The Belt and Road effect on bond markets

By Henrik Raber, Global Head, Capital Markets, Standard Chartered

On climate change, China is now the strongest proponent of the Paris agreement. On trade, it has over 25 free trade agreements in place or being negotiated.

China is also leading the dialogue on development in emerging countries underpinned by the “One Belt One Road” (OBOR) initiative.

The development strategy covers China’s geographic links to a “belt” of six overland economic corridors and a complementary maritime “road” of sea-routes linking the country to Europe, continental and maritime Eurasia and East Africa. Theoretically, OBOR covers 65 countries, 60% of humanity and over 25% of world GDP but its sphere continues to grow. Already, over 30 countries have OBOR-related partnerships with China and there is also big institutional muscle backing OBOR: the China-initiated USD100 billion Asian Infrastructure Investment Bank – with 77 members, the USD40 billion Silk Road Fund, China Development Bank and EXIM Bank China.

Trade is the prize but infrastructure takes the front seat for now

As with past outbound initiatives, OBOR ultimately aims to boost trade and investment by building up infrastructure connectivity, especially in the lesser developed countries. For instance, some OBOR projects such as the China-Kyrgyzstan-Uzbekistan railway was conceived a decade before OBOR. OBOR countries currently have over USD1 trillion in trade with China and this figure could grow meaningfully in the coming decades.

China’s initial pledge to finance close to USD1 trillion of OBOR projects is said to rise to USD4 trillion although the timeline is unclear. According to Standard Chartered Research, China had signed USD926 billion of OBOR project contracts by December last year and its cumulative non-financial overseas direct investment could double to USD2 trillion by 2020 (from USD938 billion at end 2015).

Call for greater global capital participation

Global capital is critical in closing significant funding gaps, despite China’s pledges. According to the Asia Development Bank, Asia needs to add USD770 billion of infrastructure annually from now to 2020. Commercial players and private money will also need to step in to drive greater economic tilt in OBOR projects.

The nascent OBOR bond or Silk Road bond market (where proceeds go into funding OBOR projects) is taking shape. The Shanghai-Singapore Financial Forum (SSFF) which formed in November 2015 provides a platform for industry participants in the two countries to access and finance OBOR projects in ASEAN. Entities have also started to tap the capital markets to fund OBOR projects. Bank of China (BOC) led the first in 2015 to tap the market with its multi-tranch USD4 billion issuance in OBOR bonds (including Singapore dollars and Renminbi). China Construction Bank (CCB) followed in August 2015, listing its first RMB1 billion Belt & Road Initiative infrastructure bonds on the Singapore Exchange.

Innovative financing tools like structured finance, trade finance and hedging will be instrumental to spread the risk and attract more global capital. We expect different pools of capital to be tapped to fund the expansion plans.

Particularly, bond markets such as the Dim Sum and Panda given the currency relevance, as well as Asian local currencies given their strategic place along the Belt and Road, could be key early access points. This is likely to boost financial centres in Greater China, Hong Kong and Singapore initially. Further growth in the OBOR bond market may then attract new bond issuers beyond existing Chinese banks, with multi-lateral bodies, import-export agencies, sovereigns and corporations hot on the wheels.

Commercial strategic partnerships are also important. For instance, China Merchants Bank (CMB) signed its first OBOR strategic alliance with Standard Chartered Bank in September last year, hoping to leverage Standard Chartered’s deep rooted presence in over 65% of OBOR countries to enhance its clients’ access to OBOR.

Debt financing is opportune

Global interest rates continue to be low on a historical basis. This makes raising long term debt to finance long term infrastructure projects especially opportune. A similar ethos is being debated in the United States. If this takes off, investors will have a plethora of investment opportunities in the coming years to fund infrastructure projects across the globe. This may also spur a “crowding out effect” where competition for funding will drive the best opportunities forward.

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