The Belt and Road effect on bond markets
By Henrik Raber, global head, capital markets, Standard Chartered Bank
Global Head, Capital Markets,
In the wake of the new administration in Washington and the rise of populism in Europe, there is an unmistakable sense that China is on its own on major global issues. 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 $100 billion Asian Infrastructure Investment Bank – with 57 members (and 25 new ones on the way), the $40 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 less-developed countries. For instance, some Obor projects, such as the China-Kyrgyzstan-Uzbekistan railway, were conceived a decade before Obor. Obor countries currently have over $1 trillion in trade with China and this figure could grow substantially in the coming decades.
China’s initial pledge to finance close to $1 trillion of Obor projects is projected to rise to $4 trillion, although the timeline is unclear. According to Standard Chartered Research, China had signed $926 billion of Obor project contracts by December last year and its cumulative non-financial overseas direct investment could double to $2 trillion by 2020 (from $938 billion at end 2015).
Call for greater global capital participation
Global capital is critical in closing funding gaps, despite China’s substantial pledges. According to the Asia Development Bank, Asia needs to add $770 billion of infrastructure annually from now to 2020. Commercial players and private money will also need to step in to drive the pace of economic expansion 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 was formed in November 2015, provides a platform for industry participants in the two countries to access and finance Obor projects in Asean countries. 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-tranche $4 billion issuance in OBOR bonds (including Singapore dollars and renminbi). China Construction Bank (CCB) followed in August 2015, listing its first Rmb1 billion ($145.2 million) Belt & Road Initiative infrastructure bonds on the Singapore Exchange.
Innovative financing tools such as structured finance, trade finance and hedging will be instrumental in spreading the risk and attracting more global capital. We expect different pools of capital to be tapped to fund the expansion plans.
In particular, 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 might then attract new bond issuers beyond existing Chinese banks, with multilateral bodies, import-export agencies, sovereigns and corporations hot on their heels.
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 US. If this takes off, investors will have a plethora of investment opportunities in the coming years to fund infrastructure projects across the globe. This might also spur a “crowding-out effect” where competition for funding will drive the best opportunities forward.
Hot on the radar in the Obor calendar is the highly anticipated One Belt One Road Summit in Beijing in May. About 20 countries across Asia, Europe, Africa and Latin America have to date confirmed they will attend – and attendance might possibly eclipse that at the G20 summit in Hangzhou last year. It would be extremely interesting to watch for any steer on developments around the financing of Obor projects, especially on capital markets.
Henrik Raber is the Global Head of Capital Markets at Standard Chartered Bank. He joined the Bank in July 2009 as Regional Head of Capital Markets for Europe, Africa and Americas, and took on the role of Global Head of Debt Capital Markets in March 2010 before assuming his current role in mid-August 2014. Prior to Standard Chartered, Mr Raber was with UBS Investment Bank, where he headed European Credit Flow Sales and Trading, which encompassed Investment Grade, High Yield and Loans. Before working at UBS, Mr Raber was with Lehman Brothers for eight years in Fixed Income credit trading and capital markets.
Euromoney and Standard Chartered will be running a series of webinars on debt capital markets. The first one will be on ‘Investing China: CGB futures and the Bond Connect’ on May 15. Find out more
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