19 May 2017

Belt and Road needs all sources of capital

By Martin Tricaud, Chief Executive Officer, Australia, HSBC

The growing debate in Australia about the merits of China’s ambitious One Belt, One Road initiative overlooks a critical factor that has as much capacity to transform economies as the infrastructure projects that are its central focus.

If the potential for Belt and Road to reshape trade flows isn’t sufficient to convince critics, they should consider the enormous impact it could have on capital markets and global investment due to the sheer scale of funding that it requires.

China will on May 14-15 host a Belt and Road forum for world political and business leaders that is likely to be its most significant trade and investment meeting for 2017. It will prove a critical juncture for Australia as it considers whether to accept China’s proposal to align our northern development plan with the Belt and Road route.

New Zealand last month became one of the first Western countries to formally recognise Belt and Road by agreeing to a framework of co-operation with China – but doubts about the initiative linger in Australia, even as evidence mounts about the considerable opportunities it will present to individual countries, business and investors.

Announced in 2013, Belt and Road is a multi-decade strategy aimed at boosting the flow of trade, capital and services between China and countries to its west and south. It will generate infrastructure construction as far afield as South East Asia, the Middle East, Africa and Europe – so it’s inevitable that initial interest has revolved around the railway lines, ports and highways to be built in its name.

But financing this colossal need for transport, telecoms and energy infrastructure across more than 65 countries will require all available sources of private and public sector capital. It will also generate a broad spectrum of opportunities for local and international investors – and stimulate capital markets development in many Asian markets where bank lending still tends to dominate financing.

To put this in perspective: in late February, the Asian Development Bank said it expected emerging Asia alone would need about $US26 trillion of infrastructure investment between 2016 and 2030. That amounts to $US1.7 trillion a year – more than twice what the ADB had forecast in 2009.

Beijing has spearheaded several institutions to facilitate some of the financing. The Asian Infrastructure Investment Bank, the New Development Bank and the Silk Road Fund have a combined financial firepower of $US240bn, and are starting to become active investors in Belt and Road projects. But even they can supply only a fraction of the amount that needs to flow into infrastructure as developing nations aim to raise productivity and deal with growing urbanisation and the impact of climate change.

While the need for infrastructure spending is not new, Beijing’s Belt and Road push has intensified the appetite to begin projects, and to get them financed.

Infrastructure projects by their nature are large, complex, often multi-decade ventures that can involve different kinds of funding over their lifetime. So Belt and Road fundraising will need to come from the full range of sources, including bridge financing from banks; equity capital from governments, funds and public and private equity markets; and longer-term bond issuance both from the private sector and public-sector institutions like the AIIB.

This is good news for investors – be they sovereign wealth funds or asset managers in Europe, Australia or America. Interest rates and yields remain at all-time lows following the global financial crisis. In this context, infrastructure projects and the stable, long-term returns they tend to provide are increasingly attractive in the eyes of investors who are looking to diversify their holdings.

Meanwhile, the expected growth in capital-raising activity is also good news for the development of some of the smaller, less mature markets along the Belt and Road. They mostly remain small relative to the size of the economies they serve and a boost in issuance, as well as continued reforms, could give them the depth and breadth that will make them more attractive to international capital and domestic retail investors. It will also help reduce reliance on bank lending and expand financing options for private companies.

Within mainland China itself, the onshore bond market was further opened to foreign investors last year, including banks, insurance companies and pension funds, and China has also made it easier for foreign entities to issue renminbi-denominated bonds in the domestic market.

Last but not least, increased capital-market activity could – we hope – prompt more cross-border regulatory co-ordination. More cohesion in areas like documentation, taxation, foreign exchange and credit ratings could make trade far easier for countries with deep economic connections in the Asia-Pacific such as Australia.

Debate in Australia about Belt and Road risks becoming one-dimensional. A more robust discussion would recognise the potential for the initiative to enhance the economic integration of Australia with the Asia-Pacific region, and also its capacity to boost growth in developing nations and to invigorate global capital markets.

The upcoming Belt and Road Forum is an opportunity for Australia to properly grasp all dimensions of this historic program so it does not unwittingly miss out on the opportunities it will present in coming decades.

This opinion editorial originally appeared in The Australian on 12 May 2017.