Financing China’s One Belt, One Road: US$8 Trillion in Capital Requirements
A common question when it comes to financial assessments of China’s huge Silk Road plans is how to finance the entire initiative. While the cost of the development infrastructure across the Eurasian land mass is hard to assess, the anticipated expenditure estimates suggest a cumulative investment over an indefinite timescale variously put at between US$4 trillion to US$8 trillion. Others express this as a required spend of US$1.5 trillion per annum, again for an indefinite period. This is roughly equivalent to China’s GDP for an entire month.
The financing requirements for the One Belt, One Road initiative (OBOR), and for such large sums of money are complex. This is made all the more so because China is determined to bring in private institutional capital alongside financing from the state owned Chinese banks and the Asian Infrastructure Investment Bank (AIIB).
The AIIB has just agreed to admit another thirteen members, all of whom will contribute capital in return for equity. They include Hong Kong, as well as Afghanistan, Armenia, Belgium, Canada, Ethiopia, Fiji, Hungary, Ireland, Peru, Sudan, Timor Leste and Venezuela. To date the AIIB has funded several projects; however, it also has a tendency to partner with either the World Bank or Asian Development Bank. This may be to learn how mainly Western financed and controlled institutions operate to learn how it’s done, or to generate credibility for projects that are not fully invested in. The AIIB also remains an enigma as neither the US or Japan are involved, and both are huge providers of development capital. Beijing, it seems, either remains wary of the US potential for political interference, or wants to show to the rest of the world it can go it alone.
In terms of regional state Chinese funding, this is covered by a plethora of national and provincial banks, who will lend to China’s state owned enterprises (SOEs) on OBOR projects, depending upon the head office location of the Chinese entity. It remains rare for Chinese banks to lend money to foreign investors, and even when possible, such loans must be fully secured against assets held in China.
China has instigated a number of other related banks to deal with specific project financing, often with other sovereign partners. The New Development Bank (previously the BRICS Development Bank) names Brazil, China, India, Russia, and South Africa as equity holders, and is headquartered in Shanghai with a branch in Johannesburg, South Africa. It has authorized capital of US$100 billion, of which 50 percent has been paid up.
Another sovereign invested fund is the Silk Road Gold Fund, which is invested in by 60 countries, has capital worth US$16 billion, and aims to fund mining activities along the Silk Road, with an emphasis on precious metals. These will be shared with the sovereign nation concerned, who can then use the extracted materials as collateral against additional capital funding. The fund is based in Xi’an and operated by the Shanghai Gold Exchange.
It is an excellent example of practical, forward thinking by the Chinese in terms of creating wealth, opportunity, and development financing for less wealthy nations along the Silk Road. The Silk Road Fund, by contrast, is a US$40 billion institution owned jointly by the State Administration of Foreign Exchange, Export-Import Bank of China, China Investment Corporation, and China Development Bank. It tends to loan money on build-operate-transfer (BOT) projects involving Chinese SOEs. More examples are sure to follow.
China, though, is not the only country moving in these terms. Russia and Kazakhstan have jointly established the Eurasian Development Bank with a capital of US$7 billion. It has invested in infrastructure within the Commonwealth of Independent States bloc.
The Asian Development Bank, with a membership of over 60 sovereign nations, is also heavily involved, though it is the Japanese who hold the largest equity stake at 15.7 percent, against China’s 6.5 percent. Among the current international institutional investors involved in OBOR projects, it remains the largest. A fascinating overview of the ADB’s financing of Uzbekistan’s rail system as an example of their work on OBOR projects can be viewed here.
Other financial institutions, such as the creation of a development bank lead by the Shanghai Co-Operation Organisation are also being discussed.
The real trick though is getting private sector financing into OBOR projects. This is, thus far, a work in progress, and requires banking and other institutional entities on a global basis to get involved. This will require new and innovative debt structures, denominated in Renminbi, Dollars, Euros, and a wide range of local currencies. These will include Green Bonds, tax-exempt bonds issued by federally qualified organizations or by municipalities for the development of brownfield sites.
Brownfield sites are areas of land that are underutilized, have abandoned buildings, or are underdeveloped. These are of particular significance to many of the countries within Central Asia, whose financial sector knowledge and understanding of such instruments may be rather basic. A new class of long-term infrastructure bonds that can be sold to insurance companies and pension funds can also be expected.
Education will be an important part of putting into place financial reform and sound financial practices in many of these countries. The OBOR may well become – via its various component financial parts – a magnet for seasoned banking and financing professionals to have one last crack at a very new emerging financial opportunity and advise institutional investors on risk, expected ROI, and entry terms. Many will be needed from Europe in particular, and financiers familiar with Islamic Bonds and dealing with Russia, the Middle East, and Central Asia may find themselves in demand.
This all suggests that a raft of new financial expertise will be needed with specific knowledge of the OBOR region. This will include bank arrangers, lawyers, tax experts, and consultants, in addition to fund managers able to package up projects for sale internationally either to institutions or to private investors, and whose expertise will be needed to meet the complex financing requirements of the hundreds of projects that will make up the new economic corridor between East and West. It will breed a new type of corporate hire, the “Silk Road Executive”. Watch this space.
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