China Spending Just 2% Of International OBOR Financing On Actual Projects

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CDE Op-Ed Commentary

Despite all the hype, China’s actual designated spending from its recently established, and internationally subscribed Asian investment banks has only reached a figure of less than 2% of the actual capital raised. In a survey carried out by Silk Road Briefing, it became apparent that institutions such as the Asian Infrastructure Investment Bank, BRICS New Development Bank and the Silk Road Fund have exercised extreme caution when making investments and have committed only a tiny percentage of their available capital to date. On the other hand, funding continues to pour in through China’s State Owned Banks.

The three main investment vehicles set up by China involving foreign capital contributions, and the actual spend to date are summarized as follows:

Asian Infrastructure Investment Bank

  • Incorporated January 2016, Beijing HQ
  • 52 Full Members, 25 Pending (77 total)
  • Capitalized at USD100 billion (Equivalent to 2/3 of ADB, 50% of World Bank)
  • Largest Shareholders: China, Russia, India, Germany, UK
  • Loans to date: USD1.73 billion (most joint with ADB or WB)
  • Recipients: Azerbaijan, Bangladesh, Indonesia, Myanmar, Oman, Pakistan, Tajikistan
  • Projects: Power, Pipelines, Rail, Roads.
  • Criticized for weak constitution concerning transparency and actual project financing
  • Designed to position China as an institutional lender of repute
  • https://www.aiib.org/en/index.html

New Development Bank (Formally BRICS Development Bank)

  • Incorporated July 2015, Shanghai HQ
  • 5 Full Members: Brazil, China, India, Russia, South Africa
  • Authorized Capital: USD100 billion, Actual at USD50 billion
  • Loans to date: USD1.5 billion (most joint with ADB or WB)
  • Recipients: All members
  • Projects: All renewable energy
  • http://www.ndb.int/

Silk Road Fund

  • Incorporated December 2014, Beijing HQ
  • China State Owned Fund: State Administration of Foreign Exchange, Export Import Bank of China, China Investment Corporation, China Development Bank
  • Authorized Capital: USD40 billion
  • Loans to date: USD5 billion (estimate)
  • Recipients: Kenya, Pakistan, Russia
  • Projects: Building Nairobi-Mombassa Railway, Karot Hydropower Plant, Pakistan, acquisition of 9.9% of LNG project in Siberia.
  • http://www.silkroadfund.com.cn/

The relatively small amounts invested to date have been stated by China as being due to prudence on the part of Beijing, and that loans will start to be made from the available capital. However it is noticeable that the AIIB and NDB in particular have investment funds from other nations and are under rather more scrutiny and demands for transparency – protocols Beijing is not entirely comfortable with. Certainly, the amount of media coverage China has generated by institutionalizing international funds related to OBOR investments has gone a long way in projecting China as a gate-keeper and lender of international repute, without actually having to spend any large amounts of capital.

This prudence is at odds with the real source of China’s funding of OBOR projects, which remain under the effective jurisdiction of China’s State Owned Banks and its State Owned Enterprises, who obtain OBOR investment loans from the State Owned Banks. Here, the picture is much more opaque. It is almost impossible to estimate how much money is filtered down from China’s banks into OBOR projects, although President Xi Jinping did state at the recent Beijing Belt Road Forum that China would be purchasing USD2 Trillion worth of goods from OBOR countries within three years. However, this is a different issue than infrastructure project financing.

But it is known that China does lend money to other Governments for OBOR projects via its State Owned Banks. Here though, China’s true financial mentality tends to come to the fore. It is of interest to note that recent loans made to Indonesia for the development of OBOR related Port development projects were financed by China’s Banks and its SOE’s, but with the condition that the money could only be accessed by Indonesia’s own State Owned Companies – in effect, ruling out Indonesia’s private sector at a stroke as a specific condition of the loan. That is an interesting strategy to put forward.

One one level, China may have made this condition as SOE’s of different countries tend to be highly Government related, and it makes sense for similar mindsets to be at play when executing project work – there is the guarantee of Government interests within the core of the project.

On the other hand, it also leads to an opaqueness of the financial process, which leaves the financing open to corruption, and also out of view of bodies such as the World Trade Organisation. The de facto funding of China’s SOE’s to compete for international tenders may be in breach of WTO rules concerning competitiveness. Bundling up such loans as G2G agreements only to be executed at mutual SOE level means that accounts can be manipulated and WTO rules concerning anti-competitiveness can be covered up more easily, as can illicit payments.

Indeed, the latter occurred with China’s funding of OBOR projects in Sri Lanka. The original terms of a loan agreed between one of China’s State Level Banks and the then incumbent Sri Lankan President and Government were agreed at 2% interest, only for the Lankan side to request this be increased to 6%. The State Owned Bank stepped aside and the loan was instead made via one of China’s obscure Provincial banks – at the 6% rate. The story can be found here. USD200 million went missing from Sri Lanka’s state coffers.

The apparent gap in ethics and transparency between China’s projected status as the gatekeeper and prudent investor of internationally subscribed banks and the maze of opaque deals within China’s State Owned Banks should be taken as a whole rather than separated. The real roles of the AIIB and the NDB may need to be taken with a large pinch of salt. Whether or not they actually provide truly useful investment vehicles or are effective, USD100 million window dressing exercises as China continues its exclusive funding beyond public scrutiny is an interesting question.

To date though, the financing of China’s OBOR projects actually continues to be via China’s SOEs and not the international institutions it has established. Funding the new Silk Road, with an ingrained habit of only lending to other nations state owned enterprises, the accommodation of ‘special requests’, a lack of transparency, potential covering up to get around WTO anti-competition rules are all allegations that China needs to come to terms with if it is truly to reach a global consensus that it is a fair minded, transparent and responsible nation through which international development can be guided.

One hopes that the AIIB’s and NDB’s work with the World Bank and Asian Development Bank will educate China’s bankers to the advantages of working to ethical protocols, and that these will filter down to China’s State Owned Banks. The problem is time – China needs OBOR to succeed. It remains to be seen whether a transparent financing process will be viewed as troublesome, and if so, how much collateral damage will be caused to other countries and to the global credibility of Chinese financing if lessons are not heeded in Beijing. Sitting on hundreds of millions of other countries dollars, pretending to be prudent, while on the other hand operating loans without any transparency at all is a peculiar China conundrum, and risk. Beijing needs to get the balance right.

 

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Silk Road Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Eurasia, including ASEAN, China, India, Indonesia, Russia & Vietnam. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Asian and Eurasian region. We maintain offices throughout China, South-East Asia, India and Russia. For assistance with OBOR issues or investments into any of the featured countries, please contact us at silkroad@dezshira.com or visit us at www.dezshira.com

 

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