New Silk Road: Realizing China's dream

By Allen Cheng

The historical narrative of the Silk Road remains so inspiring that leaders in Beijing – who have succeeded in engineering the re-emergence of China as a global superpower – have put forth a vision to rebuild that ancient trade route with an extension that covers maritime nations even in Africa and as far away as Latin and Central America.

China’s president, Xi Jinping, has staked his foreign policy legacy upon a grand strategy initially known as One Belt, One Road, but now called the Belt and Road Initiative.

Rebuilding the Silk Road is “a massive and transformative undertaking by China,” the largest the world has seen since the Marshall Plan after the Second World War, says Patrick Mendis, a former American diplomat who is an associate-in-research at the Fairbank Center for Chinese Studies at Harvard University and a commissioner of the State Department’s US National Commission for Unesco.

“It has both geo-economic and geo-strategic components to promote the new sphere of Beijing’s influence beyond the Chinese borders,” says Mendis.

In recognition of the enormous undertaking by China, the country’s banks and financial institutions, as well as by the global banks participating in the initiative, Asiamoney recently conducted its second annual New Silk Road Finance Awards to recognise the key players helping to finance projects across this ambitious initiative.

In addition to the private sector, participants include multilateral financial institutions that China has launched in recent years, among them the Asian Infrastructure Investment Bank, the Silk Road Fund and the New Development Bank. These MFIs are backed by a collective $250 billion in committed capital, mostly from China but also with some additional funding from dozens of other trading nations – with the exception of the US and its main Asian ally Japan, both of which see BRI as a threat to the Washington-led global world order.

The three institutions are working together with private-sector players to finance a wide range of infrastructure projects from power stations and superhighways to ports and bullet train lines, across Central Asia, the Middle East, the Caucasus and the Balkans. 

The projects stretch all the way from China to Western Europe, and once complete they will connect the entire Eurasian and North African landmass with a network of transport linkages.

About 95% of the $208 billion committed so far to construction projects across Eurasia and Africa comes from Chinese state-owned banks and corporations, according to the Washington, DC-based think tank American Enterprise Institute.

That commitment, however, could help to mobilize up to $1.5 trillion of new capital in the coming decade for Asia infrastructure projects, says Peter Burnett, regional head of corporate finance for Greater China and North Asia at Standard Chartered, which outshone all other banks in the BRI Awards. That $1.5 trillion is still not enough to meet the region’s infrastructure needs, estimated at $8 trillion just for the decade from 2010 to 2020, according to Burnett and others such as the Asian Development Bank.

As part of BRI, Standard Chartered chairman José Viñals and China CEO Jerry Zhang announced last December during the China-UK Economic Financial Dialogue in Beijing a commitment by the bank to facilitate the financing of up to $20 billion in projects by 2020.

Standard Chartered operates in 45 of the 67 countries designated by China as target markets of BRI, and recently the bank has hired more people on its China desks to cover participating Chinese companies and foreign companies.

No bank, however, surpasses Bank of China International when it comes to commitment to BRI through its massive volume of bond issuances supporting the infrastructure plans.

From June 1, 2017, to May 30, 2018, the offshore arm of China’s fourth-largest bank by assets was top of the tables for offshore China bonds issuances; it completed 306 transactions with a total value of just over $22 billion, giving it a market share of 7.7%. Its closest rival had 60 fewer deals. For the first half of this year, Bank of China was the leader in the China international debt capital markets league tables, completing 80 transactions with a total issue value of $7.6 billion and a market share of 7.5%.

Overall in Asia in 2017, Bank of China was the top arranger for Chinese issuers going to the international G3 capital markets and ranked fourth for all Asia ex-Japan G3 – dollars, euros and yen – currency issuances. In 2016, the bank was also the leader for Chinese offshore debt capital markets and in fourth place for all Asia ex-Japan G3 currency issuances.

Perhaps more than any other nation, China is best positioned to lead the Eurasian infrastructure and Africa build: it helped propel growth by investing in modern infrastructure, spending an average of more than 20% of its GDP a year on fixed-asset investments in the last 25 years.

Last year, China put $2 trillion into infrastructure investments, about 17% of its $12 trillion GDP. Using a combination of European and domestic home-grown technology, for instance, China is investing $503 billion in building a national bullet train network that covers 30,000 kilometres (18,633 miles), more than 11 times the length of Japan’s 2,700-kilometre-long Shinkansen network.

China’s bullet trains can reach top speeds of over 300 kilometres an hour, and the government now has ambitions to extend its bullet train lines all the way to London. The Chinese Academy of Engineering in Beijing has drawn up plans to build an 8,160-kilometre-long network spanning 17 nations; upon completion in the coming decade, it would take passengers only 40 hours to travel between Beijing and London.

Underlining its continental ambitions, China has begun to play a powerful role in the region as a financier, says Laurence Brahm, a Beijing-based American lawyer, entrepreneur and adviser to the Chinese government.

“China, together with other key developing nations, is forging an alternative global financial and economic development architecture different from that of the Washington consensus and post-Bretton Woods order,” Brahm says of Beijing’s efforts to fund new multilateral lenders that are independent of the World Bank and IMF, both of which are based in Washington, DC. Brahm is working with American author John Naisbitt of ‘Megatrends’ fame on a book about Xi’s efforts to revive the Silk Road.

The Beijing-based Asian Infrastructure Investment Bank has already hit the road running since its launch in 2016. It has lent more than $5.3 billion to 28 transport, energy and urban development projects in a dozen nations: Indonesia, the Philippines and Myanmar in southeast Asia; India, Pakistan and Bangladesh in south Asia; Turkey, Tajikistan, Azerbaijan and Georgia in eastern Europe and central Asia; and Egypt and Oman in north Africa and the Middle East. Heading AIIB is Jin Liqun, a former Chinese vice-minister of finance and vice-president of the Asian Development Bank. Joining him at the helm are four vice-presidents, including Sir Danny Alexander, a former chief secretary of the UK Treasury.

AIIB’s sister multilateral, the Silk Road Fund, has been branching out quickly as well, notes Brahm, adding that the institution has invested in or financed 20 deals to the tune of $7 billion since it was founded in 2014.

The fund, which manages $55 billion in capital, initially focused on financing the infrastructure projects that large Chinese state-owned conglomerates were developing abroad. Senior management, according to Brahm, have also begun looking at taking direct equity stakes in infrastructure companies in developed economies.

A landmark deal was when the fund took a 5% equity stake last year in leading Italian infrastructure operating group Atlantia, which, as part of the deal, also sold a 6.94% equity stake to a consortium led by Allianz Capital Partners. The stake sale generated about €14.8 billion for the Rome-based conglomerate, according to a news release from Atlantia last year.

Although Atlantia has come under fire following the Genoa bridge collapse in August, Brahm believes the Silk Road Fund’s investment in the longer term is still a smart one, given that Atlantia is based in Italy, a developed economy with one of the highest standards of living in the world.

“The Belt and Road is not about random investments into infrastructure,” says Brahm. “It is building up a sophisticated matrix that combines infrastructure, communications, IT and finance. Consequently, more sensitivity towards risk is apparent from the nature of the investment strategies as they are being played out in the Belt and Road.”

The tightening of state credit back in China, Brahm notes, is forcing financial institutions to take responsibility for their own risks and therefore investments and finance in BRI will have to be based on the merit of each project. Chinese financial institutions and investors are becoming more risk-averse and more sophisticated about the way they are evaluating and structuring their investments, Brahm adds.

In the wake of more isolationist political thinking in the West, with many developed economies turning inward, China is reaching out and seeking stronger trade and investment links with its economic partners, according to Peter Wong, the chief executive for Asia of HSBC. The seventh-largest bank in the world by assets is the winner of Best overall research house for BRI 2018.

China’s BRI is a prime example of its reaching-out policy, Wong says, adding that under the initiative, China aims to trigger demand for materials and goods at home by investing in strategic infrastructure projects abroad, developing economic ties along its old Silk Road to Europe, as well as along newer maritime links in and around Asia and as far away as Africa.

At its heart, Wong says, the plan is to enhance global supply chains, primarily through debt-financed infrastructure projects, across more than 60 countries. Wong says that China expects annual trade with these countries to be worth $2.5 trillion within a decade, up from $1 trillion in 2015.

To demonstrate its seriousness about supporting BRI, HSBC became the first international bank to set up a dedicated office in April. Headed up by Mukhtar Hussain, the new unit oversees HSBC’s strategy in supporting its clients – whether Chinese or global – by helping them to finance and invest in projects and companies operated along the Silk Road.

The bank, for instance, helped advise and finance a number of M&A deals last year, among them Shanghai-based China Eastern Airlines’ purchase of a 10% equity stake in Air France KLM for $438 million.

A large portion of HSBC’s work on BRI deals is advisory and making sure clients get the best advice and local insight, says Hussain, adding that the bank operates offices and local teams in 44 of the 67 designated BRI countries.

“We make sure every transaction HSBC is involved in is structured successfully – that they stand up to public scrutiny,” says Hussain. “These are important criteria. We don’t see it from the lens of profitability only. We see it from multiple lenses.”

There is no question, however, the deals along the Silk Road are fraught with economic and geopolitical risk and that the success of China’s ambitions are far from guaranteed. US president Donald Trump – who has begun a trade war with China by imposing tariffs on Chinese imports – is no doubt challenging China’s geopolitical game plan. Rising nationalism in many nations across emerging markets may also make it difficult for China to invest in massive infrastructure.

Even among Chinese bankers, pessimism is rising, notes Andrew Collier, a Hong Kong-based independent research analyst who was the president of Bank of China International in the US from 2009 to 2011.

“Some bankers are sceptical about One Belt, One Road because it is difficult to find profitable projects,” says Collier. “The due diligence of investigating good companies in far-flung countries outside of their usual lending areas is too time-consuming, so they are generally looking for quick fixes. These may not produce good returns.”

There is a need for infrastructure in emerging markets throughout Asia, Collier notes, but he wonders if it makes sense for China to do it virtually on its own.

“No – unless you assume that president Xi Jinping is looking as much for security gains as he is for expanding Chinese trade routes,” he says. “The security goals may include excluding Russia and the United States from participating in the growth of the One Belt, One Road countries, but my belief is China will make only modest progress. There is too much entrenched nationalism in these countries to allow for significant gains by China.”

Guan Anping, an adviser to the Chinese government, further notes that Central Asia is made up of mostly former Soviet satellite states where rule of law is lacking.

“It’s much easier to do business with business partners in the West or Japan, or elsewhere in developed markets,” says Guan, a former legal counsel at China’s Ministry of Commerce. “The ‘stans’, as many nations in Central Asia are known, are troublesome places to do business. Many business people there don’t honour their contracts.”

Still, Guan says most governments getting Chinese funds for infrastructure stand to benefit by being able to tax revenues generated within their borders from the projects.

“So, in the end, most governments will welcome Chinese money and will do their best to make sure their companies honour their loans,” he says.

Chinese banks know full well the risks associated with operating in many frontier markets along the Silk Road. Chief among the risks many companies have is not being able to collect from clients on funds owed, says Richard Ma, product manager of the transaction banking department at China Merchants Bank, which wins Best bank for infrastructure/project finance in Central and Eastern Europe. That is why the bank, Ma says, is working with China’s lead financial credit risk insurer China Export Credit Insurance, also known as Sinosure, to come up with various risk-mitigation services to cater to Chinese companies operating abroad.

In the last few years, China Merchants has been offering an insurance product to its clients operating abroad that takes away all accounts receivables risks. The bank in effect gives corporate clients cash up front for accounts receivables and takes responsibility – and the risk – on being able to collect on the invoices owed.

“We offer this service for many corporate clients operating in Belt and Road markets,” says Ma, adding that this “helps them mitigate risk and ensure smooth operations”.

The Silk Road strategy is indeed fraught with risk, but in the longer term will succeed because the Chinese government designed it to benefit all participating nations and the companies that operate there, asserts Zhu Lei, the director of Association of Southeast Asian Nations Affairs at the Department of Commerce in Guangxi province, which borders Vietnam.

Many nations in southeast Asia already have benefited, Zhu says, adding that a rail link completed in 2016 that runs through Vietnam, Laos, Cambodia, Thailand, Malaysia and Singapore allows goods made in southeast Asia to be shipped by freight trains to as far away as Germany in under 20 days.

“Goods shipped by sea from Asia to Europe takes twice as long, as long as 45 days,” says Zhu. “At end of the day, China’s Silk Road strategy isn’t about only benefiting China. It is about connecting all of Asia to Europe and the rest of the world through transport networks, bringing everyone closer together.”