One Belt One Road to provide USD1.2 trillion in new infrastructure financing

The financial firepower of the AIIB could be much larger than the USD100 billion committed by its 57 members.

 

 

The extent of the potential impact of China’s One Belt One Road (OBOR) initiative on the ports and logistics landscape in the Asia-Pacific region and beyond is starting to emerge as the major sources of funding for the programme come online.

An estimated USD1.2 trillion could be ploughed into infrastructure projects on One Belt One Road routes by lenders including the newly formed Asian Infrastructure Investment Bank (AIIB), the Silk Road Fund, and a host of Chinese commercial banks and financial institutions. A large portion of the funding is expected to go to transport infrastructure projects that will affect shipping, logistics, and trade, including ports, railways, and roads.

“Most of the foreign lending is just beginning,”  Rajiv Biswas, IHS chief economist for the Asia-Pacific region, told IHS Fairplay. “The bilateral financing under the OBOR initiative started flowing last year and multilateral financing is starting this year. In terms of committed funds, the scale looks vast.”

A centrepiece of Chinese president Xi Jinping’s foreign policy and domestic economic strategy, OBOR is a planned network of overland road and rail routes, oil and natural gas pipelines, and other infrastructure projects that will stretch from Xi’an in central China, through Central Asia, and reach as far as Moscow, Rotterdam, and Venice. The initiative also includes a network of planned port and other coastal infrastructure projects from South and Southeast Asia to East Africa and the northern Mediterranean.

The unprecedented nature of the programme and its financial and geographic scale make it difficult to assess its scope and potential impact on the regional and global shipping and logistics landscape. This has not been helped by the fact that many high-profile projects now labelled under OBOR actually pre-date the programme, which was only unveiled as an official part of central government policy at the end of 2013.

Major state-owned enterprises in ports and logistics, such as Sinotrans & CSC and China Merchants Group, which are now regarded as government instruments to implement the policy, were investing heavily along OBOR routes well before the programme officially came into being.

“Before the initiative was raised, a lot of our growth had been happening along One Belt One Road routes,” Sinotrans & CSC chairman Zhao Huxiang told delegates at an OBOR conference in Hong Kong earlier this year. “We were growing fast, but now expect to grow even faster.”

Bilateral funding commitments for the programme’s official projects started last year, among the most high profile of which is the USD46 billion commitment to Pakistan for the development of the three major ports at Gwadar, Karachi, and Qasim, and other projects within the China-Pakistan Economic Corridor (CPEC), a key OBOR artery.

If the plans of the central government come to full fruition, this is just the beginning, with committed funding of at least USD1.2 trillion for OBOR-related projects in the pipeline.

According to Biswas, the financial firepower of the multilateral AIIB, which starts lending this year, will likely be much larger than the initial capital commitment of USD100 billion from its 57 member countries.

“It can play a lead role in financing projects but the aim may be to leverage in other kinds of financing on projects as well, in a manner similar to how the Asian Development Bank works” he said. “This would mean national development banks can also contribute to projects, so the USD100 billion is multiplied to a much larger amount through co-financing.”

The purely Chinese Silk Road Fund adds a further USD40 billion to the OBOR project pot but the lion’s share of funding may end up coming from commercial banks and financial institutions in China. State-owned China Development Bank, whose primary mandate is to provide financing for development projects, has alone already committed to invest USD900 billion in OBOR projects across 60 countries.

“Chinese banks and financial institutions have very large balance sheets and since many of the projects are commercial they will likely play an important part in funding initiatives related to One Belt One Road.”

While the financial commitment leaves little doubt about the scale of the vision, the extent of its impact will ultimately be determined by the success or failure of the projects involved and there are numerous risks in developing infrastructure project in poorer countries with weak macro-economic conditions.

The commercial success or failure of projects in future will likely affect the extent of eventual funding, said Biswas.

“If China is lending out over a trillion dollars, you have to ask how capable its banks are of getting it back. If a rise in the number of non-performing loans starts to create problems with the balance sheets of the lending banks it could slow the appetite for new lending in five or 10 years’ time.

“Historically we see that some countries, including Pakistan, have had difficulties making repayments. While the AIIB will most likely be very cautious in structuring loans, there could be problems with the state-owned banks. A very important focus in terms of the success of the overall programme, therefore, is that lending is done on carefully assessed loans with very good risk management.”

Increasing connectivity to create new markets for Chinese products and services and to stimulate the regional economy are primary goals of One Belt One Road. China is also seeking ways to secure more raw materials and outlets for excess capacity in its own restructuring and slowing economy.

 

Contact Turloch Mooney at turloch.mooney@ihs.com and follow him on Twitter: @TurlochMooney