A commonly held misconception about the Belt and Road (B&R) initiative is that it is exclusively Chinese-led and funded. In the early stages of the initiative, funding for B&R-linked projects mostly came from policy banks and Chinese-led multilateral institutions and was fed to the Chinese state-owned companies that carried them out.
However, this is changing rapidly. International commercial banks have already been heavily involved in structuring financing and providing services for major B&R projects, and the internationalisation of B&R will only grow as the initiative develops.
In these early years, funding for B&R projects has principally come from a few major sources:
China’s Policy Banks
- China Development Bank (CDB)
- Export-Import Bank of China
- Policy banks have been vital in the B&R’s early stages, providing financing to Chinese companies for B&R projects and funding for the Silk Road Fund. They have considerable experience in massive infrastructure project financing at home and overseas (the Three Gorges Dam and Indonesia’s Tsingshan ferronickel smelting plant in Sulawesi being notable examples) and access to long-term sovereign credit that is crucial in lowering the financial risks of large-scale buildouts. By 2017, CDB had issued USD170 billion in loans to B&R countries, and in January 2018 pledged a further USD250 billion.
Silk Road Fund
- Established 2014
- USD40 billion initial capital
- A Chinese state-owned investment fund set up specifically to encourage investment in B&R countries, the Silk Road Fund has four shareholders—State Administration of Foreign Exchange (65%), China Investment Co. (15%), Export-Import Bank of China (15%) and China Development Bank (5%)— and describes itself as "a commercial investment organisation." The fund announced its first overseas investment in Pakistan in April 2015. In May 2017, President Xi committed another USD14.5 billion to the fund. While seen primarily as a financer of Chinese companies, last year it announced a joint energy infrastructure investment partnership with General Electric for projects throughout B&R countries.
Asian Infrastructure Investment Bank (AIIB)
- Established 2015
- USD100 billion initial capital
- The first major new multilateral development bank to be established in a generation, the AIIB now has 87 members. The US, which tried unsuccessfully to dissuade its allies from signing up, and Japan are notable absentees from the list. The AIIB has been a major financer of projects ranging from rural transport in India and energy in Bangladesh, to a port in Oman and a gas pipeline linking Azerbaijan to Europe. As of July 2018 it had issued at least USD5.2billion in loans.
New Development Bank (NDB)
- Established 2014
- USD50 billion initial capital (USD100 billion authorised)
- The NDB was set-up by the governments of Brazil, Russia, India, China and South Africa (BRICS) with the stated purpose of “mobilising resources for infrastructure and sustainable development projects” in BRICS and other emerging economies. While not considered a formal part of the B&R initiative, many of the projects fall within its broad aims. Only fully operational since 2016, the NDB has disbursed approximately USD4.9 billion in loans, mainly to renewable energy and sustainable infrastructure projects.
While the Belt and Road plan is often perceived as a strictly Chinese enterprise—a perception encouraged by B&R critics—this is becoming less and less accurate as the initiative progresses.
International efforts, multinational opportunities
An examination of projects funded by the AIIB reveals that most have been carried out in partnership with institutions like the World Bank, Asian Development Bank and European Bank for Reconstruction and Development.
The Belt and Road energy partnership between the Silk Road Fund and General Electric, and the more than 20 partnership agreements between the NDB and commercial, national and multilateral development banks, also show that ‘partnership’ will be a key theme in the future. B&R, in fact, requires multinational development financing on an epic scale.
And the sheer scale of B&R means that China is under no illusions that it can provide all the funding and expertise required for such a vast array of projects. China is encouraging financial institutions to conduct an estimated USD43 billion in overseas business using renminbi, and 27 countries have agreed principles to guide the financing of B&R projects.
International financial institutions will have an increasingly large role to play. A report by law firm Baker McKenzie forecasts that by 2030, more than half of B&R projects will be “funded by private capital, multilateral banks and foreign governments.”
Expertise on the ground
The first wave of mostly China-led B&R investment in major infrastructure projects in developing economies has been crucial, because this is an area where emerging-market governments have traditionally struggled to raise sufficient funding. The resulting major infrastructure deficit has stifled economies, particularly in Asia. With major infrastructure in place, a second wave of private capital is being triggered that is likely to have a broader impact on growth.
The international expertise of major commercial banks will be important in determining the success of this second wave. Major funding institutions are already benefitting from such strategic support in B&R projects as they go global. Whether it’s project and trade financing, M&A finance, loan syndication, cash management or interest-rate hedging, these partnerships have helped Chinese policy banks, commercial banks and state-owned companies structure projects from Africa to Pakistan to Indonesia.
Research by the Bank of England and the Bank for International Settlements has found that the presence of foreign banks in emerging economies substantially increases the exports of local companies. Banks such as Standard Chartered, which was involved in more than 50 B&R projects in 2017—including a 7-year financing for a Ghanaian power plant expansion project and 10-year facility structuring for a LPG storage terminal project in Sri Lanka—can also support increased trade along B&R routes by facilitating access to external finance, and by providing letters of credit, or derivatives to hedge currency risk.
Much of the financial attention surrounding the B&R initiative has been on large-scale project financing led and directed by the Chinese state, but in reality, B&R is another expression of globalisation, and globalisation cannot thrive without collaboration and partnership. B&R is an extension of the global economy, not a brand new economic model, and its success will require the same efficient use of public and private capital to generate greater prosperity.
This article was also published on Bloomberg.com.