Foreign banks divided on best approach to financing China’s US$5 trillion new Silk Road project

Foreign banks are divided on whether to help finance China’s new Silk Road initiative, with some seeing an opportunity in providing direct financing for the government-backed project while others opt for reduced exposure, citing concerns over poor returns from large infrastructure investments and other risks.

Participation by foreign banks is seen as crucial to the trade initiative’s success as even President Xi Jinping’s pledge of US$780 billion in additional funds is not enough to cover the full cost of the infrastructure plan.

“The amount of funds required for the initiative, as much as US$5 trillion over the next five years, means that foreign banks will need to be involved for it to succeed,” said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis.

“The Chinese policy banks and commercial banks combined will not be able to fund that by themselves, and at the top level the authorities have realised that.”

Moody’s Investors Service’s decision last week to downgrade the ratings on China’s policy banks has aggravated the funding problem.

Not all foreign banks, however, are choosing to get involved, and a divide is emerging between those that are more cautious and those that are already involved in the scheme.

“The opportunity for banks from greater intra-Asian trade flows as well as major investment projects is significant,” said Bernhard Kotanko, managing partner for Asia-Pacific at global consultancy Oliver Wyman.

“I see opportunities for the large universal banks that finance a lot of global trade, the regional banks and the Chinese banks.”

HSBC Holdings and Citi fall into the first group, while mid-sized lenders such as Standard Chartered and some Singaporean banks make up the second.

Perhaps the most vocal player of the banks that have chosen to get involved is HSBC, which put up advertisements around Beijing during the summit, saying “HSBC will lead the new Silk Road”.

The bank declined to give examples of current projects in which it is involved, citing client confidentiality, but it did provide some past examples, including financing for China Electric Power Equipment and Technology to deliver the first belt and road project in Egypt and acting as an financial adviser to the Vinh Tan 3 power project in Vietnam.

“Standard Chartered is already involved in funding a number of projects under the ‘Belt and Road Initiative’,” said Biswajyoti Upadhyay, regional head of trade transaction banking for greater China and north Asia at Standard Chartered.

Not all banks are as optimistic, however.

ANZ cautious of ‘further disruption’ to regional trade amid political tensions

Last month, ANZ’s head of international institutional business Farhan Faruqui said that while it saw opportunities from the scheme, it would instead let its existing clients drive their involvement in it. He said it was “too early to say what ANZ’s involvement would be”.

Societe Generale’s chief country officer for China, Anne Marion-Bouchacourt, told Thomson Reuters that foreign banks were keen to support Chinese corporates and the belt and road projects, but clarity was needed around issues like tax, financial planning and risk management.

There are certainly risks for foreign banks for getting involved in what is at present still very much a Chinese-led initiative.

“Some of the projects are so large that they will need to be financed by a consortium of banks, but there will be competition over which bank will play the lead role,” Kotanko said.

In fact, Garcia-Herrero believes the Chinese banks, which feel they are leading the scheme, may try to keep foreign players out of it.

Another area of concern is whether the large infrastructure projects at the heart of the scheme can be relied on to provide returns.

“Any banks that go into a large infrastructure project in an emerging market needs to be aware of the risks,” Kotanko said.

Underscoring the problem, not all projects may be able to offer commercial returns.

Earlier this year, Fitch Ratings warned “genuine infrastructure needs and commercial logic might be secondary to political motivations”.

The trade scheme is a component of China’s efforts to expand its strategic international influence and a means of securing access to key commodities.

However, some analysts believe foreign banks could fare better than their Chinese counterparts owing to their longer track record and sophisticated risk management systems.

“Chinese banks do not have a track record of allocating resources efficiently at home, especially in relation to infrastructure projects, and they are unlikely to have more success [doing it] overseas,” Fitch said.

In contrast, the agency is more optimistic about the opportunities for foreign banks.

“Fitch sees an opportunity for foreign banks to benefit from the initiative if they have experience in emerging markets and cross-border transactions,” said Sabine Bauer, senior director for financial institutions at Fitch in Hong Kong.

“We think HSBC is well placed to identify the projects that yield appropriate returns, given its prudent approach to taking risks and its discipline around managing capital.”