To solve China’s Belt and Road financing problem, Hong Kong looks to infrastructure loan-backed securities

Hong Kong Mortgage Corporation to acquire infrastructure loan assets from next year and will not limit itself to Belt and Road projects

PUBLISHED : Monday, 15 October, 2018, 8:01pm
UPDATED : Monday, 15 October, 2018, 10:52pm

The Hong Kong Mortgage Corporation is planning to securitise infrastructure loans and channel funds into China’s Belt and Road Initiative, the chief of the city’s de facto central bank has said.

A lack of structured, bankable infrastructure projects has created a huge gap between the financing needs of emerging markets and the “trillions” of dollars in capital looking for investment opportunities, Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority, told the Belt and Road Initiative: Infrastructure Financing Forum in Hong Kong on Monday.

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“The HKMC is going to take the first step in pursuing the securitisation of infrastructure loans, in order to facilitate a more efficient flow of capital into infrastructure projects,” he said.

The corporation said it would start acquiring infrastructure loan assets next year and would explore securitising the assets when its portfolio was diverse enough. It will also not limit itself to Belt and Road projects.

Put forward five years ago, President Xi Jinping’s Belt and Road Initiative aims to create modern-day Silk Road trading routes across Eurasia and Africa by building railways, roads and ports. It has, however, so far relied on state financing, which has raised concerns about its sustainability and political impact.

Chinese banks, most of which are state-owned policy lenders, had provided more than US$200 billion in loans to all projects part of the initiative by the end of 2017, according to official figures. And senior officials at these banks and at government research institutions have voiced concerns over the financing for the trillion-dollar plan.

The initiative’s funding gap could be as large as US$500 billion a year, Wang Yiming, deputy head of the Development Research Centre, which comes under China’s State Council, said at a conference in April.

Investors will have to take a very long-term view, perhaps 20 or 30 years
Kevin Leung, executive director of investment strategy, Haitong International Securities

The scheme has also been criticised for so-called debt-trap diplomacy, which means China is leveraging cheap infrastructure loans and exerting political influence over small, indebted countries along the route.

Chan said Hong Kong, with its abundant legal and financial expertise, is well positioned to help close the initiative’s funding gap by developing infrastructure loan-backed securities, a type of asset-backed security.

The securitisation can be done by pooling cash flows from various infrastructure projects, isolating them from their risks and turning the cash flow into an investible product, according to James Pedley, foreign legal consultant at law firm Clifford Chance, who was also speaking at the forum.

Chan said such securities could generate steady, long-term returns if designed properly. But challenges remained, as infrastructure projects were hard to standardise and came with unique risks, he added.

Infrastructure projects are also traditionally hard to pitch to investors, because they take decades to generate returns, said Kevin Leung, executive director of investment strategy at Haitong International Securities. “Investors will have to take a very long-term view, perhaps 20 or 30 years,” he said.

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On top of it all, Hong Kong and China have been slow to embrace asset-backed securities, which are more popular in countries such as the United States, according to Susie Cheung, a co-convenor of the Asia-Pacific Structured Finance Association.

Mortgage-backed securities stood at US$1.6 trillion, or 3.2 per cent of China’s entire bond market, in 2016. In contrast, the figures for the US were US$10 trillion, or 26 per cent of its domestic bond market, according to Cheung.

Song Zuojun, the alternate chief executive of China Development Bank’s Hong Kong branch, told the South China Morning Post on the sidelines of the forum that although the city had not yet reported its first asset securitisation deal on a Belt and Road Initiative project, it was something “quite doable” in the future.

“The CDB has more than US$300 billion in overseas assets. Surely, there are assets that are suitable for securitisation and repacking to be sold to investors,” he said. “Securitisation is also a common goal for many professional services providers in Hong Kong.”

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He said the biggest impediment to deals happening so far was the mismatch between the risk and return profiles of projects and those sought by investors.

“The returns of some projects are too low to meet investors’ requirements, while others with high enough returns are considered too risky,” he said. “We need to fill the gap … what’s more, the term of the investment product cannot be too short. Three to five years would be quite suitable.”