- To increase cross-border trade between the east and the west, the Belt and Road Initiative will connect cities in more than 65 countries
- The infrastructure development needed to make these links will require a substantial amount of investment from a wide range of capital sources
- Whether building new or improving existing infrastructure, projects will also need to meet international standards and sustainability goals, which is expected to open the door for more green financing
The Belt and Road Initiative (BRI) is all about simplifying and increasing cross-border trade by connecting more than 65 countries in Asia, Europe and Africa. Making that happen will require significant infrastructure development to ports, roads, railways and airports throughout Asia. It will also bring an increased focus on expanding and enhancing power plants and telecommunications networks to help create a higher-value economy focused on innovation.
The Asian Infrastructure Investment Bank (AIIB), Silk Road Fund and the New Development Bank have already committed approximately US$1.1 trillion in BRI infrastructure investment. The Asia Development Bank estimates, however, that projects in Asia alone will need US$1.7 trillion a year through 2030 compared to the US$881 billion currently being invested annually. This funding gap means that additional capital-raising and investment activity both inside China and out is needed, via traditional financing as well as green financing to support sustainability goals.
With an array of products and services such as syndicated and capital markets financing, commercial banks are in an excellent position to increase investment and trade flows in Belt and Road countries. HSBC, for instance, is already involved in approximately 100 BRI projects – acting both as an adviser and as a participant in financing.
According to HSBC Global Research1, international financial centres will also be good sources for project finance and risk management services to help enhance operational efficiency and reduce currency risk. Those located in Hong Kong and London, in particular, may offer an advantage because they have a well-developed financial infrastructure and deep, liquid FX markets.
As China continues to work toward capital market liberalisation, global investors will be able to put money into Chinese equities and bonds as well – further helping to fund BRI projects. All this will lead to opportunities for foreign financial and professional services firms to build links with businesses and governments along the Belt and Road and help investors determine which projects are investable, legal, feasible and sustainable. As an example, HSBC applies all the same standards to BRI projects as we do to any others to help our customers identify opportunities – looking at factors such as jurisdiction, other investors, project structure, risk allocation and expected returns.
BRI projects are being designed to stand up to international standards, which includes sustainability goals. The result is an increased focus on building green infrastructure – creating even more diverse investment opportunities. HSBC Global Research2 says they are already starting to see investors growing their use of sustainable finance. In a September 2017 survey, HSBC found that 97 per cent of European investors, 85 per cent in the U.S. and 68 per cent in Asia planned to increase their climate-related or low carbon investments. To meet our client’s growing interest in these type of investments and support our own sustainability commitment, HSBC has provided US$100 billion in green financing to develop clean energy and lower-carbon technologies through 2025.
China has become a key driver for growth in the global market for green bonds as it has turned its focus toward low-carbon sectors and technologies. (Green bonds are much the same as standard bonds, but proceeds are explicitly used to fund environmentally responsible projects and businesses.) Roughly US$30 billion of Chinese green bonds were issued in 2017, up from just US$1 billion in 2015. The country even recently hosted an International Green Finance Forum in Beijing to discuss green bonds as well as other instruments such as green loans, securities and funds and even green banks and green insurance.
Chinese banks are now also beginning to issue BRI-focused green bonds. In September 2017, the Industrial and Commercial Bank of China (ICBC) issued its first One Belt One Road Green Climate Bonds offshore in Luxembourg. Issued in USD and EUR, the bonds raised US$2.15 billion that is earmarked for financing a range of green projects – from renewable energy, to low-carbon and low-emissions transportation, to energy efficiency and sustainable water management and more.
By creating a global consensus around how we plan and fund infrastructure in emerging markets, the Belt and Road Initiative will be one of the most significant drivers of international development in living memory.
1 "On the New Silk Road VI: Financing the BRI – where the money is coming from," HSBC Global Research, 31 May 2017
2 China's BRI challenge: The greening of the Belt and Road, HSBC Global Research, 10 January 2018