Bracing for B&R

IFR Asia 1029 - February 24, 2018
5 min read
Asia

Assuming that the wheels don’t fall off in the financial markets as they did a decade ago, I suspect Belt and Road, or OBOR (One Belt, One Road), as it used to be known, is going to loom large this year. I’m tempted to rename the subject “OBORE” because that’s always been my visceral reaction to what at first blush seems a vanity project of Chinese President Xi Jinping, who conceived the idea of a new Silk Road around five years ago.

I say that because I’ve always imagined that I could open a petrol station or even a tobacconist somewhere on the new Silk Road linking China to the Occident as it did in the good old days – let’s say in Turkmenistan – and have it endorsed as a B&R project.

Alright, that’s flippant. But much of what is planned within the scheme would have happened anyway. It’s all about infrastructure these days.

And numerous commentators have pointed out that the B&R project was mooted by various countries on the “route” more than 30 years ago. The concept was simply hijacked by a brand-savvy China.

Much will cross the line under the B&R imprimatur – even my hypothetical bank loan for the tobacconists in Ashgabat could make it – and a few dynamics, aside from the catchphrase, will drive it.

I expect a lot of B&R debt to print this year, and it will have a lot to do with rising US Treasury yields and the desire among investors to find an environment of critical mass which doesn’t have a toxic medium-to-long-term duration dynamic. The Chinese rates market will provide the ideal underpinning (about which more later).

Moreover, there’s the sexiness of Green bonds, which I imagine will provide a natural home for the B&R-labelled bit of paper, whether or not the tin doesn’t quite contain what the label advertises.

WHAT’S BEEN NOTABLE with B&R as far as financings are concerned is the paucity of deals. Despite the MoUs and tie-ups accompanied by handshakes and smiles at press conferences, next to nothing has printed.

We’ve seen it with Deutsche Bank and China Development Bank promising to fund B&R projects for a potential total of US$3bn over the next five years at a glitzy ceremony in Berlin last summer. But as Cuba Gooding Jr said in the 1990s movie Jerry Maguire: ”Show me the money!”

There hasn’t been much of it on display. One watershed moment came some weeks ago when Global Logistic Properties, Asia’s largest owner of warehouses, received approval to issue up to Rmb12bn of B&R-related bonds in Shenzhen, the first such approval in the domestic bond market. Perhaps the B&R floodgates will indeed open.

GLP earlier this month printed Rmb1.2bn of nine-year Panda bonds in Shenzhen, exercising in the process admirable restraint when in the face of frothy demand, the company chose not to print to the maximum Rmb5bn allowed under an over-allotment option.

That was the only B&R deal of critical mass to hit the market – cement company Honshi had hit the Shanghai market a month before with a US$50m-equivalent tiddler. Small size apart, there’s clearly something bubbling in the B&R financing space. Equity offerings are also on the cards via the Stock Connect schemes out of Hong Kong.

Although the Honshi deal offered no obvious pricing advantage, the execution uncovered the new modus operandi: that anything bearing the B&R label is likely to get swifter issuance approval from the regulators.

MEANWHILE, THE RATES backdrop in China seems to me to be relatively auspicious. While 10-year US Treasuries flirt with the 3% mark, in what many commentators regard as the reversal of a 30-odd-year bull market for US government bonds, like-tenor bonds in China are toying with the 4% big figure.

That looks like an attractive switch to me, given that the short-term rate dynamic in China is arguably heading in the opposite direction to its US counterpart, where markets are already starting to price in an aggressive tightening from the Federal Reserve. That switch would fit into the script of China’s government bond market overtaking Japan’s in terms of size over the next few years.

Meanwhile, the heady combination of B&R and Green financing is a taste of nirvana for the label junkie. It doesn’t matter that Chinese Green bonds fail to live up to the stringent standards demanded of the product from most environmentally conscious investors; often as much as half of the proceeds of Chinese Green bonds are used to refinance conventional loans and other debt.

What matters is the branding, or dare I say, the hype. China was the world’s largest issuer of Green bonds in 2016 and the noise is there to suggest that much of the B&R-linked projects will be environmentally friendly. A capital markets match made in heaven is about to unfurl.

Jonathan Rogers_ifraweb
Jonathan Rogers