IFR ASIA: Good morning ladies and gentlemen. The Belt & Road Initiative has been a big talking point for the last five years, but most of the financing so far has come from the Chinese policy banks. Mukhtar, what other financing options are available?
MUKHTAR HUSSAIN, HSBC: The Belt & Road Initiative has been running since 2013, so we’ve seen five years’ worth of implementation, and the data suggests something like US$60bn worth of actual equity investments have been put in place. About US$740bn of trade has taken place along the Belt & Road, and 200,000 jobs have been created. There are many figures around the financing, but it’s a fairly material number, whichever way you cut it.
Looking forward, the scale of financing required to support the Belt & Road is quite substantial. If you just put Belt & Road to one side and look at Asian infrastructure, the ADB estimates we need about US$26trn from 2016 to 2030 to build out Asian infrastructure, that equates to about US$1.7trn every year. Depending on whose numbers you believe, there’s a gap, and that gap simply cannot be met by governments. Even the Chinese government can’t fully fund the Belt & Road. The reality is that we are going to see a migration of funding from the Chinese state-owned institutions, which have been very much to the fore in the first five years, and I think we’ll naturally come to an era where international financial institutions will be more heavily involved. In addition to funding being raised through the international bond markets, we see an opportunity in local currencies as well where capital markets will develop. Asia benefits from having relatively high saving rates. So, the theory is that high savings, against the right projects, against the right structures, could find a home through investing in infrastructure.
Clearly, there are some challenges in all of this. The reality is that many Belt & Road financings thus far can be best described as on-balance sheet lending. They have been done, essentially, by the Chinese state-owned institutions, for policy considerations and not entirely for commercial considerations.
As we move forward I think it will involve a much wider range of players and that allows everybody in the capital markets, hopefully, to play a constructive role.
IFR ASIA: Beibei, you have just taken on this job. The question, I guess, is why now? What opportunities do you see for your global and Chinese clients.
BEIBEI LI, CITI: In my previous role I was covering multinational Chinese companies in North America, so right now it’s about covering Chinese companies that are going to be global BRI agents. There is a clear shift of strategy, I think, from Chinese companies to expand on the BRI map. Undoubtedly, Chinese SOEs would play a vital role in terms of going abroad and finding the right projects, through a joint venture or M&A.
There are a number of roles that Chinese SOEs can play. But we are also seeing the rise of Chinese POEs in the Belt & Road Initiative. For example, in terms of the e-commerce business, Alibaba has been having phenomenal growth in South-East Asia.
If we look across the different industries, I would say there are several waves under the BRI. The first wave we see is infrastructure; it is about energy, construction or logistics. But we will be seeing more waves – for example, the expanded economic cycle in terms of consumption, consumer industries, real estate. There will be new industrial parks in different countries, for example. And then we see a third wave of Belt & Road, which we call the digital Belt & Road.
But it’s really not sequential. The digital part is happening at the same time. As I mentioned, for example, the e-commerce company from China going abroad, or telecommunication companies expanding mobile communications or cell phones to the less-developed markets.
We see a variety of corporate players that can benefit from the Belt & Road Initiative. And that’s just one part of the game. The other piece of the equation is the multinationals from the developed markets. We at Citi have been following the footprint of our Chinese and global clients, and we have heard multinational companies from US and Europe say that they are very keen to play a role in the Belt & Road Initiative as well.
They could be raw material or equipment providers, or they could cooperate with Chinese companies in the EPC sector, because they can provide international expertise. They can provide best practices where Chinese corporate players are lacking at the current stage. And there are good assets in the BRI countries and regions as well, where multinational companies may want to invest. They can partner with Chinese multinationals to seek the best assets.
It is really a whole game that a different variety of players in the market can be a part of.
IFR ASIA: What about the investment side? Ken, what’s the theory behind Belt & Road for you?
KEN HU, INVESCO: If we look at the big picture, I would say that China has been changing its business model, and that will affect our fixed-income investments. If we look at the old days, say 10 or 20 years ago, China’s business model was to import a lot of raw materials, like iron ore, and then make use of those raw materials to produce the basic materials that the country needs, like steel. That model worked very well in the last 20 years or so, but some years ago this model started to give China several major problems. One is the shipping costs. If the country continues to ship most of its raw materials from Latin America or Australia, it faces high shipping costs. Another problem to China is pollution as quite some factories in the country are substandard. Over-production is also a problem to China. As China over-produced some basic materials, like steel, it exports them to other countries, the US in particular, leading to current trade tensions with the US. To address pollution and over-capacity issues, the Chinese authorities have been shutting down those sub-scale polluting factories.
Under the banner of “Belt and Road”, we see that China is moving a new business model. Meanwhile, China is diversifying its FX reserves from US Treasuries. We forecast that China will set aside US$100bn to US$200bn to invest in infrastructure, commodities and manufacturing sectors of selective countries in Asia, Africa and Europe, the so-called Belt and Road Region. In addition to capital commitments, with a growing pool of well-educated talent, China has been sending engineers to those countries to support construction projects. The local factories and infrastructure projects could make use of local natural resources. With improving infrastructure, some of manufactured goods and newly explored natural resources could be exported to China and the rest of the world.
Under the old business model of China, investors might focus on the countries which could export more to China. Under the new “Belt and Road” business model of China, we focus on the countries which would receive more direct investments and capital from China and are able turn that capital into productive uses. We expect those selective countries to out-perform in terms of sovereign credit rating upgrades and productivity growth.
In the last two or three months, amid the EM corrections, we saw that the currencies and sovereign credit spreads of those countries which receive more capital from China and are able turn that capital into productive uses were more robust.
China’s Belt & Road Initiative means a new investment framework – we should focus on countries which will receive more capital from China and will be able to turn that capital into productive uses.
IFR ASIA: Lots of talking points to come back to there. Abdul Qadir, I want to ask you if Pakistan’s experience as a recipient country has been positive. And how does that differ from, perhaps, some of the public perceptions?
ABDUL QADIR MEMON, PAKISTAN: Well, from a recipient country’s point of view, we think that there is no master document or masterplan for the Belt & Road. There’s no blueprint. It is more like a brand. Another important aspect is to distinguish what are Belt & Road projects. Sometimes, every project where we see Chinese involvement is tagged as a Belt & Road project. It may be, or it may not be. There are also projects that commenced before 2013, and they are also being seen as Belt & Road projects. For us, Belt & Road is more of a brand.
So far, the Belt & Road commitments that we have received from the People’s Republic of China are about US$62bn. The break-up of that money is important. It’s not 100% debt: 20% of that US$62bn is actually grants. Pakistan will not be returning that money. The rest is divided into two segments. One is the loans from the Government of China to the Government of Pakistan for those infrastructure projects. And the other aspect is private equity. We have seen substantial private equity in Belt & Road projects in Pakistan, especially in power generation projects.
What we have been told, as to why China is investing in so much infrastructure, of course we know that China is dependent on its energy needs through the South China Sea. Today, around 80% of China’s energy needs and about 70% of its global trade passes through a very narrow piece of water, the Malacca Strait. If something happens in the South China Sea, China may face consequences. We think that China is diversifying its risk and investing in the Belt & Road.
The China-Pakistan Economic Corridor is going to connect the Western region of China with the deep-sea port in Gwadar in the South of Pakistan. The same consignment that passes through the South China Sea takes 45 days to reach the ports in Beijing, and if they transit through the territory of Pakistan it is going to take 10 days. There is a substantial time saving, and that will enhance China’s global competitiveness. So, Pakistan has agreed, in principle, to provide the right of transit for People’s Republic of China through its territory. In return, China has committed to build the infrastructure. And the grant component is going to those projects where China is going to benefit directly by using those facilities for transit. The other important aspect about Belt & Road is that China is also interested in developing its Western region, which is one of the most underdeveloped in the country.
We have no objection. If China connects Western region through Pakistan and develops its Western region, we understand that. And as a recipient country, we have seen that the appetite for risk from other investors is not there. Chinese capital is the only available option for us, where investors are willing to take the risk.
Out of the US$62bn around US$20bn has been spent so far. It’s too early to see its impact, but our economy has been doing well since the initiation of Belt & Road projects. Last year, we had 5.5% GDP growth. This year, we expect 6%, which would make Pakistan the fifth fastest-growing economy in the world. BRI has contributed around 1.5% to 2% annual growth in our GDP.
As far as public perception is concerned, a survey by Pew Research, a US-based think tank, last year found that 84% of the people of Pakistan viewed China favourably. That was China’s highest positive rating in any country. In fact it was the highest rating for any country in any other country. Pew Research also mentioned that wherever China is investing in BRI projects, the public perception of China has improved.
This is a positive aspect and I think this sits with China’s policy objectives, because they don’t want to be seen as an imperial power or a hegemonic power. They would like to be seen as a development partner for the Belt & Road countries.
For the Government of Pakistan, it’s an opportunity for us to improve our infrastructure, to improve livelihoods and opportunities, and we hope that this would help Pakistan to realise its policy objectives.
IFR ASIA: David, can you explain to some of us who aren’t so familiar with the legal concepts, what kind of protections have you seen in Belt & Road contracts?
DAVID LAM, KWM: Well I’m a lawyer, and as lawyers we like to help our clients to transact transactions. We like closing deals. And we also like to help our clients prepare for any bad luck.
I would just like to share some of the experience that we’ve had in Belt & Road countries. Initially, in some of these Belt & Road transactions, I echo what Mukhtar mentioned earlier, there is a lot of policy-driven financing. We’ve seen a lot of those transactions driven by the Chinese government and Chinese financiers. They would, probably, prefer to use PRC law, Chinese documentation and they might prefer standard forms, which can be just a few pages long. So, in those initial phases of the transactions we did not really see external lawyers involved.
But as these Belt & Road initiatives evolve, China has also seen the need to bring those transactions to a more international standard, because some of the upcoming transactions might be more market-driven. We have witnessed a transition from more Chinese-law contracts into more international-law contracts. I would say English law has been quite prevalent, especially in Asian transactions. We’ve seen Chinese policy banks willing to enter into English law financing contracts in the Belt & Road countries. This would actually be a very good move for China to raise the standard, and it would give a pretty good foundation for international market players, like the banks and investors, to come into these transactions.
Hong Kong law has also been quite popular recently. Chinese institutions may take some comfort in using Hong Kong law instead of English law, given that London is so far away. Hong Kong, in the same time zone, would make it easier to attend to any dispute resolutions. And from a foreign perspective, Hong Kong is still a common law system, with a lot of resemblance to English law, so that also gives foreign players some comfort. From a contracts perspective, we’ve seen this uplift from a local Chinese standard to a more international standard.
We’ve also seen these policy transactions becoming more market-driven. I echo Beibei’s comment that more multinationals are getting involved. We’ve recently worked on a club deal, a financing, which involves policy banks as well as the Chinese commercial banks. It’s still all Chinese capital, but we’ve seen a move away from solely policy banks. The commercial banks are Chinese, yes, but they are market-driven. They still need to report to their shareholders. They need to make profit. That’s actually great to see.
IFR ASIA: The theme we want to focus on today is the shift to a more commercial framework, and the opportunities for private sector finance. Mukhtar, are we going to be seeing structured project financings with a Belt & Road angle? Is that where we’re going?
MUKHTAR HUSSAIN, HSBC: I think, Steve, that’s the direction of travel that we should move in, because, so far the bulk of the financings have been done through policy institutions. It’s largely been state-led. There have been very few market structures as it were.
But as we look forward, and if China is going to benefit from the provision of external capital, then you need market-driven structures to attract that capital. Those structures provide a level of transparency, a level of inclusivity that actually gives more capital owners a rationale to invest.
We see that trend beginning to develop in some markets. I can give one specific example, where we were advising Indonesian public utility company PLN, which was looking to install some additional power generation capacity in Java. The advice that HSBC provided was really on how to structure the tender process and how to get the largest number of bidders at the most attractive terms.
Essentially the approach that was taken was adopting market discipline, in terms of understanding the structural transparency that the market will look for. What are normally the challenging factors in execution – issues like land rights, environmental consents, community approvals – many of these issues were thought through in advance. And we were able to structure a tender process which got a very large number of bids. It led to a bidder being found at the lowest possible terms within 14 months. In that case, a Chinese entity won the transparent bidding process, but this wasn’t restricted to China.
We had seven bidders from the US, from Japan, from Europe. And that led to a competitive process, which led to the right outcome for the client. I think that began to demonstrate that if you bring in private sector disciplines, around transparency, risk mitigation, feasibility studies, environmental consents, you can bring in all the best bidders from around the world.
That particular example is probably just emblematic of what can be done if that approach is more widely adopted. I think there is scope for private capital to drive these structures from being predominantly corporate-based as they are today to being more broad-based and therefore more attractive to external capital sources, which are much more commercially driven in terms of their outlook.
IFR ASIA: Let’s look at some of those commercial investments, then. Ken, when you look at long-term instruments, does a Belt & Road angle or a Chinese sponsor help?
KEN HU, INVESCO: International geopolitics has just started heating up direct investment competition among China, the US, the UK and Japan, that would benefit long-term investors.
In the US, the White House has launched its Indo-Pacific strategy, and has indicated US$113m of capital and sharing some of the US technology research with selective countries. The US government is trying to strengthen diplomatic relationships with countries like India and Mongolia. The US also plans to turn some federal government agencies into overseas investment vehicles to support American corporations to invest in foreign countries, indicating a capital commitment of US$60bn. In August 2018, United Kingdom’s Prime Minister, Theresa May, made her first official trip to Africa, visiting South Africa, Kenya, and Nigeria. She mentioned that she wants Britain to be the biggest investor in Africa among the G7 nations. Japan is increasing its direct investments in ASEAN countries, competing with China on infrastructure projects.
We see this kind of competition is good for those recipient countries, as it would not only improve economic terms but also transparency of infrastructure projects.
Invesco has put a lot of resources into studying environment, social and governance factors at both the country level and the level of individual bond issuers. My research team focuses on countries which have received capital from China and are able to turn the capital in productive use in a sustainable basis. We pay close attention to governance, environment and social issues.
IFR ASIA: Beibei, how do you think we can get some of these projects up to a standard where you can attract more private sector financing?
BEIBEI LI, CITI: Sure. I would start by saying that a key word for BRI is connectivity. It’s about connectivity among regions and countries, and in the finance world it’s also about connectivity between different partners, who can play complementary roles, as well as connectivity in the capital markets. How to connect origination to distribution means how we can translate risks that cannot be easily understood by investors into something that is more obvious.
I can give two examples. On the connectivity between financial institutions, Citi in April signed an MOU with two of the largest banks in China: Bank of China and China Merchants Bank. The purpose of that is we don’t want to be a competitor, but we want to work hand-in-hand with the Chinese financial institutions to provide insights and best practices in a region where they, perhaps, don’t have a presence. They are very good at long-term lending, but they, perhaps, lack expertise in terms of market solutions or distributing risk. We are still developing the details of the cooperation. But I see those strategic alignments between financial players as key to bringing down the risks to a level that the market can understand.
The second example relates to how to translate or transfer the risk to investors that have appetite for different asset classes or different geographies. Citi has recently helped a government-affiliated single purpose entity on a CLO transaction, which is to securitise all the collateralised loans for infrastructure projects, many of which are along BRI. We have a good range of investors with appetite for different asset classes, and we can properly structure these loans through the right channel for them. It’s a matter of how to make it more transparent and how to utilise our investor connections to best support the financing needs of the Belt & Road Initiative.
IFR ASIA: Abdul Qadir, you said earlier that China is one of the only sources of capital for some of these projects. How do you come to that conclusion? Does Pakistan try to find private sector financing first?
ABDUL QADIR MEMON, PAKISTAN: First of all, let me make an observation regarding competition. We are reading that the United States has come forward with a plan to compete with China in the Belt & Road. As a recipient country, we think that investment in infrastructure is essential, but we also believe that investment alone is not sufficient. We also need to look at the regulatory environment, the ease of doing business, the environment. We also need a trade facilitation environment. Instead of the United States competing with China, or Japan, or the UK, we want them not to compete, but to complement each other. If China is investing in infrastructure – road, bridges, ports and so on – the United States, UK and the other development partners can help developing countries like Pakistan in improving governance structures, in improving the ease of doing business. For example, if China built a port in a developing country and the capacity of the public services means it takes 30 days for the customs to clear goods from that port, I think that the objective of that investment would have failed.
To your question regarding investment in Pakistan, of course, we have been partners with the United States in the war on terror. Afghanistan is our nextdoor neighbour, and the situation there is still quite uncertain, unfortunately. Situations like this create risk for investors, and we have seen this increasing trend that appetite for such risks is not there. For example, we know that there is around US$100trn of pension funds in the West – in the EU, United States and other countries. We don’t see those pension funds investing in infrastructure in developing countries. They’re more interested in the equity markets and other less risky areas. And our experience has been recently that there has been more talk, more rhetoric than actual resources from that side. On the other hand, China has been quite forthcoming. They have been able to address our concerns.
There is a big misconception around the Belt & Road that China has this list of ready-made projects being offered to developing countries. From Pakistan’s point of view, it doesn’t work like that. We have approached the government of the People’s Republic of China with our own projects. If we take 10 projects to People’s Republic of China, we might be successful in getting funding for two.
Another important aspect around dealing with the People’s Republic of China has been that they have been very accommodative on Belt & Road projects. We have seen examples of this in Malaysia, where they have accommodated projects, which were politically important for the previous government. Of course, then, there was a change of government and then there was a lot of political noise. But I don’t blame People’s Republic of China for being accommodating: if there is no political ownership or desire, those projects are not needed. China has been able to accommodate those governments, and this has at times backfired. But I don’t see there’s any other option to move forward on it.
For us, when we take these projects to other investors, we don’t get a good response. We get a lot of talk. We get a lot of rhetoric. We get a lot of advice. But we don’t see any money.
IFR ASIA: David, have you seen examples of how you can mitigate some of these risks – political and otherwise?
DAVID LAM, KWM: From our perspective, we have seen that there are all sorts of risk in the Belt & Road contracts and there’s no legal means of eradicating the risks. The right thing to do is to allocate the right risk to the right parties. If it goes to the wrong parties, it just doesn’t work.
We understand that in the contracts we have to think about the different parties. For example, if we are talking about political risks or natural disasters, we’ve got lots of insurance experts here who play a very important role in covering those sorts of risks. In terms of legal risks, we know that a lot of developing countries may not have a very sound legal system. We’ve seen that in some of our recent transactions, and we suggested that one way of doing it is to use international law in the main documentation, to the extent possible.
So, for example, the facility agreement, could be governed by English law, Hong Kong law, instead of the local law of the host country. While the local system might also be sound, foreign parties may not be that familiar with dealing with local issues.
In some contracts or for some types of assets you might have to use local laws. Land and mortgages are usually very jurisdiction-specific. Then, you have to think of mitigating measures. For example, other than creating local security, can you do an English law security in parallel? Or can you take an English law share charge over the holding company, the intermediate holding company for the SPVs owning the chain of assets.
We’ve got ways to mitigate those risks and actually to make the transaction bankable. Otherwise, if the risk can’t be assessed, it can’t be allocated, and it can’t be mitigated. In that case, then I don’t think we can move a Belt & Road transaction from a Chinese policy-driven format to a more international standard, with more commercially driven terms and the involvement of more international players.
IFR ASIA: What’s the role for Hong Kong here? Where does Hong Kong sit on the Belt & Road?
MUKHTAR HUSSAIN, HSBC: Well, Hong Kong is simply pivotal to the execution of Belt & Road. Hong Kong will be and is, indeed, a hub for expertise. David raised a lot of the issues around legal mitigation of risk, and we’ve got a world-class financial centre here that has a lot of risk management expertise. You’ve got a critical mass of people who have been very successfully involved in the execution of a wide range of infrastructure transactions. You’ve got one of the best listing destinations. You’ve got a very deep bond market. You’ve got a very mature investor base.
In many ways, Hong Kong has all the ingredients, the expertise and the track record, to play a major role. And, indeed, in fairness to the Hong Kong government they’ve been very forthright in investing and making that capability more widely known.
As we go forward, and as we see the transition into more finance from the private sector, not just from state-owned institutions in China, there’s a very natural role for Hong Kong to play in the promotion of those standards. We see Hong Kong continuing to be central to the Belt & Road roll out.
Audience: A quick question about potential problems. China has got a very well-developed arbitration regime, as does Hong Kong. What about the countries on the Belt & Road that don’t have that kind of legal structure? How do you deal with that?
DAVID LAM, KWM: We understand there are two major ways of resolving disputes. Either you go through courts or you through arbitration. And we understand that if you’re choosing courts, it’s usually pretty difficult to enforce a foreign court judgement in another country, like if you want to enforce a Cambodian judgement in China, that’s probably not possible. In the Belt & Road transactions I’ve seen, there’s a trend towards arbitration.
We usually can say that arbitration awards are relatively easier to enforce, because most of the countries are party to the New York Convention on the recognition and enforcement of arbitral awards. So if we have agreed an arbitration forum in a New York Convention country and then you want to enforce the arbitral award in another country, which is also a party to the New York Convention, then it would be much more facilitating.
In reality, we know that there will be obstacles. But it’s important to make these choices on day one, at the time when people are still friendly, not when the dispute occurs. You have to decide on the mechanics of dispute resolutions on day one in the contract.
One perception is that many people may not want to do dispute resolutions in Hong Kong because it’s part of China. But, actually, I think this is misguided, because Hong Kong is a separate jurisdiction. And Hong Kong has a bilateral arrangement with mainland China to reciprocate enforcement of both court judgements and arbitral awards. This is maybe a less well-known fact globally. Agreeing to a dispute resolution in Hong Kong, either through courts or arbitration, actually gives a foreign party a much better chance of enforcing that award or court judgement in mainland China, because of the bilateral arrangements between mainland China and Hong Kong, compared to, say, Singapore.
ABDUL QADIR MEMON, PAKISTAN: For Belt & Road projects, which are basically funded by the Government of People’s Republic of China and executed by Chinese state-owned enterprises, from Pakistan’s point of view, we haven’t witnessed a desire by the Chinese state-owned enterprises to use arbitration in any dispute.
We have observed that the People’s Republic of China wants to resolve those issues bilaterally, through government to government talks. There were some issues in Pakistan, which were amicably resolved at the G to G level. If they had opted for arbitration or other judicial means, they would have to exercise other options. It would have been very, very expensive for the investors as well as the government.
Audience: What kind of incremental projects has the Belt & Road made possible, and which ones would run anyway? For Pakistan, you say you found investment for two of 10 projects. It would be a very positive effect if the other eight would also materialise.
ABDUL QADIR MEMON, PAKISTAN: Yes. For example, if we are building a port in a city, we would also like China to come forward and build an export processing facility. We would like a water desalination plant, if that area has a water shortage. We would also like a power generation plant. So, for example, China may agree to build the port, power generation plant and desalination plant, but they would not build the export processing zone. This is in our master plan, so if any investor is interested he is welcome.
It’s just an example. Of course, when we are building new airports through funding from People’s Republic of China, we would also like to build hotel accommodation near the airport, and we would request funding for a hotel and shopping mall or something like that. China may agree to fund the building of the airport, but they may not agree to fund the other commercial ventures that support the airport. There are many examples. From the projects presented to the People’s Republic of China by the Government of Pakistan, the acceptance rate is around 20% to 25%. Those opportunities still exist, if any investors have the appetite and are able to take the risk.
BEIBEI LI, CITI: I just would like to add that I think the Belt & Road initiative is a multi-decade effort and we are at the very beginning stage. I think we will see that build-up of the whole ecosystem around the Belt & Road. At the beginning, as I mentioned earlier, it is more about large infrastructure projects, followed by the industrial build-out. But we will be able to see more benefits for individual consumers after the road is built, for example. We will be able to see the booming of the economy, and there will be logistics needs in those regions. E-commerce is also growing, and we will be seeing that more very soon in different parts of Belt & Road countries.
I think the build-out of that ecosystem will be seen, perhaps, in the next five years. In 10 years’ time we will be discussing a very different set of topics and challenges.
AUDIENCE: For Abdul, given the Chinese economy is slowing down, it is perceivable that China’s foreign exchange reserves will be decreasing. How would your country react if one day China says it will only lend to you in Chinese currency?
ABDUL QADIR MEMON, PAKISTAN: Of course, the ongoing trade war between China and United States is a cause of concern for all of us, because it is not only going to affect mainland China or United States. It’s going to affect every country in the world.
China is a very important trading partner for Pakistan, and so is the United States. Instead of taking unilateral tit-for-tat measures, we would like to see both countries approach the World Trade Organisation, which is the right place for such disputes. It’s very normal for countries to have trade disputes.
Right now, what we see in Pakistan on the Belt & Road is that most of the Chinese government-funded projects, which are loans to the Government of Pakistan, have an RMB component. The private equity commitments, especially in the power sector, are based on US dollars. Pakistan has a currency swap agreement with the People’s Republic of China. Every project document that is signed also has the modalities of how we will pay back the debt component. If the agreement says we will pay back in RMB, we pay back that debt in RMB. Of course, the agreement can be renegotiated on the consensus of both sides, but we hope that situation does not arise.
Audience: There’s a lot of talk about bringing the projects to international standards. I take that means that there will be a syndication involving both Chinese banks and international banks, such as Citi and HSBC. How would you be able to team up with Chinese banks, given that your risk profile is so different?
MUKHTAR HUSSAIN, HSBC: Perhaps, the way that we would look at it, is that your selection of transactions, your selection of counterparties, is all part of your risk framework in terms of how are you proposing to transact business. We have robust frameworks that we apply to risk mitigation and analysis. Transactions absolutely have to make sense for us in their own right. Lending against security is a poor practice: if your sole basis for lending into a transaction is because it has a guarantee from an export credit agency, that’s probably not a good starting point.
What you want to see is projects that are well structured, where the risks are well mitigated and the parties are all motivated to perform correctly. And then you avoid that situation of having to call on the security. Security certainly helps in terms of pricing, it helps in distribution and it helps to get more people involved. I think the international banks have a role to play in providing funding to support transactions where it’s commercially sensible to do so.
BEIBEI LI, CITI: I agree the risk assessment is the number one priority in terms of assessing a project. But I don’t think we should only look at the Chinese banks or the international banks’ loan books here. We are here to, actually, develop deeper capital market access for the Belt & Road projects. For example, when we are partnering with the Chinese banks, we can provide funding to them by issuing bonds for them under the Belt & Road initiative. Instead of co-lending, we can find a vehicle to get them access to the capital market by giving them bonds from the capital market, so that they can further lend.
But, of course, risk assessment is always the first criteria. In addition to loans, we can always look at other players in the capital markets. There will be investors focussed on project bonds, and there are private equity providers who could be more risk-takers. If we can build that overall system then we’re not only relying on the bank loans or using Sinosure as the main risk mitigant.
Audience: To follow on from that question, to Ms Li and Mr Hussain, what keeps you awake at night as financiers for the Belt & Road Initiative?
MUKHTAR HUSSAIN, HSBC: That’s a very good question to which there are many unknown answers. The reality of Belt & Road is that we can assess what we know, and what is in front of us in terms of the transactions, the territories, the parties. What’s very difficult to know is whether those circumstances will change during the process, if there’s a political transition that takes place, or there’s a viewpoint change around the viability of a particular transaction. It’s managing the unknown risks, because a lot of our models and a lot of our risk frameworks and assessment procedures rely on known variables.
For some of the Belt & Road projects, those variables are much more easy to discern, because there’s data available, and there are precedents. In some of the more frontier markets, that’s more challenging, because that data isn’t there. In some cases, you might be breaking new ground in new jurisdictions, and that requires some very considerable assessment. I think, what keeps us awake at night will be things that we don’t understand in markets where we’re not familiar.
BEIBEI LI, CITI: I think, for me, I will be watching very closely what our clients need. We follow the needs of our clients as they look at a new geography, or a new development. I have always been a client-facing person, so that’s what would be keeping me excited in this field.
Audience: This is a question to the bankers, as well as to you, Steve, at Thomson Reuters. How do you define which projects are part of the Belt & Road brand?
IFR ASIA: I’m going to pass that along to the panel, I think!
MUKHTAR HUSSAIN, HSBC: I think we need to be clear that when the Belt & Road Initiative was set up it wasn’t done with clear parameters saying it’s these transactions in these countries, in these sectors that are eligible.
The Consul General is very clear on this. This is a brand that has developed through discussions between counterparties, in many cases government to government.
You might argue that those transactions would have existed in any event as part of national development plans. What the Belt & Road initiative has done is act as a catalyst to allow those projects to find a form of funding or a realisation that might not have occurred otherwise.
BEIBEI LI, CITI: The Belt & Road Initiative, as Abdul Qadir said, can be a brand. There is so far no defined list of projects, or even of countries. The list from the Chinese government, actually, keeps getting longer. It’s a strategy for China. For example Latin America is now involved. Brazil is the top country for us in Latin America, and we would map that into the Belt & Road Initiative.
The Belt & Road Initiative is also evolving. Currently, we are at the very early stages of including the international capital markets, but globally, BRI can also be an enabler for local capital markets. For example, in Malaysia or in Indonesia, we would be able to see capital markets developing to support a BRI project itself. These stages will unfold gradually, and that’s why BRI is very exciting.
IFR ASIA: In 2016, the official BRI country list included 64 countries. According to Xinhua News, by the end of 2017 China had signed agreements with 86 countries and international organisations.
Ken, you mentioned at the beginning that you’ve got Belt & Road strategies in place, so how do you define what goes into those funds?
KEN HU, INVESCO: We invest in bonds issued by issuers from Africa, Europe, the Middle East and Asia, which directly or indirectly benefit from the Belt and Road Initiative. The issuers may be governments or non-government entities.
We have identified five themes.
One is improving funding costs. For sovereign or corporate issuers in emerging markets, if they could put the capital from China in productive uses and benefit from increasing connectivity with China and the rest of the world as well as increasing trades, their credit profiles will tend to strengthen. This will improve their funding costs and hence credit spreads.
Another theme is infrastructure. We expect more companies in the Belt and Road region to increase their export revenues with improving infrastructure. Commodities, energy and raw materials would be the third theme. The fourth one is consumption. We’ve been seeing, for example, that real estate prices in Vietnam have been rising because of improving job market. So, we may invest in bonds issued by real estate companies in Vietnam. And the fifth one is economic corridors that connect border areas of China to its neighbour countries. We see that the Belt & Road would also benefit some companies in the Western part of China. For example, Xinjiang province could become a railway transportation hub and an energy hub for China, benefiting some local Chinese companies.
The agriculture sector in the Belt and Road Region may also benefit from the US-China trade war. China may need to diversify its soya bean imports from the US. We expect that Chinese companies may increase its direct investments in farming, irrigation systems and fertiliser sectors in the Belt and Road Region. Going forward we may expect China to increasingly import soya beans through railway from some countries in the Belt and Road Region.
Audience: From the banks’ perspective, in your Belt & Road lending or investments, how do you work together with CDB? Do they give you some kind of amount of cheap money and then you lend down to some Belt & Road projects?
BEIBEI LI, CITI: China Development Bank is a very important partner for us in terms of providing support to BRI. We, actually, can collaborate in a number of areas. As an example, we can refer projects to each other. CDB may have their preference on certain regions or certain projects, but they’re not necessarily so familiar with the market outside of China. Citi has a footprint in 60 out of the 70 Belt & Road countries. Collaboration around identifying project opportunities, that’s number one. And number two, we can always be partners in co-lending. We would be able to help CDB going into the international loan markets because we are one of the leading syndicated loan arrangers, and we are familiar with the investor base. As I mentioned before, we may help go deeper into the loan markets through securitisation and further distributing the risk to new investors. There are many innovative ways we cooperate with CDB or other policy banks.
MUKHTAR HUSSAIN, HSBC: I entirely agree. Collaboration amongst financial institutions is already becoming fairly industry wide. Clearly, it’s important that CDB as an institution reaches out to a whole host of institutions – including the Citigroups and the HSBCs and others – as it seeks to extend its capabilities.
Sometimes, it’s as simple as giving people exposure to either markets or industries which will help them develop their sector capabilities or their market assessment or risk capabilities.
The intention, really, is to cooperate meaningfully with each other, so that when activities take
place – co-lending or capital markets issuance, for instance – you’ve got counterparties. This is an industry where you need two hands to clap.
IFR ASIA: Thank you all very much for your time.
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| China Pakistan Economic Corridor – Projects underway in one of the main Belt & Road initiatives | |||
|---|---|---|---|
| Project name | Estimated cost (US$m) | Progress update | |
| ENERGY | |||
| 1 | 2×660MW Coal-fired Power Plants at Port Qasim Karachi | 1912.2 | Fully operational since April 2018 |
| 2 | Suki Kinari Hydropower Station, Naran,Khyber Pukhtunkhwa (870MW) | 1956 | Commercial Operation Date expected Dec 2022 |
| 3 | Sahiwal 2x660MW Coal-fired Power Plant, Punjab | 1912.2 | Project Completed in 28th October 2017 |
| 4 | Engro Thar Block II 2×330MW Coal fired Power Plant | 2,000 | Commercial Operation Date June 2019 |
| TEL 1×330MW Mine Mouth Lignite Fired Power Project at Thar Block-II, Sindh, Pakistan | |||
| ThalNova 1×330MW Mine Mouth Lignite Fired Power Project at Thar Block-II, Sindh, Pakistan | |||
| Surface mine in block II of Thar Coal field, 3.8 million tons/year | 1,470 | Commercial Operation expected December 2018 | |
| 5 | Hydro China Dawood 49.5MW Wind Farm(Gharo, Thatta) | 112.65 | Fully operational since April 2017 |
| 6 | 300MW Imported Coal Based Power Project at Gwadar, Pakistan | To be determined | Environmental approval July 2018; tariffs under discussion |
| 7 | Quaid-e-Azam 1000MW Solar Park (Bahawalpur) Quaid-e-Azam | 1,302 | 3x100MW units operational since August 2016 |
| 8 | UEP 99MW Wind Farm (Jhimpir, Thatta) | 250 | Commercial operation June 2017 |
| 9 | Sachal 49.5MW Wind Farm (Jhimpir, Thatta) | 134 | Commercial operation April 2017 |
| 10 | SSRL Thar Coal Block-I 6.8 mtpa &SEC Mine Mouth Power Plant(2x660MW) | 2,000 + 1,300 | Commercial operations for plant and mine expected by 2019 |
| 11 | Karot Hydropower Station | 1698 | Expected Commercial Operation Date (COD) December 2021 |
| 12 | Three Gorges Second and Third Wind Power Project (2x49.5MW) | 150 | Fully operational since July 2018 |
| Three Gorges Third Wind Power Project | |||
| 13 | CPHGC 2x660MW Coal-fired Power Plant, Hub,Balochistan | 1912.2 | Expected COD Dec 2018 and Aug 2019 |
| 14 | Matiari to Lahore ±660kV HVDC Transmission Line Project | 1658.34 | Expected COD March 2021 |
| Matiari (Port Qasim) —Faisalabad Transmission Line Project | 1,500 | COD expected in 2018 / 2019 | |
| 15 | Thar Mine Mouth Oracle Power Plant ( 1320MW) & surface mine | To be determined | Shareholding agreement on new equity partners in process |
| ROAD | |||
| 1 | KKH Phase II (118km Thakot -Havelian Section) | 1,366 | To be completed by March 2020 |
| 2 | Peshawar-Karachi Motorway (392km Multan-Sukkur Section) | 2,980 | Completion planned in August 2019 |
| 3 | Khuzdar-Basima Road N-30 (110 km) | 80 | Frame Work Agreement shared with Chinese side |
| 4 | Upgradation of D.I.Khan (Yarik) - Zhob, N-50 Phase-I (210 km) | 195 | Land acquisition in Progress |
| 5 | KKH Thakot-Raikot N35 remaining portion (136 Km) | 719.8 | Procedural formalities to be completed shortly |
| RAIL | |||
| 6 | Expansion and reconstruction of existing Line ML-1 | 8,172 | Working party approval for Phase 1 May 2018; COD expected 2022 |
| 7 | Havelian Dry port (450 M. Twenty-Foot Equivalent Units) | 65 | Framework agreement signed in May 2017 |
| 8 | Capacity Development of Pakistan Railways | Focus groups established | |
| GWADAR | |||
| 1 | Gwadar East-Bay Expressway | 140.6 | Date of Completion October, 2020 |
| 2 | New Gwadar International Airport | 230 | Construction work to start in 2018 |
| 3 | Construction of Breakwaters | 123 | Business plan received from China Overseas Ports Holding |
| 4 | Dredging of berthing areas & channels | 27 | Business plan received from China Overseas Ports Holding |
| 5 | Development of Free Zone | 32 | 1st phase completed and inagurated in January 2018 |
| 6 | Necessary facilities of fresh water treatment, water supply and distribution | 130 | Pipelines near completion; desalination plant BOT floated |
| 7 | Pak China Friendship Hospital | 100 | LOE signed April 2018 |
| 8 | Pak-China Technical and Vocational Institute at Gwadar | 10 | LOE signed April 2018 |
| 9 | Gwadar Smart Port City Master Plan | 4 | Completion planned in August 2018 |
| 10 | Bao Steel Park, petrochemicals, stainless steel and other industries in Gwadar | Slated for inclusion as new CPEC project | |
| 11 | Development of Gwadar University (Social Sector Development) | Chinese side will identify a Chinese university for collaboration | |
| 12 | Gwadar Livelihood Project | COPHCL to take measures to boost social sector development | |
| OTHERS | |||
| 1 | Cross Border Optical Fiber Cable | 44 | Project Completed and inagurated by Prime Minister in July 2018 |
| 2 | Pilot Project of Digital Terrestrial Multimedia Broadcast (DTMB) | Working group approved demonstration project May 2018 | |
| 3 | Early Warning System (EWS), Pakistan Meteorological Department | System will be integrated with World Bank project to draw maximum benefit | |
| MASS TRANSIT | |||
| 1 | Karachi Circular Railway | Groundbreaking is expected in 2018 | |
| 2 | Greater Peshawar Region Mass Transit | Feasibility study underway | |
| 3 | Quetta Mass Transit | Feasibility study underway | |
| 4 | Orange Line - Lahore | Orange line project will be complete in 2018 | |
| NEW PROVINCIAL PROJECTS | |||
| 1 | Keti Bunder Sea Port Development Project | Further studies needed | |
| 2 | Naukundi-Mashkhel-Panjgur Road Project connecting with M-8 & N-85 | Project preparation underway | |
| 3 | Chitral CPEC link road from Gilgit, Shandor, Chitral to Chakdara | Project preparation underway | |
| 4 | Mirpur – Muzaffarabad - Mansehra Road Construction for connectivity with CPEC route | Approvals in process | |
| 5 | Quetta Water Supply Scheme from Pat feeder Canal, Balochistan | Under discussion with provincial governments | |
| 6 | Iron Ore Mining, Processing & Steel Mills complex at Chiniot, Punjab | Under discussion with provincial governments | |
| Special Economic Zones | |||
| 1 | Rashakai Economic Zone , M-1, Nowshera | Feasibility studies for SEZs shared with Chinese partners | |
| 2 | China Special Economic Zone Dhabeji | Feasibility studies underway | |
| 3 | Bostan Industrial Zone | Feasibility studies underway | |
| 4 | Allama Iqbal Industrial City (M3), Faisalabad | Feasibility studies underway | |
| 5 | ICT Model Industrial Zone, Islamabad | Feasibility studies underway | |
| 6 | Development of Industrial Park on Pakistan Steel Mills Land at Port Qasim near Karachi | Feasibility studies underway | |
| 7 | Special Economic Zone at Mirpur,AJK | Feasibility studies underway | |
| 8 | Mohmand Marble City | Feasibility studies underway | |
| 9 | Moqpondass SEZ Gilgit-Baltistan | Feasibility studies underway | |
| Social Sector Development | |||
| 1 | People to People exchanges | Both sides resolved to promote Chinese and Pakistani culture and heritage | |
| 2 | Transfer of Knowledge in different sectors | Training workshops on industrial zone held October 2017 | |
| 3 | Establishment of Pakistan Academy of Social Sciences | Consultations to establish PASS with the Chinese Academy for Social Sciences | |
| 4 | Transfer of Knowledge in Education sector through Consortium of Business Schools | Consortium of business schools from China and Pakistan established | |
| Western Route Projects | |||
| 1 | Hakla D.I Khan Motorway | Date of Completion: May 2019 | |
| 2 | D.I Khan (Yarik) –Zhob (N-50) | LOI forwarded to Chinese side | |
| 3 | Zhob Quetta (N-50) | Consultancy, land acquisition underway | |
| 4 | Khuzdar-Quetta– Chaman Section (N-25) | Detail designing and feasibility in progress | |
| 5 | Surab-Hoshab (N-85) | Completed | |
| 6 | Gwadar – Turbat – Hoshab (M-8) | Completed and Inaugurated | |
| Source: CPEC | |||
