Perhaps it’s inevitable that interest in China’s Belt and Road Initiative tends to revolve around the railway lines, ports and highways that will be constructed in its name.
These are the most visible manifestations of the "Belt and Road," and they evoke beguiling images of the ancient land and sea routes along which silk was once transported from Xi’An to St Petersburg, or tea from Guangzhou to Rotterdam. But sometimes it is the financial dimension of infrastructure in Asia that stands out – because of the sheer scale of what is required.
In late February, the Asian Development Bank said it expected emerging Asia to need about $26 trillion of infrastructure investment between 2016 and 2030.
That amounts to $1.7 trillion a year – more than twice what the Asian Development Bank had forecast in 2009. And this is just in Asia, while the Belt and Road encompasses Africa and Europe as well.
Financing this colossal need for transport, telecoms and energy infrastructure across more than 60 countries is going to require all available sources of private and public sector capital.
But it will also generate a broad spectrum of opportunities for local and international investors – and stimulate capital markets development in many Asian markets where bank lending still tends to dominate financing.
Take the Investment Opportunity Aspect First.
Announced in 2013, the Belt and Road Initiative will galvanise infrastructure construction as far afield as Southeast Asia, the Middle East, Africa and Europe.
Beijing has spearheaded several institutions to facilitate some of the financings. The Asian Infrastructure Investment Bank, the New Development Bank and the Silk Road Fund have a combined financial firepower of $240 billion and are starting to become active investors in Belt and Road projects.
But even they can supply only a fraction of the amount that needs to flow into infrastructure as developing nations aim to raise productivity and deal with growing urbanization and the impact of climate change.
While the need for infrastructure spending is not new, Beijing’s Belt and Road push has added an extra sense of urgency. It has intensified the appetite to begin projects and to get them financed.
Infrastructure projects by their very nature are large, complex, often multi-decade ventures that can involve different kinds of funding over their lifetime.
So Belt and Road fundraising will need to come from the full range of sources, including bridge financing from banks; equity capital from governments, funds and public and private equity markets; and longer-term bond issuance both from the private sector and public-sector institutions like the Asian Infrastructure Investment Bank (AIIB).
This is good news for investors right now – be they sovereign wealth funds in Asia or asset managers in Europe, Japan or America. Interest rates and yields remain at all-time lows following the global financial crisis.
In this context, infrastructure projects and the stable, long-term returns they tend to provide are increasingly attractive in the eyes of investors who are looking to diversify their holdings.
Sovereign wealth funds, for one, have been deploying more of their assets to global infrastructure investments, especially in Asia. At the same time, the savings of Asia’s middle classes are growing rapidly, and these savers are looking for yield.
The steady return potential of infrastructure investment will be a good fit, especially as many of these savers are getting older and need to plan for their retirement.
Meanwhile, the expected growth in capital-raising activity is also good news for the development of some of the smaller, less mature markets along the Belt and Road. Many emerging-market local-currency bond markets have grown rapidly in recent years.
But they mostly remain small relative to the size of the economies they serve – let alone compared with the $40-trillion-plus2 US bond market.
A boost in issuance, as well as continued reforms, could give them the depth and breadth that will make them more attractive to international capital and domestic retail investors.
It will also help reduce reliance on bank lending and expand financing options for private companies. Within mainland China itself, the onshore bond market was further opened to foreign investors last year, including banks, insurance companies and pension funds.
China has also made it easier for foreign entities to issue RMB-denominated bonds in the domestic market. Issuance of such "panda bonds" has soared, last year hitting RMB 122 billion, eight times the 2015 amount.
Last but not least, increased capital-market activity could – we hope – prompt more cross-border regulatory coordination among markets in Southeast Asia or Central Asia, for example.
More cohesion in areas like documentation, taxation, foreign exchange regulation and credit ratings could lend critical mass to what is at present a fragmented landscape of many relatively small and illiquid markets.
All these developments may not be as immediately visible as the bulldozers and cranes that are laying down train tracks and dredging ports around the globe. But we believe bonds – as well as other forms of capital – have a critical part to play in making that activity possible.
Gordon French is the Head of Global Banking and Markets for the Asia-Pacific region at HSBC. He is based in Hong Kong and is responsible for all of GBM’s businesses in the region. He holds a Bachelor of Commerce degree from The University of Melbourne.