Key announcements:
China has pledged an additional Rmb100bn ($14.5bn) for the Silk Road Fund.
It will encourage financial institutions to conduct overseas renminbi fund business with an estimated amount of about Rmb300bn.
It will also provide Rmb250bn and Rmb130bn of renminbi loans for OBOR projects via China Development Bank and the Export-Import Bank of China, respectively.
Participant countries made a commitment to the promotion of bilateral local currency settlement and co-operation agreements, development of local currency bonds and stock markets, and to engage in dialogue to prevent financial risks, according to the joint communique from the forum.
The US embassy in Beijing and US businesses are setting up the American Belt and Road Working Group, according to media reports.
The next Belt and Road forum will take place in 2019.
RMBi :
Speaking at the forum, Zhou Xiaochuan, governor of People’s Bank of China (PBoC), said once again that the use of local currencies for Belt and Road projects can mobilise local resources and help ensure financial stability. Zhou added that China hopes to promote the development of capital markets, such as in equities and bonds, and increase connectivity between bond markets.
Ken Cheung, Asian FX strategist at Mizuho Bank, said China’s strategy to push for use of local currency will encourage the use of renminbi beyond China.
“China has been taking some initiatives in this area, including signing the currency swap agreement with other central banks,” Cheung wrote in a memo on May 15. “We believe this would help enhance renminbi’s linkage with other countries along the route and promote renminbi’s usage, turning renminbi into a regional currency.”
Cheung added that the timing of the Belt and Road forum, as China signals some loosening capital controls, was important.
“The Belt and Road Initiative would promote renminbi internationalisation and China is set to resume opening up its capital account in the medium term,” said Cheung. “The capital outflow controls are likely to be temporary measures, and [Chinese] authorities will likely continue to ease their capital outflow controls in the rest of this year as long as renminbi exchange rate remains stable.”
Although infrastructure projects are key to the initiative, Belt and Road’s goal to connect countries and continents will also bring about demand in cross-border financing, said Qu Hongbin, chief China economist at HSBC.
“The Belt and Road Initiative will be the key driver for renminbi internationalisation as it stimulates the next phase of China’s outward direct investment,” Qu wrote on Monday. “[OBOR] will help open up more markets for Chinese companies and facilitate global trade, investment and capital flows.”
Yue Yi, CEO, Bank of China Hong Kong, said in a May 14 statement Hong Kong should make use of its role as an offshore renminbi centre to develop financial products denominated in renminbi, in order to promote the use of renminbi in Belt and Road countries.
“As a world famous international financial centre, Hong Kong has capital, talent, advanced [financial] services and the advantage of One Country Two Systems, which means it can become the most important financial services hub in OBOR,” Yue said.
Economy:
Alicia Garcia Herrero, chief economist at Natixis, said in a May 12 report that a 50% rise in cross-border lending might be needed to reach China’s spending target under the initiative. However, such a sharp uptick in foreign lending to China could end up being a drag on the economy.
“While such a surge in cross-border lending is not unheard of, […] the real bottleneck would be the rapid increase in China’s external debt,” said Herrero. “[China’s external debt] would go from the currently very comfortable level of 12% of GDP all the way to more than 50%, if China were to take on the [full amount of] debt, or something in between if co-financed by Belt and Road countries.”
John West, executive director of the Asian Century Institute, also argued that OBOR can be as much a curse as it is a blessing to the Chinese economy.
“Unless China shifts to a lower volume of higher-quality investments, the country is likely to suffer an infrastructure-led financial crisis,” said West.
China-US relations:
While China has committed a substantial amount of capital to OBOR, results will take time to materialise, Jing Ning, portfolio manager at Fidelity, said in a statement.
“We are unlikely to see projects mushroom immediately,” said Jing. “It requires both financing mechanisms to be in place as well as negotiations to take place between governments before such projects are executed on the ground.”
It may be too early for investors to position their portfolios towards OBOR projects, but Cheah Cheng Hye, chairman at Value Partners, said that a new foreign policy in Washington may force investors to pay closer attention to China’s flagship programme.
“It is noticeable that the new administration in Washington has […] rejected the Trans-Pacific Partnership Plan,” noted Cheah. “Many Asian countries now realise that they have to do something [about OBOR, which is why] the Belt and Road Initiative has gained a lot of support and relevance.”