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Xi Jinping, the Chinese president, has a fondness for atavistic grand designs. In one, the “Chinese dream”, he urges his people to recapture the glories of the past through a national rejuvenation. In another, the “New Silk Road”, he looks back in time to envisage a future buoyed by closer ties across Eurasia.
So wide-ranging is the New Silk Road initiative to build vast infrastructure projects among 64 countries linked by China’s ancient trade routes that the plan encompasses a full set of Beijing’s modern development goals, including promoting the use of the renminbi in international investment and finance.
The scheme, also called “One Belt One Road” (OBOR), is set to turbocharge renminbi usage, emphasising the Chinese currency’s role as a vehicle to raise capital in overseas financial centres to fund railways, highways, ports, airports and other infrastructure projects across Eurasia.
“London, the US and Asia, plus local markets where the projects are being built, will be places to raise money, as well as onshore in China,” says Spencer Lake, global head of capital financing at HSBC, an investment bank.
“The OBOR financing will be massive and we are already seeing deals being concocted that will require the mainstream public markets for liquidity,” he adds.
Already, the influence of OBOR is evident in China’s overseas investment flows, which rose 16.3 per cent in the first 10 months of this year to $92.5bn. Within this, OBOR-related investment rose 36.7 per cent to $13.7bn, according to China’s ministry of commerce.
But these are the mere foothills of OBOR ambitions. The China Development Bank, one of the country’s main policy banks, has calculated that some 900 projects worth a total of $890bn are currently under way or planned.
The lion’s share of the funding — both in renminbi and other currencies — is likely to come from Chinese policy banks such as the CDB and the China Ex-Im Bank, supported by the Asia Infrastructure Investment Bank, a new China-led development institution with 57 founding governments, and the Silk Road Fund, a state-owned investment fund, as well as Chinese banks.
But Chinese institutions are also increasingly tapping offshore financial centres to take advantage of a climate of low interest rates and to popularise the renminbi. In the run-up to Mr Xi’s visit to London in October, two state-owned Chinese banks, the China Construction Bank (CCB) and the Agricultural Bank of China (ABC) issued bonds, at least partially in renminbi.
The issues were heavily oversubscribed, with the CCB Rmb1bn bond attracting orders in excess of Rmb5.5bn from investors lured by a coupon of 4.2 per cent and little default risk for what amounts to a quasi-sovereign issue.
“There is a tremendous amount of liquidity for primary new issues from a wide range of Chinese issuers in multiple currencies,” Mr Lake says. “The recent deals in London demonstrate that. As China’s profile on the world stage grows, so too will demand.”
The ABC bond also indicated strategic priorities. The issue was styled as a “green bond” and raised a total of $1bn in both US dollars ($900m) and renminbi ($600m), all of which is destined to be invested in “green” projects including renewable energy, energy efficiency, sustainable transportation, waste management, sustainable land use and water management.
Such “green” investments are envisaged as a key component of the OBOR master plan as China tries to boost the international business of its environmental companies, which it regards as world leaders in search of a ripe international market. The aim is that Chinese suppliers to such OBOR projects will be paid largely in renminbi.
“London is seen as a place where China can raise much of the finance for OBOR projects at relatively low rates and in renminbi,” said one UK official, who declined to be identified. “The main challenge is ensuring that there is enough renminbi liquidity to buy the debt that is issued.”
In order to deepen the market for renminbi in London, the People’s Bank of China, the central bank, has started regular sales of one-year renminbi debt at the relatively attractive rate of 3.1 per cent (compared with just 2.43 per cent for one-year sovereign notes onshore). In an indication of demand, the first Rmb5bn tranche attracted 91 orders of over Rmb30bn, bankers said.
Reinforcing this trend toward tapping offshore capital markets was the official easing of rules in September on Chinese corporate bond issues overseas. The new rules, published by the National Development and Reform Commission (NDRC), withdraw a requirement for approval and require only that companies inform Beijing of their bond issuance intentions within 10 days of selling.
Such auguries suggest a significant boost not only in Chinese activity in offshore debt markets over the next few years, but also a growing role for the renminbi as an increasingly influential currency in international debt markets.
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