The Belt and Road: Great for Trade but Who is Going to Pay? IEMS and BRUEGEL May 2017
The Belt and Road:
Great for Trade but Who is Going to Pay?
IEMS and BRUEGEL
May 2017
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1. Positive impact on trade beyond China
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Working Paper: China’s Belt and Road initiative: can Europe expect trade gains?
By Alicia García-Herrero and Jianwei Wu
Bruegel, September 5, 2016
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Most investment in on the “road” not on the “belt”
• Estimated reduction in road/railway transportation nearly 50% (only 10% for shipping)
• China will look more like Europe in terms of trade transportation
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Air, 22%
Road, 19%
Rail, 0%
Maritime, 59%
Others, 1%
Source: China Customs
Share of Chinese trade by transportation mode
Air, 0% Road, 8%
Rail, 70%
Maritime, 19%
Inland Water, 3%
Source: Eurostat
Share of EU's trade by transportation mode
4
Transportation cost reduction is win-win for trade creation
• Gains larger in Europe, followed by Asia, as land route undergoes larger savings
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-1
0
1
2
3
4
5
6
7
EU Non EU Asia Rest of World
Sim
ula
ted c
hange o
f tr
ade (
%)
Source: Bruegel
Regional trade impacts of the reduction in
transportation costs
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By country, Eastern and Central Europe gain more: Some losers but very small losses, and therefore generally win-win
5
7.6
7.8
8.0
8.2
8.4
8.6
8.8
9.0
9.2
9.4
9.6
Belg
uim
Ne
therl
and
Slo
ven
kia
Austr
ia
Hu
ngu
ry
De
nm
ark
Mo
ldova
Germ
any
B&
H
Pola
nd
Source: Bruegel N.B. B&H stands for Bosnia and Herzegovina
Panel A: Top 10 winners in trade
-0.16
-0.14
-0.12
-0.10
-0.08
-0.06
-0.04
-0.02
0.00
Mo
rocco
Ma
li
Lib
ra
Alg
eria
Sie
rra L
eon
e
Fiji
Seych
elle
s
Ch
ad
Vanu
atu
Japa
n
Source: Bruegel
Panel B: Top 10 Losers in trade
EU Non-EU Asia Rest of World
6
However, if China opts for a trade deal (instead of focusing on infrastructure), Asia becomes the largest winner
6
-2
0
2
4
6
8
10
12
14
EU Non EU Asia Rest of World
Sim
ula
ted c
hange o
f tr
ade (
%)
Source: Bruegel
Impact of a free trade agreement on trade
by region
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2. How to finance the Belt and Road?
7
8
8
14.7
26.2
8.4
2.3
0.8
0 10 20 30
Water & Sanitation
Telecom
Transport
Power
Total
Asia: Investment Needs by Sector (2016-2030, USD tr)
Source: Natixis, ADB N.B. Climate-adjusted estimates
China 59%
South Asia 24%
Southeast Asia 12%
East Asia ex China
3%
Central Asia and Pacific
2%
Asia: Investment Needs by Country (2016-2030)
Source: Natixis, ADB N.B. Climate-adjusted estimates
Huge infrastructure investments needed in Asia
9
9
0
10
20
30
40
50
60
70
80
Russia Other Asia ASEAN Africa Europe
Belt & Road Investments by Country (USD bn)
Energy Rail Industrial Park Materials Port Road
Source: Natixis *Both confirmed and highly likely projects included.
USD 5 trillion!: Size of investment in the next 5 years by official
source
Road 2%
Port 3%
Materials 5%
Industrial Park 6%
Rail 41%
Energy 43%
Belt & Road Investments by Industry
Source: Natixis *Both confirmed and highly likely projects included.
How much so far in the Belt and Road?
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10
Table: China lending to the world
Announced Potential Notes
China Banks - At least 137
USDbn*
Total cross border lending as much as 1,574
USDbn (at least 9% in OBOR)
Development Bank (China Development Bank/EXIM) - 415 USDbn*
Based on actual lending to LatAm by China
Development banks (125 USD bn) and the
relative share of LatAm versus OBOR in
cross-border lending
Bank of China 20 USDbn -
Capital Announced Disbursed Notes
Multilateral banks 240 USDbn 17 - 23 USDbn > 3.1 USDbn
Asian Infrastructure Investment Bank (AIIB) 100 USDbn 10 - 14 USDbn 1.7 USDbn
New Development Bank (NDB) 100 USDbn 5 - 7 USDbn 1.4 USDbn
Silk Road Fund 40 USDbn 2 USDbn -
Source: Natixis * Estimated from the proportion of cross border lending (excluding Europe) to OBOR / Total lending
How to finance this huge investment effort? Key funding source so far not multilaterals but Chinese banks
10
11
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But there is a limit to what China can finance (especially in USD): the world is looking at China’s forex reserves
-500
-400
-300
-200
-100
0
100
200
300
400
-500
-400
-300
-200
-100
0
100
200
300
400
10 11 12 13 14 15 16 17
Natixis China Capital Flow Tracker (Quarterly, USD bn)
Natixis China Capital Flow Tracker
BOP Flow
Source: Natixis
11
5.6
5.8
6.0
6.2
6.4
6.6
6.8
7.0
7.2
2,800
3,000
3,200
3,400
3,600
3,800
4,000
4,200
11 12 13 14 15 16 17
Reserves and Currency
Reserves (USD bn) USDCNY (rhs)
Source: Natixis, Bloomberg
12
Three options to mitigate problem First option: RMB financing
• More financing of infrastructure projects in RMB as host countries’ exports invoiced in
the same currency and providers/infrastructure companies are mainly Chinese
• However, it is now more difficult due to RMB steady depreciation
12
0
5
10
15
20
25
30
35
0
500
1,000
1,500
2,000
2,500
12 13 14 15 16 17
China's cross-border trade settled in RMB
RMB settlement (bn) RMB settlement share (rhs)
Source: Natixis, CEIC
0
10
20
30
40
50
0
10
20
30
40
50
11 12 13 14 15 16 17
USD EUR GBP JPY CNY
Source: Natixis, Bloomberg, SWIFT
Share as international payment currency (%)
13
13
232%
181% 176%
66% 56% 53%
0%
50%
100%
150%
200%
250%
14 15 16 Q3
NPL Coverage Ratio (%)
NPL Coverage Ratio Adjusted NPL Coverage Ratio
Source: Natixis, CEIC, WIND
0
1
2
3
4
5
6
7
14 15 16
Stressed Loan Ratio (%)
Non Performing Loan
Non Performing Loan + Special Mention Loan
Source: Natixis, CEIC
5.8
6
1.7
6
1.0
4
3.5
4
Related research:
China Banking Monitor 2016: From lending to investing in order to survive
But not sustainable given the worsening asset quality of Chinese banks
14
0
50
100
150
200
250
300
350
400
450
HK SG
14
Second option: More offshore financing
• More external financing would increase China’s external debt (from a low level)
• Opportunities for Hong Kong to intermediate the financing of B&R
Hong Kong Market Size USD tr
Bank Assets 2.45
Market Cap 4.11
Bond 0.39
Source: Natixis, World Bank, Bloomberg, CEIC
0
20
40
60
80
100
120
140
CN IN PH KR TH TW ID VN MY NZ JP AU
External Debt (2016)
Source: Natixis, CEIC N.B. Vietnam as of 2015 (rhs)
15
15
0
5
10
15
20
25
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
International Claims (USD tr)
Total Europe China
Source: Natixis, BIS NB Locational statistics used for China, available from 2015 Q4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Borrowing countries (USD tr)
Developing countries OBOR
Source: Natixis, BIS
EU, 55%
Rest of
World, 45%
Total 1,739 USDbn
EU 953 USDbn
Loan to OBOR countries
European banks relevant part of the equation Largest cross border lenders globally but also for OBOR so far
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• USD 5 trillion would increase China’s debt by 50% of GDP
• Equity market needs further development and openness to foreign investors
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Beyond banks, capital markets should be tapped but, again China cannot take all that burden by itself
0
50
100
150
200
250
300
350
China(Unilateral
B&RFinancing)
EU US China
Source: Natixis, BIS
Debt-to-GDP Ratio (%)
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Third option to mitigate problem: More host co-financing
• More co-financing by host country and/or co-financing by other beneficiaries (especially European Union)
• Host country co-financing already happening but the limit is quite clear for many countries (hard to take more debt)
• Already initiatives to attract EU financing in exchange of China’s financing of Juncker Plan
• Also China EU Commission connectivity platform to co-finance transnational transportation projects
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The way forward
• The Belt and Road is indeed a grand plan which will take decades
• The approximate 5 trillion USD financing for next five years is just the beginning. This is a 20 year end game.
• China’s reduced reserves and saddled banks are making financing the key constraint for Xi’s grand plan.
• Trade gains are large for host countries, and even European Union
• It is, thus, in EU’s interest to finance the current version of the Belt and Road.
• European banks well placed to do so as major cross-border lenders
• Hong Kong has a role to play in intermediating external financing as key off-shore center in the region
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