Although shrouded in the uncertainty brought by the Brexit negotiations, London remains the world's number one financial center. Crucially, the reach of its financial markets and services across Europe, the Middle East and Africa overlaps highly with the regions along the "Belt and Road."
"London's financing capability is second to none globally: insurers, pension funds, sovereign wealth funds and other institutions in the London market have long been seeking long-term projects, in numbers that are unmatched—and all of them can finance Belt and Road projects through instruments such as bonds," Sherry Madera, the City of London's Special Adviser for Asia, said in a recent exclusive interview with Yicai. For the City of London, an important priority is providing financing for the Belt and Road Initiative; not only does the City of London Corporation, as a public governing body, think this is a good idea, but institutional stakeholders across the City are also very interested in participating.
Madera also told Yicai that supporting green and sustainable development financing for the Belt and Road is one of the City of London's key tasks, and to that end she hopes to continue deepening the London market's thinking on the Belt and Road Initiative and to discuss how to participate in its financing.
Financing Belt and Road Projects in Overseas Markets
Market estimates suggest that total infrastructure investment in Belt and Road countries could reach US$6 trillion. An Asian Development Bank report shows that by 2030, Asia's infrastructure investment needs will be as high as US$26 trillion.
In building Belt and Road projects, it has become a trend for Chinese enterprises to broaden direct financing channels and raise funds in overseas markets. For example, since 2016, China Railway Construction Corporation and CRRC—two companies actively involved in Belt and Road construction—have raised a combined US$1.1 billion overseas.
Madera also believes that Belt and Road projects "need not only public funding but also private capital to succeed."
China-UK relations are currently sound and are regarded as a "golden era" for the two countries; when British Prime Minister Theresa May visited China last September, she reaffirmed the wish that the "golden era" can continue. From the City of London's perspective, Madera said, financing Belt and Road projects is a good example of continuing to build this relationship—not only does a public governing body like the City of London Corporation think it is a good idea, but the City's stakeholders are also very interested in participating, including investors who come to the City of London as well as market forces such as Standard Chartered Bank and HSBC, all of which hope to help translate the Belt and Road Initiative into concrete projects.
Madera believes there is a genuine fit between the Belt and Road's financing needs and London investors.
Despite the shadow of Brexit, major multinational financial institutions around the world still regard London as their regional headquarters for Europe, the Middle East and Africa, relying on such headquarters to reach the widest possible pool of talent and manage business in these regions along functional lines.
Take Standard Chartered Bank: its offices span the Middle East and Africa, overlapping highly with Belt and Road countries. Madera noted that the bank also believes it can combine its knowledge of Belt and Road countries with the financial needs of construction.
However, the specific ways financial institutions participate remain to be discussed—for example, whether to adopt direct financing or structured loans, or to create investable bonds or structured products and then seek investors. This awaits answers from Belt and Road project participants.
The just-concluded Belt and Road Forum for International Cooperation achieved a series of outcomes: for example, China will host the second forum in 2019; the parties produced more than 270 representative deliverables; and the total number of countries and international organizations that have signed Belt and Road cooperation agreements with China reached 68.
Madera hopes the forum's outcomes will help the world better understand the Belt and Road Initiative and allow participants to work closely together to determine the financing approaches needed.
One thing is certain: supporting green and sustainable development financing for the Belt and Road is one of the City of London's priorities. Madera revealed that the City of London is working with the Green Finance Committee of the China Society for Finance and Banking, led by the People's Bank of China, to develop Green Investment Principles for the Belt and Road, hoping to complete them by September this year.
Previously, the central banks of China and the UK jointly launched the G20 Green Finance Study Group, encouraging the commercial sector to strengthen green finance innovation and the connectivity of domestic and overseas green bond markets. Bank of China issued the first Chinese green covered bond on the London Stock Exchange.
Insurers Dive into the Belt and Road Market
Beyond financing, London's insurance companies are also eager to seize the huge business opportunities presented by the Belt and Road.
Earlier, Swiss Re Corporate Solutions published a research report saying that the Belt and Road Initiative brings a large number of infrastructure projects and trade liberalization, which will also boost the growth of commercial insurance premiums at home and abroad. It is estimated that between 2015 and 2030, the Belt and Road is expected to lift China's commercial insurance premium income by US$23 billion.
"I think the London insurance market is ready to dive into this market," Madera told the reporter, adding that the Association of British Insurers regards China and Asia as among their regions of greatest interest.
"We believe insurance and insurance products will play a key role: when considering financing, people think about geopolitical risk and construction risk; all these risks need to be priced, and London has always been a leader in insurance," Madera said. Looking at Belt and Road countries, one finds that risks vary greatly from country to country. "When we say something is 'unsafe,' in financial terms it means high risk. However, that does not mean it is uninsurable—only that the price needs to fit the risk the financial market is taking on."
For example, building a brand-new power plant or port—a greenfield investment project—involves construction risk, schedule risk and cash flow risk. Madera explained that in such cases, after fully considering geopolitical risk, it may be better to seek banking facilities with shorter tenors; but when the project enters operation in the second phase, geopolitical risk, environmental risk and operational risk may emerge, at which point an insurance product that can serve for decades needs to be created—and in these areas, the London market is very mature.
Source: Yicai, 2017-05-18