China’s ‘Belt and Road’ initiative is good news for the capital markets

Less obvious is the impact that the vast amount of spending linked to the initiative will have in the financial arena – in the currency and bond markets in Asia and beyond.
Initiated in 2013, Belt and Road is an essential part of China’s economic rebalancing and of its outbound ambitions. It entails ploughing trillions of yuan into hardware – railways, highways and ports – that links China and the countries to its west and south.
The impact on the software of financing will also be significant. The money needed to meet Asia’s infrastructure needs will inject fresh momentum into the region’s capital markets.
Investment in planned and ongoing Belt and Road projects could total 1.5 trillion yuan (Bt8.2 trillion) in the coming years [footnote 1]. Part of this will come via a US$40-billion (Bt1.4 trillion) Silk Road Fund and the new $100-billion Asian Infrastructure Investment Bank.
Yet this is only a small part of the trillions that will need to flow into transport and urban infrastructure over the coming decades, as developing nations aim to raise productivity and deal with rising urbanisation.
In Thailand alone, more than 10 million people are expected to move to cities over the next 20 years. Across Asia, the total is about 800 million [2].
The Belt and Road initiative will trigger more issuance and investment in China and encourage policymakers to open the country’s capital market further to global participants.
Local-currency markets in other countries along the Belt and Road, including Thailand, could also get a welcome boost.
Thailand’s well-developed capital-markets framework will help bring foreign issuers with close economic ties to its sophisticated local investor base.
Belt and Road-related spending will help provide the “push factor” that will provide much-needed breadth, depth and liquidity to many of Asia’s smaller markets.
A “pull factor” is also at work here in the form of Asian cash looking for yield and investment options.
Many of Asia’s economies, including Thailand’s, are still growing well above the global average [3]. In the Asean region alone, the middle class is set to double by 2025 [4].
While household, corporate and government debt levels have risen in parts of the region, they mostly remain low compared with those in the developed world.
And for an ageing population in many countries in the region, the stable income provided by bonds can be an attractive investment option as retirement approaches.
This convergence of supply and demand could help transform Asian financing markets in the coming years by expanding the role of bond markets in recycling Asian savings into long-term investment in infrastructure for growth – especially if policymakers manage to bring about more cohesion in areas like taxation, foreign exchange regulation and credit ratings.
On the currency front, more and more of the increased trade that Belt and Road facilitates will be settled in yuan. In other words, the initiative will help boost the internationalisation of the Chinese currency.
Belt and Road will help make it easier for trucks, ships and trains to transport goods around large parts of the globe. But it could well have another valuable impact in oiling the wheels of finance.

Footnotes

1. HSBC Global Research: “On the New Silk Road III”, April 2015.

2. United Nations, Department of Economic and Social Affairs: World Urbanisation Prospects: The 2014 Revision

3. HSBC Research: Global Economics Quarterly, January

4. McKinsey: www.mckinsey.com/insights/public_sector/understanding_asean_seven_things_you_need_to_know

Dickinson, the author, is head of global markets and treasurer for Thailand at HSBC.