Fund managers positive on China’s OBOR project

16 May 2017   Category: News, Asia, China, Global, Middle East, USA, Europe, Africa   By Asia Asset Management

Market players are cautiously optimistic about the funding plan for the China-led One Belt One Road (OBOR) initiative to boost infrastructure investments and promote free trade in countries along the new trade route.

At the opening of the inaugural Belt and Road Forum in Beijing on Sunday (May 14), Chinese President Xi Jinping pledged US$124 billion for the plan. He said a massive package of additional funding would be provided to finance projects in belt and road countries, including an extra 100 billion RMB ($14.5 billion) for the Silk Road infrastructure fund, a $40 billion Chinese state-owned fund.  

The OBOR project, which Mr. Xi, unveiled in 2013, aims to connect Asia, Europe, the Middle East and Africa with a vast logistics and transport network involving 65 countries.

Cheah Cheng Hye, chairman and co-chief investment officer of Hong Kong-based fund manager Value Partners Group, says the plan is looking a lot more relevant than when it was first introduced four years ago, especially since the US and other Western countries appear to be getting more negative on globalisation.

“Many of the heavy lifters in belt and road are the private sector or state-owned enterprises from China that are very much governed by the profit motive,” Mr. Cheah says in a research note.

“Execution has been slow because good projects are difficult to find and many long-term projects produced quite low returns so it’s going to take time, but we’re seeing real progress. The trade between China and the countries covered by the initiative is already rising much faster than the trade between China and the rest of the world.”

Mr. Cheah estimates that the project could generate as much as $4 trillion of economic value eventually, about one third of China’s gross domestic product today.  

Alicia Garcia-Herrero, Asia Pacific chief economist of French investment bank Natixis, notes that the Asian Development Bank recently increased its estimate of the amount of infrastructure funding needed in Asia in the next 15 years to $1.7 trillion a year, from the $750 billion projected previously.

“The great thing about the China-driven belt and road initiative is that it aims to address that pressing need, especially in transport and energy infrastructure, but there is also a limit on how much China can finance,” Ms. Garcia-Herrero writes in a report.

But there are hurdles, including China’s slowing economy and its limits on the use of foreign reserves, she says.  “Furthermore, Chinese banks balances, the largest source of financing so far, are increasingly saddled by doubtful loans, which limit their lending capacity.”

According to Ms. Garcia-Herrero, European banks are well placed to step up their already large financing to OBOR countries. Private and public European co-financing of belt and road projects are expected to increase over the next few years, she adds.