In its heyday, the Silk Road was the most important trading network in the world – connecting east to west and stimulating diplomatic, economic and cultural development. Some 2000 years later, China has set out to rebuild this historic highway. Deutsche Bank’s Global Head of Trade Finance Daniel Schmand provides an update on the project’s progress, and the opportunities arising from it.
When China’s President Xi Jinping called for a modern revival of the country’s ancient Silk Road trading network in late 2013, onlookers were understandably astonished at the sheer scale of his ambition. The resources and global collaboration required to drive the initiative are unprecedented, with some estimating the project will cost up to US$900bn, and President Xi having already pledged a substantial US$124bn. The human development project, dubbed the Belt and Road Initiative (BRI) (“yi dai yi lu” or “one belt, one road” in Chinese), lays out a vision of integrated Afro-Eurasian trading, driven and supported by the creation of solid national infrastructures.
Spanning 60 countries across three continents, BRI is estimated to exceed the reach of the Marshall project – which galvanised economic regrowth in Europe after World War II – twelvefold. Projected to reach 65% of the world’s population, while covering 75% of all known energy reserves, one-third of world GDP and a quarter of all cross-border goods and services trade, BRI is arguably the largest human development project in history. Building this huge modern network will require equally huge capital investment, which creates numerous opportunities for financing. The Silk Road Fund was established at the end of 2014 with investment from the State Administration of Foreign Exchange, China Investment Corporation, Export-Import (Exim) Bank of China and China Development Bank (CDB), and “in collaboration with domestic and international enterprises and financial institutions”, is designed to promote the “common development and prosperity of China and other countries and regions involved in the BRI”.
Sizeable infrastructure projects are being pursued across Afro-Eurasia, with banks and businesses alike no doubt buoyed by the numerous benefits these projects can have. BRI is becoming a catalyst for economic, infrastructural and diplomatic advances – and is gaining traction.
International and national backing
BRI projects are sound investments for corporates and their financiers, thanks to their backing from China’s export credit agency (ECA), Sinosure, the Exim Bank of China, CDB and the four state-owned Chinese commercial banks – Bank of China (BOC), China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC) and Agricultural Bank of China (ABC) – along with the respective governments of BRI countries. The nature of these projects positions them as cornerstones of national economic policy, which, combined with considerable backing from a number of industry bodies, give them an acceptable risk profile.
BRI projects have similarly gained support from highly respected industry bodies, including the European Bank for Reconstruction and Development (EBRD), German government-owned development bank KfW, the International Finance Corporation (IFC) and the International Monetary Fund (IMF). The European support here has been particularly important in compounding BRI’s stability when dealing in emerging markets with unpredictable business climates – as was suggested by ratings agency Fitch in 2017.
Funding provision in local currency is part of Deutsche Bank’s Memorandum of Understanding (MOU) with CDB, which was signed in May 2017. This strategic partnership was formed to stimulate RMB internationalisation and promote financial and economic co-operation between Germany, China and other countries along the BRI routes. Deutsche Bank is the first international bank to sign this kind of MOU with a Chinese banking partner.
The MOU between Sinosure and Deutsche Bank signed two months earlier is already yielding results, underpinning a US$50mn facility for the cross-border financing of a cement project on behalf of a Chinese company’s Kazakh subsidiary. Currently, there are three deals live under the Sinosure MOU, amounting to total of over US$650mn.
While internal board committees (whose support drives financing propositions to market) may harbour memories of BTA Bank’s fraud and consequent bankruptcy a decade ago, the financing of these new Silk Road ventures in Kazakhstan are cut from a different cloth – not least because they are entrenched in economic policy and consequently enjoy robust government support. Critically, these agreements also depend on a natural flow of goods into the country, which was not the case with the loans afforded to BTA back in the late 2000s.
With such firm backing in place, investment in Kazakhstan continues. In 2018, the state-owned Development Bank of Kazakhstan (DBK) took the first drawdown of a US$225mn Sinosure 12-year buyer credit facility for the modernisation and expansion of the Shymkent oil refinery. Deutsche Bank Hong Kong acted as mandated lead arranger and agent of the facility, which stands to strengthen Kazakhstan’s economic and political relationship with China. DBK’s stake in the expansion has so far amounted to a total of US$932mn in loans, with the equivalent of US$100mn of this funded in Kazakhstani tenge.
Roads to other projects
Significant inroads have been within other emerging markets too, such as Pakistan and Greece. Pakistan is a key country for the BRI thanks to its strategic location between Asian and Western economies. As a result, a microcosmic BRI project, the China-Pakistan Economic Corridor (CPEC), was launched in 2013. The CPEC forms an important portion of the second Silk Road, and has become a hotspot for financing opportunities. From hospitals to railways, power grids to motorways, all equipment pertinent to manufacturing, building and running these projects will require financing under the BRI banner – creating an estimated 1 million jobs across Pakistan.
The results of BRI’s infrastructure projects have been impressive across the board. Take the financing of ZAO Baltic Pearl project, for example, whose three-year US$95mn Sinosure-guaranteed credit facility was structured by Deutsche Bank in 2016 and won Asiamoney’s New Silk Road Award for “Best Bank for BRI-Related Infrastructure Finance” in 2017. Upwards of US$1.3bn has been invested in the Baltic Pearl development in St Petersburg since 2005 and it has been noted as the largest residential project in the area, as well as the biggest non-energy investment by Chinese companies in Russia.
With attractive risk profiles and a compelling, progressive purpose with positive impact, BRI projects continue to represent great opportunities for business and bank, albeit this looks like a 15 to 25-year project. Central to a valuable agreement is effective risk mitigation, through strong relationships with local parties and support from incumbent countries’ ECAs.
Deals along the road
1. SEPCOIII, Iraq: US$105mn advanced payment guarantee
In December 2016, Deutsche Bank arranged a US$105mn advanced payment guarantee issue for SEPCOIII Electric Power Construction (a subsidiary of Power Construction Corporation of China) and its Al-Anbar Combined Cycle power plant in Iraq. Once operational, the 1,642MW power plant will be one of the largest and most efficient combined-cycle power plants in the world.
2. ZAO Baltic Pearl, Russia: US$95mn Sinosure-guaranteed credit facility
In 2016, Deutsche Bank structured a three-year US$95mn Sinosure-guaranteed credit facility for ZAO Baltic Pearl. While most of the investment for this project has been provided by Shanghai Overseas United Investment Holdings (SOUI), this Deutsche Bank loan offers overseas subsidiary financing without the need for cross-border parent guarantees for SOUI’s nine shareholder companies. The project – and this latest round of funding – has been hailed by policymakers in Beijing and Shanghai as a model for Chinese companies looking to invest in BRI projects in Russia and other countries in Central and Eastern Europe.
3. Development Bank of Kazakhstan, Kazakhstan: US$225mn Sinosure buyer credit facility
In February 2018, the Development Bank of Kazakhstan executed its first drawdown from the 12-year US$225mn Sinosure buyer credit facility, for which Deutsche Bank acted as a Mandated Lead Arranger, and continues to act as facility agent. The deal finances the modernisation and expansion of the Shymkent oil refinery in Kazakhstan – a project that is set to have a significant political and market impact. Benefits include improving the quality and increasing the volume of petrochemical products in the local market, while also improving the refineries environmental impact.