It is funny just how creative bankers can be whenever they come up with something new they need to publicise and sell.
Those familiar with Asia will have no doubt heard of dim sum and Panda bonds, which refer to offshore renminbi-denominated bonds and renminbi-denominated bonds sold by foreign issuers in China, respectively.
Both their names and the asset class they represent have resonated well with market participants, which is reflected by the billions of dollars’ worth of issuance following their creation. (see GlobalRMB data)
One of the major reasons for their success is because their existence fits with China’s policy aims. Dim sums helped promote the offshore renminbi market while Pandas are aimed at internationalising the country’s domestic bond market.
Based on the same school of thought, Silk Road bonds, or bonds in which the proceeds will go into a project associated with China’s Belt and Road initiative, should boast a similar level of potential. At least that was the suggestion at an event Summit organised by International Capital Market Association and Dagong Global Credit Rating on September 8.
The Belt and Road initiative encompasses about 60 countries and one of its key concepts is economic integration between the various jurisdictions. But that can only happen if the proper infrastructure is in place to link them together.
Needless to say, a lot of infrastructure investment is needed to turn this into a reality — roughly $2tr-$3tr per year. A large portion of that will have to come from the debt market.
This is supposedly where Silk Road bonds come into play although there have only ever been three transactions marketed as such. Bank of China kick started issuance in June 2015, followed by China Development Bank three months later and China Construction Bank (Asia) in November. All three are meant to be on-lending the proceeds to Belt and Road projects.
Silk Road bonds Silk Road bonds have not been in the market for a long time but here is GlobalRMB’s guide on what is there to know about the nascent product. What exactly is a Silk Road bond? The notes are linked to China’s Belt and Road initiative, which is split into two components – the land based Silk Road Economic Belt and the Maritime Silk Road. As things stand, bonds for which the proceeds will be used for a project associated with the initiative count as a Silk Road bond. However, there is no official definition of the product. Is there a big market for this? One of the key aims of the Belt and Road initiative is infrastructure investment, which is estimated to be anywhere from $2tr-$3tr a year. It can be hard to predict just how big a part Silk Road notes will play, but even if only a small part of the funding is completed in the bond market, the volumes could be huge. Are there any examples of Silk Road bonds? Only a few. As things stand, three Chinese banks have issued Silk Road bonds for a combined $7.26bn spread across a variety of currencies including euros, renminbi, Malaysian Ringgit, Singapore dollars and US dollars. |
It is hardly surprising that financial institutions are taking the lead in issuing Silk Road bonds as bank lending remains one of the main avenues of funding in emerging Asia in particular.
But it is simply unrealistic to have to rely on banks to provide the financing needed for projects related to the Belt and Road initiative, especially when so many zeros are involved.
One solution would be for Asia to finally start embracing infrastructure project bonds. In its purest form, an infrastructure project bond is where the source of repayment is based on the revenues generated by the project itself.
This would be a perfect fit with what Silk Road bonds are meant to achieve, which is to provide a channel for Belt and Road projects to obtain the necessary funding.
There are, however, obvious difficulties in making infrastructure project bonds work in emerging Asia.
One of the major stumbling blocks is the buyside’s unwillingness to invest. While project bonds are common in developed markets such as Europe and US, it is a different story in this part of the world where infrastructure investment is notorious for the high risks, which can range from political uncertainty to projects being delayed or left uncompleted.
The most common scenario would be for local governments to support this via credit enhancement facilities or guarantees. But for one reason or another, many countries in emerging Asia have either been extremely slow to come up with such plans or they already have plans in place but have difficulty rolling them out.
This calls for someone else to step up the plate and the ideal candidates would be the likes of Asian Infrastructure Investment Bank, Asian Development Bank or New Development Bank.
On the other hand, investor concerns could also be soothed if there are proper guidelines in place for Silk Road bonds.
Perhaps the market could learn from Green bonds where industry bodies such as ICMA and the Climate Bonds Initiative have introduced guidelines detailing the standards for the market to follow.
For starters, it would be useful to have a proper definition for Silk Road bonds. Other standards Silk Road bonds could benefit from would be mechanism to track the use of proceeds and third-party verification.
The potential of Silk Road bonds is huge but only if the proper system is in place to make them work. If not, it could very well end up as just another addition to the long list of capital markets gimmicks that are forgotten as quickly as they are created.