The road less travelled

There have been numerous attempts to kickstart a Belt and Road bond market. But bankers are confused what that means in practice – and investors are unsure why they should care, writes Matthew Thomas.

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When Bank of China raised about $4bn from a Belt and Road bond in the middle of 2015, bankers hailed the issuer as a “pioneer”. The fund-raising was certainly a difficult undertaking, combining deals in four different curren­cies, requiring the coordination of five issuing entities and offering investors 10 separate tranches. But what exactly did the issuer pioneer?

The Belt and Road bond market, also known as the Silk Road bond market, has shown some signs of life since then. China Development Bank, Maybank and even the Republic of Maldives have sold bonds with a Silk Road label. By June, the Shanghai Stock Exchange had approved 14 Belt and Road bonds in the domestic market, worth a combined Rmb80bn ($11.56bn).

But each deal has left market par­ticipants scratching their heads. What exactly is a Belt and Road bond? Aside from the label and marketing hype, how does it differ from any other deal by a Chinese issuer? How important is the use of proceeds? What exactly is a Belt and Road project anyway?

Neither bankers nor investors appear to know the answers to these questions, at least not yet. When GlobalRMB asks one China DCM head how much poten­tial there is for the Belt and Road bond market he shakes his head and laughs. “Does that answer your question?” he says.

“It doesn’t really mean much at the moment. There is no certification like you get in the green bond market and no guarantee that funds are being used along the Belt and Road. Investors don’t treat these deals any differently than they would a deal without the label.”

Part of the problem is that the Belt and Road Initiative (BRI) itself is ill-de­fined. The BRI is split between the ‘21st Century Maritime Silk Road’, which is a sea route covering South and Southeast Asia, the Middle East and parts of Africa, and the ‘Silk Road Economic Belt’, a land corridor that cuts through Central Asia to Europe.

The initiative has suffered not only from being over-ambitious in targeting nearly the entire globe, but also from the fact that most of the funding so far has come from Chinese development banks. That has reduced the transparency of lending done around the initiative and limited the scope for the public capital markets to serve their purpose.

“There’s a lot of marketing hype around the concept and having the label helps to appeal to certain institutions that need to be seen to be supporting the Belt and Road Initiative,” says Adam McCabe, head of Asian fixed income at Aberdeen Standard Investments. “But any project that’s helping to finance a Chinese development around the world could be classified as a Belt and Road-re­lated bond.”

There has been some effort to clarify the matter. In March, the Shanghai and Shenzhen stock exchanges issued guide­lines for Belt and Road Panda bonds, saying issuers must allocate 70% of the proceeds of their deals to BRI projects and forcing them to make clear in their prospectuses which projects would bene­fit from the funds.

But even though the rules went some way to defining the ‘bond’ part of Belt and Road bonds, they did little to address the wider confusion around the term.

“If I am building a power plant in Pakistan, is that a Belt and Road project? It can be, or it can just be considered a local project,” Ivan Chung, head of Greater China credit research and analysis at Moody’s, told GlobalRMB at the time. “Belt and Road is a very broad and vague concept, and I don’t think the guidelines provide a lot of details about the scope of BRI.”

None of this is likely to put a stop to Belt and Road bonds any time soon. Although bankers and investors may not see the purpose of these deals, they do at least offer a clear — and relatively pain­less — opportunity for issuers to show their commitment to an initiative that was launched by president Xi Jinping in 2013 and which has since become a key plank of Chinese foreign policy.

“The only reason Chinese issuers will sell Belt and Road bonds is to show the government ‘we’re doing what you want us to do’,” says the China DCM head. “There is no other benefit.”

For many issuers, that may be benefit enough.