Published January 25, 2017
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Date: January 25, 2017
Categories: China, Data & Analytics, Governance, Markets Exchanges, rating
Keywords: Fitch, OBOR
China's One Belt, One Road (OBOR) programme will support domestic demand in some of the economies involved, and may help to resolve some infrastructure inadequacies. However, OBOR is driven primarily by China's efforts to extend its global influence and relieve domestic overcapacity. There is a risk that projects might not be aimed at addressing the most pressing infrastructure needs and could fail to deliver expected returns, says Fitch Ratings.
China's shift away from an investment-led growth has created pockets of excess capacity across much of its industrial sector. OBOR is in large part a strategy to export this spare capacity and surplus domestic savings. Under the programme, Chinese funding will be used for the construction of a network of transport, energy, and telecommunications infrastructure extending across Asia, eastern Europe and east Africa, as well as less developed parts of China.
OBOR and the increasingly international focus of China's construction companies will create opportunities in the targeted economies. Some of the OBOR projects are large enough to make a significant difference to the performance of the economy in which they are located.
OBOR projects might help to address some infrastructure deficiencies in the region, particularly in countries where a shortage of long-term domestic savings is a constraint on investment. Furthermore, Chinese firms bring with them technical expertise that is often lacking in emerging markets.
However, there are risks attached to OBOR. Chinese officials have stressed that OBOR will be run with market-based principles and that projects should generate returns for shareholders. In reality, OBOR projects do not have to demonstrate the same level of commercial viability that would be required to attract domestic or foreign investors.
Fitch has doubts that China's banks can identify profitable projects and manage risks better than international commercial banks and multilateral lenders. After all, Chinese banks do not have a track record of allocating resources efficiently at home, especially in relation to infrastructure projects. The implied backing of projects by the Chinese government could also add to complacency.
In some cases, genuine infrastructure needs and commercial logic might be secondary to political motivations. OBOR, in addition to being a way of exporting spare capacity, is a component of China's efforts to expand its strategic international influence, and a means of securing access to key commodities. Meanwhile, local politicians have an incentive to associate themselves with marquee projects. This subjugation of market forces means there is a heightened risk of projects proving unprofitable.
Execution risks are also high. Chinese engineering and construction companies have extensive technical experience, but most will be operating in unfamiliar markets and will often need to deal with challenging and unpredictable business environments.
Some of the loans are large enough to have an impact on the borrowing country's public finance profile, particularly if debt-servicing from project proceeds becomes a problem. Fitch-rated sovereigns with identifiable OBOR projects are typically of speculative grade, but as a whole range from the 'B' to 'BBB' categories.
Re-disseminated by The Asian Banker