Territory where most bond investors fear to tread are traversed by Chinese President Xi Jinping’s new Silk Road to Europe.
The top three international rating firms rate the sovereign debt of 27 are rated as junk, or below investment grade of the 68 nations China lists as partners in its Belt and Road Initiative. Either they are not rated or have withdrawn their requests for ratings are applicable for another 14 countries, including Afghanistan, Iran and Syria.
According to Morgan Stanley, spending as much as $1.2 trillion on railways, roads, ports and power grids over the next decade is involved in President Xi’s vision, first proposed in 2013 and this week elevated to an official policy enshrined in the Communist Party’s constitution. Even though the route cuts through multiple conflict zones and some of the world’s most corrupt countries, the intent is to extend China’s reach and to open new business opportunities for domestic companies.
Xi said the Belt and Road Initiative is pivotal, while outlining a road-map for his nation through 2050 at this month’s 19th Party Congress. “We hope to make new ground in opening China further through links running eastward and westward, across land and over sea,” Xi said.
There were no comments available from the Ministry of Commerce and the National Development & Reform Commission, China’s top planning body.
This time around the economic heft behind the move stands a better chance of transforming the fortunes of the mostly developing countries along its route even while the idea of China reaching out to the world via trade along its Silk Road is centuries-old. The undertaking has the potential to vault 3 billion more people into the middle class by 2050 and to boost a region that will contribute 80 percent of global economic growth, according to McKinsey & Co.
Offering $1 billion 10-year bond at 40 to 50 basis points over Treasuries, and $1 billion of five-year notes at a spread of 30 to 40 basis points over Treasuries, China this week began marketing its first sovereign dollar bonds since 2004.
Michael Every, head of financial markets research at Rabobank Group in Hong Kong said that it is best to see the initiative as a “vast geopolitical project aimed at cementing China’s political and trade role over that of the U.S., not an economic one in the sense that each project will generate a return”.
According to data compiled by Bloomberg from official statements and company releases, China has so far spent or committed more than $500 billion on the plan. Though comprehensive data on their activities isn’t readily available, the figure is considerably higher if lending by China’s big commercial banks is included.
“Most Chinese spending under One Belt, One Road will see no financial payoff,” said Derek Scissors, resident scholar at the conservative-leaning American Enterprise Institute in Washington. “The firms and banks involved are quite aware of the high likelihood of financial losses in many OBOR countries, even if they will not admit to it publicly.”
Cao Yuanzheng, chairman of BOCI Research Limited in Beijing said that sovereign debt ratings matter less than the financial stability of each specific project. “Even in the poorest countries, projects like public water system, electricity grid and railway are all commercially viable as long as there is income generated from user fees,” he said.
(Adapted from Bloomberg)