Chinese groups in billion-dollar Eurasia quest

Institutional investors are looking to latch themselves onto the bandwagon as the country’s infrastructure firms unveil aggressive strategies to expand abroad.

“From a historical perspective, One Belt One Road is something that must take place. [Eurasia] is the least globalised part in the world,” Ronnie Chan, chairman of Hang Lung Properties, recently told delegates at the Asian Financial Forum (AFF) held last month in Hong Kong.

The One Belt One Road (OBOR) initiative, proposed by Chinese President Xi Jinping in 2013, aims to better connect major Eurasian economies through infrastructure, trade and investment. Some also see it as part of a solution to China’s domestic problems, particularly overcapacity in its construction industry.

The schemes cover the Silk Road Economic Belt and the 21st-century Maritime Silk Road – a collection of 65 countries across Asia, Africa and Europe.

As AFF panellists noted, OBOR comes at a time when Chinese investors are aggressively investing within and beyond the region’s borders.

2015 has been a record year for Chinese outbound merger and acquisition activities, with the closing of 382 deals totalling $67.4 billion, according to PwC. China’s Ministry of Commerce reckons Chinese overseas direct investment topped $118 billion in the 12 months to end December.

PwC believes the momentum of Chinese buyers’ investing in overseas assets will remain sustained well into 2016, with an anticipated 20 percent more deals than last year.

While the Belt and Road countries are not a typical priority for institutional investors due to their high-risk profile, that doesn’t mean pension funds and insurers haven’t joined the party.

These have been snapping up dollar-dominated bonds issued by Chinese infrastructure groups, which have raised at least $1.5 billion since the start of the year. Issuances by the likes of China Railway Construction Engineering Corporation and China Railway Rolling Stock Corporation have succeeded despite worries about Chinese growth and global market turmoil.

Vivian Tsang, associate managing director of project and infrastructure finance at Moody’s, said in an interview with Infrastructure Investor that offshore bonds by Chinese investment-graded companies were particularly attractive to institutional investors because of their scarcity in the market.

In the past six months, Tsang has met a number of prospective Chinese issuers looking to fine-tune their strategies dedicated to “going-out”.

Ada Li, a vice president at Moody’s, added that Chinese companies are asking for ratings as they plan strategies to meet future financing needs. Citing China Southern Power Grid as an example, she noted that the company is in a midst of exploring opportunities in the Mekong region.

Tsang stressed that Chinese companies are cautious about investing away from home, however. “Investing in overseas markets is surely a riskier move. Therefore, an insurance covering political risks and a secured concession contract are important to make sure the investment is safe and profitable. The companies may also need to consider refinancing and hedge currency risk at different stages.”

Notwithstanding Chinese investors’ spending spree, observers reckon a boom in development across the region is not likely to happen this year.

Two China-led institutions set up to channel private investments towards the OBOR region, the $100 billion Asian Infrastructure Investment Bank (AIIB) and the $40 billion Silk Road Fund, are in no rush to open up their taps, Moody’s analysts observed.

“It’s not a question of opportunities,” Ben Way, chief executive officer of Macquarie Group Asia, commented on the OBOR initiative at the AFF. “There are plenty of opportunities in the next 20 years. The question is how to fund these opportunities.”

Way believes that in the medium term, OBOR need to push harder on market reforms and work out a better scheme to entice foreign institutions. More realistic return expectations are also needed on the part of investors, he said.