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China's 'Belt and Road' Plan Seen as Next Big Threat to Global Finance

China's 'Belt and Road' Plan Seen as Next Big Threat to Global Finance

By    |   Friday, 25 August 2017 04:00 PM

China's largest state-owned commercial banks have vowed to raise billions to fund investment under Beijing's "Belt and Road" drive, people close to the matter said, bolstering ambitions to revive Silk Road trade routes and internationalize the yuan.

However, many experts reportedly fear that the project could create a problem for China's banking sector — which would be a problem for the world

China Construction Bank Corp. (CCB), the country's second-biggest bank by assets, has been conducting roadshows to raise at least 100 billion yuan ($15 billion) from onshore and offshore investors, the people recently told Reuters.

Bank of China (BOC) , the smallest of the country's "big four" lenders, aims to raise around 20 billion yuan, two of the people said.

The fundraising comes less than a week after the government said it would strengthen regulation to reduce risk for domestic firms investing abroad and curb "irrational" Belt and Road investment.

The government is increasingly scrutinizing international investment after some big-money deals in recent years. Private spending on overseas mergers and acquisitions has since slumped in countries other than those targeted by the Belt and Road initiative, where investment for 2017 hit $33 billion this month.

That compared with $31 billion for all of 2016, Thomson Reuters data showed.

CCB and BOC are raising money via their private equity or other investment platforms, as part of a broader central bank push to invest yuan overseas, one of the people said. Funds from offshore investors would be in U.S. dollars, the people said.

Top lender Industrial and Commercial Bank of China Ltd and third-ranked Agricultural Bank of China Ltd are also considering raising Belt and Road funds, two of the people said.

The people were not authorized to speak with media on the matter and so declined to be identified.

The four lenders and the People's Bank of China did not respond to requests for comment.

However, experts fear the risk that the state could amass hundreds of billions of dollars in nonperforming loans if the projects fail.

"The impact could be damaging not just for China, but for the global financial system," Xu Chenggang, professor of economics at Cheung Kong Graduate School of Business in Beijing, told CNBC.

"These loans are being extended to governments in risky countries to fund risky infrastructure projects. If the projects were launched by private firms we wouldn't have to worry because they would know they had to bear the consequences. But here we are talking about government-to-government lending and, ultimately, intergovernmental relations."

Meanwhile, research bodies are assessing risks to the political, economic and business landscapes of the involved nations.

"There is no doubt in my mind that there will be a large number of projects that will have unforeseen problems," Bjorn Conrad, vice president at the Mercator Institute for China Studies, told CNBC. "There are considerable risks of nonperforming credit in many of these projects and high risks of default."

"A risk to China's banking system is, by default, a risk to the global banking system," he continued.

"There will be an enormous amount of loans to give out, on a different scale to ever before, but also an awareness that they (the Chinese government) have to keep these at a manageable scale," Conrad said. "There will still be risks, but an understanding that they have to be managed with more scrutiny."


The fundraising follows government calls on financial institutions to develop overseas lending businesses, targeting a combined 300 billion yuan, to help connect China with old and new trading partners under an initiative modeled on the Silk Road, which stretched from Asia to Europe for almost two millennia.

Raising yuan, also known as renminbi, for overseas investment would also increase the currency's use in global trade and further its internationalization, thereby reducing exchange-rate risk and preserving China's foreign reserves.

"Because those Belt and Road countries have close economic and trade ties with China, after they receive our yuan funds, they can use renminbi to pay for Chinese goods, equipment and labor," said a banker at one of the lenders with knowledge of the fundraising.

"That is the overseas renminbi recycling mechanism we've envisioned and an important way to push forward the internationalization of renminbi."

Senior China economist at ANZ, Betty Rui Wang, said yuan funds for overseas use would ease Chinese corporate concerns about normal funding channels being restricted by capital controls. However, there would still be foreign exchange risk, she said.

"Many of those Belt and Road countries are developing economies with underdeveloped financial markets," Wang said. "Companies may need to convert yuan into local currencies after all."

(Newsmax wires services contributed to this report).

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China's largest state-owned commercial banks are raising billions to fund investment under Beijing's "Belt and Road" drive, people close to the matter said, bolstering ambitions to revive Silk Road trade routes and internationalize the yuan.
china, banks, belt, road
Friday, 25 August 2017 04:00 PM
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