Insight archive for Lan Shen | Standard Chartered

Five ways Belt and Road is taking shape

Lan Shen — Thu, 30 Nov 2017 16:59:35 +0000

China’s Belt and Road (B&R) initiative – the ambitious project to build infrastructure and expand trading relationships along a new Silk road – has made significant headway in the past four years, and is now well into the implementation stage. So far, 20 per cent of investment in B&R has been in power and 19 per cent in railways, followed by roads, pipelines and other transport. With China’s government prioritising B&R as a key initiative to help open up its economy, here are five trends that show B&R is taking off in a big way.

1. China’s trade with B&R countries has hit a new high

Between 2014 and 2016, trade between China and the countries along the B&R exceeded USD3 trillion, and that momentum has continued into 2017, despite subdued growth in global trade. In the first half of this year (H1), China’s trade with B&R countries totalled USD512.2 billion, up 13 per cent year-on-year. That figures constitutes 26.8 per cent of China’s total trade in H1, which is a record high.

2. Cross-regional cooperation has stepped up a gear

China’s goal to form a more integrated market and support trade connectivity among B&R countries is gaining significant momentum. Currently, 64 nations and dozens of international organisations are participating in the B&R initiative, which is expanding its coverage to more countries in Europe. The B&R and BRICS summits held earlier this year have also solidified policy coordination on cross-regional cooperation for the initiative.

Meanwhile, the Chinese Government has signed cooperation agreements with more than 40 countries and international organisations in relation to B&R, and expanded free-trade agreements with B&R countries in Europe and Asia.

3. Foreign investment is surging

B&R has accelerated growth in China’s foreign direct investment (FDI) flows, which were the second-largest (after the US) among single countries in 2015 and 2016. China’s FDI in B&R countries reached USD129.4 billion in 2016, rising 12 per cent year-on-year and accounting for 9 per cent of China’s total. The value of newly signed contracts between China and B&R countries surged to 36 per cent to USD126 billion last year, and the value of completed projects in B&R countries grew 9.7 per cent to USD76 billion.

"China’s investment in B&R countries could reach about USD300 billion by 2030, more than double the current level"

With China’s cross-border capital flows now more balanced and exchange rate expectations anchored, we expect the authorities to unwind some restrictions on capital account transactions in 2018, supporting the strong momentum of China’s FDI in B&R countries.

4. China is more connected to Europe than ever before

A cross-regional network of railway, port and pipeline projects is taking shape. For example, the China-Europe Railway Express has operated 4,000 trains, covering 27 cities in 21 provinces in China and 29 cities in 11 countries in Europe as of June this year. While infrastructure bottlenecks in some B&R countries are impeding economic development, the need for new projects remains high.

We estimate that China’s investment in B&R countries could reach about USD300 billion by 2030, more than double the current level, and expect these infrastructure projects to yield economic returns and development benefits over time.

5. B&R is gaining interest from across the board

Interest in funding B&R initiatives is coming from a wide variety of parties, not just financial institutions such as the World Bank, but also multilateral development financial institutions such as the Asian Infrastructure Investment Bank (AIIB); investment cooperation funds such as the Silk Road Fund (SRF); China’s policy banks; commercial banks, both Chinese and foreign; and China’s export insurance company. The AIIB alone has provided USD2.8 billion for 18 B&R projects, and the Silk Road Fund has completed contracts for 15 projects.

We expect ‘development financing’ and commercial banks to play an increasing role in meeting the financing needs of B&R projects, especially because China’s Government is promoting development financing as a way to integrate funding resources, bridge state and market interests, and operate independently of government subsidies.

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China’s Belt and Road gains traction

Lan Shen — Fri, 02 Dec 2016 15:34:56 +0000

Whilst still a confusing concept to some in the West, China’s Belt and Road (B&R) initiative – launched three years ago – is now gaining significant traction.

The ambitious project – effectively linking trade in around 60 Asian and European countries along a new Silk Road – is China’s most important strategic initiative, and a crucial component of President Xi’s foreign policy.

China has now signed project contracts worth USD926 billion with over 60 countries along B&R. A series of cross-border infrastructure projects are in construction, such as a new China-Laos railway, a highway in Pakistan and a port in Vietnam.

"China’s infrastructure projects will expand quickly to more countries and regions"

So far, China’s infrastructure projects are mainly in Southeast and Western Asia, but we believe they will expand quickly to more countries and regions. We also expect more Chinese companies and private funds to join B&R projects in the future, provided the government-led projects prove successful.

Becoming a major capital exporter

Already, the B&R initiative has boosted trade and investment considerably. Trade between China and countries along the land and sea-based routes exceeded USD1 trillion in 2015, a quarter of China’s total trade value. China’s exports to B&R countries now exceed those to the US and the European Union (China’s top two export destinations), and the gap is widening.

China has developed over 50 overseas economic and trade cooperation zones with countries along B&R, and has expanded its free trade zones trial from four to seven provinces, including inland regions, which will help push B&R investment projects, simplify cross-broader transactions and improve trade liberalisation.

B&R has also accelerated China’s shift from being the world’s biggest goods exporter to becoming a major capital exporter. China’s outbound direct investment (ODI) to countries along B&R grew 23.8 percent year-on-year in 2015, and was up 60 per cent year-on-year in the first half of this year. We expect China’s cumulative non-financial ODI to reach an impressive USD2 trillion by 2020, more than a doubling of end-2015 levels.

Rallying the renminbi

Another important effect of B&R is internationalisation in the Chinese currency. So far, China has expanded its bilateral local-currency swap programmes to 21 countries along B&R, granted renminbi quotas to institutional investors in seven countries, and set up renminbi settlement banks in eight countries. These steps have helped renminbi trade settlement increase to more than 25 per cent of China’s trade in early 2016, from a mere 5 per cent at the beginning of 2012. Renminbi trade settlement is set to be boosted further as Chinese companies pursue opportunities along B&R.

New financing mechanisms, set up by China, demonstrates the leadership’s strong commitment to B&R. China has encouraged commercial banks, quasi-official regional cooperation funds and private capital to participate in B&R projects, to boost limited official resources and make projects more commercial.

The Asia Infrastructure Investment Bank, New Development Bank and Silk Road Fund, together with China’s policy banks, have taken the lead and started to participate in cross-border investment projects.

Overcoming obstacles

Despite the progress, obstacles to the B&R initiative persist. Projects in some countries have been suspended or postponed, highlighting the need for China to address concerns about outcomes and costs. B&R is not a foreign aid programme, but a commercial project which requires participating countries to make a long-term commitment and contribute investment.

The Chinese leadership has called for better coordination among participating countries, but, to achieve this, China will need to articulate clearly the mutual economic benefits of the initiative, and demonstrate through existing projects that B&R will create jobs, improve trade connections and improve living standards.

Meanwhile, the Chinese companies leading the investments need to gain more experience and knowledge in operating and investing in B&R countries, navigating debt, foreign exchange and geopolitical risk.

These risks can be mitigated, as long as companies conduct project assessments and implement appropriate risk management before operating – using credit insurance protection and overseas investment service platforms to help manage the projects. We think China could make it easier for private companies to control their risks, by encouraging multilateral institutions to participate in projects, and by continuing to promote international adoption of the renminbi.

"Uncertainty around the trans-Atlantic and trans-Pacific trade deals amid Donald Trump’s victory could renew efforts for alternative regional trade deals"

The B&R initiative is undeniably important to China’s growth prospects, but the initiative goes far beyond benefiting China, especially given today’s economic headwinds.

The uncertainty around the US-led trans-Atlantic and trans-Pacific trade deals amid Donald Trump’s election victory, along with the rising risk of an anti-globalisation push by the US, could renew efforts for alternative regional trade deals.

If implemented effectively, the B&R initiative will improve global trade and commodity demand at a time of rising uncertainty, bringing a much-needed boost to global growth.

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Is China’s property market weakening?

Lan Shen — Mon, 05 Sep 2016 09:08:52 +0000

Asignificant segment of China’s property market could dampen in the second half of 2016 as sentiment among developers shows signs of softening.

That’s the finding from our latest semi-annual China property survey, which took place in July and focused on 30 of the biggest unlisted local property developers in the country’s lower-tier (tiers 3-4) cities.

This group of developers is particularly interesting because the lower-tier cities account for about half of China’s housing market. Yet, compared to top-tier city developers (tiers 1-2) and listed developers, statistics on unlisted developers in lower-tier cities are limited.

"Whereas home prices in China’s megacities have sky-rocketed, property sales in China’s lower-tier cities have been stable"

Property developers expect construction momentum to continue in the next six months. But interestingly, the expected rise in construction is not because developers are confident in sales being strong; rather, they want to accelerate their sales revenue. Our survey found that this is becoming a more important main financing source, as access to bank credit is becoming increasingly difficult for developers. Some of them are so keen to sell stock faster that they are accepting lower down-payments or are taking down-payments in installments, while others have offered additional gifts to buyers.

Lower-higher tier divide

The housing market picture in China’s lower-tier cities is very different to the one in the higher-tier cities. Whereas home prices in China’s megacities have sky-rocketed, forcing local authorities to tighten housing policy, property sales in China’s lower-tier cities have been stable only, leaving developers under pressure to shift stock. Against this backdrop, it’s not surprising that the developers we surveyed were only cautiously optimistic about future sales. On a positive note, most of them said they are on track to reach their full-year target, thanks to their de-stocking initiatives.

While there is no immediate risk of construction levels in the lower-tier cities falling, worry about future activity is mounting. Bank credit remains tight for developers. If sales cannot increase substantially, financing conditions will become harder for them. Most of the respondents said they were slightly nervous or worried about their cash positions in the near term, with sales revenue cited as a top three funding source, alongside bank loans – the cost of which is rising – and using own capital. Developers also said they found it more difficult to issue bonds for financing, given increasing default cases in the local bond market.

Easing policies expected

In the wake of stable sales, the developers believe there will be further easing by local governments, expecting the down-payment ratio for buyers to be maintained or lowered, mortgage interest rates likely to stay flat, tax and subsidies for buyers becoming more favourable, and a marginal easing of hukou (household registration system) restrictions in the next six months. However, easing policies are likely to come from local government only – developers think the central government will maintain their market neutral (no major easing or tightening) housing policy.

We believe central government housing policy will be based on two key targets this year: de-stocking and supporting demand. Given there wasn’t a clear pick-up in sales in the lower-tier cities in the first half of 2016, local housing market policy may stay accommodative and focus on containing default risk and pushing sales. Although defaults on borrowing are not expected to be a common occurrence in the second half of this year, as many as two-thirds of the developers expect a few more cases, reflecting concerns over the rising default risk in the market.

Developers are cautious about buying land

Another sign of developer sentiment softening comes from the falling appetite to buy land. The number of land purchases – a good indication of developers’ expansionary appetite – in lower-tier cities has weakened, and developers said they feel cautious about purchasing land in 2016. Most of the respondents said they expect prices to continue rising in the second half of this year, by up to 10 per cent.

Away from developer sentiment becoming more cautious, an interesting finding from our survey is how the structure of home buyers is changing in China. First-time buyers supported the country’s housing market boom for around 10 years, but this part of the demand is now shrinking. Compared to our survey in January, the number of first-time buyers buying in lower-tier cities is down to 43 per cent from 50 per cent, while purchases by up-graders increased to 46 per cent from 43 per cent.

China’s property market is one of the most important sectors to its economic health, accounting for about 13-15 per cent of GDP. When it comes to the country’s lower-tier cities, developers are bracing themselves for tighter times, which could dampen their expansionary appetite going forward. While the housing market in top-tier China cities is overheating, our survey shows the picture across the country is very mixed.

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