China's Infrastructure Initiative Driving Financial Reform

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China’s “Belt and Road” infrastructure initiative is an essential part of the country’s domestic economic rebalancing and of its outbound ambitions.

The initiative entails investing billions of dollars into infrastructure such as railways, highways and ports that link mainland China and the dozens of countries to its west and south. The goal is to encourage more cross-border trade while creating opportunities for Chinese companies.

Raising the vast amount of capital needed to meet Asia’s infrastructure needs will also inject fresh momentum into the region’s capital markets. Investment in “Belt and Road” projects could total RMB1.5 trillion in the coming years. Part of this will come via a USD40 billion Silk Road Fund, and the newly launched USD100 billion Asian Infrastructure Investment Bank.

Yet this is only a small part of the trillions that will need to flow into transport and urban infrastructure over the coming decades as developing nations aim to raise productivity and deal with rising urbanisation. In China alone, more than 200 million people are expected to leave rural communities for the city in the next 15 years.

Reforms in mainland China have expanded the options available to foreign and domestic investors and bond issuers in recent years. The “Belt and Road” initiative will trigger more issuance and investment. It could also galvanise China’s financial reforms, and encourage policymakers to further open the country’s capital market to global participants.

This is good news. A more liquid and diverse bond market will help improve the allocation of capital and reduce the Chinese economy’s heavy reliance on bank lending.

Local-currency markets in many of Asia’s smaller countries could also increase in depth and range. “Belt and Road” investments will help to attract investor attention globally, and expand corporate access to long-term capital around the region.

This convergence of supply and demand could help transform Asian financing markets in the coming years. It has the potential to expand the role of bond markets in recycling Asian savings into long-term investment in infrastructure for growth – especially if policymakers manage to bring about more cohesion in areas such as taxation, foreign exchange regulation and credit ratings. The initiative will also help boost the internationalisation of the Chinese currency as more transactions are settled in renminbi.

The “Belt and Road” initiative will help make it easier for trucks, ships and trains to transport goods around large parts of the globe. But it could well have another valuable impact in oiling the wheels of finance.