China state funds reveal multi-billion Belt and Road plans
Chinese government investors are leading a multi-billion dollar charge into infrastructure projects related to the Beijing-driven Belt and Road initiative (BRI)—but they claimed to also be alert to the risks involved.
China Investment Corporation (CIC) and Silk Road Fund, with some $900 billion under management between them, outlined their strategies for the Asia-to-Europe investment programme during a gathering of sovereign wealth funds this month.
Between them, the two Beijing-based institutions have already committed $17 billion to BRI-linked projects. And they plan to allocate a lot more, said senior officials speaking at the annual meeting of the International Forum of Sovereign Wealth Funds (IFSWF), this year held on September 6-7 in Astana, Kazakhstan. Both stressed they are financial investors – as opposed to strategic buyers seeking control of assets.
Rating agency Fitch said $900 billion in BRI projects were planned or under way in a report at the start of this year. Asia alone requires $26 trillion—or $1.7 trillion a year—of investment in infrastructure by 2030, according to a report released by Asian Development Bank in February.
CIC highlights cooperation
CIC, which allocates around one-third of its $814 billion to private markets, with a bias to developing countries, was already investing in BRI-linked markets before the initiative was launched in September 2013. It has invested $10 billion in BRI-linked countries but will ramp up such exposure, said Li Keping, senior adviser at the fund, speaking at the IFSWF event.
Infrastructure investments in emerging markets are often greenfield projects and therefore face more uncertainty and risk than those in developed countries, noted Li, who was formerly chief investment officer at CIC.
“So for purely commercial investors, it is very tough,” he added, echoing views voiced by others in the industry.
But the BRI initiative should bring more workable investment opportunities, said CIC’s Li, because it facilitates greater cooperation between and support from governments and multilateral institutions, such as Asian Infrastructure Investment Bank and the European Bank for Reconstruction and Development.
CIC also works with Chinese companies to help them invest abroad, including in BRI countries, added Li, because the fund has more experience of investing overseas. It aims to be a bridge between Chinese and foreign companies, he said. The fund also wants to have close cooperation with international institutions and with local partners.
Li pointed to platforms that CIC has set up with other state institutions, such as the Russia Direct Investment Fund.
However, CIC needs to improve its research capability, he said, because in many emerging markets it does not have enough expertise. As a result, it also looks to work with sector investors, other international institutions and local partners.
Like CIC, Silk Road Fund (SRF) was optimistic about BRI's prospects but highlighted some obstacles. The fund, set up three years ago to focus on BRI investment, has $40 billion in AUM and is set to receive another $15 billion that was pledged in May by the Chinese government.
SRF has more than 100 potential BRI projects to consider, but selecting which ones to invest in is very challenging, said managing director Yang Luo. He pointed to potential issues such as the political stability of the host country, as well as weak legal frameworks and government inefficiency in certain markets.
Hence SRF depends heavily on due diligence, said Luo. He noted that law firms and investment banks such as Goldman Sachs and Morgan Stanley help in this regard, forming a key part of the project negotiation team.
SRF has already committed $6.8 billion to 16 projects. It usually co-invests with a leading company in the field, especially from China, but also partners multilateral financial institutions, said Luo. For instance, it is working on projects with IFC, the private-sector arm of the World Bank, and has allocated to an IFC fund focused on emerging market infrastructure.
Luo said Silk Road’s specific investment strategy centred on paying special attention to host countries’ own objectives. He cited as an example Kazakhstan’s plans to develop its digital economy.
Silk Road Fund has already invested in a big hydropower station (the 720-megawatt Karot project) in Pakistan alongside China’s Three Gorges Corporation, noted Luo. In Russia it has also invested in the Yamal LNG project (a 9.9% stake worth $1.2 billion last year, according to Reuters), alongside France’s Total and China’s CNPC.
CIC and Silk Road Fund are not the only Chinese institutions making BRI investments. Mainland insurer China Life, the National Council for Social Security Fund and the country’s four state-owned banks are all seen to be lining up capital for related projects.
The sheer level of Chinese capital flowing into BRI projects should provide some confidence to other investors; and it suggests new investment projects are likely to emerge for those wary of the early-stage risks.
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