April 17, 2018 / 6:06 PM / 4 months ago

Breakingviews - Cox: Belt and Road paving way to worrying excess

HONG KONG (Reuters Breakingviews) - In a conference room overlooking Victoria Harbour, a senior banker smacked a mahogany table in mock theatricality and caused the tea cup on it to rattle around. Informed that rival HSBC had just anointed a senior executive in Asia with the newly minted role of “Head of Belt and Road Initiative,” the financier exclaimed: “Damn, I wish we had thought of that first.”

Chinese President Xi Jinping speaks during a briefing on the final day of the Belt and Road Forum, at the Yanqi Lake International Conference Centre, north of Beijing, China May 15, 2017. REUTERS/Nicolas Asfouri

It was a common refrain during a week of meetings with Hong Kong’s financial community. HSBC’s move was a brilliant stroke of public relations designed to indulge Beijing in its quest to fulfill President Xi Jinping’s extraordinary ambition to recreate Silk Road trade routes for the modern age. The infrastructural extravaganza spans 80 countries and could involve up to $1.5 trillion of investment over the next decade.

HSBC’s decision was more than just PR, though. As the Western bank with the deepest roots in the region, it should be more immersed in the concept than most of its New York and London rivals in helping to finance projects that will accompany Xi’s vision. And yet a single position at HSBC is telling in another way. It signals an inflating Belt and Road bubble.

The hallmarks of speculative excess go beyond a fancy job title, though it has been a telltale sign from the tech boom to sovereign wealth fund hype. There are the conferences organised around the world, where would-be entrepreneurs come to skim something off the vast sums of development funds looking to build bridges, dig tunnels, lay railroad tracks and dredge ports. Investment advisers show up, too, creating new funds or stock-market indexes for ordinary punters to get in on the action.

And in much the same way that American municipalities are prostrating themselves to host Amazon’s second headquarters, cities from Trieste to Algiers and even far-flung parts of South America – hardly stops on the old Silk Road – are finding ways to market themselves as nodes along the series of land and sea corridors designed to more efficiently connect the world’s soon-to-be largest economy with the rest of the planet.

In short, the elements to make Belt and Road a catch-all for capital misallocation on an epic scale are proliferating. Unlike the last boom China fueled – a largely debt-driven bonanza of unoccupied buildings, ghost cities and underused highways – this time China is hoping to persuade the rest of the world to get carried away.

The People’s Republic is already indicating it won’t be doling out money willy-nilly. Li Ruogu, the former president of the Export-Import Bank of China, said last week that many of the countries hoping to participate in the Belt and Road Initiative didn’t have the needed funds, according to the South China Morning Post. Speaking in Guangzhou, he is reported to have said these nations were already heavily indebted and needed “sustainable finance” and private investment.

It’s a similar concern to the one highlighted last week in Beijing by International Monetary Fund Managing Director Christine Lagarde. “These ventures can also lead to a problematic increase in debt, potentially limiting other spending as debt service rises, and creating balance of payment challenges,” Lagarde said, after noting “the first challenge is ensuring that Belt and Road only travels where it is needed.”

She added: “With any large-scale spending there is sometimes the temptation to take advantage of the project selection and bidding process.” Ignoring the IMF’s worries is another feature of any incipient exuberance. Two years before the great financial crisis, the fund’s chief economist warned about the risks associated with credit default swaps and undercapitalised financial institutions.

It therefore would pay to heed some of the anecdotal signs surrounding BRI, the acronym by which Xi’s initiative is now known (an improvement on OBOR, for One Belt, One Road). For instance, there’s the upcoming event at Hong Kong’s Convention and Exhibition Centre, charging HK$3,200 ($408) to attend (with a 30 percent discount for “Belt and Road Portal User”). Further afield, similar events have taken place from Duisberg, Germany, to Bruges, Belgium, not to mention in the many countries China has identified as BRI-worthy.

Investment funds are fueling the hype, too. In February, a division of HNA, the sprawling Chinese travel-to-finance conglomerate, said it would develop two funds targeting more than $3 billion of related infrastructure investments. Last month, Invesco, the asset manager, started the Belt and Road Bond Fund. And on Monday, Nomura published an extensive research report on how investors can capitalize on BRI, including a list of the 10 best Hong Kong - and China - listed stocks with exposure to the whole extensive project.

Even M&A may play a part. Although acquisitions of foreign assets by Chinese companies have been curtailed, bankers in Hong Kong say the government is willing to bless transactions that have a Belt-and-Road flavour. That has included deals as speciously connected to the endeavour as last year’s takeover of a Brazilian port terminal in Curitiba for nearly $1 billion by China Merchants Port Holdings. Though Brazil was no Silk Road hotspot, it suggests that anything that can be deemed helpful to Xi’s global trade ambitions may get an approving nod from Beijing.

That hints at the danger of BRI’s historic scale. There is little doubt that China can beneficially transform the way goods and people travel across the globe. As banks redesign their organisation charts and asset managers dream up new products, though, the one sure bet is that the Belt and Road will pave the way for many investors to lose their shirts along the way.

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