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New Risk to Chinese Banks Could be Ancient Silk Road Revival Plans

New Risk to Chinese Banks Could be Ancient Silk Road Revival Plans
Fitch Ratings warned that new asset-quality risks for its banking system could be created by China's expansive overseas infrastructure lending through the One Belt One Road (OBOR) initiative.
Aimed at strengthening Chinese ties with more than 60 countries across Asia, Europe and East Africa through infrastructure, trade and investment and reviving the ancient Silk Road, the program was launched in 2013 by Xi Jinping.
While they now often lack the modern infrastructure needed to attract large-scale investment and trade, the trade links established centuries ago to routes in South Asia, Persia, Arabia and Africa, still remain and the attraction to China is opening up vast areas of Central Asia that were connected by this trade route.
But rather than meeting the infrastructure needs of countries involved or commercial logic, this global project might be more about China's strategy to extend its global influence, Fitch said.
Analysts at Fitch Ratings said in a report that an estimated worth of more than $900 billion is accorded to China's wide-ranging infrastructure projects with developing countries along the Silk Road link that are planned or underway.
While noting government moves to take on debts run-up by local government has "significantly reduced the banks' credit risks, in our view", S&P Global ratings affirmed 'AA-/A-1+' sovereign credit ratings on China on Thursday.
But most of the capital will likely come from Chinese policy banks or large commercial banks, even with the Asian Infrastructure Investment Bank (AIIB) to support the funding needs of the OBOR and China's pledged $40 billion Silk Road Fund.
"One Belt One Road's emphasis on large-scale capital-intensive infrastructure investments abroad is aimed at channeling surplus domestic savings away from less productive domestic uses and at relieving overcapacity pressures," Jack Yuan, associate director at Fitch Ratings, said.
"Since the bulk of China's savings are concentrated in the banking system, it is only natural that banks should provide most of funding for OBOR," Yuan explained.
While China’s largest commercial banks have 'A' to 'A+' ratings, 'A+' ratings by Fitch Ratings have been given to China's three policy banks - Agricultural Development Bank of China (ADBC), China Development Bank (CDB), and the Export-Import Bank of China (Chexim).
The report said that a large portion has gone to financing infrastructure projects involving Chinese state-owned enterprises from the overseas loans from Chinese banks are estimated to be worth $1.2 trillion.
But the ratings agency warned that as political motivations take priority over the commercial viability of some OBOR projects, these projects might fail to deliver expected.
Fitch added that policy banks tend to have poorer disclosure compared to commercial banks and non-Chinese development banks and Chinese banks have a poor track record of allocating resources efficiently.
One analyst said that as these infrastructure projects tend to have a long time frame, problem loans and bad debts can also take a while to emerge.
"So, while initially banks and Beijing can handle loading up on exposure to these projects, it's the longer term management of the loan book and risk tools used that will be key to ensure they don't get bogged down with non-performing debt," said Gavin Parry, managing director of Parry International Trading.

Christopher J. Mitchell

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