China’s much-vaunted Belt and Road Initiative is expected by Moody’s Investor Service to have a credit positive impact upon participating nations by boosting infrastructure funding, while also serving Beijing’s strategic interests.
According to Moody’s recently released report, “BRI report card -Positive factors outweigh negative for China and recipient countries,” the initiative will be credit positive for participating countries, as it will improve their productivity by helping them to meet their infrastructure financing needs.
“Our ‘report card’ on BRI indicates that overall it generates more positive than negative effects both for China and the recipient countries,” said Michael Taylor, a Moody’s Managing Director and Chief Credit Officer for APAC.
According to the report Beijing is guiding Chinese investment in BRI countries to meet certain key strategic imperatives, which include resolving industrial overcapacity by exporting goods and services to trading partners, as well as shoring up overseas access to food and energy.
“This approach is credit positive for the Chinese sovereign and companies in these sectors and also benefits recipient countries when the goals of both sides coincide in areas such as infrastructure development.”
Moody’s nonetheless points out that BRI could have an adverse impact upon the credit of participating nations by tilting their debt structure towards most costly, less-transparent financing, while also exposing Chinese financial institutions to greater risk in emerging economies.
“The initiative faces significant implementation challenges and will result in the increased exposure of Chinese issuers to countries with comparatively poor credit profiles, including weak financial strength, high susceptibility to event risk, and an unfavourable business environment,” said Lillian Li, a Moody’s Vice President and Senior Analyst.
Li notes that 37% of Chinese BRI investment over the past four years has flowed towards participating countries with credit ratings of Ba1 or lower, while this figure rises to 54% when Singapore is excluded.
According to Moody’s a key risk challenge will be the apportioning of risk between the central government and the Chinese policy banks, commercial banks and state-owned enterprises that are directly exposed to risk via their investment in or involvement with BRI projects.
“So far, the scope for a negative impact on Chinese banks is still limited as overseas loans represent a small proportion of total loans, but there is little transparency about returns on capital in BRI regions.”
BRI could boost RMB internationalisation
The Moody’s report points out that BRI could foster the internationalisation of the renminbi, with China’s bilateral local currency swap agreements expanding to 36 countries (24 of which are BRI nations) and rising to a total amount of 3.3 trillion yuan by June 2017.
People’s Bank of China data indicates, however, that the usage of the renminbi for BRI transactions (accounting for 14% of total cross-border trading settlements since 2015) continues to lag the average for all of China’s cross-border trading settlements (23% of the total).