Risk control remains key problem for Chinese banks expanding along B&R

Giving full play to financial allocation in resources and expanding financing channels have become essential conditions in supporting and securing the success of the projects related to the China-proposed Belt and Road (B&R) Initiative. However, risk control remains as a key problem faced with the financial industry.

-- Broad future market space

Most countries along the B&R are developing countries, allowing a great deal of investments and financing opportunities in different areas, such as infrastructure, rail transit and urban development.

In terms of infrastructure alone, there has been significant broad future market space. By 2020, transport corridors will be almost established from China to Southeast Asia, South Asia, the Indian Ocean, the Persian Gulf, the Mediterranean Sea and the Baltic Sea, and a grand international land passage to west and south from China’s western areas will be completed, undoubtedly bringing huge demands for investment and financing, according to Zhang Yansheng, chief researcher at the China Center for International Economic Exchanges.

“New development opportunities will be brought to these countries along the B&R,” said Lin Yifu, director of the Center for New Structural Economics at Peking University, adding that the B&R Initiative means an opportunity to financial industry because infrastructure needs financing while developments in the production capacity require multiple types of financing such as equity investment.

-- Chinese banks’ forward-looking layout

Construction of the B&R Initiative can hardly be done without efficient financial services including investment and financing, settlement and cash management. In this regard, Chinese banks have made their corresponding layout.

Data from China Banking Regulatory Commission shows that by the end of 2016, nine Chinese banks had set up 62 first-tier branches in 26 countries along the B&R.

More and more Chinese banks are planning to improve service ability and service coverage through establishing new branches, strategic mergers and acquisitions, and stake investment, among other measures.

The Export-Import Bank of China and China Development Bank are playing very important roles in the B&R construction. The data in 2016 indicates that the balance of loans provided to countries along the B&R by the Export-Import Bank of China exceeded 600 billion yuan for over 1,000 projects, while the balance of loans by China Development Bank was over 100 billion U.S. dollars for more than 400 projects.

Meanwhile, commercial banks are also making constant efforts. For example, the Industrial and Commercial Bank of China (ICBC) has provided support over 100 overseas projects, and the Bank of China (BOC) has issued B&R related bond totalled 4 billion U.S. dollars. Some joint-stock banks also frequently took part in project reserve and innovative products service in recent years. For instance, China Minsheng Bank has reserved 17 projects and China Everbright Bank has 10 projects, mainly involving in areas such as infrastructure, energy, transportation, mineral products and agriculture.

Some commercial banks such as China Minsheng Bank innovatively rolls out a wide range of financial services including project consulting, due diligence, deal negotiation, structural design in taxation and finance and cross-border industrial chain matchmaking, to effectively solve issues like financing difficulty of private companies.

-- Risk control as main focus

While “going out”, there will always be opportunities and risks.

The financial infrastructure of many countries along the B&R is incomplete, in terms of payment system, legal environment, accounting principles, credit environment and anti-money laundering. Chinese financial institutions should attach high attentions on these when “going out” to serve the B&R construction, said to He Yafei, the former Vice Foreign Minister of China.

Wang Hongyuan, general manager of the Great Wall Marine Science & Technology Strategic Development Industry Fund of China Merchants Group, agreed that to some extent, overseas investment comes along with risks, so risk control should be the main focus.

As in many insiders' view, making the pre-judgments is helpful for companies to smooth out investment problems. Besides, in order to support the B&R Initiative, banks should design diversified and flexible financial services and products.

It is worth noting that, to promote sustainable development of the countries along the B&R routes, green finance has become an important business option for Chinese financial institutions in supporting the B&R construction. Green finance is a new direction in economic development, but green projects may have longer cycle length and many other uncertainties, bringing higher risks to the projects, according to Yang Yu, general manager of Investment Banking Division of China Minsheng Bank.

To avoid green finance risks, experts suggest that on the one hand, government should take the lead in making its alliance with countries along this route, to jointly formulate related standard and basis; on the other hand, financial institutions should create multiple products to back up the development of green economy and develop cooperation in various aspects.