May 07, 2017

OBOR: Internationalization of Renminbi and City of London

Announced in 2013, the ‘Belt and Road’ remains broadly defined as a reference framework to develop more specific ad hoc policy initiatives. It supports investment into a wide variety of infrastructure, including road, rail, port, energy and air traffic projects, and channels financial and non-financial resources into the ‘Silk Road Economic Belt’, the ancient Silk Road that linked China to Europe and into the ‘21st Century Maritime Silk Road’, a network of maritime trade routes that connect South and Southeast Asia to Africa and Europe*.

On should examine the evolving framework of the ‘Belt and Road’ including political and strategic considerations for its future, *what it means for countries in its intended sphere, and the role of governments, international institutions, developers and investors in realizing its potential.

The ‘Belt and Road’ Initiative and the London Market – the *Next Steps in Renminbi Internationalization* - See more at:

Official guidance is needed from the Chinese government on its strategy regarding the use of the offshore renminbi bond market for the purposes of financing the Belt and Road initiative.

The Belt and Road initiative provides an opportunity for greater issuance of renminbi-denominated bonds on the global market, and thus for an expansion in the international use of the renminbi.
Chinese corporates involved in manufacturing and construction will benefit from the Belt and Road initiative. They will be encouraged to go abroad to deliver Belt and Road projects. The offshore issuance of bonds denominated in renminbi can provide a source of international financing for these corporates. The supply of offshore bonds is currently low, because lower interest rates make the onshore market more attractive to issuers. However, Chinese corporates may be incentivized to issue debt offshore if the transaction costs involved in conducting renminbi business offshore are lowered on the back of the Belt and Road initiative and the potential consequent increase in the number of corporates in the real economy outside China doing business in renminbi.

The Chinese government and the associated policy banks that it has empowered, such as the Export-Import Bank of China (China Exim Bank) and China Development Bank, could support the offshore issuance of bonds for Belt and Road financing. They could do this by issuing guarantees, or by issuing the bonds directly themselves. This process could be made easier if the Chinese government provided official encouragement and guidance on how it plans to support the issuance of debt in the offshore market.

The British and Chinese governments could promote ‘triangular cooperation’ in the Belt and Road region.*

‘Triangular cxooperation’ is a form of development cooperation involving a traditional donor, an
emerging market donor and a developing-country beneficiary. Triangular cooperation has been
increasingly encouraged by the UN, World Bank and other multilateral institutions since about 2008 –
most notably in the 2010 Bogota statement on South–South Cooperation and Capacity Development
and the UN secretary general’s 2010 report on international cooperation.3
During Premier Li Keqiang’s
visit to France in July 2015, China and France issued a joint statement on triangular cooperation – this
marked China’s first signing of an official triangular cooperation agreement with a developed country.
We propose that China also actively develop a triangular cooperation strategy with the British
government, focused on the promotion of economic cooperation with Belt and Road host countries.
Areas of triangular cooperation could include joint investment, joint research, joint training and so
forth. This would make use of the UK’s financial and high-tech advantages, including experience in
overseas investment, thus reducing investment risks in Belt and Road projects. At the same time,
triangular arrangements would showcase the potential of the Belt and Road initiative to become
in effect an ‘open platform’ in which all countries could participate, and a benchmark for top-level
cooperation between China and developed countries in jointly promoting global aims.

🔴 Access to an export credit agency or similar institution could be* *provided by the Chinese government to allow non Chinese investors in Belt and Road projects to* *obtain political risk cover.*

The Chinese government could provide a means of supplying political risk insurance for foreign investors by creating or empowering an export credit agency (ECA) or similar entity to cover Belt and Road financing for non-Chinese investors. Private financiers investing in foreign countries are generally funded by ECAs in their issuing countries. China’s ECA, the China Export & Credit Insurance
Corporation, also known as Sinosure, provides insurance for country risk in Belt and Road projects.

However, Sinosure requires that at least 60 per cent of any project capital raised goes to Chinese entities, and that at least 70 per cent of financing is provided by Chinese banks. This limits the
ability of international investors to gain political risk cover.While other countries have ECAs, their mandates are not aligned with the objectives of the Belt and Road initiative, meaning that they are less likely to provide cover to private investors in Belt and Road countries. If certain political risks inherent in Belt and Road projects are not covered through some
insuring entity, they may not be financeable at any yield.

By creating a Belt-and-Road-specific ECA, or empowering Sinosure to do so, the Chinese government could facilitate the financing of projects not otherwise considered ‘bankable’. For political reasons, such an ECA may have to be co-financed or co-governed by a variety of international governments, as
is the case with the World Bank’s Multilateral Investment Guarantee Agency. The Asian Infrastructure
Investment Bank (AIIB) could also be expanded to fill this role.


Over the past 18 months, the internationalization of the renminbi, China’s currency, has entered
a new phase. Lower interest rates in the onshore renminbi market, combined with slower economic growth in mainland China and expectations of currency depreciation in the medium term, have
caused the expansion of the offshore renminbi bond market to slow dramatically (in some quarterly
periods, bond issuance has even contracted). This is despite the progressively greater opening of the
Chinese capital account, increased interconnectedness between the onshore and offshore markets, and the addition of the renminbi to the IMF’s Special Drawing Right (SDR) basket.The Chinese government’s outward investment agenda is feeding into currency reform prospects. In late 2013 the government announced
the so-called ‘Belt and Road’ initiative, commonly known

in the West as ‘One Belt, One Road’. This initiative aims to promote infrastructure development in 60 countries in Asia and surrounding regions. However, it also has implications for the internationalization of the renminbi. Over the past several months, a team of seven researchers
(see ‘About the Authors’) at Chatham House and the Chinese Academy of Social Sciences (CASS) has
studied the feasibility of using this initiative as a means to expand the use of the renminbi, both in the real economies of Belt and Road host countries and in the London offshore financial market.

Investment in infrastructure in developing countries will need to increase from approximately US$0.8–0.9 trillion per year in 2008 to approximately US$1.8–2.3 trillion (at 2008 constant prices) per year by 2020. This works out at a gap of approximately US$1 trillion between the level of 2008 and that of 2020.

Based on these estimates, the authors argue that the Belt and Road initiative can
help fill that gap and provide ample opportunities for increasing use of the renminbi outside China.

The internationalization of the renminbi in the real economies of the countries concerned will require greater external circulation and third-party use. Belt and Road activity is likely to contribute to this by incentivizing the use of the renminbi by local corporates operating in host countries. Meanwhile, issuance of renminbi-denominated debt by these corporates will encourage greater circulation of renminbi in offshore markets, in particular in bond markets.

The greatest obstacle to the development of offshore renminbi markets remains their lack of liquidity.
This could be ▶🔴addressed by issuing renminbi-denominated debt financing instruments linked to
Belt and Road projects. This would also help to ensure that currency internationalization in the real economy will not cause excessive shocks to the domestic financial markets of participating countries.To support this initiative, the authors have identified a series of 16 policy recommendations detailing how the Chinese and British governments, in collaboration with private banks and investors based in the City of London and worldwide, can effectively support the development of Belt and Road financing
in such a way that it expands the use of the renminbi in both the financial and real economies. These recommendations can broadly be divided into five categories:

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