The big theme of the coming decades in finance is infrastructure. That was the message delivered by US President-elect Donald Trump in his acceptance speech on November 9 and that theme resonates across Asia. This is whether through the mouth of Philippine president Rodrigo Duterte or further West with the grand ambitions for Indian infrastructure of the country’s Prime Minister Narendra Modi.
Amidst all the rhetoric spewed out, China is going to be a huge winner. The strides the country’s banks have made – whether the mammoth China Development Bank or the country’s quasi-bank export credit agencies – over the past decade or so are phenomenal.
Back in 2003, a huge petrochemical plant in Huizhou City, Guangdong was largely financed by foreign banks; institutions that understood the finer points of non-recourse financing and were happy to put up balance sheet to fund Chinese infrastructure.
Flash forward to 2016 and you will discover that no foreign banks appear in the syndicate on the deal’s recent refinancing but that the entire roster is occupied by Chinese commercial banks as well as by CDB. Why? Because in that time, these banks have been learning the vagaries of project finance and have become mightily self-confident in the process.
Sure, it may be that these banks differ from their foreign brethren, which used to dominate the Asian project finance landscape, in that they are willing to go up the curve in terms of tenor, and able to accept pricing to a floating benchmark – in the case of this project just Libor plus 90bp at 15-years – which the foreign banks will reject.
There is no real surprise there: the balance sheets of the big European banks, which used to dominate Asian project finance have been decimated by regulation and years of moribund economic growth. They simply haven’t the means to do it anymore, and the Chinese banks are stepping in to grab pole position.
Added momentum is coming from the recently established Asian Infrastructure Investment Bank, which has over the past few months approved its first loans. Interestingly these happened in collaboration with the World Bank and the Asian Development Bank, which are supposed to be the AIIB’s arch rivals. Never mind that there is talk in the market of walkouts at the AIIB by senior staff who have supposedly disapproved of what they regard as lax risk assessment processes at the bank.
Time will tell whether a rash of bad loans is the result, much as it will with the books of the Chinese commercial and investment banks, which have been throwing money at infrastructure like it’s going out of fashion.
A loan banker friend of mine once observed that project finance loans either default or get refinanced. There may be some truth in that but the political significance of the endeavours is not lost on China, which is using the infrastructure revolution to extend its “soft power” throughout Asia.
And interestingly, as China’s banks face rising NPLs at home, they are using outbound PF deals as something of a hedge against deteriorating domestic loan books.
Meanwhile if the rate cycle in the US has bottomed out and we are about to see a shift upwards in the dollar yield curve, it can only be good news for the vast offshore project finance loan books of Chinese banks accumulated over the past decade and referenced to dollar Libor. Perhaps there’s a long equity or bond play to be had there on that dynamic.
