Credit risk for Chinese shareholders in OBOR projects: BBVA

HONG KONG - The challenges faced by China’s Belt and Road initiative (OBOR) are significant, says BBVA Bank in a new research report. Excluding Singapore, nearly 54% of OBOR investments have flowed to countries with speculative grade sovereign rating, it says. “This raises implementation and credit risk concerns for Chinese stakeholders.

“Recipient countries risk being exposed to less stable and move expensive funding amid increased dependence on Chinese lending.”

BBVA says China’s focus on boosting overseas direct investments (ODI) in OBOR countries is already evident.

Between 2013 and 2015, China’s total ODI to OBOR countries grew 26% yoy compared to a 15% increase in China’s ODI to non-OBOR countries.

“Furthermore, in 2016, China obtained US$126 billion of new infrastructure contracts from OBOR countries, which accounted for 52% of China’s total Engineering Procurement and Construction (EPC) contracts globally,” the report says.

“China’s rising industrial overcapacity in the wake of economic rebalancing, tested expertise in infrastructure, capital account surplus and efforts to secure food and energy resources are complemented by the need to address infrastructure and funding constraints in recipient countries of OBOR.

“OBOR countries account for close to 33% of world GDP and 25% of global foreign investment flows.

“Not surprisingly, between 2005-2016, China’s foreign direct investments in OBOR countries has mainly concentrated in energy (50%), transportation (18%), property construction (11%), metals mining (8%) and the agriculture (3%) sectors.

“Such capital allocation, as steered by China’s national policy, has gained traction under OBOR.

“Chinese M&A deals with OBOR countries in 2015 were 17% of China’s total M&A (at US$9.2 billion), a significant jump from just 4% in 2014.

“So far in 2017, Chinese acquisitions in OBOR countries amount to US$33 billion, compared to US$31 billion invested during the whole of 2016 and despite a 42% yoy drop in overall outbound M&A from China so far in 2017.

“This, in turn, reflects the relative immunity of China’s recent capital control measures on OBOR related investment flows.” www.bbvaresearch.com (ATI).