July 8, 2019 / 12:19 PM / 10 days ago

Trade war hits BRI financings

HONG KONG, July 8 (LPC) - The trade war between the US and China is forcing lenders to reassess, or even reject, financings linked to China’s massive US$1trn Belt and Road Initiative that includes transportation, energy and infrastructure projects in more than 70 countries.

While Chinese lenders remain the biggest backers of President Xi Jinping’s “project of the century”, some are turning increasingly cautious on BRI deals that could be exposed to US tariffs or other measures.

Bankers are particularly concerned of a deterioration of credit quality for Chinese companies that sponsor BRI projects or play a pivotal role in the supply chain.

“We’re considering rejecting funding for some Belt and Road projects after analysing the potential impact the trade war might have on the sponsor,” a senior Beijing-based banker said.

Despite the uncertainty, lenders still see opportunities in certain industries or countries, including Vietnam, Taiwan, Bangladesh and South Korea.

“We remain supportive of projects which are not exposed to these risks, especially in some countries that could even benefit from the trade war, in particular, Vietnam, and other South-East Asian countries,” the Beijing-based banker said.

South-East Asian countries are likely to be among the recipients of trade and investment opportunities as the US and China divert imports away from each other to other nations, according to a June 5 study by Japanese investment bank Nomura.

Vietnam has so far been the biggest winner, with increased exports to both China and the US helping boost GDP growth to 7.9%. Taiwan, Chile, Malaysia and Argentina also stand out as beneficiaries, according to Nomura.

The most recent financing linked to the Belt and Road Initiative was a US$1.065bn 14.5-year loan for China Construction America, the American subsidiary of state-owned builder China State Construction Engineering Corp.

The deal was signed in early June and backs the construction of a 538-kilometre highway project in Argentina. This is CCA’s first public-private partnership and the first such contract for a Chinese company in Argentina, which has pledged to deepen cooperation with China under the BRI framework but stopped short of formally endorsing the scheme.

Sumitomo Mitsui Banking Corp was the mandated lead arranger and bookrunner of that transaction, which attracted four banks in syndication and pays an interest margin of 300bp over Libor.

OPPORTUNISTIC LENDING

Non-financial outbound direct investments from China into 51 countries along the Belt and Road declined 5.1% year on year to US$5.63bn in the first five months this year, according to data from the Chinese ministry of commerce.

The biggest destinations were Singapore, Vietnam, Pakistan, the United Arab Emirates and Malaysia, in sectors including leasing and business services, manufacturing and retail as well as information and technology.

Despite the fall in outbound investments, bankers are still eyeing potential lending opportunities as uncertainties around trade talks drag on.

“We’re still seeing strong pipelines in the infrastructure and energy sectors in South-East Asia and in some parts of Europe,” said a second senior Beijing-based banker at a Chinese bank.

US President Donald Trump and Chinese President Xi Jinping met on the sidelines of the G20 summit in Japan on June 29, where the leaders of the two world’s biggest economies agreed to restart stalled trade talks and pledged to hold off on new tariffs on each other’s imports.

Although trade talks have restarted, a potential deal is still a long way off, White House trade adviser Peter Navarro said in an interview with US media on July 2.

“It remains to be seen whether the two countries will be able to resolve the trade issues. We’ve all seen Trump changing his mind, days after he made his statements or promises, so we’ll remain selective in our lending and follow the developments closely,” said the second banker.

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