Financing the dream: The Silk Road Fund

Beijing’s vision for a New Silk Road stretching from the heartlands of China across the expanses of Central Asia, over the sea to Africa and Indonesia as well as South and West towards the Middle East and India is for many an enticing one, combining long term political thinking, economic opportunity and a desire to expand trade and investment ties across the region. However visions like this require deep pockets and financial expertise and this is where the Silk Road Fund comes into play.

The Silk Road Fund was established in 2014 and is to be at the heart of Chinese efforts to promote its New Silk Road or One Belt, One Road initiative. The Fund was capitalised with US$40 billion worth of foreign exchange reserves with a mandate to fund infrastructure projects across the Eurasian landmass. Jin Qi formerly assistant to the PBOC governor was drafted in to be the Fund’s CEO.

The Fund is owned by the PBOC and a couple of other major Chinese development Banks namely the EXIM and CDB, who both excel in overseas investment and finance. The Fund has not yet made much of an impact, only a couple of deals have been signed so far, the first of these was in Pakistan a traditional ally of China, the project a hydropower facility in Karot.

The Fund has been set up to be like a sovereign wealth fund crossed with a private equity firm. It is funded by the Chinese state, but it looks like it will invest fairly actively rather than the more hands off approach taken by many sovereign wealth funds. The Fund also has the option to lend money as well as make equity investments.

While other banks like CDB, AIIB and EXIM will provide funding for One Belt, One Road (OBOR) projects, the Silk Road Fund will be entirely devoted to financing the dream that is the New Silk Road. This means it will almost certainly grow in size over time as the funding requirements of this OBOR are huge. The Fund will also have to match the realities of fulfilling Beijing’s overarching geo-political objectives and finding creditworthy projects in parts of the world which can be very unfriendly for businesses.

The Fund will have a major advantage over the AIIB (and the CDB to an extent) as it is completely devoted to Silk Road projects, whereas the AIIB is a multilateral organisation so it cannot easily be used to fund unprofitable, highly risky or political projects. The CDB is a policy bank so will do as Beijing instructs, but it already has much of its portfolio in Chinese infrastructure and various other projects around the globe. The Silk Road Fund by contrast can be the leader in terms of carrying out Beijing’s OBOR vision.

This does carries the risk that the Fund will end up backing the most politically and financially questionable projects, the uneconomic roads, poorly planned cities and other white elephants that occur when there is a lot of new money available and short sighted politicians eager to waste it. Other projects will require long term commitment particularly rail lines in underpopulated regions, these are rarely profitable but often help invigorate underdeveloped regions, leading to a wider economic gain, the Fund will be well placed to take a lead in these scenarios.  Hopefully careful management and planning can help avoid the worse of these excesses and make the the Silk Road Fund one of the key pillars in the One Belt, One Road initative.

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