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Liz Mak

The International Capital Market Association has pledged to lend its expertise towards the development of a standardised Silk Road bond, setting a pathway for new issuance and international trade in the fixed-income markets of “One Belt, One Road” countries.
Among participating financial institutions, Bank of China, DBS, Goldman Sachs, and Standard Chartered Bank will be part of a working group to support the setup a framework for the new standardised format.
Law firm Clifford Chance, mainland rating agency Dagong Global Credit and audit firm EY will also take part in the pan-industry initiative.
The ICMA previously developed the international green bond format, which at the end of last year had reached US$42 billion of issuance.
“We now know the Asia Infrastructure Investment Bank is a positive driver for infrastructure development. But AIIB can only play a part in spearheading the investment. The bulk of the capital should still come from the capital markets,” Guan Jianzhong, chairman of Dagong Global Credit Rating told the Post on the sidelines of a conference on Thursday.
“It’s next to impossible to raise funds from the capital markets for new infrastructure projects,” Guan said. “This is so even in mature western markets. Rating agencies can only give ratings to mature, already developed and operating projects that already generate cash flow.”
The work group is seeking to set up a standardised format for infrastructure bonds that could be traded internationally to help developing countries tap a wider source of funds.
Guan said new bond products developed under the standardised format were unlikely to launch before the first half of next year.
The bonds, to be denominated in yuan, will require a rating framework and a cross-border trade and settlement mechanism.
Dagong is concurrently looking into the feasibility of an online over-the-counter market to facilitate cross-border bond trading.
Martin Scheck, chief executive of ICMA, said the bonds will be structured to appeal to both issuers and international investors. The standardised format is necessary to make Silk Road bonds a scalable asset class, he added.
The fledging market will require support from local governments and supranational bodies. It will also require clear protection of investor rights, he said.
Leng Fong Lai, a lawyer at law firm Clifford Chance said: “Project finance has traditionally been financed in the bank market. The regulatory environment now limits the ability of banks to lend for the long-term… Japanese banks are the big lenders for projects in the Asia market. There’s going to be regulatory change in the US which means money market funds for US dollar commercial papers will fall, that will affect the ability of Japanese banks to raise US dollar funding and lend in US dollars to regional projects.”
“It makes sense to have a developed bond market to finance infrastructure projects. To put together the massive need for infrastructure in Asia, we think this [bond market] is something really worth pushing, and encouraging more markets to see this as something viable and worth exploring,” he said.
The ICMA warned that traditional funding sources for infrastructure projects, such as government financing, development bank loans and bank project finance, are insufficient to satisfy Asia’s infrastructure demands. They said an international bond market was necessary to help bridge the funding shortfall.


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Bonds

Global bankers pledge expertise to foster standardised Silk Road bond

The first Chinese cargo train, to be used following Iran-China joint efforts to revive the Silk Road, arrives in Tehran, Iran, on February 15, 2016. Photo: EPA

Business

Banking & Finance

Belt and Road Initiative