How the OBOR Is Financed

The ambitious OBOR initiative that will help the major markets of the world come together with China at the very center will cost over a trillion dollars. The huge financial outlay will not start paying back until years after the investment. This begs the question of how this mammoth of a project will be financed.

The Asia Infrastructure Investment Bank (AIIB) offers part of the solution. The bank is a multilateral institution that is led by China and has 57 member countries in total. The bank started out slow and invested only around $2 billion in early infrastructure projects in the first year. In its second year, the bank invested about $5 billion and then started raking up investments over $10 billion subsequently.

The main chunk of the financing, however, is slated to come through bilateral lending by Chinese policy banks according to a number of analysts. China Development Bank and the Export-Import Bank of China are the main pillars in this regard. The Export-Import Bank of China is primarily established to boost foreign trade and encourage foreign investments into the Chinese economy.

Recently, however, the bank has been deeply involved in foreign lending.

The bank has lent over $80 billion in 2015 alone. These figures overshadow those of the Asian Development Bank which stood at 27.1 billion for the year. The EXIM bank has financed over a 1000 projects. All of these investments had been in the economies that are connected to the OBOR initiative in one way or another. The policy banks of China such as EXIM are not even strictly guided by business logic when it comes to their financing and lending decisions as many analysts and researchers have pointed out.

There are strategic reasons involved in a number of its investments across the countries that are associated with the One Belt One Road initiative. One example of such investment decisions is the flagship CPEC project. The China Pakistan Economic Corridor (CPEC) connects the south western Chinese region to the warm water port of Gwadar in the south western end of Pakistan through a network of rail, roads, and other infrastructure. This project will cost more than $60 billion dollars. In return, China now has direct access to the warm water port of Gwadar as an alternative route to acquire its energy supplies in case the South China Sea or the Strait of Malacca is blockaded by hostile countries.

There has recently been a shift in the Chinese financing strategy as China turns to syndication for financing OBOR projects. The country is starting to look towards international pension funds, sovereignty wealth funds, private equity and insurance firms for financing.