China To Use REITS To Cash Out Belt & Road Initiative Infrastructure

Op/Ed by Chris Devonshire-Ellis

• Assets to be listed and sold as tradeable equities
• Funds to be reinvested in digital economy and trade 
• Specific regions of China to be prioritized 
• Expected to become a US$300-750 billion market within a decade 

The problem of infrastructure building is that it is a huge cost on national budgets. China has spent some US$4 trillion for example along the Belt & Road Initiative, with many questioning how this money can ever rematerialize and much talk of ‘white elephants’. REITS are a Chinese innovation based on studying Hong Kong’s capitalist system and then repurposing this for its own ‘Capitalism with Chinese Characteristics’ models.

Real Estate Infrastructure Investment Trusts (REITs) are financial structures developed by Hong Kong and mainland China investors and are about to formally enter a pilot phase in China. REITs may become a US$300 billion-US$735 billion market within a decade, driven by “new infrastructure” and e-commerce assets.

In April 2020, the China Securities Regulatory Commission (CSRC) and the National Development and Reform Commission (NDRC) jointly issued “Circular 40”- the Notice Concerning Work to Advance Infrastructure Real Estate Investment Trust Trials. 

This aims to “make full use of the capital markets to actively support the REIT trials for high-quality infrastructure in key areas and industries in accordance with the market principles and the rule of law” and clarifies the position concerning the development of REITs as follows:

“Infrastructure REITs are internationally accepted allocation assets. They have the characteristics of high liquidity, relatively stable returns, and strong security. They can effectively revitalize existing assets, fill the gaps in current financial products, broaden social capital investment channels, and increase the proportion of direct financing. Enhance the quality and efficiency of capital market services for the real economy. In the short term, it is conducive to extensively raising project capital and reducing debt risks. It is an effective policy tool to stabilize investment and make up for shortcomings; in the long term, it is conducive to improving the savings conversion investment mechanism, reducing the leverage of the real economy, and promoting the marketization and standardization of infrastructure investment and financing healthy growth.”

Infrastructure REITs aim to finance China’s next phase of development through digital infrastructures, including 5G, data centers, logistics centers for E-commerce, and cross-border digital trade warehouses, etc.

Contrary to the Western REITs experience, China’s main goal is to support China’s digital infrastructure building. The plan specifically excluded residential and commercial real estate properties from the REITs. meaning China’s REITs are not designed to finance real estate developments and properties.

China needs innovative and structured financial instruments to share market-based risks and returns between the public and private investors, while the pilot REITs aim to control leverage in the infrastructure sector, creating space for new projects and growth.

This will free up capital investment from existing infrastructures for greater expansion opportunities.

Between 1995 and 2019, China invested nearly RMB 150 trillion (US$23.1 trillion) in infrastructure development. So far, China’s infrastructure development projects have been mostly SOE-led and heavily debt-leveraged. Infrastructure REITs can now unleash existing assets locked in the existing infrastructure projects and divert the funds for greater infrastructure expansion.

REITs are also appearing in local China Government Five-Year Plans. Shanghai for example aims to be the primary listing and trading center for future infrastructure REITs according to its regional 14th Five-Year Plan. Other provinces, including Jiangsu, Guizhou, Jiangxi, Gansu, and Chongqing, have also highlighted in their Five-Year Plans to actively pursue REIT trials to promote investment, financial reforms, and innovation. The CSRC notice also identified that “priority REIT support will be given to key areas such as the Beijing-Tianjin-Hebei Region, the Yangtze River Economic Belt, Xiong’an New Area, The Greater Bay Area, Hainan, and the Yangtze River Delta, and support pilot projects in state-level new areas and state-level economic and technological development zones.”

REITs are designed to be publicly traded, listed on China’s stock exchanges with the CSRC specifically mentioning Shanghai and Shenzhen. Hong Kong will also be wanting to position itself as a REIT trading centre, and it can be expected that over time, China REITs may become available as an investment vehicle for foreign investors – another way to profit from the BRI infrastructure build. From there, it can also be expected that REITs would be developed along other Belt & Road Initiative countries – a useful way to invest Government capital and ultimately show a return on investment by listing on respective BRI stock markets. This will be of relevance to Central Asian and South-East Asian. bourses where money tied up in expensive infrastructure and redevelopment projects can later be released.

Related Reading

• How Non-Chinese Companies Can Start To Exploit Belt And Road Initiative Projects
• An Introduction to China’s Cross-Border E-Commerce Pilot Zones and Pilot Cities