If You Build It, They Will Lend: Why Japan May Fund More Infrastructure than China


Sean Creehan

Demand for infrastructure is growing as developed countries replace deteriorating infrastructure and emerging economies invest in new projects. China has attracted significant attention through its One Belt, One Road initiative and the founding of the Asia Infrastructure Investment Bank, but Japan has recently dominated global project finance. With low borrowing costs and limited domestic credit demand, Japanese banks may be best positioned to lead the financing of a global infrastructure push.

Japanese Banks Dominate Global Infrastructure Lending

Japan has long helped fund and build infrastructure around the world. Part of the country’s modern industrial strategy has been to support Japanese firms’ exports, including world-class heavy equipment that supplies infrastructure projects ranging from high-speed rail to power plants. Japan’s long-running current account surplus has provided excess savings that has flowed to infrastructure, as Japanese investors seek investments which tend to produce reliable, if not outsized returns.

Within this context, it’s no surprise that Japanese banks are consistently at the top of global project finance rankings. The three Japanese megabanks issued 14.4% of global infrastructure loans in 2016 according to data tracked by Project Finance International and Thomson Reuters, and all rank among the global top four (see Table 1). The banks share their top position with China Development Bank (CDB), China’s largest government-owned policy bank, though its appearance is an anomaly in 2016. CDB was not even ranked among the top 250 institutions the prior year, while all three Japanese banks were in the top 5 as a dominant force in global infrastructure finance. To be fair, CDB is heavily involved in on-lending to foreign governments, funding which often supports infrastructure investment.

Table 1: Top Asian Banks for Infrastructure in 2016

Bank Global Project Finance Loans* ($ mn) Rank** Global market share (%)
Mitsubishi UFJ Financial Group (MUFG) 14,459 1 (1) 6.1
China Development Bank 13,203 2 (NR) 5.6
Sumitomo Mitsui Financial Group (SMFG) 11,359 3 (2) 4.8
Mizuho Financial Group 7,676 4 (5) 3.2
SBI Capital 5,278 9 (4) 2.2
ICBC 2,504 19 (23) 1.1
Bank of China 2,452 21 (57) 1.0
*Lead arranger
**2015 rank in parentheses

Source: Project Finance International

Overall, Asian firms are diversified in their lending, with multiple firms placing in the top 10 lenders across the three major geographies of the Americas; Asia-Pacific; and Europe, Middle East, and Africa (see Table 2). SBI Capital, the project finance arm of the State Bank of India, actually leads all banks in the Asia-Pacific.

Table 2: Top Asian Banks Project Finance Rankings by Region (2016)

Bank Americas Rank Asia-Pacific Rank Europe, Middle East, and Africa Rank
MUFG 1 2 2
China Development Bank NR 10 1
SMFG 2 4 3
Mizuho 5 3 18
SBI Capital NR 1 NR
ICBC 13 25 42
Bank of China NR 13 25
Source: Project Finance International

Japan also leads the way in infrastructure spending by multilateral and public sector financial institutions, with the Japan Bank for International Cooperation (JBIC) the lead lender for emerging markets and third-largest lender in developed countries. Besides JBIC and CDB, two other large Asian public sector lenders are Korea Development Bank, 29th in the world in 2016, and Development Bank of Japan (40th).

China’s Global Infrastructure Ambitions Will Need Help

Amid much fanfare the Chinese government has announced ambitious infrastructure programs centered around the country’s One Belt, One Road (OBOR) initiative launched in 2013. The project aims to create a 21st century version of the ancient Silk Road by land and sea, connecting 70 countries across Asia, Africa, and Europe. In May 2017 Chinese President Xi Jinping pledged $124 billion in investment over an undefined period for projects in OBOR countries. The allocation will be funded by a number of sources, including China’s Silk Road Fund, two state policy banks—CDB and the Export-Import Bank of China—as well as state-owned banks. The five largest Chinese state-owned banks are expected to provide $45 billion in funding for the project, with several already in the middle of fund raising.

Based on the amount of attention the One Belt, One Road initiative has received, one might expect Chinese banks to lead the list of the world’s infrastructure lenders. While planned Chinese outlays on overseas infrastructure are impressive, particularly for a country still in the midst of its own economic development, Japan’s three megabanks funded roughly $34 billion in infrastructure projects in 2016 alone. This is nearly five times the amount of 2016 global project finance by the big five Chinese banks and roughly 20-times the amount granted by the Asia Infrastructure Investment Bank since its launch in January 2016. Meanwhile, the estimated cost of the OBOR projects is $900 billion, meaning non-Chinese sources of finance will be necessary to support the effort.

Much of the announced OBOR projects are in fact part of multinational efforts to improve infrastructure. Future world infrastructure demand will require trillions of dollars in annual investment. Attuned to the growing importance many countries place on infrastructure development assistance from strategic competitors like China, Japanese Prime Minister Abe pledged in 2016 that Japan would invest $200 billion in “high quality infrastructure around the world” over a five-year period. In many ways Abe was simply reminding the world of Japan’s might in project finance as Japanese banks will hit that figure by continuing their 2016 pace.

The growing focus of the Chinese and Japanese governments on infrastructure is already evident across Asia, where the countries are competing on projects like high-speed rail lines in India , Malaysia, and the Philippines. In Indonesia, where China beat a Japanese bid for another high-speed rail line in 2015, Minister of Finance Sri Mulyani Indrawati has welcomed the brewing Sino-Japanese rivalry as beneficial to Asia. She emphasizes the complementary strengths of each country, whose bidders can drive affordability, quality, and social and environmental standards, often in collaborative projects with multinational financing.

A Global Effort

The tremendous challenge of 21st century infrastructure development requires enormous resources, leveraging technology and expertise from a variety of countries with the support of global savings. Infrastructure projects will benefit from participation by an array of national and multilateral institutions. While China’s One Belt, One Road Initiative and associated financing efforts will have a major impact, Japanese firms’ decades of experience position them as leaders in the effort. Countries across the world in need of infrastructure will reap the benefits.

The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.

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