Good, so good afternoon everybody and From those who are listening in virtually from across Atlantic good morning or good late evening For those in Asia. My name is Klaus still man. I'm head of division in the directorate Supervisey strategy and risk of ECB banking supervision. Please. Let me make upfront a few housekeeping announcements We have in this session three papers and we have allocated its In the following way we have 20 minutes for the author of the paper to present then 10 minutes for the discussant and Then 10 minutes for discussion We take questions from those who are attending from this room and also from those who have joined online In order to help presenters and discussants to stick to the timeline Andreas will help us by waving warning signals when you're coming close to the end I may ask those who are here on the table that We need to press the button for the microphone because otherwise the people who have virtually joined will not hear us Keep this in mind now Let's move to the content of the first session. What is a common theme in the first session one way to look at it is to See that they contribute to assessing in different ways the effectiveness of the regulatory response to the global financial crisis The first paper looks at the forward-looking Provisioning approach the authors seen new provisioning roads in Colombia as an anticipation of the Expected credit loss framework as it was called as it was introduced by the IFRIS 9 This is work presented by Rosiluiz Pedro from Imperial College and Discussed by Skanda van der Heuvel from the Federal Reserve Board The second paper explores internal capital targets of banks and their interaction Both with the use of capital buffers and with lending supply also for different characteristics of banks Is presented by Cyril Qualier from the ECB and discussed by Florian Haider from Goethe University The third paper Inspects the impact of the ECB different recommendation on bank lending This represented by Ernest Dautovich from the ECB and discussed by Dejana Bonfin from Banco de Portugal and University Catolica Lisbon The second and third paper also have in common that they use the COVID-19 pandemic as a test case for the analysis So they also contribute to the corresponding strand of literature that is still increasing The key variables considered in all three papers First one credit provisions, second capital targets, third one bank payouts Also key variables for supervisors to carefully monitor and assess in ongoing supervision So the policy relevance is clear and needs I think no further Motivation so that in the interest of time, I'm happy to give the floor to Rosiluiz for the first paper Thanks a lot, thanks for the invitation So this paper is a quote from Bernardo Morais from the Federal Reserve, Gaifka from ESE Monica from Pennsylvania State and Miguel from the Banco de la República of Colombia So loan of provisions is the highest accrual for banks There has been until recently the incurred credit losses in which basically it resulted in two little provisions too late Luke has a very famous paper in 2004 if I remember correctly on these issues And basically the problem of this type of approach is that then in the middle of a downturn banks will have to increase very fast the specific provisions and this might create potentially a credit crunch in the economy and lower profitability and capital for banks So there has been introduced both in the United States and in Europe from 2018 to 2020 The expected credit losses and the big difference between the expected credit losses and incurred credit losses is that for the origination of loans which are still below 90 days of delinquencies if you want and they're performing and they're incurred credit losses, the loan allowances were zero and the expected credit losses they are positive This is the big change, so the big change is that when you originate a lot alone you are already thinking about future losses and you start the provisioning already there Now this is very important for accounting but it's also very important for policymakers and supervisors because in a sense this might create, this potentially might reduce the prosyclical quality in the banking sector and at the same time to better align risk taking incentives for banks As Andrea was saying before risk management has been one of the key issues in the bank failures in the United States Now there was the COVID-19 crisis, so one could have seen these issues in the COVID-19 crisis but they allow the supervisors, they allow banks to defer the introduction of the ECL and you know at the end it was a description of the banks to use it or not to use it And as I was saying before this is very important not just for policymakers for accounting So accountants think that this is the biggest reform even more than IFRS Now we check in Colombia, why Colombia? The first thing in Colombia is that this was introduced more than 15 years ago I will explain you exactly what it was introduced, it was more forward-looking provisions So in the sense that we, you know, loans at Origination or loans that are underperforming So below the 90 days or loans at Origination they have, you know, have to provision like in the expected credit laws And then just, this is an academic paper for identification, just for the issue about identification empirical identification, there is some discontinuity, a particular discontinuity which affirms, you know, which are very similar in all the things but they are very, just there is a random number of 50, sorry, of 2 million pesos Colombian pesos cop, around 2 billion, then you will have more or less provisions Just because smaller firms tend to have a higher probability of default than larger firms And there was just a particular rule and this rule is helpful for us just for the identification Basically, if you were a firm below these 2 billion, then, you know, even at the beginning with no arrears at all you would have to provision and you would have to provision more than firms which are a bit larger And this is just introduced, so before these, if you were not in arrears, you wouldn't have to provision at all So it was zero, okay, so it's the introduction of the provisioning for expected losses and a bit higher for smaller firms So what are the preview of the main results? The preview of, so I'm going to tell you two types of results, one more for policy makers and then the results of the paper So the preview of the results is, the first one is that these changes in provisioning implies a reduction in credit to firms These will have an associated reduction in real efforts for the firms And we are comparing firms which are extremely similar around this continuity, but they have more provision and less provisioning due to the rule The second thing which starts being very important for policy is that these effects are even stronger in bad times So the issue of prosyclicality, reduction in prosyclicality, we don't see it there The evidence of the mechanism is that this is truly through an increase in provisioning between the different type of firms and before and after And then there is going to be a complementarity with capital, these effects will be stronger for banks that have less capital Then there is regulatory arbitrage, you might have rules, and this is a question I was posing to Andrea So you might have rules, in this case regulations or accounting, but there might be an issue which is, you know, maybe banks react through unintended consequences And here the unintended consequences is that now the banks are making less profit from these loans So what we find is that they will do a search for yield within the high provisioning, within the loans to high provisioning firms They will try to, within these, they will try to go for a higher search for yield, especially banks with less capital And this will end up in more concentration and higher spot defaults through these unintended consequences So the key policy message of the paper is the first one is, I think it's important, there is no clear reduction in prosyclicality with forward looking provisions The effects are even stronger in bad times Second thing, there is a complementarity between provisioning and bank capital Of course, provisioning and capital, they are different in the sense that the effect profits potentially taxed differently One is more for expected losses versus unexpected losses And you can have part of the provisioning tier two and the other is tier one Nevertheless, both of them are coming from the shareholder funds So what we find is that the negative impact on credit on the higher provisioning is enhanced if the bank has less capital In fact, here in the string case, in this one here, there is this reduction in credit in bad times is zero With the new provisioning of forward looking if banks have enough capital, if they have high capital levels So in a sense, this is something that are not independent, they are complementary these policies The last point on bank supervision for this regulatory arbitrage is that there are unintended risk taking So the other point which is important, apart from the prosyclicality or the complementarity between bank capital and provisioning Is that you want them to introduce these reforms in order to have better risk taking And what we find is that not surprisingly banks adjust in the margins in which they can take more risk and they get higher yield Within the staff that they have to provision similarly, and this is what we find in the data This is an example of risk taking but exposed, it has more concentrated effects And you know, concentration is important, we saw it in the Silicon Valley bank just to put an example Or they have higher exposed loan difference And basically in these eight minutes that I spoke, I just gave you like the big overview of the paper Now the rest of the times are just details So the first thing is that we use credit register data much with firm and bank supervisory data The provisioning law is from May 2007 They affect firms in different ways and we are not going to exploit all these things But because in a sense our paper is academic and we want to exploit something which is a bit better on identification So we want to compare firms which are similar but they have these different provisioning And we will use this exogenous arbitrary threshold of two billion copes Also, we will have a long period of time, so we will have a crisis before and a crisis afterwards Like recession before, recession after And so we're going to see whether the implications of prosyclicality in recession times are different with the provisioning scheme of forward-looking provisioning Versus the all-in-care credit losses And the data goes from 2001 to 2016 So now you will see lots of stuff, but let me just go a bit So now you will see around the provisioning So these are firms which are more affected, which are the red ones, less firms which are less affected The provisioning of these firms just before the introduction were similar And after the introduction, these firms below the threshold, they have to provision more and indeed they provision more These are tables on the left-hand side is long volume And so we find that around the threshold, remember the threshold is two billion So once after the introduction of the provisions, firms that have to provision more, what they will see is a reduction in credit This is not a question of smaller versus a bit larger firms, they are very close to around the threshold and we can be as close as possible to the threshold But if you see thresholds which are lower, so this is from 1.5 to 2.5, this is from 0.5 to 1.5, you don't see anything And these are smaller firms, or if you see thresholds above, you don't see anything So it's just around the threshold in which some firms they have to provision more than others Is then bands will react by cutting credit to those firms This will have negative real effects, it's not only a reduction in credit But those firms around the threshold that they have to provision more, they will have not only less credit volume, lower liabilities, lower sales, lower assets, and lower investment So there will be some negative real effects at the front level As you can see here, I cannot close because I need the micro, but as you can see here Everything comes just after the introduction of the regulation, both the provisioning, both the reduction in lending And you know, it's not only a reduction in lending, these firms are less, you know, you have to provision more So not only you give them less lending, but you increase the interest rates and you reduce the maturity Reduction in maturity is another way of tightening lending standards And so on, this is immediately So this is the first part of the paper, short windows, but we want to analyze crisis times, so economic cycles And we have, you know, like recessions before in the sample in the global financial crisis and even later Even before in the credit sample, the sovereign CDS of Colombia was relatively high and unemployment was also high So in a sense we have, you know, bad moments before the introduction of the policy, the policy was introduced in May 2007 Then we will have short unemployment in the global financial crisis And then, so once we analyze the cycle, now as you can see here, so this is what I showed you before After the introduction of the policy, firms that are more treated, they have to provision more There will be a reduction in lending for those firms, and this effect will be stronger when there is a weak GDP Or when there is a recession And again, all this only happens around this threshold of firms, which are very similar, but one have to be provisioning more than the other But it doesn't happen to other type of thresholds, arbitrary thresholds, in which all the firms have similar provisions There will be also associated real effects, I don't need to go to all of these things, but what you will see right now on credit It will also happen for real effects in the sense of liability, sales, assets, investment and survival of the firm This is, everything is related to provisions, everything is related to provisions, meaning like you have to provision more You know, for these firms that have to provision more, indeed they provision more, and especially in bad times So this is the problem of the prosyclicality, so this is better credit loss for banks to provision more in crisis times And so the prosyclicality that you know was at the idea of reducing prosyclicality, and we saw this in the COVID-19 20 That's why I know you guys here stopped, I mean, you kind of watered down this type of provisioning, both in US and in Europe Because you were afraid, you know, you were afraid, and also there was a substitution with capital, no? Capital buffers went down So there was a watered down of this, and it's precisely because of this, because they do provision more in crisis times When there is a weak GDP Then we have a result on bank capital and provisioning, which is also the second type of result, which is important So as you can see what I was telling you before, that they have to provision more, the firms that have more treatment There will be a reduction in credit because of the more provisioning This is somewhat reduced, but not eliminated, but somewhat reduced if the banks have more capital Again, only this happens around the threshold of being more or less provisioning more or less, but it doesn't happen in other firms Now what happens in the crisis times? In the crisis times, it's the same thing And now there are many tables and many rows, and I'm very used to read these things, and it's very difficult for you I show you many tables, it's very difficult, but just trust me For instance, in this one there is a reduction in credit in crisis times for the firms that have to provision more after the introduction of the provision But this coefficient is completely killed if banks have more capital So basically what this is saying is that these negative effects of provisioning on the reduction in credit in crisis times could be completely mitigated if banks have enough capital Because remember, there are many differences between provisioning and capital, and I explain this to my students But at the end of the day, both come from shareholder funds, so in a sense if you have a lot of capital, then you can, you know, the increase in provisioning Even in recession times will not imply a reduction in credit if banks are highly capitalized, this is what we find In the final thing, I have four minutes, so regulatory arbitration Now, these firms are making less profits, provisions imply a reduction in profits automatically, everything else comes Now, the time when you lend to firms that require more provisioning, more because of the forward-looking provisions, the expected credit losses Then you are making even less profits in those firms, so how do banks are going to react sometimes? They are going to react by going to risker borrowers, not because of the sake of taking more risk, but because they can search for a higher yield And this is what we find here, so, you know, again as before, if you, these firms that you have to provision more, you will cut lending to those firms But you see, in these firms, you will completely upset that by taking to the highest yield firms with the higher provisioning With the treated firms that you have to provision more, on the high yield firms, exposed, you will start lending more to those firms And you completely kill the effect So in a sense, you have to provision, you will cut lending, but within the high provisioning firms, you still want to make the old profits So you will go for the risker ones because they give you an exante yield And all these things are driven by lower capitalized banks, in higher capitalized banks, you don't have these things Again, another complementarity between bank capital and provisioning And this only happens around the firms in the reform, sorry, around the firms related to the reform, but not in the other type of firms In which basically these ones are placebo tests, in which all the firms are similarly, so the level of provision to these firms is similarly changed And the final table, there are already many tables, let me just give you the headline result on the top This exante is taking, and these unintended consequences imply that these banks that they do these, they end up with higher concentration of loans And with more response at default, so you do care as a supervisor of these things So let me, in the last two slides, just go back to the results And let me just pay more attention to this one, to the main policy messages So the first thing, and this is in a sense what we kind of saw in the COVID But in the COVID there was endogeneity of banks taking this provisioning, and then there were the regulators softening this provisioning So these forward looking provisions, they're going to increase the provisions in recessions, because there is much more risk at that time And this will lead to a reduction in credit, so the prosyclicality will be even worse Now, this is what we find Second thing, there is this complementarity between bank capital and provisioning Meaning that despite of many differences across the two Remember profits, taxes, expected losses versus unexpected losses, TR1 and potentially TR2 Both come from surholder funds And this implies that the reduction in credit due to higher provisioning will be reduced if you have more capital Because you have more surholder funds In the string case, which is very powerful, in the string case, this reduction in prosyclicality, this increase in prosyclicality This reduction, stronger reduction due to the provisioning in bad times will be completely mute if banks have high levels of capital That will be, you know, like, you cannot treat these reforms independently They might be complementary, and our evidence, both in good times and in bad times, is that they are complementary And the final point is, supervision is important You might have rules, you might have rules, but you need the supervision over and about the rules Why? Because banks, they will adjust on the margins, they will adjust to the old times I always put this slide on my students, on this book by Tomaso del Ampedusa, Ilgato Pardo They will always try to find ways to have the same privileges as before In that case, in the book, it's about aristocracy in Italy, in this case, it's about getting profits And this might not imply anything, this higher standard is taking, but exposed, they end up with more risk, both in the concentration And in the exposed loan defaults And the final slide Thanks, thanks a lot And the discussant of the paper is Skanda von den Hövel from the Federal Reserve Board Thank you, Luke It's a pleasure to be here, thanks for inviting me to discuss this paper And it's so nice to see so many familiar faces Oh, here we go, I have to just say that the standard disclaimer applies, these are just my own views since I'm at the Federal Reserve Board So the main message of this paper, the way I took it at least, was that it really calls into question the desirability of the expected credit loss provisioning And including the notion that ECL, as it's known, can reduce prosyclicality So it really raises some questions about that More specifically, it finds that the introduction of forward-looking provisioning in Colombia in 2007 had the following effects It led to higher provisioning and higher loan interest rates It led to declines in credit and economic activity at more affected firms, as Jose Luis explained And moreover, these effects were more pronounced in times of economic stress And for banks with less capital And there's even some evidence that these banks searched for yield within groups of firms lending more to riskier firms, higher yields So, you know, if incurred credit loss provisioning is too little too late, as some have claimed It begs the question whether ECL is then too much and too prosyclical Or still too prosyclical So that's sort of what I thought of as the main takeaway from this paper Just a little bit more detail and then I'll give some further comments So the setting, as Jose Luis explained, is the 2007 Colombian reform that replaced ICL and incurred credit loss provisioning With forward-looking provisioning, which is, you know, if you look at the details, it's similar to an ECL approach Expected credit loss, that seems to have been also the intent of the reform Under the new model, you have these prescribed probabilities of defaults, PDs, and loss-given defaults, or LGDs And they depend on some variables that you'd expect, the number of days past due, the collateral But also borrower size, and, you know, that will come back in a moment Overall, the reform raised required provisions, in addition to making them more forward-looking Most of the causal identification is based on a somewhat arbitrary size threshold And so the paper in a lot of the exercises compares firms just below the threshold and just above the threshold Right? And arguably these firms shouldn't be that dissimilar because they're just below and just above And then you can identify the causal effects, even if there's other things going on at the same time in 2007 Which can always be the case And so the key thing there is that post-reform, there were higher provisions for loans, two firms with less than 2 billion in assets So overall common, so, you know, the paper has a compelling identification of the effects of the reforms It's really, in a sense, the reform is looking at the joint effects of higher provisions as well as forward-looking provisions Now you might say ECL is always going to entail higher provisions I don't know if the Colombian reform was particularly harsh on that, particularly stringent, I should say The paper is very well executed, placebo tests, the right fixed effects, right standard errors, so at least I thought it was very well done It also has the benefit it can show the persistence of the effects that it finds and that's because the reform was already a while ago Whereas IFRS 9 and CISEL were much more recent, so papers looking at that can't go that far out The impacts are economically large as well as statistically significant And you know, maybe one question one has about papers that look at a particular historical episode We should always ask, you know, what's the external validity? I'd like to maybe know a little bit more about what's special about the Colombian banking system Or maybe the reform compared to CISEL and IRFS 9, how much can we extrapolate? So in the remainder of my comments I'm going to talk a little bit more about the last two points, they shouldn't detract that I really like the paper But I'm actually going to take the results really seriously and see, you know, try to put them together by looking at the economic magnitudes Okay, so let me try to do this in five minutes So the reform raised the prescribed PDs, probability of defaults, at origination from zero to 1.1% for larger firms or 1.6% for smaller firms Okay, so the difference is 50 basis points, right? That's where the paper is going to get most of its identification You'd expect the differential effect on provisioning to be less than 50 basis points, right? Because LGD is going to be less than 100%, LGD depends on collateral, other things, but sort of in general not more than 50 basis points The difference in provisions observed between the firm groups is 1 percentage point, excuse me Or 1.4 percentage point depending on whether you're just looking at straight up difference or whether you're controlling for other loan terms So it's the same ballpark, but it is substantially more and so it made me wonder where that's coming from It could be that there's a number of outstanding loans because the paper, the effects in the paper are not just on loans at origination but the whole portfolio of each bank And so maybe there's some outstanding loans that are between 90 and 150 days past due where the difference between the pre and post reform and the two groups is larger So is that the reason or is it something else the paper could check I think and it would be nice to see Going further along and this just shows the effect of provisions for the two groups which Jose Luis also showed this picture Going further in the economic mechanism, once you know provisioning the next link in the causal change is to look at the lending rate So doing a really crude back of the envelope calculation, 1.4 percent higher provisioning rate if we just take that as given Should raise the lending rate by 0.01 four times the required excess return on equity right how much more expensive is equity relative to other bank funding costs So if that's 10 percent which I think is a high number then it should raise the loan rates by 14 basis points If it's 20 percent let's say it's high in Columbia then it would be double that What do they find they find that the lending rate goes up by 0.6 to 0.8 percentage points So maybe against same roughly ballpark but a substantial amplification that we see and so I was wondering you know where does that come from is that evidence for financial frictions Maybe it's really hard for Colombian banks to raise equity that could well be although the effects appear to be persistent So you just kind of expect that to over time they'd be able to retain earnings and solve that problem And then going one step further again even if we take this differential effects on interest rates as given so 0.8 percentage points on an average loan interest rate of 18 percent We see a really big impact on lending volumes that impact is about 24 to 31 percent depending on the specification So normal elasticity's where CNI loans in the US are two and so you'd expect something much smaller you know in the order of 2 percent What's going on there I'd really like to know more what's going on there it's not substitution because if you aggregate at the firm level you still get this result And it has real effect these at these firms total assets go down sales go down by big numbers like 20 percent It made me wonder if there's perhaps something going on like a switch from lending to subsidiaries to parents could that be what's going on I don't know enough about the Colombian economy to know whether that's a factor or not Maybe it's just credit rationing that banks just cut off credit in addition to raising loan interest rates to the more affected firms So I have some other comments but in the interest of time I'll stop here and and do the remaining ones bilaterally Yeah, I think so it's kind of I would like to collect first questions and then ask the author to address them all in one go Three quick remarks I would like to do we collect questions first from those in the room and then from those who have joined on joint online I will take only three questions but I see only three hands and the rest we need to do afterwards I guess Please speak your first first your name and affiliation when asking a question and for those in the room please wait until the microphone has arrived so that other people online can can hear you So we start from the left to the right the left hand side Paul if you could come Hi, thank you. It's very interesting presentation. It's an atolli Segura from the Bank of Italy a question related to the standard validity When it comes to to the discussion of potential prosyclicality of IFRS 9 that we had here in the Euro area and have been also some academic contributions The issue was regarding the reclassification from stage one to stage two at the beginning of a recession that was forcing the banks to to estimate the expected losses from one year to the entire lifetime of the of the loans So my question is is that feature present in the in the example you are you are considering and if not I guess the the the implication would be is that if anything IFRS 9 would be more Procyclical than what you find in the Colombian case. Thank you. Thank you. Next is Peter in the last row, please. Peter Raupach, Deutsche Bundesbank just for a better understanding having seen these huge loan rates. Are we here in an environment of extremely high default risk or is it rather just nominal rates and We have a high inflation. So if we are in the in the first variant, then I wonder whether this is let's call it a healthy cleansing effect or is it just other figures than the ones we are used to. Thank you. So in the right hand side, Jacob. Thank you. Jacob from the B.A. Hi, so Luis. So I was going to say a nice paper right I guess I have a slightly different take, which is that if if what you're really looking at is banks seeing that what they see as a request for over capitalizing because the machine changes that make that it makes a lot of sense to what you're seeing is that the banks fight back and try to avoid the over capitalization by taking on more risk. And I particularly like your the last slide which is actually they undo each other perfectly right which to me is like, let's say a standard Lucas critique finding right that actually you change the rules you should expect the system to respond. Aside from all the other stuff I think that will be my interpretation but I'd like to hear you read if you think I'm way off or where I am. Thank you. Thank you. Any questions from our online community. If not then we can also go. No, nothing. I have one question. Costas. He was wondering if the paper distinguishes between the persistent prosyclicality of addressing forward looking losses in forward looking LLPs as opposed to the prosyclicality of the impact of truly through the cycle forward looking LLPs on landing. Thank you. I think that's all then we have space for one last question please. I think that this reform gave firms a strong incentive to grow or at least a great gave a loan officers strong incentives to tell firms to mark to market some assets that had grown in value and so on. And these could explain why Scander is skeptical about the high effects because of the companies that remain below the threshold are weaker along an unobserved dimension. So it will be and I would think that this effect becomes stronger and stronger as you go in time and firms have stronger and more time to adjust. Then we close the question over here and I give back to Jose Luis to respond to the discussant and also the questions please. So I will go into this order but first let me just say thanks Scander for the excellent suggestions. So on my Asunta. Yeah, so in some regressions we don't do regression discontinuity just because precisely because what you just said. And so and then in some regressions is this paper in revision so it's the lots of robustness. So we take we move away from the threshold to avoid firms which are say the very good firms which will be close to the first threshold that we want to switch to the other one. One thing that we should check is the economic effects whether they are reduced going to your suggestion. So cost as yet there are persistent effects and persistent effects especially in crisis times. So the crisis times is the strongest. Jacob I completely agree on that. I mean it's just a point that I wanted even to highlight more here on the supervision. And that was my question to Andrea that you know like at the end nothing is about is not only regulation is just supervision as well over and above the rules because the banks will try to adjust. Yeah Peter long rates high sometimes it's like, you know like in this long sometimes the number we should check very well these things because sometimes the numbers are high because you have the fees, the rates and sometimes if the, you know the drawdown is very small so the the loans are very small. So the interest rates could be high so we should check on the interest rate whether it's driven by these smaller numbers. And not only, you know states one is also important because there have was a change in the state one and two. You know we used to only have state three and the introduction is the state one and two and both are important. And on a standard we will check the numbers. We are checking the numbers on basically the big, big number in the long rates is what I answered to Peter. And there is the issue and Maria Sunta as well and then there is the issue of the external validity. And here external validity. These are forward looking provisions. You know, what one problem that I might say more philosophical is that in medicine they do lots of you know test in order to be confident in a particular drug or something like that. So here in order to understand better a particular law we have to do we have to have many lots of evidences. And this is one. The external validity is that it's forward looking. We have the different recessions in good times and bad times both with the policy and without the policy. There is a state one and two versus purely state three and the effects are, you know, in a sense they're related if you think about the COVID-19 crisis in Europe and the United States, but if they follow the expected credit loss provisions will go up very high and there will be a drop in credit. That is my interpretation why the regulators supervision supervisors, you know, water down these chains in provisioning at the time of the COVID. So thanks a lot.


Ladies and gentlemen, welcome to the Louie Institute and also welcome to our first EMP China lecture series. And since I joined the Louie Institute, it's also my first public event, so please don't be too harsh. And today we're going to, before I start, I want to take this opportunity to acknowledge our very generous benefactor, EMP, who makes the China lecture series possible. So every year we hold us three events in Melbourne, Sydney and Canberra. So it's a bit of advertising that next month we're going to welcome, or in July, one of the China's most famous journalists, Hu Shuli, to come to Australia and she will speak, I think, in Melbourne, so stay tuned for that event. So today we're very fortunate to have Grant Dooley to be our lecturer on the first topic and is a very hot and a sexy topic. It's about one build and one road. If you go to China, either as a journalist or as a politician, you will get a one-build-one-road question. They will ask you, what do you make of this China's new grand strategy? I think our executive director, Michael Fulila, when he was in Beijing last year, to deliver the Boi lecture and he was asked the same question, what do you think of Oboe? So it is a bit of a mystery. So today we're having a decipher here to explain a mystery to everyone here. We have Grant Dooley, he's the executive director of the Hastings Infrastructure Fund in charge of Asia operation and before he became a fund manager, he was Australia's council general in Guangzhou and he also served as a senior diplomat in the Australian embassy in Jakarta. So he also had a China economic trade section and a DEFAT and also I believe Grant was also an officer in the Royal Australian Navy as well. So a very interesting background so he can talk about the foreign policy aspect and he can also talk to you about the risk premiums and the returns. I think it would be interesting for our business audience here in Sydney. So Grant, first question. One Belt One Road or Belt and Road, I think a lot of people object to the term One Belt One Road or what exactly it is. It has been described as a China's grand strategy or even Marshall playing China's equivalent to reshape the whole region or even the world. Francis Fukuyama described as a China's strategy to export as a development model and but we don't know much about Oboe. I mean he seems to be especially at an operational level, he's very patchy and very vague. Do you think why are they keeping us so vague? Is that a sloganing search of a strategy? Yeah, well first thanks for coming along today and I really do appreciate the opportunity to speak and being your first guest lecturer. I'm not sure I'm the 60 man to be talking about such a 60 subject though so I'll try my best. The One Belt One Road initiative and for those that follow this closely you would have noticed that from a Chinese perspective the name is being changed to Belt and Road and there's a very good reason for that and that is that when it was initially announced it was the One Belt One Road initiative but very quickly they realised as you said it's a strategy in search of some substance and to actually give it substance what they did was amalgamate a lot of existing development initiatives that they had at the time and hence you can't have One Belt One Road when you have many different development initiatives and many different economic corridors which is what they brought under the initiative so when you look at One Belt One Road or Oboe it actually is amalgamation of other initiatives one being the the new Eurasian land bridge from Royal Mochi that's got spreads right across Russia and Kazakhstan the idea for a rail line all the way to the Netherlands it also encapsulates the Mongolia-Russia economic corridor another corridor from Kashgar in Western Xinjiang down to Guadalaport in southern Pakistan which is the China-Pakistan corridor and also one in South East Asia which is from Nanning down through the Indochinese Peninsula called the Indochina Economic Corridor so what it actually is is amalgamation of a number of existing strategic initiatives that the government was trying to implement and when they thought of a name the One Belt One Road which literally stands for the One Belt being the Silk Road Economic Belt and the 21st century maritime Silk Road hence the Belt and Road name but it's actually it actually is a well thought through initiative when it was announced I think possibly didn't have a lot of substance but now they've been able to build a number of different things around it and amalgamate these economic corridors the other thing they've been able to tie it very closely to is a number of other initiatives like the Asia Infrastructure Investment Bank for instance and the Silk Road Fund so they've kind of been able to build up some substance to it through these other initiatives that they've got. Thanks for that so thanks for the explanation and also just the question is you mentioned Asia Infrastructure Investment Bank which you received a lot of immediate attention about whether Australia should join the Asia AIIB and there's a lot of discussion about what is China's intention behind to the Oble or behind AIIB is a plot to I don't know expand China's geopolitical influence or if you want basically to make a buck out of it export China's access capacity or more high value added products like high speed railway so there's a range of discussion there seems to be a lot of people in Washington DC maybe in Canberra I'm all worried about the geopolitical aspect is this China's strategy to counterbalance the US's pivot to Asia is that a counterbalance to TPP which China is not part of it and what do you make of this? Yeah I think it's actually a lot of those things and actually and more there's no doubt that there is a political overlay and there's an economic overlay from the political perspective when I dare say when prison Obama announced his pivot to Asia back in 2011 this obviously was caused for great consternation in various policy levels in the Chinese Communist Party and in the government so you know it was actually a natural reaction to them to come up with something which they perceived to counter that type of a grand plan for what they saw as US containment of China in Asia so I think at a geo strategic level yes there's no doubt that the one belt one road initiative was was I was in response to that but it'd be too from a political level to be too I think too shallow analysis to say that's the only reason you need to understand it from a political level most things head back internally everything goes back to the center in China and when you look at the amalgamation of some of those economic corridors I was talking about that the cash car water one for instance that's from Western Xinjiang the one that goes the new new Eurasian land land bridge goes from Wudu Mochi over to through Russia and over to Europe so in addition to the the broader geopolitical issue there was a need there from the Chinese government to develop these restive regions to generate growth economic growth in some of these western parts and southern parts of China the Indo-China the China Indo-China Peninsula economic corridor starts in Nanning the capital of Guangxi province so it was actually it wasn't just about the geopoliticals a lot of it was actually about how do we tie this with trying to generate levels of economic growth in some of these very restive poor parts of China where you know from an NDRC perspective from a national development reform commission perspective they've been trying to do that for quite a long period of time so it fitted very neatly in with that overarching geopolitical plus internal stability narrative that's the political side of course the economic side of just what we all probably more associated with was to deal with a number of very large issues occurring in the Chinese economy and that is as we all know slowed down in growth internally excess capacity and key pretty much infrastructure related type industries so iron ore steel iron ore steel cement these type of bulk of these these type of skills and over capacity in these industries that they needed to export so having an initiative we build infrastructure in these markets obviously is a way of potentially dealing with those things you also had at the same time you've got the you know the desire to internationalize the R&B as a you know they can also facilitate that you also have a lot of excess liquidity sitting in the Chinese economy at the moment we have a lot of debt problems but we actually also have a lot of excess liquidity in the context that there's a lot of money that wants to leave China at the moment good for me what I do I'm a fund manager we manage a lot of Chinese money so but we see it in very little ways and in the Chinese money going into the real estate sector for instance in Australia and globally but a lot of that excess liquidity in the Chinese economy is searching for opportunities to be invested offshore to diversify their risk base so you have a lot of bent up demand for overseas assets within the Chinese economy because of this this this excess liquidity issue on top of that you also which is I think a potentially not strategic part of it from the economic side and that is China I think we'll try and use this initiative and build through these corridors to try and secure supply chains you know if they if they can help establish those and grow new trade routes through these markets it actually helps them with their actually longer-term you know trade issues and growing new markets for their goods as well so so you had a number of various different you know economic reasons in addition to the you know the exporting of of the excess capacity capacity and and high-speed rail and various other capital equipment type issues so I know this is a very complex projects involves a multiple motivation if I'm gonna ask you which one would you write as the most important overriding objective behind this oval initiative do you think is more central around the China's own economic development needs the developing Xinjiang Yunnan all this periphery province who are have been lagging behind in overall development in China or do you think is served primarily as a as a blunt weapon not a blunt weapon but as the weapon to counter us as a pivot to Asia look I think it would depend who within a Chinese bureaucracy you spoke to I mean if you're speaking to someone in the NDRC and they've been trying to develop the Western regions for last ten years and he'll very much see it as being that's a you know an opportunity to it to hit some very key you know KPIs for a better word or goals that he has if you're right the very top of the the Chinese Communist Party then anything that can grow through soft power means I mean this is a very effective tool from a soft power perspective making they can potentially grow relationships embed themselves with their near neighbors China's been trying very hard to improve a soft power outreach it has very good relationships with a lot of those central Asian countries that go through the Shanghai Cooperation Organization and other mechanisms so I think it depends where you sit if you're talking to a Chinese SOE really that stuff is all important and it's interesting but he just wants a good return on investment so if you're talking to State Grid or China Merchants Group or one of the big SOEs they're just looking for deal pipeline how do I get my money deployed how do I get opportunities to grow my my business they're very much businessman so I think it really depends on who you're speaking to within the government as to how they would view the overarching initiative yeah it can be many things to different people it can be many things to all people and just try to pick up on the economic theme and in the last kind of a year or so we haven't seen the kind of a invincibility the kind of a reputation of a China's economic planning and etc. management has been dentured the China's foreign reserve dropped significantly something like 800 billion dollars and also big Chinese banks and they have all the non-performing loans piling up on their books so do you think now we have an impact on China's ability to finance these very ambitious projects because I haven't heard the figures are truly mind-boggling people talking about the trillions and the trillions with all those of investment and you know some bankers love the figures and a quarter something like six trillion dollars one-third of the humanities and do you think Beijing has the the means and a resource to finance this project one thing having worked around the Chinese economy and Chinese government officials for way too long is it these figures just tend to after a while it's wash over your head they do like to talk in grand plans there's no doubt about it look I think from a from a funding perspective which is actually question they've already got a number of vehicles that they can use to look at funding some of these projects and I'll get back to the projects in a minute because that's probably the most important part you know they've got the AIOB the Asian Infrastructure Investment Bank has a hundred billion dollar vehicle we all know about that there's the new BRICS development bank again another hundred billion dollar vehicle which is being seeded by all the BRICNations there's a Silk Road fund forty billion dollar vehicle there's the Shanghai Property Organization Development Bank which is about to get off the ground apparently and you've got obviously China Development Bank and China Exit Bank as well so they have a number of different vehicles by which they could potentially fund what they're trying to achieve you know you talk about to go back a step and talk about foreign exchange reserves I mean they're still I mean very hard to work out exactly what their foreign exchange reserves are to be quite frank but they probably still somewhere around that three trillion mark and the overlay on that is that China still runs a trade surplus in April was about forty five billion dollars I think so while exports are going down imports are dropping quicker so they're actually got still got good capital inflows so you know I don't see that being a major issue but I think what the major issue won't be less won't be more it won't be about funding per se it'll be about actual projects they can invest into so the biggest constraint will be the lack of investable or potentially bankable projects because you might have the desire I mean even in Australia right now not Australia but even in Asia more broadly there's a lot of liquidity looking for infrastructure investment and a lot of countries looking to attract that investment but there's a dearth of investable projects so you have you might have all the money in the world you want we've got nothing invested into that it's very hard to actually make the investment so so I don't see it I don't see the constraint on this execution of this strategy being funding I see it more being actually identifying types of projects that actually are actually investable themselves that would be a kind of that's a very interesting observation and what does it mean let's say if China's intention is more geopolitical will they just push through the projects irrespective whether they will make a return on art or whether they are bankable and arts in your you know kind of a professional investment terminology do you think that that's what Beijing's intentions are or do you think there's investment entities like a China development bank or AIIB what are they a risk appetite like are they happy to fund the political projects yeah that's that's a really good question I look I think the the biggest issue they're going to have I mean you just try these companies will invest to make a return like any other company I mean I think there's a bit of a sure that sometime there might be a strategic overlay but generally speaking they've got their own benchmarks internal benchmarks they want to make a return on any investment when you get to the development banks and the XM bank it's slightly different different objectives for those vehicles the AIIB though here's an interesting thought the AIIB is being promoted as a as an investment bank that will only invest in best practice projects it's funded by you know various different agencies and governments around the world they might want to invest in something that they don't see as generating a decent return to meet the actual over return benchmarks of that bank so some of these vehicles will be constrained by the nature of the vehicles CDB and XM bank I believe will probably be more constrained by the fact that on their own balance sheets right now and it's very hard to know this because there's not a lot of detail out there but given the slowdown in economic growth in China and given some of the bad loans and some of the projects they've invested into in other markets like Africa it's hard to see that have a lot of appetite to go and repeat that process in other markets in in Central Asia for instance or in Pakistan or places like that so I think there'd be a pretty big stretch and it'd have to be a pretty big push to make them do that the other thing too is I don't think from a soft power perspective you know the the Chinese could quickly undo a lot of that really good gains they're getting in those markets if they do invest into projects which are not perceived to be very very good projects and and the projects themselves fail it'll undermine confidence in AIB, it'll undermine broader confidence in what the initiative stands for so again I do believe that whether the OBOR strategy is really going to struggle is actually identifying those type of projects that meet those near-term investment criteria for them to automate those type of investment decisions. Oh that's very interesting if I can draw back to perhaps the lessons here in Australia in the last perhaps a decade we have seen so many fail the China's investment projects in Australian resource sectors do you think now they have learned to the lessons in how to invest abroad you know for example not to jump into a battle with someone like Palmer and I think you're probably going to come out on top of that and do you think there's they have kind of had a very sharp learning curve now they can replicate their experience seeing Southeast Asia or Central Asia? I'd like to say yes but I still think they're learning yeah look you're right they've a number of the very marginal resource projects particularly in the iron ore sector are still untouched undeveloped mine sites in various parts of Australia. The I think they have learned but this is a listen in the market you only really learn if you've if you've borrowed money you've invested into something and you can't get it up and five years later you've lost your money and the bank comes back and says well I need my money back and you can't pay them and then your bank erupt that's when you learn unfortunately the Chinese system these a lot of these organizations have borrowed money from various different banks back in China those banks themselves keep rolling over a lot of that debt hence they've got the debt issues in China we've got you know bonds being rolled over we've got a lot of these various big debt issues being rolled over so you've got so you've got companies have made bad investments who haven't learned the lesson from the bad investments so they actually are still learning that process until you know risk is properly priced until these various other things that we do in a normal market are done it's hard to see how they learn the real lesson of bad investment decisions now they'll understand they've got a bad investment and they will learn but until that financial impact you kind of wonder how how much that message sinks in and we if I take it another step forward is that what they've they are learning very quickly you know even in my sector in the infrastructure sector the state grids of the world are very savvy investors they've invested in Portugal invested in Brazil they've invested in the Philippines they've invested in Australia already through Gemina and Electronet they understand how these markets work they've they've learned through the process of investing what we're seeing though with the excess liquidity in the Chinese market and looking at trying to get out the speed of it at this point in time is so great that you're getting a lot of other people getting caught in a tailwind who don't have that level of experience investing in overseas markets and they're the ones that are potentially going to make the mistakes that the state grids in the China merchants now the more sophisticated investors have already learned so you've got this bit of catch-up because these other more I suppose less sophisticated or developed investors who are potentially going to make the same mistakes that the role the brothers made a couple of years ago and they did those earlier investments in the resources sector. Thanks for that I think at a law institute we're having to ask very important questions about soft China Z. So it's also for the benefit of our friends who travel from Canberra and also for the for the diplomats who are here in Sydney watching very carefully what is unfolding in South China Sea when we see escalating tension between China and some of the the climate states from Southeast Asia and given Southeast Asia a subgroup is a very important part of China's Oval Strategy which cuts through the Southeast Asia the 21st century maritime Silk Road. Given all this tension that is happening do you think that we have an impact on Beijing's ability to to roll out those projects in this country or do you think we'll come to a point some of the country for example like a Vietnam or some some other country just basically no given the bad relationship we have in a moment I don't want your investment and especially in a critical infrastructure what do you think have we reached that tipping point yet. Yeah look I don't think there's any doubt that it will be an issue the impact though I think is can be in the context of the whole Borrudo one-but-one road strategy could be somewhat more limited given that the strategy itself is encompasses a lot of you know economic corridors that don't go through those parts of the world. So when I see this I mean it's a very significant issue it's it's obviously growing in steam which is obviously all very concerning so I do see it as more complicating rather than directly impacting that strategy so when you've got the Indochina China Peninsula Economic sorry the China Indochina Peninsula Economic Corridor yeah that runs down through Vietnam and parts of those claimants states so you'd expect that that may have they'd be less willing to be part of that process if they're having you know very testy hostile relations with with China. But for the the countries that lie further west and you know the Central Asian countries it's it's it's obviously not as big an issue as it doesn't directly impact them. What it probably can do though which is you know negative type of negative issues like the South China Sea and what's happening there will no doubt though raise issues around confidence I mean if you're sitting in one of those other countries not directly related and you're reading the media seeing what's happening it does just raise questions it does question your you know the China's intentions in those markets so why wouldn't have a direct impact it will just undermine some of the soft power issues we're trying to talk about and some of the soft power gains that they're trying to achieve through the the OBOR strategy. But for that part of the world being the South China Sea in those climate countries and you know the Indonesia's of the world I mean if you talk to Indonesia for instance and I spent a lot of time in Jakarta and still have a lot of friends in Deplu the Ministry of Foreign Affairs there you know three years ago they didn't see the the South China Sea issues really impacting them in the Antuna Seas quite south there was a crossover of claims but it wasn't as big an issue but as we all know quite recently there's a big confrontation between Chinese fishermen and the local Indonesian Coast Guard which has raised that that issue and made it now a substantial issue in relations between India and China so you know the Indonesians have been courting quite actively Chinese investment for the power sector they do see you know the Chinese when I attended to build this high speed rail between Bandung and Jakarta all these type of things that happen in the South China Sea all I do is chip away at the confidence that exists between governments between people between entities and just undermines over the longer term undermines that level of confidence and if what is happening in the South China Sea was to continue ramping up in intensity then you think it would have to have a more direct impact at some point. Thanks for that with that question with answer I think I want to take an opportunity to get an audience to ask great questions this is I think a fantastic opportunity to ask someone with a combination of a founder management and a foreign policy expertise. So any a Robert sitting in the front with the great jacket Robert do you mind too and also just a bit of a House rule and that even though we welcome comments but we like to use this foreign as a place where you can ask questions. So I don't want to do a Tony Jones and say that I will take as a comment. So please just ask a direct a question and try to keep it short and sharp. Thank you. This from a man who's here I've already talked off on numerous occasions. I do have a simple question though you talked about the the fact that that investable projects would probably be the biggest barrier and I think that's a sound conclusion of the sort of general areas that you outlined as being in the we are what where do you think those investable projects will be found or where at least will be more likely than others. That's a really good question because my view is those projects will be found in China and it might sound a bit strange but we'll talk about this before that we started but now that they've actually undertaken this this grand strategy like everything in China if you're sitting as a provincial level official sitting in Kashgar or or in Nanning or whatever part of China or Kunming for instance in Yunnan province all of a sudden there's this big bucket of money that's been opened up that you can actually reach out to and use to fund another one of those lovely projects that you've always been adding another 16 platforms to your high speed train station and things like that. So I see an immediate term because of the lack of investable projects in some of these other countries that the real problem will be perceived you know the perception that they're actually not getting on with it and as such you'll see some of that short-term money flow into more infrastructure related projects that actually are inside China. So you'll have high speed rail up to the border with Vietnam or and I think we're talking about this your experience in Kunming where there's a high speed rail station up to the border with Burma and then all of a sudden there's nothing and so unfortunately in China those things do happen and I do see my fear is that some more money will go to projects which don't actually need to have money spent on and you'll get more of this waste around some of the infrastructure developments. I will add one other thing though that and that is that the rule you probably heard my theme now my big issue around OBOR is more about the execution of the strategy around being able to invest the money rather than the strategy itself and if you look at the OBOR countries that it covers more than two-thirds of those countries have sovereign debt which is which is rated below investment grade. The reason it's below investment grade is because of political stability, economic instability all these type of issues. So straight away you're actually looking at investing in the countries people will invest don't get me wrong people will invest into those markets but finding bankable projects is so much more harder. Sorry the end in front just wait a minute thank you. Thank you. Jeff Miller from the Institute of International Affairs. Some time ago I heard an Indian comment on the one belt one road which was yes but it's a Chinese belt and a Chinese road and I wonder to what extent is cooperation with governments and firms in the countries beyond the Chinese border seen as an important part of this strategy. Yeah I was just on your note I was in India quite recently and I had had discussion on the one belt one road and that was the deputy finance minister he said in India we just want to be the braces which I thought was interesting why I'm looking at it. But yeah look the what will underpin this is I mean the governments can put in place frameworks and various other things but even from a Hastings perspective my company we see an opportunity there to work with Chinese capital to try and find opportunities and how we can invest that money as well so people at business levels will see the opportunity they'll try and use it I mean the Chinese are very good at following national strategic initiative so you can you know you'll find a Chinese company will come up to you now and because if they can tie it to it they can get access to capital from banks by saying it's part of an overarching initiative that's quite an attractive thing if you're an Australian company looking at doing something in China or you're looking at doing something in one of those other Oboa countries so yeah there's a real opportunity for Australian companies I think Oboa provides two opportunities we're already seeing Oboa in action in Australia and that's coming through the Port of Darwin we had land bridge acquire that port the Northern Australia Development Policy needs capital there's an opportunity for Chinese who see obviously Northern Australia is a great food bowl for you know protein for cattle through other bulk commodities so land bridges investment very much was based upon the view that that port will become a very integral part of the Maritime Silk Road the Port of Fremantle when it's sold again I would see that you know if Chinese companies there they can see that as being part of that particular issue as well so we're already seeing in Australia the One Belt One Road play out even our own market even though we're not on those economic corridors the other way that Australian companies can benefit is that by accessing opportunities through the AIIB through the Silk Road Fund people like ourselves like Hastings now competitors Macquarie how do you how do you invest alongside some of those large institutions because if I look at investing into a market like Pakistan or India we've been looking at India for quite a while now if I go in alongside the AIIB and I go in alongside the Silk Road Fund it's a straight away at de-risking some of those sovereign risk issues because the Indian government is not going to want to upset the big the big member countries who are partnership to that including India so that's actually provide funding options for Australian companies to look at going into markets and can de-risk some of the investment decisions about investing in those markets I think that's the real opportunity for Australian businesses how do you use the One Belt One Road how do you use China and some of these initiatives to de-risk your market entry into some of these markets that you wouldn't probably invest into Just a little note on the imagination of a Chinese investor I think there's a plane to build an education sitting in the Melbourne it's been pitched as a One Belt One Road projects so everything is possible so everyone has got a question Thanks Grant Aaron Conley from the Institute I'm curious two countries where there has been a backlash against Chinese investment are Myanmar and the Philippines and in both cases that was related to governance issues in Myanmar the dam on the Irrawaddy that was being built by China North Chinese defense contractor was seen to have been approved because of a close relationship between the previous military regime and that defense contractor in the Philippines as ETE was accused of having bribed the husband of the president Gloria Macapagaloroyo and that led to this big backlash you mentioned earlier that China is learning from its investment experiences in countries is it also learning that higher standards of governance are also important to the long term survivability of those investments or should we expect more of these kinds of activities to continue and maybe not Australia where they know that there are high standards of governance but in other countries say in Southeast Asia Central Asia Yeah that's a very good point I mean the from my experience of China's investors I think I mentioned before about the sophistication of the investors if you're dealing with a state grid or one of the 100 odd centrally based state enterprises that it's such a sensitive issue now corruption such a sensitive issue internally you know you don't want to be seen to be anywhere near anything that's going to have a backlash like that you know my friends at China Merchants Group talk about this all the time they've got if you even to go to the website they go very proud they've got their own ESG policy they've got all these you know what they call best practice Western standards those type of things you know they're really focused on it to a great deal some of the more less sophisticated provincial based SOEs and even POEs you know private companies I'm not a believer in any real private companies in China but even those POEs at that level they you know they don't quite have that experience and I think in the case of the one but one road the type of companies they're going to be investing using that strategy they're going to need to have extremely close links to government which does raise questions and to your point can you invest in Kazakhstan can you invest in Kyrgyzstan can you invest in Pakistan without that nexus the reality is you probably can't and this will go to the whole question around the investability of these projects because to my point I was trying to make earlier if it's only a Chinese company investing into these projects and no one else goes along with them then very quickly people are going to see it for what it is and it'll undermine all that great momentum that have been able to generate behind the AIIB the AIIB is very critical in this the AIIB is a institution it's a multilateral institution it's China's first foray into such organisations it has member you know of which Australia is member countries capital you know tied up in it and they've made a big song and dance which I think is fantastic about making sure that this thing works in a way best practice standard invest into projects for all the right reasons you know financially viable economically responsible socially responsible projects if that gets undermined in any way shape or form this could go very very badly for the Chinese and my view is that I think they get that so I don't you know you'll always have people doing bad things around investments around you could even need to argue in Australia we've had some you know some bribery issues related as well so it's not just the Chinese but I think on this particular anything associated this particular initiative I would I would have thought the damage could be so bad to the Chinese that I think the NDRC which will end up being the clearing house of all these investments would be paying a lot of close attention to it gives me hope just that nature of it yeah Any more questions Professor Dupont thanks Thank you Hello Dupont I'm a non-resident fellow at the Low Institute Grant I'd just like you to give us your thoughts about success or failure of the of oboe Optimists say that it could be the most transformational thing we've seen in this century that if China succeeds in essentially running a 21st century version of the old Silk Road including this maritime dimension it's going to not only link China and integrate it into Central Asia but also with really half the world so that's the the optimistic forecast that will be transformational skeptics will argue that the chances that are happening are virtually nil and they focus on the risks that you've already touched on when there are many more of course so could you just give us your you know your best judgment about what do you think the likely outcome of oboe is going to be looking forward 10 or 20 years? Do you think it's going to be some kind of mixture of local successes? It's not going to disintegrate but it's not going to be it's not going to actually meet the grandiose designs of Xi Jinping and the Chinese leadership or where do you see it's something on that spectrum? Yeah it's a really good question because I've actually tried to I thought it might come up actually you know what I want to say no yeah look history's taught me in China that quite often it always ends up being somewhere generally speaking in the middle we very rarely have a you know and that's purely because unfortunately the Chinese love grand visions and grand visions are very very very hard to to implement this strategy is even more even harder you get argued intimate because it's so reliant upon what happens outside its own borders so for that for it to be successful China has to be able to either influence or somehow be able to form relationships of these countries that allow them to actually go through and do these things that is severe limitations because at any given point in time over the course of the next decade the relationships of those countries can be anything from very strong and very positive to very weak and very fractious we just got to look at the South China Sea to understand that to use again the Indonesian relationship which has been quite a good relationship you know Yudiyono and even Jokowi also China's capital is a way of meeting that short-term infrastructure deficit issue only defined that came in strings attached and various other things and it's caused those issues in that relationship so I'm have to say that and it's based on just how I've seen other things like this play out I'm probably more pessimistic I think China's really and I'm just based on something I might read of the situation but I think that the whole OBOR initiative was very much while there was a number of different economic corridors being undertaken there's a lot of things happening in various different parts of China as I said at the beginning OBOR is an amalgamation of a lot of those strategies under one umbrella under one overarching you know one grand vision and that is the economic corridors it's also the western development strategy of China it's the need driven by economic policy to deal with a lot of excess capacity in industry so I think and then then what lit that was the pivot to Asia of Obama back in 2011 which we need something and we've got all these things out there we bring it under the one Rubik we can actually look at it and when you make those type of decisions they're invariably rushed and to go to your question way back at the beginning is it a slogan in search of a strategy well I think they've built a strategy as they've gone the AIB and various other things under that one Rubik they've got a leading group in in Beijing headed by Zhang Gali who's a very very capable senior official in the Chinese government but I just think the one thing that's going to undermine this to go back to my point and maybe it's because I work in funds management now but the lack of investable opportunities in the region to make this happen I mean the idea of building a railway from Wodemuchi all the way to to Rotterdam through Kazakhstan Russia it's it's great in theory in practice it's extremely difficult the the idea of building a a railway from Kashgar to to Guadarport in in southern Pakistan did I go through Bluchstan you know northwestern frontiers tribes in in Pakistan again it's it's a great grand vision but the implementation of these are going to be extremely difficult so I think in in in 10 20 years time I think unfortunately we may have a lot of development in the western regions of China associated with this because of the ability to source capital to fund new projects in those in Xinjiang and Xijiang and and Guangxi and other parts of China but I don't think you're going to have a lot of outstanding new railways linking various different parts of Asia I'd I'd I'd find it hard to see that any more questions yet Leon thank you Leon Berchelman's from the Lowe Institute so you gave pretty pessimistic take on the on the prospects for success how does the Chinese leadership then sell it in 2010 or 20 years time when it looks like a bit of a dud if that's what it becomes yeah be careful yeah pessimistic it depends what you see is the outcome to go back to the earlier question if the outcome is a grand Marshall plan and and I mean in the perfect world to be great if it did because a lot of those things would lift economic growth and people have poverty and and I'm not saying that yeah some of those things may happen I mean there's that many different initiatives that some may get off the ground particularly the greatest opportunity would be you would have thought in Southeast Asia where you do have economies that are actually a lot more developed but then the South China see overlay complicates that but for the Chinese government what is there what are they trying to achieve I mean so what is success you could argue that from a soft power perspective through the AIB they've already received or achieved a slimming in amount of success in trying to play this you know role as a as a as a global citizen as someone that's trying to support global growth taking more responsibility all things we've been wanting China to do for quite a while I'm a big supporter of the AIB I think the initiative itself has the potential to be more transforming than the whole the overall strategy as long as the actual investments and the way it's dispersed and the way it's deployed stick to what we've been talking about and you know Chris Leigh from Treasury who's been an Australian rep on the AIB he gives me a lot of confidence when you speak to him he says how they've been really trying to do best practice around that particular bank that one bank itself a hundred billion dollar bank I mean if that can make if that can disperse half its capital on the next five years into well-funded well-resourced bankable type projects then you could say that in itself that's a success so it depends on what you know what type of levels you're trying to talk here I think the AIB itself if it's done right can really can really lift China's standing globally because it's a real test for them if it's done wrong I think it can actually quite damage you know the Chinese brand because they've put so much into it diplomatically they've put so much into it lobbying very very aggressively around the world so that that AIB I think is is is quite critical to the overall perception of how successful the one but one one road strategy is going to be so a question in the back Kip Hi I'm Eric Lewis I'm City Excelist say you mentioned that Erbor is now looking south as well towards Australia how do we make it officially into Erbor as one of the countries that's on that new maritime list perhaps and how do we tap into that capital that's available because it seems like it's a much easier investment to make in Australia than some of these Southeast Asian countries and also how do we respond in terms of FERB which is a big issue for Chinese investors in Australia Yeah you don't you don't apply to be part of the Erbor strategy you kind of global domination now just joking Now look I think Australia where it lies you could even look at the mapping to say geographically the trade flows and all those things but the reality is we're part of Asia we're integral part of Asia we have the ability to generate a lot of economic produce agricultural produce that can go to meet a lot of China's own internal needs so there's a lot of complementarities there in in the trade flows and the commodities so it kind of makes sense that we would be part of the maritime silk road from a Chinese perspective the that is what's driving a lot of that interest I mean Landbridge saw the port of Darwin for those reasons how to develop a port into being a major transshipment point from Northern Australia into China that was the thesis of their investment not having seen a business case but I would assume that would have been it so from a Chinese investment perspective and coming to Australia which is something that Hastings the first transaction I did at Hastings when I joined Hastings was the port of Newcastle and we we invested 50-50 with China Merchants Group into that port when I get asked this question around Chinese investment what concerns me is the show on this of the debate in Australia and the fact that Chinese investors have exactly the same and you'd know sitting CLSA I mean they have this the same overriding reasons for making an investment that's to generate a good return to meet their benchmarks yeah they've got exactly the same reasons for making an investment as I do they may have in the approval process going back through China they may have to go back to the NDRC or SAFE and when they get their final approvals if it's got a strategic overlay and somehow you can say it's attached to the oboe then big tick but but the principal reason for making that investment will be based on fundamental fundamentally sound commercial reasons in Australia we had this overlay around concern around land being owned and ports being owned and critical infrastructure being owned strategic overlay and all these various other things I won't go into that but from a FURB perspective we have a very very good and very well established regulatory regime around foreign investment one of the reasons the Chinese like investing here is because we have that regulatory regime the FURB itself is very good you know you engage FURB early it's a very set you've got the FATA the Foreign Acquisitions and Takeovers Act out yeah very clearly what you need to do the problem we have around that investment though is there's a political overlay that comes on top of it which somehow then can muddy the waters and obviously things become more emotional and then I mean because in the end under the FURB the final decision is made by the by the Treasurer from where I sit maybe from where you sit as a person trying to facilitate capital into this market the only thing I'd argue is that we need to engage the Chinese investors early enough as the government does I'm talking here about the FURB and sell side advisors like yourself well you know you need to actually engage early enough to tell them what the likely implications are going to be of 100% ownership of a critical infrastructure asset I think we need to give them early enough guidance I think the government just needs to sometimes come out and say on this particular asset from day one Chinese need a partner they need a partner with Hastings or QIC or AMP or Macquarie or whoever it might be they need an Australian partner it's critical infrastructure there's national interest at stake just all the Chinese want to know is what's the where's the goalposts they're there who are over here is that big is this big I just want to know I just want to know what the goalposts are I don't want to spend my three million on due diligence only to find the goalposts that I thought were over there or all of a sudden over here you know what do I do and it's the same as when I go if I'm looking investing in China I say the same thing in the Chinese government where are the goalposts what are the what are the issues investors just want a transparent process where they know what they're getting themselves into when they start that process that simple as that Yes question in the front Hello, Peter Green how does Russia view this one-built one-road and what does it see as the opportunities and challenges That's a very good question I wish I wasn't a Russia expert no I think well what do I think I think the Russia and China have again one of those relationships that can be at any given time fractures are very close we've seen that over history a very big part of China's particularly northern energy reliance now comes through Russia so there's very much as we know they've recently signed a very large deal I think about two and a half years ago three years ago so a lot of the gas flow from Russia and China's becoming more heavily dependent upon I think the Russians are quite pragmatic around the relationship with China they've been doing this for quite a while now they know we're both stand they have what the Russians wouldn't want is the perception that China this is my personal view Kazakhstan, Kyrgyzstan, Tajikistan and all the Stans are Chinese satellite states and have been Central Asia was China's background sorry Russia's background or playground I should say you don't have to go back to the days of the great game and you know there's a little finger of Afghanistan that sticks out and touches the Chinese border that was ever separate the British and Russian empires I mean that part of Russia they see it as part of Russia so anything that puts greater Chinese influence through those the Kazakhstan, Kyrgyzstan, Tajikistan Uzbekistan whatever I think Russia would feel very very very nervous about they'd say it's pretty much playing in their own backyard the overlay on that though is the anything that stimulates economic growth and anything that actually facilitates the trade and facilitates for a very pragmatic level they would actually encourage I think they know that they need new more customers they've got China's a very big customer they wouldn't want to endanger that at all but if they perceive there's any level of political interference or any type of strategic interference going into those those particular countries I think that would make them very very nervous so I think my own perspective that they would be quite watching that quite closely and that would actually make them feel quite unsettled I would have thought so we have one last question sorry in the middle sorry Aurya Weigold from the University of Canberra I want to ask a similar sort of question to the last one about Russia but in this case about India now when and if the Kashgar Guadal is a complete link China virtually encircles India I think this has some effect on India's own regional pushes in various directions and India's not always and India's not always the quickest off the mark I'm just wondering what you would think about India's view of what China's doing in the same way as you commented on Russia's view Yeah there's no secret that India's been very concerned about the relationship between China and Pakistan going back 20 odd years definitely if not longer if you sit in the Indian perspective or if you sit in their seat well I should go say you're sitting in the Chinese seat how the Chinese view the ring of pearls as ace they call it the containment of India the US, Australia, Japan that's one of their ways strategic geopolitical reasons for doing the One But One Road is to try and chip away at that so they're trying to chip away at this what they see in encircling of their own interest I mean they see India as being part of that now again no secret that India has been having a creating great closer links with the US and with Australia and with Zolkomov countries so that's of concern to the Chinese without doubt so there's a couple of things playing out here so from an Indian perspective anything at all that leads to a potential strengthening of the relationship between China and Pakistan which could lead to greater more militarily than anything else and Guadalport is actually military port you know Chinese ships being based just across their border is obviously serious concern for the Indian government again we're all nothing if not very pragmatic around economic needs though and you only have to sit and talk to the Indian government and their approach to Chinese investment has become quite a lot more positive probably in the last three years when it was previously and I just noticed from my own experience I've had Chinese investors who we have as clients come with me to meet Indian government officials around investing in India extremely positive rolling out red carpet we need Chinese investment again on our terms a lot of these you know discussions you have with the same as Australian government we've got our own national interests we've got our own views on our terms welcoming investments how can we use it to meet both countries needs if you're in India right now they look to China as a model that they're A they respect and they also wish they could follow to a degree given the speed by which people have been lifted our poverty of course you've got a very different political situation and different architecture but there is a grudging respect for the Chinese as to what they've done from an economic perspective and they want to learn and they can see big pools of capital that can help them in what they're trying to achieve as well so they see the OBOR in that context they see there's something that they could potentially work with they could work with the AIIB they could help unlock some of the infrastructure deficit use that capital to deal with these issues but again a little bit weary of the relationship with Pakistan the growing relationship you speak to actually Indian officials what's worrying them even more is the growing relationship with Cambodia and Myanmar that is because that is encircling and that's people forget that quite often is how much the Chinese have been actively involved in those two relationships in Cambodia and Myanmar so if you're an Indian official it's not just about Pakistan it's also about the other the other side as well here and also actually on that note to make it feel real it's totally petrified Colombo Port in Sri Lanka is being developed by China Merchants Group and by a lot of Chinese capital and potentially the word has been to be used as a staging post for Chinese forces into the Indian Ocean and potentially on their anti-piracy roles over in over in the western Indian Ocean so you really are feeling quite quite enclosed if you look at that way Hannah is my neighbour so I have to give her the one opportunity to ask a grander question so Hannah I'm Hannah we're also from the Lowe Institute I just had a question about going back to bankable projects because obviously we've talked about China's initiatives but the World Bank and the Asian Development Bank of which China was also part of are also trying to unlock these bankable projects in the same region where do you see the established multi-lateral development banks are fitting into Oboe Yeah the AIIB has been quite open about its desire to work with the ADB and look I think this is really good and ADB is very much a Japanese institution and anything that brings those two institutions together is obviously good for all of us if they're talking at that level so the AIB has been talking about how do they the AIB I don't think will because given the political nature of its first investment it they'd have to nearly do it alongside another reputable multi-lateral like the IFC the ADB I mean the IFC is the investment arm of the World Bank so the IFC, the ADB are the two logical partners that they would look at investing alongside The other interesting thing is the AIB also would like to invest alongside other institutional investors and they could be you know we've had discussions with them I dare say that the big Canadian pension funds who are now looking at investing in Asia PSP, CEPQ, CPPIB you've got some very large Middle Eastern sovereign wealth funds now like the Katari Investment Authority the Kuwait Investment Authority so you've got a lot of very large institutional investors now who are looking at investing in Asia Asia from where I sit at Hastings is becoming more and more of an interesting market and people want a club as a way of de-risking political risk and execution risk you want a club you want to actually invest alongside others that have a very similar view of the market and a very similar risk tolerance that's the key issue here how do you mitigate risk so I think the AIB will be looking when it makes that first investment to invest alongside one of those large multilaterals whether it be the ADB, the IFC or some of those other large institutional investors and sovereign wealth funds Thank you so much I think this is the end of the event I think we'll have a very informative session and do we have another representative on EMP? Oh yes, oh Matthew, sorry Of course there are competitors Yeah Ah, good afternoon everyone On behalf of you all I'd just like to thank Grant for a most erudite and informative presentation I'm sure we're all leaving today much better equipped So thank you Grant I think it'd be very remiss not to thank Peter for asking such excellent questions Thank you Matthew Definitely showing your journalistic background And most of all to a fabulous audience who was so engaged and really stimulated a great discussion Would you please join me in thanking Grant


Hi, everyone, I'm a dumb. Yeah, I forgot to do the the free box giveaway if you bought at least two teams You'll get an entry four teams two entries Sometimes my this brain doesn't work so good. Yeah, there's all the details right there top name will get a sealed box Who knows what will be inside you can sell it if you want to you can open it if you want to whatever you want Give it away as a gift. All right, let's sort everyone's names by their first name. So Aaron bought Six teams so if you buy an even number of teams half of those are entries Six yes, Cory Phillips got two teams. That's an entry EA got four teams. That's two entries Josh got two teams, that's an entry Lance got two teams. That's an entry Matt hedges got two teams. That's an entry Robert got two teams. That's an entry Ryan got two. That's an entry Sean oh with two entries Shane with two entry Just spot check this really quick make sure I didn't make sure I got everybody So Aaron check Cory Matt Daniels or Matt But Matt hedges yes, Robert, Ryan, Sean and Shane All right There's some new dice There's a clean list right here name on top gets the box good luck after lucky seven times one two three four five six And once more right yep seven then final time after seven congrats to Sean Oh, they're Sean. I don't think I called your name out all break So a sealed box going your way as a consolation prize. Thanks again everybody. I'm Joe and I'll see you next time for the next one Bye-bye


I heard the Lord give me a name. I believe it's the last name that I want to pray for you your family. I heard the word Perez. My husband's second last name is Perez. The Lord showed me yesterday as I was praying for this service. I want to pray for the husband and I want to pray for a son. What's happening with your son? He's walked away from the Lord after the divorce. The generational curse that was going through your husband is operating and affecting him. Yes, my husband's great-grandfather divorced the wife. My husband literally did to us what his dad did. But I believe that the Holy Spirit is bringing deliverance to you and your family. I got delivered and I didn't feel like I was up against the world. I didn't feel like I needed to fight with my husband. I didn't feel like I was alone. I didn't feel that I had to defend myself anymore.