China backs up silk road ambitions with $62bn capital injection

China will draw on its massive foreign exchange reserves to inject $62bn of capital into state-owned "policy banks" in support of its ambitious "New Silk Road" plans to build infrastructure links to foreign markets.

Beijing's "One Belt, One Road" strategy includes plans to build roads, railways, ports, natural gas pipelines and other infrastructure stretching into south and Southeast Asia, the Middle East, and Central Asia to create demand for China's industrial exports in the face of overcapacity at home.

The recapitalisation plan revealed on Monday shows China's leaders are prepared to mobilise the country's considerable financial resources to put the scheme into action and help extend Chinese influence across Asia.

The details emerged as President Xi Jinping began a visit to Pakistan bearing promises of more than $45bn in infrastructure investment.

It follows Beijing's diplomatic success in securing the support of 50 countries for the China-led Asia Infrastructure Investment Bank, despite US objections.

Extra financing for infrastructure could help support China's weakening economy and the majority of foreign construction projects will most likely be undertaken by Chinese companies.

Increased foreign currency lending would likely also help China boost financial returns on its forex reserves, which are now mainly invested in low-yielding US treasuries.

China's three state-owned non-commercial lenders - China Development Bank, Export-Import Bank of China, and Agricultural Development Bank of China - are collectively known as "policy banks" because they are explicitly devoted to financing infrastructure and other policy priorities within China and abroad.

Respected financial magazine Caixin reported on its website on Monday that the cabinet's plan involves the central bank injecting $32bn in forex reserves into CDB and an additional $30bn into Ex-Im Bank. The capital injections will come in the form of entrusted loans that convert to equity, the magazine reported. The Ministry of Finance will inject a further unspecified amount directly into Agricultural Development Bank.

"For CDB and Ex-Im Bank to support 'One Belt, One Road' they need a source of stable foreign-exchange funding," Caixin quoted a senior CDB source as saying.

China's forex reserves stood at $3.7tn by the end of March, according to official data.

China Development Bank has provided funding for many of the country's most ambitious financial diplomacy initiatives, including loans-for-oil to Russia, Brazil and Venezuela. Both CDB and Ex-Im Bank also provide trade credit to support Chinese exports.

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Earlier this month China's cabinet approved a plan to reform the three policy lenders but provided few details. For years the government has said it intends to transform the institutions into commercial entities, but progress has been slow.

The policy banks do not take deposits and fund themselves mainly by selling bonds that carry an explicit sovereign guarantee. The banks sell both renminbi bonds within China and USD bonds in the offshore market.

Experts have warned that the banks are undercapitalised. The Ministry of Finance and China Investment Corporation each own 50 per cent stakes in CDB, but the bank has not received a capital injection since 2008.

The Financial Times reported last year that CDB had asked several foreign clients to delay drawing down lines of credit previously offered, apparently due to funding strains.

CDB's capital adequacy ratio stood at 11.28 per cent at the end of 2013, according to the bank's most recent annual report. That compares to 13.18 per cent for China's banking system as a whole at the end of 2014.

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