China, Explained Series: Evaluating Belt and Road bonds using an ESG lens

China, Explained Series: Evaluating Belt and Road bonds using an ESG lens

Yifei Ding,Senior Portfolio Manager

Anthony Xiao,CPM, Fixed Income

The case for B&R bonds

As emerging economies begin to recover from the pandemic, investors can consider investing in Belt and Road (B&R) bonds. These bonds, used to finance infrastructure projects related to China’s Belt and Road Initiative (BRI), may offer better risk-adjusted returns with lower volatility particularly given the current low-yield environment. Since 2017, when the BRI was written into the constitution of Chinese Communist Party, the iBoxx Belt and Road Index has for the most part outperformed both the J.P. Morgan Emerging Market Bond Index (EMBI) and the Corporate Emerging Market Bond Index (CEMBI) (see Chart 1).

Chart 1: Performance of iBoxx Belt and Road Index relative to JP Morgan EMBI and CEMBI
Chart 1: Performance of iBoxx Belt and Road Index relative to JP Morgan EMBI and CEMBI
Source: Bloomberg, data as of June 28, 2021

China has demonstrated its commitment to the BRI both in their 14th Five-Year Plan and annual Two Sessions meetings. As of early 2019, the estimated total eligible size of the B&R bond market had already reached over USD 1.5 trillion1. The recent lockdowns and social distancing measures enacted as a consequence of the Covid-19 outbreak have no doubt impacted the progress of BRI projects.2 However going forward, emerging economies will still need to meet significant infrastructure funding needs to drive growth (see Chart 2) and are also looking to offset the decline in GDP caused by the pandemic. Economic improvement of these economies will benefit both government and corporate bond issuers along the B&R.

Chart 2: Rising infrastructure investment gap in emerging market countries
Chart 2: Rising infrastructure investment gap in emerging market countries
Source: Global Infrastructure Hub, as of 30 June 2020.
Inroads into sustainable development

In recent years Beijing regulators have been making inroads in promoting sustainable development in the context of the BRI. China’s Ministry of Finance released a debt sustainability framework (DSF) at the second Belt and Road forum held in April 2019.3 Financial institutions in China and other BRI countries are encouraged to use the DSF to manage their debt risks and engage in more disciplined lending. Beijing has also announced several green finance policies and encouraged green bond issuances in recent years that can be applied to BRI projects.

Whereas funding for the BRI has typically originated from government entities, the private sector is now playing a more active role in financing these developments.4 B&R infrastructure projects are also attracting growing multilateral interest. In March 2019, the Ministry of Finance together with several multilateral development banks set up the Multilateral Cooperation Center for Development Finance (MCDF) demonstrating China’s interest in promoting multilateral projects under the BRI.5 At the same time, other nations are competing with China to invest in BRI countries. In November 2019 at the Indo-Pacific Business Forum, the US alongside Japan and Australia founded the Blue Dot Network6, a private-led infrastructure investment scheme intended for the Indo-Pacific region.7 The wider range of financing options, greater external competition and increasing multilateralization of the BRI are all likely to improve the sustainability and transparency of B&R projects over time.


Where we see opportunities in B&R bonds

We believe that considering environmental, social and governance (ESG) factors are critical when evaluating B&R bonds. Our team follows a fundamentals-first approach and systematically considers ESG factors to avoid the “worst-in-class” countries and corporate issuers. For example, on the sovereign side, data shows that there has been better financial market performance from EM sovereign bonds that are more highly rated from an ESG perspective (see Chart 3). We view ESG as a driver of alpha and therefore favor issuers that are making notable improvements in their ESG disclosures and metrics over time.

Chart 3: Emerging Market sovereign bond returns for past three years by MSCI ESG rating
Chart 3: Emerging Market sovereign bond returns for past three years by MSCI ESG rating
Source: MSCI, J.P. Morgan, Bloomberg, Invesco. Performance data as of June 8, 2021. MSCI ESG rating is as of December 31, 2018. Past performance is not indicative of future results.

In the next half year, we see opportunities in countries that have good diplomatic relations with both China and Western countries. We also favor China USD bonds with a domestic focus or those that have strong government support. In terms of sector allocation, we see opportunities in the infrastructure sector covering diversified industries such as power utilities, energy, transportation, telecommunications, affordable housing, and construction.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.

1 Invesco, based on Invesco B&R relevance compliance check, as of 25 February 2019. Based on current market conditions and subject to change without notice.
2 The Belt and Road Initiative 2021 Survey – The impact of Covid‑19 on the BRI, June 2021,
3 China’s New Debt Sustainability Framework Is Largely Borrowed from the World Bank and IMF. Here’s Why That Could Be a Problem., July 2019,
4 China’s Belt and Road Initiative in a Post-Pandemic World, June 2020,
5 Broadening the Belt and Road: China’s new fund for multilateral cooperation, September 2020,
6 Blue Dot Network,  
7 China’s belt and road plan: can the US find an alternative route?, May 2021,