The vastly different financial conditions of about 70 countries and regions along the B&R have made international financial cooperation highly difficult. Photo: FILE

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With the advancement of the Belt and Road (B&R) initiative, it is increasingly important for China to cooperate with countries along the initiatives’ routes financially. International financial cooperation is necessitated by huge infrastructure financing gaps. However, creating a financial channel involving multiple subjects on multiple levels is not simply a financing issue. It concerns the top-level design of such aspects as financial systems, markets, institutions, currencies and regulations. The vastly different financial conditions of about 70 countries and regions along the B&R have made international financial cooperation highly difficult.

 

Problems loom large
Among the objectives of the B&R initiative, namely policy coordination, facilities connectivity, unimpeded trade, financial integration and stronger ties between peoples, financial integration is at the core and the starting point of international financial cooperation.

Infrastructure construction is a significant part of the initiative. Due to the large scale, heavy workload and long duration of construction, the funding gaps are enormous. According to estimates by Asia Development Bank and KMPG Global China Practice, Asian countries need infrastructure funds of approximately $730 billion prior to 2020. In the long term, the planned infrastructure in B&R countries and regions will amount to $20 trillion.

A conservative estimate by the People’s Bank of China in 2016 reveals that the annual infrastructure investments needed in countries along the routes ranged from $1.3 trillion to $1.9 trillion. Neither financial institutions of B&R countries and regions nor international and regional financial organizations can fill the substantial capital gaps. The low rate of return and long payback period compound the problem.

Along the B&R are primarily emerging economies and developing countries. Most of them have a low level of financial development, and their financial environments are widely different. Because of low-level development in finance, it is hard to effectively allocate limited funds to infrastructure construction. Moreover, the varying financial conditions increase the credit risks for infrastructure construction in the region.

Currently, the financing models of B&R countries and regions are simple, basically little more than sovereign borrowing and mortgage loaning. Such problems as various obstacles, high costs, low efficiency and few financing channels are extremely prominent.

 

Joint efforts needed
The difficulties in financial integration can never be solved by a single financial institution, a single country or a simple financing system. Multilateral financial institutions and related countries and regions should join forces to create a diversified financial channel involving multiple subjects on multiple levels.

When the 70 economically and financially different countries and regions build a multilateral financial channel on the common platform of the B&R, it is not purely an issue of capital borrowing and lending or financing. They need to, according to agreed-upon rules, complement each other’s advantages multilaterally in areas like financial system coordination, cooperation between institutions, monetary payment systems and risk regulation.

In terms of financial system coordination, some countries along the B&R have enforced strict financial control, making it very difficult to move capital in and out. Therefore, international financial cooperation should prioritize the coordination and alignment of financial systems and rules to ensure cooperation is carried out on an open platform. Most financial systems are based on indirect bank financing, while the direct financing market is generally inadequate. The evolution from indirect financing to diverse financing models should be an important component of financial system coordination.

Regarding cooperation, the developmental, policy-based and commercial financial institutions of the countries should complement each other to shape an all-round, multilevel financial support system.

Developmental financial institutions should play the role of guiding and opening up, linking the government and the market, integrating resources of all parties and providing medium- and long-term loan support for promising demanders to guide commercial finance in a market-oriented manner.

In the meantime, they should open up and strengthen cooperation with international developmental financial institutions, such as the World Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the New Development Bank and the Asian Infrastructure Investment Bank.

Policy-based financial institutions should act as protectors while commercial institutions serve as operators. The process of financial integration necessarily involves account management, fund settlement and clearance, agency relationship, syndicated loans and project loans, all of which raise specific requirements for cooperation between financial institutions.

Furthermore, the financial cooperation framework for B&R construction should have its own monetary payment system to build a community with a shared future and a financial channel characterized by highly blended interests. The promotion of both RMB internationalization and the “RMB+X” (X refers to the currency of countries suited to currency internationalization) model aims to weaken the dominance of the dollar and reinforce deep financial cooperation along the B&R.

To establish an externally independent and internally cooperative monetary payment system, B&R countries and regions should gradually build a multilateral currency swap system of a certain scale. China’s attempts to sign currency swap agreements, conduct monetary outright transactions, and build the RMB Clearing Bank and the Cross-border Interbank Payment System represent the first steps in establishing the system.

When it comes to risk regulation, financial risks including credit, interest rate and exchange rate risks have become unavoidable obstacles for international financial cooperation within the B&R framework. The outlook of cooperation will remain bleak if no effective precautionary, responsive, corrective and safeguarding measures are adopted.

It is essential to build a regional financial risk pre-warning system, improve institutional arrangements for risk response and crisis handling, set up a regular coordination mechanism and unify investment rules to encourage cooperation between credit management departments, credit service institutions and rating organizations. In doing so, financial regulation resources will be shared to facilitate international cooperation.

 

Government and market crucial
The overall financial ecosystem along the B&R is weak. It is complicated and diverse. For instance, the financial system of most Asian countries is dominated by government-supervised commercial banks, relying heavily on financial institutions. Only few countries have reasonable and sound financial systems without overdependence on financial organizations.

The difference is huge even in terms of only one financial element. Take credit risks as an example. Financial institutions in countries like Singapore have sufficient capital, high asset quality and strong risk resistance capacities, hence low credit risks. By contrast, the low sovereign ratings of such countries as Myanmar and Cambodia make them vulnerable to being trapped in a vicious cycle between sovereign debt crisis and bank crisis.

In other words, international financial cooperation along the B&R has a long way to go given the interplay and mutual restriction among the financial, economic and investment conditions and the financing behaviors of related countries and regions.

In this process, it is crucial to bring the role of the government and the market into full play. For one thing, financial systems, regulation and monetary payment systems bear strong resemblances to public goods. During the top-level design of financial cooperation, B&R countries should highlight the fundamental and public feature of financial institutional arrangements and reasonably define the function of the government to better play a guiding role.

For another, government resources are ultimately limited. Only by guaranteeing the major role of enterprises and market-based operation can international financial cooperation be sustained. Lucrative profits, controllable risks and shared interests are incentives for market-based operation, so the international financial cooperation for B&R construction must be steady and sustainable by ensuring the short- and long-term economic and social returns for the financiers and investors of construction projects.

 

Qi Jianhong is a professor from the School of Economics at Shandong University.

(edited by CHEN MIRONG)