Financing China's Belt and Road Initiative

Investments and Infrastructure

XIAO Gang

• Publisher: Routledge
• Print ISBN:
  9780367619657
• Edition: 1
• eBook ISBN:
  9781000287776
• Topic: Business
• Subtopic: Business General
• Index: Business

Centering on the investment and financing infrastructure of China's Belt and Road Initiative (BRI), this book puts forth the basic principles and general objectives of constructing a new investment and financing system of this magnitude.

Beginning with a succinct analysis of the practical issues faced while developing the BRI's investment and financing system, the authors put forward several approaches to optimizing and reestablishing the system for the further advancement of investment and financing among and beyond the Belt and Road countries. Topics include credit rules, management and control systems, investment protection, dispute settlement and risk assessment while establishing a new mechanism that helps resolve debt defaults, checks for potential corruption and bribery, fosters new growth, and enhances information transparency.

The book will be a practical reference for researchers interested in the Belt and Road Initiative and world investment and finance, as well as policymakers, financial institutions and enterprises relevant to the BRI.

1 Genesis and development of the Belt and Road investment and financing

Wang Fujian and Xie Yongjia

During September and October 2013, General Secretary Xi Jinping proposed the strategic initiative of building the Silk Road Economic Belt and the 21st Century Maritime Silk Road (the “Belt and Road” or “B&R”). Working together toward building the Belt and Road is a strategic initiative proposed by China to protect the global trade system and the open economic system, encourage countries involved in the Belt and Road Initiative to strengthen cooperation and carry out concerted efforts to overcome difficulties and pursue common development, and build a community with a shared future for mankind. The initiative is epoch-making and of far-reaching strategic significance.

1.1 Overview of B&R investment and financing development

1.1.1 Value in B&R investment and financing

The Belt and Road Initiative would be impossible without funding support. Investment and financing services are a key pillar and necessary condition for realizing connectivity of infrastructure and facilities and unimpeded trade. They are valuable in the following respects: first, supporting the initiative’s funding demand; second, improving BRI countries’ financial services; third, offering opportunities for the development of China’s financial industry; and fourth, providing a platform for driving renminbi internationalization.

1.1.2 Achievements under the Belt and Road Initiative

To date, the Belt and Road Initiative has received positive responses and support from more than 130 countries and international organizations. High-level government officials are visiting each other’s countries more frequently, and the degree and scope of cooperation between countries continue to expand and deepen. Positive results are seen in the connectivity of railways, highways, ports, energy, and telecom facilities, as well as technical cooperation. As China’s trade ties with other BRI countries become increasingly closer, the trading volume is growing year after year. From 2013 to 2018, China’s trade in goods with other BRI countries surpassed US$5 trillion, and foreign direct investment exceeded US$70 billion, while the country paid US$2.2 billion taxes to host countries, and created 210,000 jobs. Investment and financing services have provided strong funding support for the initiative. Since its founding at the end of 2015, the Asian Infrastructure Investment Bank (“AIIB”) has increased its membership to 84, and launched 24 infrastructure investment projects involving total loans of US$4.2 billion in 12 member countries.

1.1.3 Chinese capital gives BRI a boost

First, Chinese government departments including the National Development and Reform Commission, the Ministry of Finance, the Ministry of Foreign Affairs, the Ministry of Commerce, and the People’s Bank of China have boosted the B&R Initiative by unveiling a full set of supportive policies.

Second, China’s financial institutions have supported the initiative through participation in financial cooperation in diverse forms, and in doing so gathered rich experience. They participated in nearly 2,600 BRI projects, granted total credit of close to US$400 billion, and loaned more than US$200 billion.

Third, the B&R investment and financing models and methods have become more innovative. Chinese enterprises tried various offshore financial resources such as related products and services of commercial and international financial institutions, such as HSBC, Standard Chartered Bank, Citibank, and Multilateral Investment Guarantee Agency (“MIGA”), apart from using traditional export credit and trade finance.

1.2 Characteristics of B&R investment and financing

Although five years have passed, the B&R investment and financing system is still in its infancy. The 1.0 version has the following distinct characteristics.

1.2.1 Driven by policy finance

Policy and development financial institutions play an important part in China’s economic cooperation with the rest of the world, and they help enterprises obtain credit support and hedge risks in the “going global” drive. Policy financial institutions are continuously reinforcing capacity-building. According to data for recent years, the Export-Import Bank of China (“Eximbank”), China Development Bank (“CDB”), and China Export & Credit Insurance Corporation (“SINOSURE”) have fully performed their policy and development finance functions, greatly supported foreign contracted projects and overseas investments of Chinese enterprises, and played a crucial role in the B&R projects.

1.2.2 More extensive financial cooperation

The communication on financial policies involves wide-ranging contents across many different levels, dealing with not only inter-governmental strategic financial cooperation in the macro sense but also business cooperation among financial institutions. This has made investment and financing services for the BRI possible.

So far, China has carried out useful endeavors in financial policy communication and coordination with other B&R countries, and the cooperation among financial institutions has achieved initial success. At the Belt and Road Forum for International Cooperation in 2017, SINOSURE signed cooperative agreements or MOUs with a number of peers, marking a substantial outcome of the investment and financing policy communication. CDB and Eximbank discussed potential cooperation with the European Bank for Reconstruction and Development (“EBRD”), and CDB also discussed joint lending with the French Development Agency (“AFD”). The China-CEE Countries Inter-bank Association, established in late 2017, is comprised of 14 banks and aims at providing development financing for projects in the two regions. It is set to become a fresh force in multilateral cooperation. The Belt and Road Inter-bank Regular Cooperation Mechanism of Commercial Banks has seen mutual referrals of projects exceeding US$2.5 billion among its 53 members.

1.2.3 Key support to infrastructure sector

Connectivity of infrastructure and facilities serves as an important foundation of the Belt and Road Initiative and enjoys priority in cooperation. It plays a pivotal role in supporting BRI countries’ economic development and creating benefits for their people. It also provides significant support for realizing practical cooperation and mutual benefit for all. In the past five years, connectivity of infrastructure and facilities, typically construction of transportation hubs, petroleum pipelines, and fiber-optic communication lines, has reaped fruitful results, successfully connecting Chinese capital and technologies with the infrastructure construction needs of relevant countries. Connectivity of infrastructure and facilities, visible in the emergence of a group of demonstration and milestone projects, has stood out as a fruitful leading area in the “five-pronged approach” (policy coordination, infrastructure and facility connectivity, unimpeded trade, financial integration, and closer people-to-people ties).

1.2.4 Central and state-owned enterprises playing leading role

Central and state-owned enterprises have made irreplaceable contributions to the Belt and Road Initiative leveraging their strengths, mainly in terms of being strongly capable of carrying out a large number of influential projects which boasted big synergies and obvious driving effects.

Over the past five years, central and state-owned enterprises have launched many large infrastructure projects, fully displaying their robust professional capabilities. And they are good at countering risks because the market environment abroad is complicated, particularly the development of market economy in B&R countries is relatively underdeveloped, and some countries are politically unstable and highly risky. The Belt and Road Initiative is an updated version of the Chinese enterprises’ “going-global” drive, with international cooperation not being limited to the efforts of single enterprises or single industries alone. Instead, central enterprises can bring their comprehensive power to the fullest and further enhance synergies and driving effects. In this way, a new model in which central enterprises lead a group of companies to go global together has come into being.

1.2.5 Industrial parks showing cluster effect

The ways of cooperation, management structures, and development philosophies of foreign economic and trade cooperation zones mirror Chinese models and experiences, which can be copied by more developing countries involved in the Belt and Road Initiative. Economic and trade cooperation zones abroad have already become an important carrier of the Belt and Road Initiative.

Consistent with the B&R philosophy of “making joint efforts to a future enjoyed by all,” industrial parks have injected fresh vitality into the Chinese economy and stimulated the further development of related service industries; they created more jobs and increased investments in host countries, galvanized the economic and industrial growth of host countries, and raised social and economic benefits through expanding economic and trade contacts between China and other B&R countries, promoting their capacity cooperation, and drawing on one another’s strengths. Through building cooperation zones, investors have attracted their domestic enterprises, and companies of host countries and other nations to set up plants there and form industrial clusters. This, on the one hand, increases employment and tax receipts of host countries and, on the other hand, helps them earn more foreign currency through export and improved technologies, thus spurring common development of bilateral economy.

1.3 Viewing debt growth in BRI countries rationally

1.3.1 Foreign debt of B&R countries

China upholds the principle of wide consultation, joint contribution, and mutual respect in the Belt and Road Initiative. The country never forces any partner nation to accept the Chinese approach or encourage the partner nation to become debt-ridden but commits to promoting mutually beneficial and win-win outcomes that are shared by all. Moreover, the country follows international rules and commercial principles and engages in market-oriented project cooperation that regards enterprises as the main player.

As to whether the initiative has pushed the foreign debt of B&R countries higher, we can perform an objective analysis of the countries’ foreign debt growth in the five years after the launch of the BRI.

The foreign debt of countries involved in the Belt and Road Initiative is mainly made up of the direct borrowings or the medium- and long-term foreign debt guaranteed by the host countries’ public sector. Due to the contingency in foreign debt changes over a single year, this report compares the annual growth of the medium- and long-term foreign debt of foreign countries’ public sector in the five-year period before the Belt and Road Initiative was launched (2009–2013) and that in the five-year history of the initiative (2014–2018) based on the IMF data. Our finding is that 37 of the 63 countries for which data are available have recorded a decline in annual foreign debt growth in the five years since the introduction of the BRI.

From 2014 to 2018, only 12 countries (Oman, Kuwait, Iran, Bulgaria, Nepal, Iraq, Moldova, Syria, Myanmar, Pakistan, the United Arab Emirates, and Uzbekistan) reported an above 5% growth in foreign debt (Figure 1.1).

Figure 1.1 Twelve B&R countries with rapid foreign debt growth.

Source: IMF data.

Judging from the statistics, the BRI does not push up the debt of countries involved in the Belt and Road Initiative. First, overall debt of most countries has not changed a lot; second, only a limited number of countries reported growth in their public sector’s medium- and long-term foreign debt; third, in spite of certain growth in China’s investment in some countries, the data refer to all of China’s overseas investment, and the actual data about sovereign borrowings or loans with sovereign guarantees are smaller than such investment data; and fourth, excessively fast foreign debt growth of individual countries has something to do with their specific development stage and national conditions.

1.3.2 Debt burden alleviated under innovative models of raising and using funds

Sovereign borrowings and sovereign guarantees are the primary reason behind debt burden increase of host countries. The debt issue can be substantially eased when sovereign borrowings and sovereign guarantees weigh down. For example, changing the equity-debt ratio can optimize the capital structure of projects, alleviate the debt burden of host countries, and scale up the investment in the B&R projects.

In recent years, due to the external economic and competitive landscapes, Chinese enterprises have been innovating their overseas business models and exploring different project financing models such as public-private partnership (“PPP”) and build-operate-transfer (“BOT”). They not only participate in the projects’ planning, design, and construction but also take part in the operation after completion of the projects. In this way, enterprises can get immediate benefits from project construction and, what’s more, have access to future benefits, too, truly expanding common interests and sharing responsibilities with host countries. This integrated business model can also reduce host countries’ debt pressure sharply.

In response to the debt issue of countries involved in the Belt and Road Initiative, Chinese financial institutions have proceeded from the actual situation, strengthened the examination on the projects’ self-liquidation during the approval process of credit funds, and provided projects with good economic benefits and in line with the host country’s policies and easier access to loans. In addition, in view of the development state of different countries, Chinese financial institutions have adopted country-specific policies, and paid more attention to debt risks while supporting projects’ funding needs.

2 Challenges faced by the Belt and Road investment and financing

Xie Yongjia

Belt and Road investment and financing is hampered by an...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• List of contributors
• Introduction
• 1 Genesis and development of the Belt and Road investment and financing
• 2 Challenges faced by the Belt and Road investment and financing
• 3 An approach for solving the Belt and Road investment and financing issues
• 4 Reforming existing credit rules for the Belt and Road Initiative
• 5 Optimizing the Belt and Road investment protection and dispute settlement mechanisms
• 6 Strengthening the Belt and Road investment and financing risk assessment and early warning
• 7 Building a new mechanism for resolving debt defaults in the Belt and Road investment and financing
• 8 Stepping up the fight against corruption and commercial bribery in the Belt and Road investment and financing
• 9 Making the Belt and Road investment and financing information public and transparent
• 10 Pushing Renminbi internationalization to inject new growth momentum into the BRI
• 11 Improving other areas of the soft environment
• Epilogue
• Bibliography
• Index