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A Banker's View of the “Belt and Road” Initiativ

January 27, 2017

Q: Some projects implemented under the “Belt and Road” Initiative have failed to move ahead. What were the main reasons and what impact will this have on the financial institutions involved? 

A: Some projects have not been able to proceed. ABC itself has encountered such setbacks. There are many reasons for this, including political factors, cultural factors, environmental factors, lack of public communication, as well as other reasons.

I believe that some projects may be experiencing financing difficulties. On one hand, the vast majority of projects of the “Belt and Road” Initiative belong to the infrastructure sector of developing countries, which have a long construction periods with low rates of return on investment and high degrees of geopolitical uncertainties. That makes it difficult to obtain adequate funding.

On the other hand, as can be seen from international experience, about 60% of the financing for international infrastructure projects comes from bank credits, including syndicated loans. The rest comes from debt financing and government investment. However, the financial markets in many of the countries participating in the “Belt and Road” Initiative generally are somewhat undeveloped and that leads to financing gaps.
  
For domestic financial institutions, the key is to manage the project financing risks under the “Belt and Road” Initiative as these are much greater than those of domestic projects. Banks must be particularly cautious in this respect.


 Q: Financial cooperation is an important component of the “Belt and Road” Initiative. Where has ABC seen progress in cooperation?

A: ABC has attached great importance to strengthening financial cooperation. It has achieved good results, and they have mainly been in the following areas:
 
The bank has undertaken business exchanges with financial institutions in the countries participating in the ''Belt and Road'' Initiative. It has also set up cross-border renminbi business centers in border regions such as Guangxi, Yunnan, Inner Mongolia and Xinjiang. The construction of international financial cooperation platforms has also help facilitate trade and investment under the strategic program.

At the end of 2016, there were 27 overseas banks that had joined ABC in its renminbi cross-border payment system as indirect participants. This network has stretched across Asia, Europe, Africa, America and Oceania. Among the banks in this network were nine from countries participating in the ''Belt and Road'' program, including Mongolia, Pakistan, Kazakhstan, Kyrgyzstan and Latvia. There were more than 270 renminbi settlement accounts for overseas counterparts promoting cross-border use of renminbi.

The bank also continued to deepen financial cooperation with the participating countries. In 2014, ABC signed the Agreement on Agricultural Cooperation with the Tajikistan Agricultural Investment Bank to carry out credit operations such as project financing and account financing, and promote bilateral currency swaps. In 2016, ABC successfully held two senior financial management training courses for Tajikistan, which was a strong impetus for the integration of financial ideas and business products linking the two countries. ABC also began quoting a renminbi-somoni exchange rate to achieve cross-border settlement of the two national currencies and thereby promote the use of the renminbi in Central Asia.


Q: In recent years, Chinese enterprises have stepped up their offshore investment, and this has been particularly obvious in countries participating in the “Belt and Road” program. However, some enterprises have pretended to make investments but instead have just used the program as a way to move capital offshore. In response foreign exchange authorities have tightened their efforts to supervise investments. In your opinion, how can macro prudential supervision of cross-border capital flows be managed better? 

A: Foreign exchange management departments have issued clear management guidelines regarding the actions of some companies that have falsified evidence of foreign investment. Regulators have established a cross-border capital flow risk monitoring system, enriching the macro prudential toolbox for managing cross-border capital flows. They have also improved the management system for micro cross-border capital flows and strengthened domestic and foreign capabilities. For commercial banks, the key has been to follow these general guidelines.

First, there is a need for banks to maximize their role as a bridge between foreign exchange management institutions and the market players. In the long term, the general direction of the country's effort to reach convertibility of the renminbi under the capital account will not change. However, under the current situation in cross-border capital flows, banks act as a link between regulators and enterprises, effective transmitting foreign exchange management policies and rationally guiding customer expectations to achieve an orderly outflow of funds.

Banks also need to strictly review customer information and gain a thorough understanding of their customers to ensure that the information is accurate and that foreign investment projects have been approved by regulatory authorities.

The banks also need to step up staff training in order to ensure that relevant lending requirements are met.


Q: Global trade, investment and economic growth remain sluggish. The anti-globalization movement is gaining ground. Against this background, what significance do you see for the “Belt and Road” program? Can it help promote global economic development?

A: I think that under the prevailing economic conditions, the ''Belt and Road'' Initiative has shown it can deliver a number of benefits. The ''Belt and Road'' Initiative is a strong rebuttal to the anti-globalization movement and reflects China's willingness to shoulder its international responsibilities. In the face of an anti-globalization trend and more aggressive forms of protectionism, China is firmly and vigorously promoting greater economic cooperation in an effort to defend the fruits of globalization. China is bravely shouldering the responsibility of maintaining global stability in an era of turbulence and uncertainty.

In the past decades, globalization has been sharply criticized by many people, mainly because globalization in the past was dominated by the capital elites of the developed countries. This inflicted damage on the interests of large numbers of people. But the ''Belt and Road'' Initiative is an open, inclusive and balanced globalization. It is a globalization that benefits everyone and creates a win-win scenario that boosts global growth.
 
The ''Belt and Road'' Initiative ultimately will become an important driver of global economic growth. The world economy is still in the midst of a gradual recovery from the global financial crisis. As we learned from the Great Depression of the 1930s, protectionism exacerbates economic problems. The “Belt and Road” Initiative can be a successful deterrent to a repetition of that mistake. It will enable more countries to accelerate investment, promote liberalized trade and optimize the division of labor in the global industrial chain. This in turn will help spur global economic growth.





Source: From wechat platform of “China Foreign Currency”


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