Ding Yifan

Innovation on Financing should Pave the Way for Realizing the Belt and Road Initiative

Ding Yifan

During a recent research tour in the Xinjiang Uygur autonomous region and my visit to Huoerguosi Port， I have found some issues concerning the relationship between the relaxing of financing regulation and difficulties in fund usage. Therefore， I think that there are some issues between financing innovation and the implementation of the Belt and Road Initiative that need to be resolved. I would like to share my personal perspective on these issues.

The Belt and Road Initiative Will Promote Investment and Growth

Many people in China have doubts about the real benefits the Belt and Road Initiative will bring to the Chinese economy. They think that investments in the Silk Road Economic Belt and the 21st Century Maritime Silk Road are risky and will not produce effective returns.

Why then has the government launched the Belt and Road Initiative？

From the end of 2001， when China joined the World Trade Organization to 2009， one year after the global financial crisis erupted， the Chinese economy achieved rapid development， primarily due to China's exports. Chinese exports maintained double-digit growth over that period.However， since 2009， China's exports have declined significantly.

Over the past five years， China has taken steps to adjust its economic structure， and great changes have taken place. As a result its exports have been diversified to a very large extent. In addition to its exports to traditional markets in developed countries， China has increased its exports to emerging economies.

The fastest export growth is now toward emerging countries. During his trip to Indonesia， President Xi Jinping visited Bandung and reaffirmed Asian-African friendship and cooperation， showing that China pays great importance to its economic and trade relations with developing countries. However， China's trade growth with developing countries is different from its trade growth with developed countries. China's traditional export trade has been with developed rich countries that pay in hard currencies； as a result China has had a soaring foreign reserve. However， China's exports to developing countries in Asia and Africa are closely linked with relevant investments. China exports more to countries where it makes the most investments. Without Chinese investments， these countries' economies would remain stagnant， and they would not have the purchasing power to buy Chinese products. Thus economic and trade relations would not develop between China and these countries.

Proceeding from such circumstances， the Belt and Road Initiative is actually China's strategy for investing overseas in developing countries. Without the Belt and Road investments， it would be difficult to produce a growth driver for future trade. Currently the destinations for China's exports to developing countries are those emerging economies in which China has invested most， such as countries in Africa and Southeast Asia. Over the past two years， Chinese investments in Africa and Southeast Asia have grown so fast that some analysts hold that China's largest trading partner will be Africa instead of the United States or Europe by 2020. China's fast trade development with Southeast Asia has also resulted from China's investments in ASEAN countries. China's investments in ASEAN countries account for more than 50 percent of foreign investments in ASEAN countries over thepast five years. It is the swift growth of Chinese investments in the ASEAN countries that has pushed forward China's economic and trade relations with Southeast Asia.

The Importance of Financing Innovation

It is not an easy task for China to make readjustments to its export structure and to boost its exports to developing countries. To promote exports with foreign investments is an effective approach. However， it involves many risks for China. For instance， many infrastructure projects in developing countries are constructed by China with loans from Chinese banks. They involve certain financial risks that China has to bear on its own. To reduce the investment risks， China is encouraging the participation of others in order to share the risks. The establishment of the Asian Infrastructure Investment Bank （AIIB） with the participation of many other countries will allow China to spread the risks. The warm responses from many countries to the AIIB show that the world is not short of capital， but rather of good investment projects and opportunities. However， Chinese scholars are more cautious than their counterparts in other countries concerning the linking of the Belt and Road Initiative with the AIIB. Their concerns are， first of all， that Belt and Road Initiative and the AIIB are not related， and secondly that linking them may have may have adverse repercussions. However，people in other countries consider that the AIIB and the Belt and Road Initiative are closely linked and are positive about this linkage. This shows the completely different perspectives of Chinese and foreigners and that they study the matter from different angles. Foreigners take the AIIB as an important platform for funding the Belt and Road Initiative， and they think the Belt and Road are very promising so that they wish to invest in Belt and Road projects. Foreigners attach great importance to the AIIB and consider the AIIB to be part of China's foreign investment strategy， and they believe that since the Belt and Road Initiative has been launched by the Chinese Government investment returns are ensured. The AIIB is aninnovation of financing， and it can share financial risks， but all investments in infrastructure have long payback periods with fairly low returns. Without governmental guarantees， investments in infrastructure entail severe risks. The AIIB is a world financial institution， and it is more likely for the AIIB to be successful in its investments and to have fewer defaults since it will conduct comprehensive pre-assessment and post-evaluation of its projects and have the guarantees of the governments concerned. As both Chinese and foreign investors are looking for Belt and Road related investment opportunities， it is necessary to provide the market with more Belt and Road related financial products.

How to Address the Belt and Road Financing Difficulties？

Although the Belt and Road Initiative is an external strategy， it is also aimed at addressing the imbalances in the Chinese economy. Over the past decades，economic development has taken place along China's coastal areas， and these areas have participated in and benefited from economic globalization. Such a development model has resulted in regional disequilibrium in the country's economic growth. With the stress on promoting economic development in the western part of China， the priority of the Belt and Road Initiative is the Silk Road Economic Belt. It is estimated that promoting the Silk Road Economic Belt will remarkably improve the infrastructure in western China， with， for example， over 4，000 kilometers of roads being constructed. The Belt and Road Initiative， to a large extent， is intended to improve the infrastructure in the western part of China， therefore， it involves the issue of how to transfer large amounts of capital to infrastructure investments in this region？ With huge savings， people in China invest either in the housing market or in the stock market， with no investments in genuine growth drivers. Thus how to introduce innovation in financing so that funds can be invested in infrastructure construction in western China with stable returns and how to transform China's savings into usable funds for infrastructure construction in western China are the key issues.

How can those places which are in a position to carry out financial innovations be encouraged to make use of capital for infrastructure building？The Huoerguosi Port in the Xinjiang Uygur autonomous region which shares a border with Kazakhstan is a case in point. Being an important juncture along the Belt and the Road， the Port is applying for its upgrading to a city. Now a large number of immigrants have flooded into the port. The Yiwu market for small commodities has established a branch market there， and this is only the first phase of project. When all three phases of construction are completed， the market will be as big as the one in Yiwu in scale. Very soon another area for living will come into being along the border，and another city established. That is the Shenzhen model for development. To this end， the People's Bank of China has granted some privileges， such as the financial privileges in the China-Kazakhstan Free Trade Area in the Port. It will enjoy more privileges than the Shanghai Pilot FTA.

Now， there are large amounts of capital from Singapore and the Hong Kong Special Administrative Region flowing into the China-Kazakhstan FTA in the Huoerguosi Port. However， local people are also perplexed by some issues： the financial privileges they enjoy are confined to a limited area of the FTA established in parallel by the Huoerguosi Port and Kazakhstan， and large amounts of money cannot be taken out of the FTA. If the Port is to be established as a city， then there will be huge demands for capital for the construction of infrastructure. Shenzhen would not have achieved its fast economic development if it were not linked with the city of Guangzhou. Therefore， if the Port can be linked in a better way with the city of Yili， that will be very beneficial to the development of the Port. At present Huoerguosi Port has to ask the government to allocate funds for its infrastructurebuilding. How to make a better use of capital for local infrastructure building through financial innovation， and promote rapid development of the Belt and Road in the pivotal regions has become an important issue that needs to be addressed. In my view， it is of great importance to find resolutions to these problems while exploring innovation in financing.

Ding Yifan is Senior Research Fellow， Development Research Centre of the State Council， and Vice President， Chinese Society of World Economy. The article was originally published in the Chinese-language journal International Economic Review， Issue 4， 2015.