One Belt One Road Research Institute
Li Yanjun: Strengthening Financial Cooperation with the Host Countries, Mitigating Investment Risks under the “Belt and Road Initiative”
Li Yanjun, Research Institute of “Belt and Road Initiative”
As the country proposing the “Belt and Road Initiative”, it’s fair that we deserve a share of the international obligations for infrastructure investment, however, the huge financing gap at present can be ultimately filled only when more countries along the route are mobilized to invest in this initiative. We should make a clear distinction among aid investment, development investment and business investment. In the initial stage, China can take construction aid as the major part and consideration of its investment based on its due international obligations, however, on the whole, we should follow the market-based operation principles established in the Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road. On account of this fundamental starting point and in view of the potential risks and problems at the moment, we should follow the economic law, have the overall situation in mind, proceed with specific countries, and try to mitigate and reduce investment and financial risks as far as possible through building a community of common interests and destiny with the host countries. The basic approach to do so is to strengthen and deepen the financial cooperation with the host countries.
Currently, researches and policy suggestions on the financial cooperation under the “Belt and Road Initiative” are mostly concentrated on how to develop financial cooperation with international financial institutions and utilize their platforms to solve the financing problem, how to build various types of funds, and how to establish a joint development mechanism based on the funds of the countries along the route. These suggestions about financial cooperation are no doubt very important and feasible when it comes to filling the financing gap, bringing the powerful fund operation and management capabilities of these international financial institutions into play, reinforcing the financial connections between countries and realizing mutual financial aids among the countries along the route. The problem is that, when it comes to the prevention of investment risks in specific projects, we need to explore the possibility of establishing an interest & risk sharing mechanism. For this purpose, we must start with the idea of how to attract the host countries, i.e., the specific and core subjects who will benefit from the investment, so that we can develop various forms of financial cooperation through various channels, create common investment subjects with common goals, and minimize the risks from the host countries.
Compared with relying on domestic investment and financing and on investment by international financial institutions, actively attracting the host countries to participate in the investment and financing of infrastructure projects has the most significant advantage of “welding” the common interest relationship onto specific projects, so as to dock the overall operations of projects with the investment environment and business environment of the specific countries, overcome decision-making and management errors and facilitate the localization of projects. To be specific, financial cooperation can be conducted with the host countries from the following three levels:
1 Strengthening of financial cooperation with the government of the host countries
State credit is the most fundamental and most important credit. Due to the worrisome political and financial situations of some countries along the route of the “Belt and Road Initiative”, the issue of state credit becomes even more prominent. However, the route planned for the “Belt and Road Initiative” is the only route, and the ultimate realization of this vision depends on the realization of the overall planning and the elimination of “dead end” and “dead node”. In other words, the “No Country Left Behind” principle requires investment in all the countries along the route, and, when it comes to special countries such as those at important nodes and strategic nexus along the route, China must participate in their investment. To achieve that end, the financial cooperation with the government of the host countries should be strengthened to reduce the risk of state credit. First, the cooperative projects should try to dock with the developmental strategies currently implemented by these countries. At present, many countries along the route of the “Belt and Road Initiative” have put forward their developmental strategies for economic and international cooperation, such as the “Eurasian Union” led by Russia, the “Way to Light” of Kazakhstan, the “Prairie Silk Road” of Mongolia, the “Central Corridor” of Turkey, and the "Two Corridors and One Circle" of Vietnam. First, docking with the developmental strategies of these countries can help us gain political support and policy support; second, these countries have related arrangements of their financial funds when it comes to the implementation of their developmental strategies, especially in the field of infrastructure construction, so it makes it easier to receive investment by the government of the host country; third, it makes it easier to obtain the understanding and support of our own people in the promotion process. Thus, efforts should be made to develop inter-governmental financial cooperation, and to encourage government funds to participate in relevant project investment or provide financial guarantee through consultation and negotiation.
2 Strengthening of financial cooperation with the enterprises of the host countries
The financial cooperation with the enterprises of the host countries constitutes the main field of mitigating investment and financial risks, and plays a dominant role in the field of direct investment. Currently Chinese enterprises mainly adopt two models in their “going global” strategy, i.e., greenfield investment and cross-border M&A investment, the financing of which mainly relies on equity funds and loans from domestic banks (mainly China Development Bank and Export-Import Bank of China). Currently they are mainly concentrated in the manufacturing industry, and are relatively rare in the field of infrastructure investment; the investment subjects are mainly state-owned enterprises. In the future, relying on market-based operations, policy guidance will be combined with the promotion of PPP pattern to encourage the enterprises of the host countries to invest in infrastructure construction through equity financing. With an effective corporate governance structure, equity financing can achieve the optimal allocation of ownership and right of management, and maximize the rights and interests of shareholders. As a financing cooperation mode that can bind the interests of the host countries’ investors together, it also provides the most effective means of mitigating investment and financial risks. Enterprises adopting the “going global” strategy can also combine the strategy with the reform of state-owned enterprises, admit the funds of the host countries, realize the diversified and mixed ownership of equities and improve the governance structure of state-owned enterprises.
3 Development of financial cooperation with the residents of the host countries
The final beneficiaries of infrastructure construction are residents. Generally speaking, the residents’ demand for and consumption of infrastructure in underdeveloped regions have a higher marginal utility than those in developed regions, so investment in the infrastructure construction of underdeveloped countries along the route of the “Belt and Road Initiative” will be warmly welcomed by most residents. This is the public opinion foundation on which we will develop our financial cooperation with the host countries. Meanwhile, although infrastructure investment has a longer investment cycle, it generally adopts franchising mode and enjoys a natural monopoly. So, compared with other investments, it has lower risks and more stable long-term returns, and is attractive to private funds to some extent. Thus, the successful experience of issuing municipal bond adopted by urban infrastructure construction in the development and urbanization process of the world economy can be applied to the infrastructure construction under the “Belt and Road Initiative”, and, through the bonds issued by the state and enterprises, funds lying idle in society can be extensively absorbed to realize “crowd funding” in the field of infrastructure construction. In addition, the wide participation on the part of residents in the host countries will also exert a credit pressure on the government of the countries and compel them to support investment projects, thus reducing the risks of political and social instability to investment. In this regard, the executive meeting of the State Council held on February 24 of 2014 made clear that China would take off the geographical restrictions to domestic enterprises and commercial banks regarding the issue of RMB bonds, thus expanding the financing channels of domestic enterprises.
(This article is published in the Report on the “Belt and Road Initiative” and China’s Investment Safety (2016-2017), a program under the Publication Plan of “13th Five-Year” National Key Books, Audio-Visual and Electronic Products.)