Promoting Financial Cooperation Among BRI Countries

Abstract

Financial support plays an essential role in promoting economic cooperation among BRI countries. Financial services for economies in BRI countries (BRI finance) are both development-oriented, as they attach importance to advancing the development of these countries, and commercial in nature, as such services also pay attention to the economic benefits and long-term sustainability of relevant projects as well as those of the financial support for these projects. BRI finance is mainly funded by policy financial institutions and state-owned banks, and mainly takes the form of bank loans. Currently, BRI finance mainly serves natural resource, energy, and infrastructure construction projects in developing countries in Southeast Asia, Central Asia, Africa, and Latin America. It has played an important role in alleviating poverty and boosting economic growth in BRI countries.

Like early overseas investments conducted by some developed countries, BRI finance is led by governments. BRI finance focuses on infrastructure construction, and is based on the valuable experience amassed since China’s reform and opening up. In the past decade, BRI finance has greatly supported the connectivity and development of real economies in BRI countries. In the coming decade, we believe BRI finance has the potential for sizable growth. For example, diversifying participating entities and forms of finance, which helps improve performance, reduce risks, and enhance efficiency of investment and financing, has become a trend in economic development. This is evidenced by the following: (1) The universe of investors and lenders is expanding beyond unilateral policy financial institutions to include multilateral institutions and private sectors that work together or separately; (2) BRI finance is switching from a government-led model to a government-guided and sustainable market-based model that attaches importance to returns; and, (3) it is shifting from a bank loan-dominated model to a new, capital market-based model that is characterized by multiple financing options.

BRI finance is still in its infancy. Looking ahead, we think infrastructure construction in BRI countries will continue to generate substantial demand for funding. Banks will continue to play an essential role in BRI finance, and capital markets will be crucial to expanding the range of financing options and improving investment efficiency, in our view. Domestic financial institutions can improve their capabilities in going global, advance financial connectivity in BRI countries, and build a flexible, stable, and resilient BRI financial system based on local conditions in order to boost long-term common development in China and BRI countries.

Author: WU Xiaohui, WANG Naixi, PENG Wensheng; Contributor: ZHU Feng.

4.1 BRI Finance Pays Attention to Both Development and Profitability

BRI advocates win–win cooperation and common development among emerging economies. Since embarking on reform and opening up in 1979, China has gradually become integrated with the global market, its economy has grown rapidly, and the country has made tremendous achievements and amassed rich experience in development. Finance has played an essential and positive role in this process. Currently, pursuing high-quality development and high-level opening up has become the consensus and focus of policies in China and many economies. We have seen increased uncertainties in the world since outbreaks of the COVID-19 pandemic and the Russia–Ukraine conflict. BRI countries are making joint efforts to resolve bottlenecks in development, overcome difficulties, and embrace new development opportunities. Financial support is essential for them to achieve these goals.

We have stated in the Chap. 1 of this book that development is the master key to advancing the BRI. High-quality, efficient financial resources are indispensable in supporting the development of real economies in BRI countries. BRI finance is different from either traditional development finance or commercial finance. The core of BRI finance is that it integrates development finance’s focus on public goods that serve the whole society and the market-based, efficiency-driven, and profitability-oriented approach to commercial finance. In addition to serving China’s strategic goals, increasing economic, trade, and investment links among BRI countries, and advancing common interests among BRI countries, BRI finance also seeks to balance strategic benefits and financial returns, as well as foster close collaboration and a win-win situation among BRI countries, societies, and private sectors.

4.1.1 Current Status: Bank Loans and Direct Investment Are the Main Sources of BRI Funding

Finance provides important support to BRI projects. Since the launch of the BRI, development finance provided by state-owned financial institutions in China has played a dominant role in the development of BRI finance, supplemented by commercial finance. As of end-2021, China’s cumulative investment and financing in BRI countries amounted to nearly US$1.3trn (Fig. 4.1). Of these funding sources, bank loans and grants were more development-oriented, while direct investment and portfolio investment were more commercial in nature. Bank loans, foreign direct investments (FDI), portfolio investments, and grants accounted for around 73%, 21%, 4%, and 2% of the total proceeds. Overall, two state-owned policy banks (China Development Bank and Export–Import Bank of China) and four state-owned commercial banks¹ in China were the main lenders, accounting for more than 80% of total BRI loans. The Asian Infrastructure Investment Bank (AIIB), New Development Bank (NDB), and other multilateral financial institutions accounted for merely 2% of total BRI loans.² Some loans were lent to governments in BRI countries in the form of sovereign credit before being injected into real economies in these countries. Some BRI loans were directly offered to industries in real economies via banks.

Fig. 4.1

Source State Administration of Foreign Exchange, IMF, Wind, AEI, CICC Global Institute

Basic types of access to investment and financing for BRI countries—policy financial institutions play a crucial role. Note Currency unit: US dollar; ODA stands for official development assistance; we use data on existing investment in 2021; direct loans in this figure refer to "loans" defined in the report Time-series data of international investment position of China released by the State Administration of Foreign Exchange; direct investment in this figure refers to China’s existing direct investment in countries that have signed BRI cooperation agreements with China (based on Ministry of Commerce data); capital market investment refers to China’s existing portfolio investment in countries that have signed BRI cooperation agreements with China (based on IMF data). Changes in thickness of lines in the figure do not represent proportional changes.

Direct investment is mostly made in real economies in BRI countries via companies, and a small proportion of direct investment is made by financial institutions³ (such as Silk Road Fund, China Investment Corporation, and other government funds, as well as private equity funds). As of 2021, China’s existing direct investment in BRI countries reached US $283.1 bn, of which US $206.1 bn or 70% was equity investment. Portfolio investment in BRI countries is mostly made by government funds and private-sector investment funds via capital markets. As of 2021, existing portfolio investment in BRI countries was merely US $53.4 bn, of which 54% was in the form of bonds and 46% in the form of equities. The size of grants is smaller than that of portfolio investment, and grants are mostly offered by the Chinese government to governments in BRI countries.⁴

Capital links between financial institutions also play an important role in BRI finance. Banks are the main sponsors of investment funds that are focused on BRI countries.⁵ Such investment funds can be categorized into two groups—government funds and private-sector investment funds. Government funds include the Silk Road Fund and bilateral funds established by Chinese government in partnership with governments in other countries. Private-sector investment funds mainly comprise private equity (PE) and venture capital (VC) funds that invest in stocks and bonds. Government institutions are the main sponsors of the Silk Road Fund. Specifically, the State Administration of Foreign Exchange, China Investment Corporation, Export–Import Bank of China, and China Development Bank account for 65%, 15%, 15%, and 5% of total capital of the Silk Road Fund.⁶ Commercial banks are the key sponsors of bilateral funds.⁷ Funds from government sources and multilateral institutions also flow into BRI countries in the form of fund-of-funds, either through direct investment or portfolio investment by other investment funds.

In a nutshell, traditional development finance continues to hold a dominant position in BRI finance. Loans from state-owned policy banks and commercial banks currently account for a dominant proportion in BRI finance, supplemented by direct investment from companies. China lags developed countries in terms of promoting commercial finance in BRI countries. The scale of China’s direct investment and portfolio investment in these countries remains small. However, the scale of China’s existing direct investment in BRI countries is catching up. Its existing direct investment in BRI countries was equivalent to 20%, 44%, and 79% of US, German, and Japanese direct investment in these countries in 2021 (vs. 6%, 9%, and 33% in 2009). On the other hand, the size of China’s portfolio investment in BRI countries remains notably lower than those of developed countries. Its existing portfolio investment in BRI countries was equivalent to merely 3%, 4%, and 15% of US, German, and Japanese portfolio investment in these countries in 2021.⁸

Currently, China cooperates with more than 150 economies under the BRI framework. It invests in many countries via development finance. However, the amounts of its investment vary in different regions and different industries. China’s direct BRI investment in East Asia and the Middle East has been increasing more rapidly than that in sub-Saharan African countries, while the number of its BRI investment and financing projects in Europe and America is less than that in other regions. As of 2021, the top 10 BRI countries measured by the value of direct investment from China accounted for 61% of China’s direct investment in BRI countries. Among them, Singapore ranked No. 1, accounting for 24% of China’s direct investment in BRI countries.⁹

As BRI finance focuses on serving the real economy, the universe of industries across which BRI finance has spread is influenced by the economic structures of recipient countries. BRI finance is currently concentrated in natural resource (metal & mining), energy, and infrastructure construction projects. In particular, China’s bank loans in BRI countries are concentrated in the infrastructure construction and energy industries. Infrastructure related industrials, mining, and construction industries, combined with transport and warehousing industries, accounted for approximately 48% of China’s bank loans in BRI countries over 2013–2017, and the proportion was around 28% for the energy industry (Fig. 4.2). Direct investment is also concentrated in energy, transport and logistics, and mining projects. The energy industry accounted for 36% of China’s direct investment in BRI countries over 2013–2022, and the proportions were around 20% for the transport industry and about 17% for the metal industry (Fig. 4.3).¹⁰ This, to some degree, shows that China and some BRI countries can meet each other’s economic development needs in a complementary way.

Fig. 4.2

Source AidData, CICC Global Institute

Bank loans for BRI countries are concentrated in the natural resource, energy, and infrastructure construction industries.

Fig. 4.3

Source AEI, CICC Global Institute

Direct investment in BRI countries is concentrated in the natural resource, energy, and infrastructure construction industries.

4.1.2 Uniqueness: BRI Pays Attention to Both Economic Development and Financial Returns

In order to offer effective financial support to BRI projects, we believe efforts can be made to promote both policy-based development finance and market-oriented financial services from commercial financial institutions. Modern development finance or development assistance can be traced back to the Marshall Plan, which was sponsored by the US after the end of the Second World War. The Marshall Plan facilitated post-war reconstruction in Europe, boosted the economic recovery of European countries, and built a foundational cooperation and financial support framework for international development finance. Major participants in the Marshall Plan tended to be developed countries.

BRI finance is more akin to the development finance that focused on promoting industrialization and infrastructure construction in developing countries in the 1950s and 1960s than to the Marshall Plan. Long plagued by poverty, these developing countries lacked basic public services, and their industrial foundations were fragile in the 1950s and 1960s. During this period, development finance was mainly extended by bilateral or multilateral institutions; and a global development finance system comprising the World Bank, the International Monetary Fund (IMF), affiliated organizations of the United Nations, and regional development banks was established. In the following several decades, the scope of development finance has expanded to cover all aspects of the economy, as well as social development and governance in major regions around the world.

The organizational form of BRI finance is similar to those of early development assistance plans, which were led by countries that had made notable achievements in development and governance. China is advancing the construction of a system that is based on new international financial organizations (such as the AIIB and New Development Bank) so as to boost the growth of BRI countries, mitigate risks, and create a win–win situation among all parties involved.

The emergence of development finance after the end of Second World War was, to a large degree, attributable to market failure, which resulted in inefficient distribution of resources and hence sluggish and unbalanced economic development. The Great Depression in the 1930s showcased the destructive effect of market failure, giving rise to Keynesian economics, which advocates the use of fiscal and monetary policies to stabilize the economy and boost growth. Development finance, to some degree, emerged in response to market failure, as an extension of Keynesian policies abroad. The main purpose of development finance is to utilize government intervention to resolve the severe economic and financial imbalances in developing countries and regions, creating jobs, boosting economic growth, and promoting social progress, including poverty alleviation and sustainable development. In many developing countries, technologically backward infrastructure facilities, poor public services, and companies’ limited access to credit and other forms of finance have hindered corporate development, economic growth, and job creation. Development finance, coupled with policy guidance and technical assistance, is a key means of inter-country, regional, and global collaboration for mitigating the impacts of market failure on economic growth and social progress in less developed countries.

Some essential elements of economic growth, including infrastructure in the traditional economy (such as highways and railways) and 5G base stations and data in the digital economy, are, to some degree, public goods. They also have unique externalities. The self-correcting mechanism of the market typically cannot eliminate all the distortions in these elements, thereby leading to second-best optimality. Therefore, government intervention is often required to correct market failure. Infrastructure and other public goods are, to some degree, non-excludable. When a good is non-excludable, it implies that once it has been produced and provided, there is no efficient way to prevent someone from consuming or benefiting from it, regardless of whether they have paid for it. Public goods are also non-rivalrous. This means they are accessible by all while one’s usage of the product does not affect the availability for subsequent use. For instance, highways and railways are essential to development, yet the construction and maintenance of such facilities are typically costly. In less developed market economies, such facilities tend to generate much lower private returns than social benefits. As a result, the private sector would be unwilling to offer these public goods.

Externalities may pose fundamental economic policy problems when the private sector is unable or unwilling to internalize the indirect costs of or the benefits from their economic transactions. The resulting wedges between social and private costs or returns would lead to inefficient market outcomes. In some circumstances, they may prevent markets from emerging. Government intervention is one of the most common ways of helping investors and enterprises overcome the limitations of market forces and internalize returns and costs. As such, public fiscal policies and development finance are the key approaches to offering and regulating public goods and services in less developed countries.

Looking at China as an example, at the initial stage of the country’s economic development, the government realized the attributes of infrastructure facilities as public goods that are essential to development. Since the beginning of its reform and opening up, China has utilized development finance to expand its funding sources to support infrastructure construction. The country has amassed rich experience and set a role model for the rest of the emerging world in leveraging policy finance and development finance to support rapid growth of the real economy.

BRI finance and traditional development finance have many things in common. Both are aimed at boosting economic growth and social progress in developing countries, addressing the problem of inadequate infrastructure facilities and other problems arising from market failure that may weigh on economic growth, and creating a win–win situation for all stakeholders involved. As with traditional development finance, lenders need to consider the efficiency, sustainability, and impact of BRI finance on local communities and environments when making their lending decisions. Unlike the more policy goal-oriented development finance or the more efficiency and returns-focused commercial finance, BRI finance lies somewhere between the two. The uniqueness of BRI finance can be summarized in four aspects:

First, one of the main purposes of BRI finance is to support economic and financial connections between the countries involved. Large BRI infrastructure construction projects aim to build networks of railways, highways, and ports, among others, to connect China with the producers, consumers, and capital markets in Asia, Africa, Europe, and South America so as to boost bilateral and multilateral trade and investment. They also promote market, economic and financial integration, and create or increase the economies of scale. As such, the size and scope of BRI finance is different from those of traditional development finance. As is the case with traditional finance, China-led BRI finance typically takes the form of loans. However, BRI finance attaches greater importance to industrial links between China and recipient countries so as to promote multilateral trade and investment, while some traditional forms of development finance tend to support special development projects through unilateral and multilateral organizations’ conditional aid, grants, and concessional loans.

Second, BRI finance combines development finance and commercial finance to offer a combination of development-oriented and market-based funding. One important aspect of BRI finance is that it seeks to promote friendly bilateral and multilateral relationships among BRI countries to achieve a win–win situation that would foster common prosperity. Therefore, the purpose of BRI finance goes beyond financial returns. International aid provided by Europe and the US is often intended to serve important strategic interests in addition to pursuing economic growth and humanitarian goals.¹¹

For example, the US government has been promoting development finance projects via the US Agency for International Development (USAID) and the US International Development Finance Corporation (DFC), and these projects are closely associated with the US government’s international strategic goals and diplomatic policies. Promoting development in recipient countries is just one of the goals of these projects. The US Congressional Research Service has made it clear that one of the reasons behind the establishment of the DFC is to respond to the BRI.¹² Judging from actual fund flows, we find that the DFC also invests in high-income countries that are not in urgent need of financial support; and the External Investment Plan (EIP) of the EU invests in African regions that are adjacent to the EU in its effort to resolve the problem of illegal immigration to the EU by boosting economic growth and employment in Africa.

In addition, market-based mechanisms and profitability are crucial to the sustainability of financing projects in developing countries. Since the establishment of the Marshall Plan, grants, concessional loans, and other aid-based funding have been the most common types of financial support received by developing countries from the international community. While the organizational form of the BRI is similar to that of the Marshall Plan, the financial structures of the two are entirely different. The US offered a total of US $13.3 bn in aid to 16 European countries over 1948–1951, of which nearly 90% was in the form of grants and the remainder was in the form of loans.¹³ Given the need for substantial fiscal subsidies to facilitate such cross-border finance, most countries, apart from the US and several other countries, were unable to offer long-term foreign aid after the end of the Second World War.

However, large amounts of aid can make recipient countries reliant on free or low-cost external assistance rather than developing their own competitive industries and financial systems, thereby de-incentivizing self-propelled growth. Such aid may also cause the cross-border “crowding-out effect” by reducing private sector investment in recipient countries, and distorting effective market-based resource distribution mechanisms rather than addressing market failure. BRI finance, which is mainly in the form of bank loans offered by policy banks and state-owned banks and focuses on promoting market-based financing and capital operations, is more likely to increase the profitability and long-term sustainability of BRI projects than aid-based funding support (Figs. 4.4 and 4.5).

Fig. 4.4

Source CEIC, CICC Global Institute

The Marshal Plan boosted recovery of US exports and helped increase capacity utilization rates of many industries. Note Areas shaded in grey represent the period of implementing the Marshall Plan.

Fig. 4.5

Source Komiya & Wakasugi (1991),Footnote

Komiya, R., & Wakasugi, R. (1991). Japan’s foreign direct investment. The Annals of the American Academy of Political and Social Science, 513(1), 48–61.

CICC Global Institute

The percentage of Japan’s FDI in the financial and insurance industries increased, while that in the mining industry declined.

Third, BRI projects can effectively support and complement China’s real economy, which may in turn improve the viability and sustainability of BRI finance. BRI projects are typically large-scale projects that involve many economies, projects, and companies. Infrastructure construction projects can be very costly and time-consuming. The sustainability of BRI projects largely hinges on the social benefits and private sector returns that can be generated from such projects. As a result, BRI finance should be market-based and serve China’s strategic goals while paying attention to profitability and financial viability so as to create a win–win situation between China and BRI countries and between state-owned companies and private sectors.

For example, China and Laos account for 70% and 30% of total investment in the China-Laos Railway, which started operation in December 2021. This project was funded by loans from the Export–Import Bank of China¹⁵ and has notably boosted the number of tourists as well as trade between the two countries. The passenger traffic and cargo volume of the China-Laos Railway in the year following its launch reached 8.5 mn and 11.2 mnt, of which more than 1.9 mnt were cross-border cargos. China’s imports and exports via the China-Laos Railway came in at Rmb2.99 bn and Rmb8.6 bn over January–October 2022.¹⁶ Such BRI projects have presented important opportunities for the internationalization of Chinese companies. The internationalization of Chinese financial institutions is essential to helping Chinese companies go global and companies in BRI countries build their presence in China. With sound infrastructure facilities, the moves to increase financial support for profitable non-infrastructure projects and businesses will improve financial returns and the sustainability of BRI finance, in our view.

Finally, BRI finance focuses on the growth potential of emerging economies. It takes the lead in exploring new trends in international development finance, and advocates paying closer attention to infrastructure and other important economic growth drivers in the long term. According to traditional macroeconomic theories, excessive borrowing and investment by public sectors may cause surplus in demand, and lead to a decrease in private sector investment via higher actual interest rates, thereby generating a typical “crowding-out effect” on private sector investment. However, in 1989, Aschauer noted that government investment in infrastructure could help private sectors improve efficiency and profitability, thereby drawing further private sector investment. This is known as the “crowding-in effect”,¹⁷ which occurs when higher government spending leads to an increase in private sector investment.

This is why China has been promoting government infrastructure investment—to encourage companies to enter the market and benefit from economic growth. Infrastructure construction has been one of the most important growth engines for China’s economy since the reform and opening up of the country. Substantial government spending and investment of financial resources in infrastructure construction have supported development of China’s real economy. Currently, there are notable investment deficits in less developed economies. Infrastructure construction projects are now a key focus of BRI economic plans, and hence of BRI finance. This is an important difference between BRI finance and the general form of commercial finance, in our view.

4.2 The Road to Diversification

BRI finance is intended to serve real economies in China and BRI countries, increase trade and investment among them, boost economic growth, and mitigate risks. In order to achieve these goals and meet the different needs of BRI projects, BRI finance could expand its universe of investors and lenders to include more countries, regions, industries and entities; increase BRI countries and private sectors’ involvement in BRI finance; and improve the role that capital markets play in BRI finance. Increased diversification in investor base, investment and financing options, and capital market access is crucial to supporting the BRI and mitigating investment and financing risks associated with BRI projects, in our view.

4.2.1 Diversification in Investor and Lender Base

The purpose of financial diversification in the context of BRI finance is to offer various forms of financial services and access to funding to support different kinds of BRI projects based on actual demand and economic rationale, as well as to match different risk appetites of investors. Among BRI countries, 89.4% are developing countries and 17.9% are low-income countries.¹⁸ These countries still have sizable demand for infrastructure construction projects, which tend to require substantial investment with long payback periods and relatively low returns. Policy financial institutions play a dominant role in funding these projects, mostly by offering development loans (or grants) at concessional interest rates. We suggest focusing on the following aspects to improve diversification in BRI finance.

The first aspect is improving diversification in investor and lender base. Multilateral development banks (MDBs) such as the World Bank, the Asian Development Bank (ADB), and the Inter-American Development Bank have played a key role in development finance, especially in providing financial and technical assistance to boost economic growth and sustained development in developing countries. MDBs have multiple advantages over unilateral development financial institutions. First, multilateral development institutions can effectively help reduce related financing costs. With direct and/or indirect government guarantees, unilateral development financial institutions can leverage sovereign credit to issue low-interest rate capital market bonds. For emerging BRI countries, bonds issued by multilateral institutions typically have higher credit ratings, lower interest rates, and more favorable credit terms than those of unilateral sovereign development bonds. For example, the New Development Bank established by the BRICS countries (Brazil, Russia, India, China, and South Africa) is rated AA+, while China, which has the highest sovereign rating among these BRICS members, is rated A+.

In addition, multilateral development institutions’ funding is more stable, and can play important countercyclical roles in stimulating economic development. MDBs and the IMF expanded their annual financial support by 30–50% amid the global economic crisis.¹⁹ Bond financing by the ADB has increased steadily in recent years. Its bond financing continued to increase and remained high despite the impacts of the COVID-19 pandemic and Fed interest rate hikes in 2022, showing greater resilience than that by commercial institutions.²⁰

The second aspect is supporting a diverse range of BRI infrastructure construction projects, increasing involvement of the private sector, and allowing capital markets to play a more important role in BRI finance. The types of infrastructure construction projects are becoming increasingly diverse in China, and the involvement of capital markets in funding such projects continues to increase. This may also be the trend in BRI countries going forward, in our view. We note that over time, China has shifted focus from transport and electricity and thermal power projects to water conservancy, public facilities, and other infrastructure construction projects. Data from the National Statistics Bureau (NBS) of China shows that the percentage of fixed asset investment funded by companies increased to nearly 70% in 2022 from 40% in 1990,²¹ showing increasing involvement of private sectors in such investment. Data on total social financing (TSF) in China shows that bank loans as a percentage of existing TSF dropped to 62% in 2022 from 80% in 2002, and that non-financial companies’ equity financing, corporate bonds, and government bonds accounted for 9%, 4%, and 17% of existing TSF in 2022. Capital markets, especially bond markets, have grown notably and have played a more important role in financing the Chinese economy.

The third aspect is promoting public–private partnerships (PPP), which are conducive to developing diversified and market-based solutions to BRI finance, especially in the field of infrastructure construction. The PPP-based investment and financing model, under which there is a concession agreement between a government and private sector institutions to deliver public products and/or services, is widely adopted in developed countries. Currently, PPP account for a small proportion of BRI projects, and we see large growth potential in PPP-based BRI projects. In addition, the G20 announced at its Development Ministers’ Meeting in 2022 principles to scale up blended finance, suggesting that governments advance local sustainable priorities for development and engage in more cooperation with multilateral institutions, foundations, philanthropists, and other private-sector institutions which pursue goals beyond making a profit, such as creating positive social impact.²² We think PPP, blended finance, and other innovative financing models will help increase the private sector’s involvement in BRI investment, make BRI finance more sustainable, and diversify forms of BRI investment and financing.

4.2.2 Diversification in Investment and Financing Options

Countries and regions participating in the BRI differ notably. We believe efforts can be made to diversify investment and financing options to meet different needs in different BRI countries and regions. There are notable differences between regions across the world in the following respects: Infrastructure investment opportunities; reliance on the export of energy, minerals, agricultural products, and other resources; level of financial market development; and quality of digital infrastructure (Fig. 4.6).

Fig. 4.6

Source World Bank, China International Contractors Association, UNCTAD, International Telecommunication Union (ITU), CICC Global Institute

Regional economic differences call for tailored financing. Note Infrastructure Development Index (2022), resources export proportion (2021), credit ratio (2020), and network coverage ratio (2022); the Arab world includes 21 countries and regions (ITU data).

Southeast Asia has ranked No. 1 in the infrastructure development index (which indicates infrastructure investment opportunities) for four consecutive years, and its score was notably higher than that of the runner-up in 2022. The infrastructure development indexes of Vietnam, the Philippines, and Malaysia exceeded the average level in the region.²³ Demand for infrastructure construction in Southeast Asia presents opportunities for China. We think bank loans, bonds, and other long-term financing tools for projects will continue to play an important role in BRI finance, while the bond financing to bank loan ratio and the proportion of PPP-based financing may be increased in an appropriate manner so as to expand funding sources and improve the economic efficiency of BRI finance.

Europe, the Asia–Pacific region, and the Americas have gained notable advantages in the field of digital infrastructure construction. This is evidenced by the wide coverage of 4G and more advanced networks in these regions, which has laid a solid foundation for the development of the digital economy. PE, VC, and other equity-based financing options can be explored to support related tech startups, in our view.

Energy and mineral exports are of great significance to some African countries. In energy and mineral industries, we believe mature companies can gain access to stable funding via banks and bond markets, while new startups can tap capital markets and other equity-based funding sources.

From the angle of financial development, we think East Asia and Europe already have a solid financial foundation, and efforts can be made to improve capital market connectivity as well as cooperation on payment clearance and settlement in these regions. We think policy banks can play a role in guiding financial cooperation in Africa and other less financially developed regions. We also see room for fintech and other innovative financial activities to develop in Africa and other less financially developed regions. We expect an increasingly diverse range of industries and financing methods to be involved in the BRI cooperation projects in which China participates as BRI countries differ notably in the levels of economic and financial development.

The experience of other countries shows that investment in developing countries and related financing methods are becoming increasingly diversified. The ADB and International Finance Corporation (IFC) believe equity investment allows more flexibility, and are expanding the coverage of their investments. IFC, an equity investor that often takes influential minority stakes in client companies, can provide hands-on strategic guidance to critical players in local and regional economies.²⁴ ADB conducts both PE and VC investment. ADB Ventures is a financing partnership facility supporting early-stage companies. It also plays a role in helping the ADB increase the use of technology-enabled solutions to address climate change and gender inequality in developing countries. The ADB also invests in PE funds to support companies in sectors and countries where direct equity and lending programs may have limited penetration. Such investments during 2021 were particularly timely due to the impact of the COVID-19 pandemic, and they were concentrated in highly impacted sectors such as agriculture, education, financial services, and healthcare.²⁵

BRI finance not only funds investment projects, but also offers diversified financial services that can help promote international trade and boost growth of medium, small, and micro enterprises (MSMEs) in BRI countries. Trade finance is a very important financial service, in our view. Common forms of trade finance include credit lines offered by banks to import and export trade companies, letters of credit offered by banks, factoring, and transport and delivery insurance programs. The amount of trade finance provided by policy banks and commercial banks in China has increased, and still has significant potential to grow, in our view. BRI countries that rely on commodity exports can utilize futures and other derivatives in the financial derivatives markets to mitigate the impacts of risks arising from volatile commodity prices and other changing trade conditions, improve the pricing of related commodities in BRI countries, and facilitate industrial and macroeconomic risk management.

BRI countries are mostly less developed economies. They typically do not have adequate banks and other financial institutions that can meet the demand for financing services from MSMEs. China has in recent years accumulated rich experience in advancing inclusive finance via fintech. Fintech can help meet different financial needs in BRI countries. Loans offered by fintech companies that focus on big data analysis can supplement loans from commercial banks²⁶ as they can support MSMEs that have poor access to bank loans due to high risks and inadequate collateral. Data from MYbank, a virtual bank in China, shows that 99.8% of its loan products were offered to small and micro companies with annual sales value of less than Rmb1 mn in 2017, of which nearly 50% were based in tier-3 and tier-4 cities.²⁷ In addition to loans, large fintech companies also offer payment, insurance, deposit, investment and other financial services to MSMEs.²⁸

4.2.3 Developing BRI Capital Markets

Experience in China and other countries shows that investment and financing markets tend to eventually become diversified, characterized by a variety of financing options. Therefore, BRI projects with different investment and financing needs and of different natures can receive funding support that matches their characteristics and risks. Such capital support includes bank loans and capital market-based direct financing.

Different players can participate in BRI projects via capital markets, sharing returns and risks.²⁹ Unlike indirect financing via banks, financing in capital markets involves multiple actors. In some BRI emerging economies, it is costly and time-consuming to amass credit information, in which case bank loans tend to be a preferred option, while capital market financing faces difficult information obstacles and “free rider” problems. In a capital market in which investors, lenders, and information sources are more diversified, combining different views on the profitability of investment projects can better reflect real situations. Compared with banks, capital markets may be more effective in monitoring financing projects, and are more likely to force the termination of inefficient projects. Investors in capital markets have different levels of risk appetite and requirements on return. This diversity should be taken into account in BRI investment and financing.

Landscapes of financial sectors, especially the importance of capital markets, vary among different economies (Fig. 4.7). The level of capital market development tends to correlate with that of economic growth,³⁰ but protection of property rights and investors, as well as legal systems, also play important roles in driving the development of capital markets. Different types of financial arrangements can help companies, financial institutions, and markets better assess potential investment opportunities, improve corporate governance, strengthen risk mitigation, increase liquidity, and mobilize social savings. Investment and financing-related systems and environments have a direct bearing on the feasibility and efficiency of financial arrangements. Capital markets tend to play a bigger role in countries in which shareholders receive stronger protection than creditors, accounting systems are more reliable, and deposit insurance protection is weaker.³¹ Data shows that stock markets are less developed in Germany, Japan, Argentina, and other countries that score lower in minority shareholder protection. South Africa scores second only to the UK in minority shareholder protection, and the level of capital market development is higher in South Africa than in many other emerging countries. The levels of per capita GDPs are similar between Argentina and China, but the former lags in measures such as minority shareholder protection, and the financial market is also less developed in Argentina than in China.³²

Fig. 4.7

Source World Bank, BIS, CICC Global Institute

Structures of financial markets in select countries. Note Debt amounts outstanding refers to the total amount of domestic and international bonds.

The growth and expansion of capital markets in BRI countries are conducive to the development of finance industry in China and BRI countries. In addition to limitations caused by the earlier stages of economic development and systems, capital markets in BRI countries are also faced with other problems such as inadequate policy support, high costs associated with regulatory coordination, the need for financial institutions in China and BRI countries to improve their competency, and restrictions on cross-border capital flows. Chinese institutions have a relatively weak foundation for equity investment. Their businesses in BRI countries are still in their infancy, and are subject to high investment risks. Sizes of BRI bonds and panda bonds remain small, and short-term dim sum bonds can only offer limited support to BRI projects.³³ We think the internationalization of BRI finance will be a key future trend, which can be built upon China’s expertise and experience in funding economic development as an emerging economy.

In addition, multilateral collaboration can be encouraged both on the level of regulatory authorities and on the level of financial institutions, and to build a BRI international capital market, establishing a cross-border financial paradigm. Efforts can also be made to support stock and bond connect programs and Chinese depositary receipts (CDRs), help Chinese companies go global via qualified domestic institutional investor (QDII) programs, increase cooperation with stock exchanges in BRI countries, and improve connectivity mechanisms. Participants in BRI finance could seize opportunities to solve problems and boost the development of capital markets in BRI countries.

4.3 Reflections and Insights

BRI finance plays an important role in helping BRI projects serve the real economy and in promoting financial development in BRI countries. It represents a new trend emerging alongside the changing goals and forms of post-Second World War development finance. It also reflects the experience in some major developed countries and developing countries. Priorities and needs continue to change in global governance and developing countries, from postwar reconstruction to the construction of dams, highways, and other large infrastructure in the 1960s and 1970s; poverty alleviation, industrialization, and social development in the 1990s; education, healthcare, other basic services and sustainable development; and then to the important roles of infrastructure and energy industries in BRI finance.

BRI finance can effectively support long-term economic growth, connectivity, and common prosperity in BRI emerging countries. The following efforts are essential to BRI finance: Increasing cross-border multilateral collaboration in finance and real economies in BRI regions, strengthening connectivity of markets and resources in BRI countries, and using innovative investment and financing methods to support sustainable development and mitigate risks. Such efforts require multilateral involvement and collaboration, including cooperation with multilateral organizations, United Nations agencies, non-governmental organizations, and private sectors that participate in traditional development financing activities, so as to enable participants to play their due roles.

The capacity building of Chinese financial institutions is crucial to delivering quality financial services for Chinese companies and BRI countries. Financial institutions can go global by conducting direct investment and M&A deals, entering into partnerships, providing technological and consulting support, and issuing financial products internationally. We believe this will enable them to better support economic development in BRI countries.

While diversification is important, we think BRI finance can still focus on infrastructure construction, especially the construction of telecommunication, internet, artificial intelligence, and other digital infrastructure that could create new business models and opportunities and improve productivity. In addition, BRI finance can support the use and development of digital technologies in agriculture, healthcare, education, and other sectors.

Building infrastructure in BRI countries requires the support of financial services. Promoting the internationalization of China’s financial sector and increasing financial cooperation among BRI countries (such as developing a centralized clearing system, jointly promoting regional financial centers in BRI countries, and fostering cooperation between BRI related financial regulatory institutions) are instrumental to the provision of such services, in our view. Efforts can be made to foster the principles of “mutual recognition” and “domestic control”. Cross-border risk management measures can help increase real-time supervision and communication. Monitoring changes in financial sectors and ensuring the long-term stability of financial systems in BRI countries may also help enable BRI finance effectively support real economies, benefit local communities and people, and reflect local needs and priorities.

It is essential to provide support and guidance for the private sector to play a bigger role in the BRI, increase returns and reduce costs, and improve the sustainability of BRI finance in the long term, in our view. Private financial institutions and corporate investment and finance are of great importance to economic growth and employment. BRI finance can provide funding and other forms of support to companies. It can also create a favorable environment for cross-border investment and earnings growth of private sectors by improving policies and regulations. Government institutions, financial institutions, and companies can join hands to explore innovative financing solutions and products. For example, social bonds and sustainability-linked bonds can be offered to fund social projects and environmental protection projects so as to allow participants from China and other BRI countries to mutually benefit from BRI projects.