Belt Allies Owed a Clear Road Ahead

2019-06-05

By Donald Low, Professor of Practice in Public Policy and Chen Kejun, master of public policy student

Leaders from more than 30 countries gathered in Beijing late last month for a forum on the Belt and Road Initiative.

In his speech at the opening ceremony, President Xi Jinping stressed that "the market should play a decisive role in resource allocation."

This appears to be in response to international concerns about the "debt trap," the cost-benefit calculus of Belt and Road projects, and the possible export of China's governance practices.

To address Belt and Road doubts, China should take three steps to strengthen the role of the market in the initiative.

First, it should enhance transparency and market discipline by making public procurement procedures, tendering processes and lending standards.

Systematic assessments of local socioeconomic environment and the debt repayment capacity of host countries should also be conducted.

In the event of a debt crisis, assistance should be given to these countries to restructure debts rather than require them to undertake debt-for-equity swaps that may be perceived as a loss of sovereignty.

Second, China should reconfigure the role that state-owned enterprises play in Belt and Road projects.

The World Bank Group points out in a new working paper that "the limited available evidence suggests that Chinese companies account for the majority of Belt and Road Initiative procurement."

Most of these Chinese construction giants are state-owned and benefit from generous subsidies from Beijing.

By the end of 2016, 89 percent of project loans have come either from two Chinese policy banks or the four big state-owned commercial banks.

In recent years, China has seen a decline of domestic investments, weak growth of consumer demand, and uncertainty of export growth.

These have exerted significant downward pressures on China's growth.

As its growth model evolves from one focused on attracting foreign direct investment to one that exports industrial and infrastructure know-how, China should reduce its reliance on SOEs and welcome international partners - possibly through joint ventures between its SOEs and firms from host countries that possess much greater local operating experience.

Technology transfers from the SOEs to local partners would also increase Belt and Road acceptance by host populations.

Third, China should build a more market-oriented financial system for the initiative.

Already facing financing pressures domestically, China should expect a large investment gap for future projects.

Increasing access to financial markets by private and overseas investors will help to ease the financing burden.

China should also involve financing institutions like the Asian Infrastructure Investment Bank, private enterprises, insurers and multinational banks.

With a slowing economy and rising trade uncertainty, leveraging Belt and Road to boost growth makes eminent sense. But this should be done in a way that achieves China's goal of allowing the market to play a decisive role in resource allocation.

The article was published on The Standard on May 29, 2019.