Editor's note: Since its establishment, as a regional, non-governmental, non-profit international organization in the field of finance, the Asian Financial Cooperation Association (AFCA) has been committed to promoting experience and information sharing among various financial industries and fields in the BRI region, building an international platform for financial business exchange and cooperation and common governance. AFCA, on the  basis of Belt and Road Financial Cooperation Committee (BRFCC), conducts Asian Financial Cooperation Association Belt and Road Financial Cooperation Practice Report. With the business sector as the entry point, the report systematically reviews the cooperation in recent years, deeply analyzes relatively prominent problems and challenges, and offers practical suggestions in line with the actual needs of partner entities.

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Copyright Statement：Belt and Road Financial Cooperation Committee of Asian Financial Cooperation Association owns the copyright on this report, including all the text, images and data. No organization or individual is permitted to use the above-mentioned work by reproducing, extracting or in any other ways without the authorization of the Committee. Those who have been authorized by the Committee to use the workshall use it within the scope of the authorization, and the quoted content shall be marked with “Source: Belt and Road Financial Cooperation Committee of Asian Financial Cooperation Association”. Those who violate the above statement will be held legally responsible by Asian Financial Cooperation Association.

Chapter 2 Credit Support for the Belt and Road Initiative

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Challenges in Credit Support for the Belt and Road Initiative

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Financial institutions work together to support the construction and development of the Belt and Road. From the overall scale of credit support provided, China’s Policy Banks still play a more leading and proactive role in facilitating credit financing of the Belt and Road projects, mainly by the CDB and Eximbank. The Belt and Road Initiative have large funding needs and huge business opportunities, but many problems arise during the process of commercial banks exploring the feasibility of project financing. As the Belt and Road construction involves many countries, including emerging and underdeveloped economies, thus banks will need to consider the credit and policy issues along the countries and regions; At the same time, the construction cycle of the Belt and Road is fairly long, and the amount of capital required is huge, commercial banks, may face a series of uncertainties in relation to the loans provided for the construction of the Belt and Road.

01

Enhancements required in the international financing cooperation mechanism

The Belt and Road infrastructure financing cooperation relies on bilateral communications between China, the host country and other related countries. Except for China-Pakistan Economic Corridor (CPEC), which has already established a good bilateral communication mechanism, the other five economic corridors have not yet form a regular financing coordination mechanism, and the financing cooperation between China and other relevant surplus capital countries needs to be deepened. At present, Chinese financial institutions are more involved in projects along the Belt and Road, while international financial institutions, including Development Finance Institutions (DFIs), are less involved. The World Bank, Asian Development Bank and other multilateral development banks (MDBS) have already invested a huge amount in the infrastructure development of Belt and Road member countries. However, as each multilateral institution (MDBs) have their own objectives, strategies and business plans, more effective coordination and communication mechanism between them and the multilateral institutions initiated by China are yet to be established.  A multi-tiered financing system with diversified participants is the more economic efficient model in fulfilling the Belt and Road Initiative. Through closer cooperation between Chinese financial institutions and multilateral development banks to co-finance Belt and Road projects that match each other’s development goals, this will improve the efficiency in resource allocation, diversification of risks, and facilitate the establishment of a more coherent system of rules. Multilateralism can play a constructive role in addressing common challenges among countries. Therefore, multilateral institutions initiated by China will need to further explore better collaboration methods with traditional development institutions in the Belt and Road Initiative.

02

Countries with weaker financial strength have higher credit risks

According to rating agency Moody’s “BRI report card - Positive factors outweigh negative for China and recipient countries”, a large amount of China’s Belt and Road investment is flowing to countries with relatively weak credit profiles. Since 2013, 37% of China’s outbound investment has gone to countries and regions along the Belt and Road initiative which were rated Ba1 or below (54% if Singapore is excluded); 40% goes to non-investment grade members, which accounted for 45% of the total number of Belt and Road countries. The credit profile of such countries is relatively poor due to their weak financial strength, unstable political environment, high sensitivity to risks from unexpected incidents and poor business environment. Moody’s also pointed out that the resultant risks from the Belt and Road Initiative will be shared between Chinese sovereignty and entities providing financing or direct investment to Belt and Road projects. As Belt and Road projects are mainly supported by Chinese policy banks, state-owned commercial banks and state-owned enterprises, and the transparency of returns on capital in Belt and Road countries and regions are poor, such banks and SOEs face higher implementation risks and may also increase contingent liabilities of China’s sovereign. In addition, due to the impact of the COVID-19 pandemic in 2020, the economies of developing countries fell into recession, increasing the pressure to repay huge loans and rapidly increasing credit risks. In April 2020, for example, Pakistan urgently requested the restructuring of billions of dollars in loans from China due to a sharp economic downturn. Pakistan’s economic growth slowed to -0.4% in 2020, the first negative growth since 1952, indicating that the economy is not performing well. The latest report by Moody’s pointed out that the pandemic has a long-term impact on the Belt and Road Initiative. China’s investment in member countries fell from US $104.7 billion in 2019 to US $23.5 billion in the first half of 2020, and it is projected that the higher investment levels in previous years will not be recovered before 2023.

03

Legaland policies protection for investors are relatively weaker

The legal systems of countries along the Belt and Road are flawed, and many projects involving public-private cooperation and foreign cooperation have legal blind spots. For example, the transfer of assets in the Transfer-operate-Transfer (TOT) model cannot be carried out smoothly among the public, private and external parties due to the unclear property rights. As TOT is a relatively new financing model, the existing policies and regulations of various countries are not highly targeted to TOT. The rights and obligations of the parties involved, the franchise rights of the transferred project and other relevant safeguards are not clear, and the legal risks of the investors are relatively high. In addition, there are too many legal restrictions in countries along the Belt and Road, especially for foreign market access. For example, there are restrictions as to the largest share of foreign investment allowed in infrastructure construction projects, which makes some models that must be fully funded by the project contracting parties unable to be applied to international capital. Countries along Belt and Road Initiative generally lack of effective supporting policies in the field of investment, especially in investment planning, financing channels, pricing, entry qualifications and etc. There is also lack of clear and feasible operation regulations and preferential policies. On one hand, this results in the reduction of the effectiveness of policy guidance and its supporting ability; on the other hand, this also affect the enthusiasm of private capital to participate.

04

Challengesin finding a feasible profit model

The profits from the infrastructure investment along the Belt and Road mainly come from three major aspects: government payments, consumer payments, and real estate appreciation brought by the development of infrastructure. However, for some countries along the Belt and Road or for low-income countries, the government and consumers may not be able to afford the price of the project; or for a very long period of time the infrastructure construction  were funded by the government, but when the government is unable to provide new facilities due to the high level of debt, the local consumers too lack of the concept of paying for facilities; or when some countries along the Belt and Road implement the law for private ownership of land, lands are not provided for the developers to develop and obtain long-term benefits. Land acquisition in Indonesia, for example, is seen as one of the biggest obstacles to attract foreign investment. Many major infrastructure projects have been delayed or cancelled because of land issues, and private ownership of land in Indonesia does not allow foreigners or foreign companies to own Indonesian land. The Indonesia’s $6 billion high-speed rail project linking Jakarta, the capital, and the city of Bandung, has been delayed due to land acquisition issues, and its target launching date has been delayed from mid-2019 to 2023. The inability of the government to pay, the unwillingness of consumers to pay, and the lack of land and other public resource benefits make it difficult for Chinese investors to explore feasible profit models in the Belt and Road infrastructure projects and to enter the local market to invest. Although Chinese financial institutions play a leading role in key projects of the Belt and Road Initiative, but attracting more diversified range of entities to participate in market-oriented ways or attracting more private capital will be more conducive to achieve better risk control of the Belt and Road Initiative and projects.

05

Geopoliticalrisks in countries and regions along Belt and Road

Some countries and regions along the Belt and Road own unique resources and are in strategic location, therefore they become the center for major power competitions. The political and economic situation are very complicated, and changes in the international situation, especially from the big countries outside the region, is bound to influence the policies of these countries. Although the countries along the Belt and Road may have the common objectives of improving local infrastructure and achieving better development, but they may also have other shared interests with other interest groups that they are reluctant to give up, (which may include politics, military, economy) which bring huge uncertainties to the region’s infrastructure construction and industrial cooperation, increasing the investment risk. On the other hand, many countries along the Belt and Road also face political instability. The pandemic has increased the risk of economic downturn, and various social problems began to emerge, which may become the tipping point of political unrests. In July 2020, the largest anti-government protests since 2014 broke out in Thailand, and the government briefly declared a state of emergency in an attempt to curb civil protests. The months-long demonstrations have had a major impact on the local economy and delayed the implementation of major infrastructure projects.