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Belt and Road on Four-Wheel Drive

Apr 10-2024   



A special draw of Belt and Road cooperation consists in the systemic match between China’s capabilities in four major domains and the conditions for large-scale infrastructure construction in most countries signing up to the initiative, wrote Prof. Lu Feng of the NSD and Pan Song Li Jiang, NSD post-doctor and Assistant Researcher, in an article for Journal of International Economic Cooperation.

 

They said that many of these countries were confronted with four significant constraints: they lack the capabilities for taking on large-scale engineering and construction; their domestic production cannot churn out capital products such as mechanical equipment and relevant materials; they are constrained by limited capital and foreign exchange reserve on macro-economic level; and they have difficulty attracting foreign direct investment and conducting debt financing in the international capital market.

 

China has assisted these countries to successfully surmount such constraints, especially the financing one, by supplying systemic matching conditions and closed-loop solutions, said the two authors. In what they termed the ‘four-wheel drive’, which constitutes a critical part of the Belt and Road facilitating mechanism, China has leveraged its prowess in four major areas to work with Belt and Road countries: project contracting; equipment and relevant materials; foreign direct investment; and credit and debt financing. Since the initiation of Belt and Road in 2013, Chinese firms have contracted projects in over 184 countries and regions and seen their competitiveness rapidly increasing to be among global leaders. In keeping with international practices, Chinese equipment and materials have been encouraged for use in these projects, which has helped relieved overcapacity pressure of some Chinese industries. Meanwhile, China has set up a number of international funds to make direct investment in various cooperative projects along the Belt and Road. Moreover, China has formed a diversified debt financing system guided by official aid, mainly constituted by policy financial institutions, and actively participated by market-based financial entities. This has played a core role in boosting the large-scale infrastructure construction and inter-connectedness along the Belt and Road, wrote the two authors.

 

Due to recent shifts in global economic environment, China and its partner countries along the Belt and Road have seen various degrees of decline in the growth rate of contracted projects, international trade, and debt financing. The two authors also pointed out that some developing countries are facing rising sovereign debt risk as a result of domestic and international factors. Despite so, they believe that by perfecting and innovating current investment and financing modes, the Belt and Road initiative will achieve more fruitful development in terms of investment and financing, as well as joint construction and cooperation.

 

They offered four pieces of policy advice. Firstly, summarize the practical experiences of cooperation thus far, comprehensively evaluate the economic development and debt sustainability of host countries, moderately adjust the cadence for cooperation on large-scale infrastructure projects, and focus on highly efficient projects that are ‘small but beautiful’. Secondly, apply market principles in contracted projects to gradually increasing the ratio of project financing and moderately reducing the weight of policy financing. Thirdly, conduct full-process risk management and control of joint projects and enhance the effectiveness of policy communication among Belt and Road countries. Lastly, on the premise of scientific and effective governance and reasonable allocation of burden, actively join and innovate the multi-lateral governance of global sovereign debt risks.

 

 

Belt and Road on Four-Wheel Drive

Apr 10-2024   



A special draw of Belt and Road cooperation consists in the systemic match between China’s capabilities in four major domains and the conditions for large-scale infrastructure construction in most countries signing up to the initiative, wrote Prof. Lu Feng of the NSD and Pan Song Li Jiang, NSD post-doctor and Assistant Researcher, in an article for Journal of International Economic Cooperation.

 

They said that many of these countries were confronted with four significant constraints: they lack the capabilities for taking on large-scale engineering and construction; their domestic production cannot churn out capital products such as mechanical equipment and relevant materials; they are constrained by limited capital and foreign exchange reserve on macro-economic level; and they have difficulty attracting foreign direct investment and conducting debt financing in the international capital market.

 

China has assisted these countries to successfully surmount such constraints, especially the financing one, by supplying systemic matching conditions and closed-loop solutions, said the two authors. In what they termed the ‘four-wheel drive’, which constitutes a critical part of the Belt and Road facilitating mechanism, China has leveraged its prowess in four major areas to work with Belt and Road countries: project contracting; equipment and relevant materials; foreign direct investment; and credit and debt financing. Since the initiation of Belt and Road in 2013, Chinese firms have contracted projects in over 184 countries and regions and seen their competitiveness rapidly increasing to be among global leaders. In keeping with international practices, Chinese equipment and materials have been encouraged for use in these projects, which has helped relieved overcapacity pressure of some Chinese industries. Meanwhile, China has set up a number of international funds to make direct investment in various cooperative projects along the Belt and Road. Moreover, China has formed a diversified debt financing system guided by official aid, mainly constituted by policy financial institutions, and actively participated by market-based financial entities. This has played a core role in boosting the large-scale infrastructure construction and inter-connectedness along the Belt and Road, wrote the two authors.

 

Due to recent shifts in global economic environment, China and its partner countries along the Belt and Road have seen various degrees of decline in the growth rate of contracted projects, international trade, and debt financing. The two authors also pointed out that some developing countries are facing rising sovereign debt risk as a result of domestic and international factors. Despite so, they believe that by perfecting and innovating current investment and financing modes, the Belt and Road initiative will achieve more fruitful development in terms of investment and financing, as well as joint construction and cooperation.

 

They offered four pieces of policy advice. Firstly, summarize the practical experiences of cooperation thus far, comprehensively evaluate the economic development and debt sustainability of host countries, moderately adjust the cadence for cooperation on large-scale infrastructure projects, and focus on highly efficient projects that are ‘small but beautiful’. Secondly, apply market principles in contracted projects to gradually increasing the ratio of project financing and moderately reducing the weight of policy financing. Thirdly, conduct full-process risk management and control of joint projects and enhance the effectiveness of policy communication among Belt and Road countries. Lastly, on the premise of scientific and effective governance and reasonable allocation of burden, actively join and innovate the multi-lateral governance of global sovereign debt risks.