Financial Connectivity Shores Up Belt And Road Growth

BEIJING, Aug. 9, 2023 /PRNewswire/ -- A news report from China Report ASEAN: Over the last 10 years since the Belt and Road Initiative (BRI) was proposed, the scale of financing under the framework has been expanding, and channels for financing have been diversifying, supporting construction of major projects and motivating countries along the route to work together to build a stable and diversified financing system. The Chinese yuan has enjoyed increasing influence. As trade and economic cooperation between China and ASEAN is growing in both quality and efficiency, settlement in local currency has been adopted in more transactions, laying a solid foundation for the development of the BRI.

Diversified Financing

Wang Zhimin, a research fellow with the Academy of China Open Economy Studies and director of the Institute of Globalization and China's Modernization at Beijing-based University of International Business and Economics, called financial connectivity indispensable support for joint efforts to advance high-quality BRI development. It is the foundation for realizing trade and infrastructure connectivity and reinforces efforts to achieve policy and people-to-people connectivity.

Statistics from China's Ministry of Commerce showed that from January to April 2023, non-financial direct investment by Chinese businesses in countries along the Belt and Road totaled US$7.53 billion, up 9 percent year on year. Over the period, Chinese businesses finished contracted projects worth US$23.05 billion and signed new contracts worth US$29.74 billion in countries along the route, accounting for 54.9 percent and 50.2 percent of the total, respectively.

Tu Yonghong, a professor with the School of Finance at Renmin University of China, said that entities participating in financial connectivity mainly include participating countries' central banks, commercial banks, securities firms, and insurance companies as well as emerging multilateral development financial institutions such as the Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund. Together, they have formed a diversified financing system to serve BRI construction.   

By the end of 2022, with membership rising to 106, the AIIB had granted funding for 202 projects, totaling US$28.8 billion. The Silk Road Fund had signed funding agreements for more than 70 projects, committing investment of around US$21.5 billion, with 70 percent going to countries along the Belt and Road route to fund infrastructure projects and projects for resource development and production capacity cooperation.

Chinese financial institutions have been the main driving force fostering financial connectivity under the BRI framework, and their role has been central. In 2017, China and six multilateral development institutions including the Asian Development Bank, the AIIB, and the World Bank signed a Memorandum of Understanding on Collaboration on Matters of Common Interest Under the Belt and Road Initiative. In 2019, they agreed to jointly build a Multilateral Cooperation Center for Development Finance. By the end of 2020, a total of 11 Chinese-funded banks had set up close to 80 subsidiaries in 29 countries along the Belt and Road.

At the fifth China-Singapore (Chongqing) Connectivity Initiative Financial Summit, China and Singapore signed 90 contracts on major projects with contract value totaling 111 billion yuan (US$15.35 billion). Breakthroughs were made in issuance of overseas yuan-denominated bonds and cross-border assignment of credit. By the end of March 2023, cross-border financial projects under the framework of China-Singapore connectivity cooperation reached US$19.6 billion in value, benefiting more than 10 Chinese provincial-level regions including Chongqing, Guangxi, Sichuan, and Yunnan.

Josephine Teo, Minister for Communications and Information and Second Minister for Home Affairs, said at the summit that strengthening financial cooperation and connectivity will help lower business costs and facilitate financing, risk management, and assets management. She added that it will promote China-ASEAN trade and economic development and cross-border investment and tap the regional potential to the full.

Wang Zhimin stressed that countries along the Belt and Road have huge demand for infrastructure financing, but the cost of financing is high and the local financial market is less developed. "Bridging the financial gap calls for joint efforts from various sectors," Wang said. Tu Yonghong echoed those sentiments. She suggested continuous efforts to open the financial sector and build an institutional system to navigate financial risks. In the meantime, a regular financing mechanism would promote coordinated development of the financial chain and industrial chains, she said, adding that greater support should be given to new business models.

New Explorations in International Settlements

On April 4, 2023, Malaysia's Prime Minister Anwar Ibrahim proposed launching an Asian Monetary Fund. On April 13, Brazilian President Luiz Inacio Lula da Silva delivered a speech at the headquarters of the BRICS New Development Bank in Shanghai. He passionately posed a series of questions. "Why do all countries have to base their trade on the dollar?" "Why can't we trade with our own currencies?"

Some have begun to seek alternative currency for international settlement and increased efforts to diversify their international reserve assets portfolio.

Tu Yonghong said that the fall of dollar hegemony doesn't mean that the Chinese yuan will replace the U.S. dollar, but it instead presents opportunities for the internationalization of the Chinese yuan. In recent years, the Chinese yuan has been a robust and resilient currency in the international market, and its appeal to international investors is on the rise.  

In May 2022, the International Monetary Fund raised the Chinese yuan's weighting in the Special Drawing Right from 10.92 percent to 12.28 percent, the third highest among all currencies. SWIFT statistics showed that in February 2023, international payment in the Chinese yuan accounted for around 2.19 percent of the world total, the fifth largest share among all currencies worldwide.

In late March, the Brazilian government said that it had reached an agreement with China, promising it will no longer use the U.S. dollar as the currency in trade with China. Instead, local currencies will be used in bilateral trade settlement. On April 26, the Argentinian government announced that it would pay for Chinese imports in Chinese yuan. On May 16, the liquefied natural gas (LNG) carrier Marweh from the United Arab Emirates (UAE) finished unloading at a port in south China's Guangdong Province, marking the completion of China's first cross-border yuan-settled LNG trade.

In 2021, cross-border payment in Chinese yuan between China and countries along the Belt and Road totaled 5.42 trillion yuan (US$747.84 billion), up 19.6 percent year on year. Wang Zhimin noted that although the Chinese yuan's credibility and appeal are on the rise, particularly in countries along the Belt and Road, it still has a long way to go to become an international currency. More efforts are needed in terms of composite national strength, financial market foundation, and institutional discourse.

In recent years, digital currency, based on decentralized block chain technology, has been shaking the dollar-denominated cross-border payment system to a certain degree. It also raised eyebrows in many countries by breaking geographical border restrictions and featuring low cost and high efficiency.

Central banks of more than 60 countries worldwide are studying and experimenting with digital currencies. China's central bank, the People's Bank of China (PBC), established a research team on fiat digital currency as early as in 2014, setting focus on key technology, the environment for the issuance and circulation of digital currency, and related international experience. In February 2021, the PBC joined its counterparts in Thailand the UAE, and other countries to launch the Multiple Central Bank Digital Currency (m-CBDC) Bridge Project. Currently in the trial phase, the m-CBDC bridge project is expected to create a direct connection network for central banks and business partners and form an independent system for international payment and settlement.

Tu Yonghong said that digital currency is a result of the rapidly growing digital economy and an inevitable outcome of efforts to deepen supply-side reform in the financial sector and facilitate integrated development of the financial sector and the digital economy. She called the m-CBDC bridge project a demonstration of significance but admitted it faces problems including huge differences in technological levels and government regulation.

Cross-border Trade Settled in Local Currencies

China and ASEAN countries are geographically and culturally adjacent. Since the BRI was launched, trade between China and ASEAN countries has been growing, creating conditions for monetary and financial cooperation. China and ASEAN are each other's largest trading partner. The Regional Comprehensive Economic Partnership (RCEP) taking effect bolstered China and ASEAN's future in trade and investment cooperation, said Wang Zhimin. Implementation of new projects will kindle greater demand for financial connectivity and open new ground for the monetary and financial market, Wang added.

According to the PBC's 2022 report on the internationalization of the Chinese yuan, by the end of 2021, China had signed bilateral currency swap agreements with 22 countries along the Belt and Road including Indonesia, Malaysia, Thailand, Singapore, and Laos. The Cross-border Interbank Payment System in Chinese yuan has been available across ASEAN member states. According to the 2022 report on the use of the Chinese yuan in ASEAN member states released by the Financial Society of Guangxi, cross-border transactions between China and ASEAN settled in Chinese yuan totaled 4.8 trillion yuan (US$662 billion) in 2021, up 16 percent year on year. The figure multiplied by close to 20-fold over the last 10 years, said the report.

Tu Yonghong said that currency circulation is inextricably associated with trade ties. Agreements on currency swaps and cross-border payment and settlement mitigate the risk of foreign exchange volatility, increase the liquidity of Chinese yuan in overseas markets, and creates conditions for trade facilitation, Tu said, adding that these effectively facilitate the flow of capital, technology and talent and will further boost trade and economic cooperation between China and ASEAN.

Wang Huiyao, president of the Center for China and Globalization, said at the fifth China-Singapore (Chongqing) Connectivity Initiative Financial Summit that China and ASEAN have primarily built necessary infrastructure for financial connectivity. From 2009 to 2021, the scale of bilateral currency swaps between China and ASEAN member states went up from 180 billion yuan (US$24.84 billion) to 800 billion yuan (US$110.38 billion), a 3.4-fold increase. Seizing opportunities brought by RCEP and conducting more cooperation on mutual recognition of financial standards, data sharing, and data flow are crucial.

Alongside cooperation with China, ASEAN member states are seeking cross-border settlements in local currencies. On March 28, treasury ministers and central bank governors of ASEAN member states met in Indonesia. The primary agenda of the meeting was to discuss reducing dependence on the U.S. dollar, Euro, Japanese yen, and pound for financial transactions and how to settle transactions in local currencies.

At the 42nd ASEAN Summit, ASEAN member states adopted the ASEAN Leaders' Declaration on Advancing Regional Payment Connectivity and Promoting Local Currency Transaction, pledging to engage and collaborate with ASEAN's external partners, international organizations, and the private sectors, advance regional payment connectivity by utilizing emerging opportunities brought by innovation, encourage the use of local currencies for cross-border transactions, and support establishment of a task force to explore the development of an ASEAN Local Currency Transaction Framework.

On May 8, Bank Indonesia and Bank Negara Malaysia (Malaysia's central bank) announced the commercial launch of the Indonesia-Malaysia cross-border quick response (QR) code payment linkage. Before that, Indonesia, Malaysia, the Philippines, Thailand, and Singapore signed agreements to launch such a cross-border QR code payment linkage. Perry Warjiyo, governor of Bank Indonesia, said cross-border QR code payment provides users more options and is key to enhancing efficiency, boosting the digital economy, fostering inclusive financial development in the region, and safeguarding macro-financial stability.

Tu Yonghong said that using local currency for trade settlement is vitally important for the development of national economies and market stability. However, because the trade volume between ASEAN member states is small and different member states use different currencies, building unified standards for the financial markets in ASEAN member states has been difficult.

SOURCE China Report ASEAN