In the fall of 2013, Chinese President Xi Jinping proposed the "Belt and Road" initiative to the world. Over the past four years, the initiative has won the support from over a hundred countries and international organizations and achieved fruitful results. The initiative covers policy coordination, facility connectivity, unimpeded trade, financial integration and people-to-people exchange, with financing being the crucial pillar for the successful implementation of the initiative. Speaking at the Belt and Road Summit in Beijing in May, Zhou Xiaochuan, Governor of the People’s Bank of China, said that the government should promote financial connectivity under the Belt and Road Initiative by tapping development finance, as the initiative features long-term projects with massive financing demands where development finance can play an important role.Against this backdrop, the first CF40 Yichun forum - “Development Finance and the Belt and Road Initiative” was held in Yichun City, Heilongjiang Province from Aug 5 to Aug 14, 2017.
I. Development Finance is a Process of Proactive Market Creation
Chen Yuan, chairman of CF40 Executive Council and pioneer of China’s development finance once defined development finance as ‘a(chǎn) mode of financing that serves national strategies and operates based on market principles’，and is different from government funding and concessional finance.
At the conference, Chen Yuan clarified some misunderstanding with development finance. According to Chen, ‘the source of development finance is securitization of national credit, and the fund should be used in a market-oriented way. Therefore development finance faces the need for creating a market." He further emphasized that China should work hard to create its own market with an efficient operation mode.
Yin Yong, Deputy Governor of the PBoC further explained the concept of “market creation”. According to Yin, development finance pursues “breakeven and meager profits” that will make other projects profitable. He stressed that development finance does not compete for profit with commercial finance; instead, it aims to create the market. This financing mode will help promote the implementation of the “Belt and Road” initiative.
Zhang Guobao, former Vice Chairman of the National Development and Reform Commission who once led the medium-to-long term planning for national railway construction agreed with the above view points. Taking China’s railway construction as an example, Zhang said that there was an inherent conflict in the process – the government required that railways would not be built unless the areas with planned railways have a traffic capacity of 1000 kilometers per year. But at many times, demand was created by ‘planning’. If no railways were built, the traffic in some areas would never reach the required capacity and therefor no railways would ever be planned for those regions, but railways were most necessary for the economic takeoff of those under-developed areas. This ‘demand creation’ is similar to ‘market creation’ mentioned above for development finance. Zhang also fully recognized the role that development finance played in revitalizing China’s Northeast region, especially in the reform of the shantytowns. China Development Bank (CDB) took the lead in providing finance to shantytown reform, expanding financing channels for local governments who used to rely mostly on fiscal funds.
II. Ensuring that the industries and companies critical to national security receive ample financing support
During the forum, Chen Yuan spoke of some problems he observed in the advancement of development finance. Generally speaking, financial institutions provide finance to enterprises on the basis of their financial performance; however, the financial indicator is not the only indicator for assessing the importance of an enterprise from the perspective of national strategies. Some enterprises may not have good financial results, but are significantly important to national security. Chen suggested that we set up a set of national security-related credit indicators for such enterprises, and include these indicators as part of the national credit system. Such a system should be used along with the traditional social credit system. Chen Yuan further pointed out that we should distinguish enterprises with national security importance from zombie companies which are insolvent due to ineffective operation.
III. Exploiting the Leverage of Development Finance from Four Aspects
The implementation of the “Belt and Road” initiative faces various risks. For example, the sovereign ratings of about half of the countries along the Belt and Road are below investment grade.
To deal with this, Yin Yong suggested diversifying risks by not concentrating funds on a few large projects. On how to fill the financing gap for infrastructure along the B&R, Yin suggested exploiting the leverage effect of development finance from four aspects. First, make more equity investment to induce more debt financing. Second, invest more as subordinated capital to induce equity investment; Third, adopt the public-private partnership (PPP) model and leverage more capital from the private sector. Fourth, invest more in projects with positive externality such as infrastructure. These projects will attract more investment into other commercially profitable projects.
IV. Giving Full Play to Equity Investment by Using the Concept of Development Finance
Jin Qi, Chairwoman of the Silk Road Fund said that the experience with development finance shall provide guidance to the Fund’s equity investment practice. According to Jin, the strengths of the host country, multilateral development institutions (MDIs), financial institutions and enterprises should be integrated; government credit and market-oriented operation should be combined to ensure smooth implementation of the projects, realize financial yields as well as social benefits. At the same time, equity investment should aim to gain greater control over project management and operation. In addition, equity investment is conducive to increasing the investors’ bargaining power. It not only stimulates domestic economic adjustment, but also drives the “going out” of the equipment manufacturing industry. It will also promote the internationalization of the RMB and help achieve "mutual benefit and win-win outcome’.
Jin said mid-to-long-term investment is faced with many problems. Especially for long-term projects with a life span of 20-30 years, balance is needed between equity investment and debt financing, government credit and commercial funds, short term and mid- to long-term capital, to achieve reasonable return for various types of investors. Innovation of mechanisms is also needed to prevent over-reliance on government funds and mismatch of risk and returns.
V. Improving Institutional Arrangements for Development Finance
According to Jin Qi, cooperation among development finance institutions, commercial institutions and policy finance institutions needs to be enhanced while promoting the "Belt and Road" initiative. The financial sector should not only provide market-based financing to the projects in a fast track approach, but also actively promote the experience with development finance, effectively integrating the powers of the governments of host countries, investors and other stakeholders to address the financing difficulties with mid-to-long term infrastructure projects, enhance interconnectivity within the region and realize mutual benefits and win-win results.
Hu Xiaolian, Chairwoman of the Export-Import Bank of China, pointed out five key factors for successful implementation of development finance. First, systematic and forward-looking planning is needed. Development finance engages in long-term, fundamental projects. Such projects need to be planned and implemented as a coherent system. Single projects could hardly realize the expected benefits or provide support for economic growth. Second, special attention should be paid to the comprehensive potential of the projects undertaken. Third, long-term maintenance of the projects is most necessary. Fourth, the government should play an appropriate role. A key feature that distinguishes development finance from commercial finance is that the government plays a role in development finance. However, it does not mean the government imposes administrative intervention. Fifth, capacity building is of key importance to the implementation of development finance.
The 10-day forum featured two major conferences and nine parallel sessions. More than 200 experts from the government, development finance institutions, financial industry and academia attended the discussions. The forum was organized by CF40 in strategic cooperation with Yichun municipal government.
