Clear route to recovery

By Mukhtar Hussain, Head of Belt and Road Initiative and Business Corridors, Asia-Pacific, HSBC

Belt and Road Initiative offers solid framework for countries big and small to overcome the economic damage caused by pandemic

The Covid-19 pandemic has caused a crisis for every economy. At the same time, it has also created an opportunity for the Belt and Road Initiative to prove its value as an international partnership that serves the international good.

Amid a fragmented global response to the virus, this network of 138 countries is uniquely positioned to channel trade and investment to developing countries that lack the resources to revive their own economies.

China cannot do this by itself, though: no country can. If the initiative is to deliver on its potential to support global recovery, it must be a collective effort. It must also live up to the high standards it has set itself for transparency and sustainability.

The International Monetary Fund estimates that some US$9 trillion of fiscal stimulus has been announced in response to Covid-19, but the Group of 20 economies account for US$8 trillion of that.

For decades, globalisation has delivered greater prosperity and better living standards to countries across the developing world. Investment in infrastructure allowed supply chains to flourish and boosted countries’ international trade. Greater trade led to greater employment and wealth creation.

This has been China’s development formula for the last 40 years. In that time it has transformed itself from one of the world’s poorest countries into a major manufacturing base, investment destination and export market.

It is no surprise, then, that international trade and investment are the DNA of the Belt and Road Initiative. This is also what makes it so important today. There can be no global recovery, especially for developing countries, without a recovery in the cross-border flow of capital, goods and services.

There is no equivalent as a network for these flows. According to HSBC Global Research, the initiative involves some 1,800 projects in countries that account for 40 per cent of the world’s population.

Estimates of the scale of investment already mobilised through the initiative since it launched in 2013 range from US$120 billion to US$575 billion, or even more.

It has established pathways for private capital and trade to follow government investment, and has evolved over the past seven years from a heavy focus on energy and infrastructure development to also encompass manufacturing and even services.

I have seen for myself how investment under the plan’s umbrella, whether in ports or auto manufacturing, can help a local economy connect with international markets, boost businesses and generate jobs.

Leveraging the initiative for the benefit of developing countries, however, will depend on its being truly international, high quality and sustainable.

It must function as an international network and not as a “China club” to increase its positive impact. It is encouraging, for example, that at least 14 countries have signed cooperation agreements with China that allow businesses from both countries to collaborate on projects in a third market.

High standards will be critical. The initiative has created well-documented concerns about debt sustainability and the transparency and viability of projects.

Responding to these concerns at the Belt and Road Forum for International Cooperation last year, China made clear it should be “open, green and clean” and released a debt sustainability framework for projects.

Delivering on these commitments will be vital.

Much has been said about the potential for emerging economies to become caught in “debt traps”. However, China would surely prefer its loans to developing countries be serviced and repaid, making it rational for this lending to be structured accordingly.

As the Covid-19 pandemic hits government finances across the developing world and calls grow for foreign creditors to forgive debt, though, it would also make sense for China to continue showing flexibility in restructuring existing loans where necessary.

But it is not logical that China should want to be the sole financier of the initiative, in spite of the country’s deep financial resources. Indeed, it is very much in China’s interests to ensure projects associated with it are affordable and commercially sound.

That reduces risk for its state-owned lenders, as well as giving projects a better chance of being funded by private capital. Likewise, it will not serve China or, in the long term, anyone else if energy and infrastructure projects along the initiative’s planned routes lock in high carbon emissions.

As a cosmopolitan, high quality and sustainable network for investment and trade flows, the Belt and Road Initiative can make a vital contribution to the global recovery. For capital-constrained emerging economies, it may be the best hope for a swift revival.

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