Juan Carlos Martinez Oliva:Currency and Financial Cooperation under Belt and Road Initiative

2017-07-18 IMI

This article is based on a speech by Juan Carlos Martinez Oliva at the 2017 International Monetary Forum on 15-16 July in Beijing. Disclaimer: The opinions expressed are those of the author and do not necessarily reflect of the views of the Bank of Italy or of the Eurosystem. Juan Carlos Martinez Oliva, Member of IMI International Committee, Senior Director for Economics, Statistics, and Research, Bank of Italy. The Belt and Road Initiative (BRI),officially announced by President Xi Jinping in 2013 isa top subject among both Chinese and Western analysts and scholars. A growing number of countries - ranging from large developed to small developing economies -have displayed deep interest in joining a project which might be listed among the most ambitious in the history of civilization. BRI aims at reviving the ancient trade maritime and overland routes, “the Silk Road”, that connected Asia, Africa and Europe,whose control and broader use started in later Han period twenty-one centuries ago. The New Silk Road will create roads – and railways, ports, pipelines, and the other necessities that make up an inter-connected region. Traded goods from China found their way to Afghanistan, India, Persia, and eventually Rome. It is not rhetorical to say that there was also an outstanding cultural and social impact, since the Silk Road contributed to the spreading of Buddhism, Indian literature and Hellenistic art, and favored mutual understanding and pacific coexistence among countries from different parts of the then-known world. As of today BRI comprehends65 nations, including China, which account for 60% of the world’s population and 30% of its output. It will be financially supported by aNew Silk Road Fund of $40 billion, backed by China’s foreign exchange reservesand by Chinese official investment and lending agencies.Moreover, last May President Xi pledged a massive funding boost to BRI which includes an extra 100 billion yuaninto the existing BRI’s Fund; 250 billion yuan in loans from China Development Bank; 130 billion yuan in loans from Export-Import Bank of China; 60 billion yuan in aid to developing countries and international institutions in new Silk Road countries. Financial institutions have been encouraged to expand their overseas yuan fund businesses to the tune of 300 billion. BIS can be viewed within a comprehensive economic strategy, where the other elements are the establishment of the Asian Infrastructure Investment Bank (AIIB) and the internationalization of renminbi. The AIIB’s expanding activity will require access to private funding; this means that the AIIB will tap private resources via financial market instruments to collect infrastructure funding. Such a move would allow the mobilization of private savings across Asia and impose market discipline, thus improving the quality of the project financed. While the initial endowment is largely based on China’s huge stock of US dollar reserves, one may easily foresee that the financing activity of the AIIB will increasingly be based on RMB operations. The mobilization of private resources via the private market, while being promoted and scrutinized from headquarters in Beijing, will obviously be handled in the main Asian financial centers of Hong Kong and Singapore. This will have relevant implications for the prestige of the RMB. In the same fashion as the International Financing Corporation, the private sector arm of the World Bank Group, which helps developing domestic capital markets by issuing local currency debt, the AIIB might prove a powerful tool in developing the use of the Chinese currency in international markets in the future. Conversely, a growing presence of RMB on the international financial market would enhance and facilitate AIIB activity and presence across the world. BIS, on its side, by largely relying on yuan-denominated loans in favor of countries with sizeable infrastructural needs, will positively interact with the process of renminbi internationalization. The rapid rise of the RMB as an international currency, up to the status of a currency in the SDR basket, shows how fast global economic relations may change in the global economy. The combination of BIS, AIIB, and of a fast spreading RMB in the international markets provide good chances for the RMB to become the major regional currency in East Asia, and a powerful vehicle for trade and investment across the area. Such an outcome should be viewed as helpful and desirable at the regional level, and a source of stability for the overall international monetary system. A growing attention is devoted by analysts and media, particularly in the West, on the political and security perspective of OBOR, which is sometimesviewed as a Chinese tool to enhance its geopolitical influence in the region. It would be nonetheless wrong toconcludethat Chinais unilaterally trying to create a pan-Asian economic and institutional order as a response to its hegemonic ambitions. If we look at how Asian regionalism has developed in the last two decades, one finds that in the aftermath of the Asian financial crisis of 1997-1998, countries in the region have acted under the common driver of achieving cohesion and finding collective solutions to common problems. There is little doubt that the 1997-1998 financial crisis contributed to fueling the impression that the international community was giving little attention to Southeast Asia’s economic problems, thus reinforcing regional connections among Asian countries. The severe economic troubles that the whole region experienced may be seen as a main cause for East Asia’s quest for a local solution, and for the development of pan-Asian views in the region.Even Japan, a close US ally with a strong trans-Pacific identity, look favorably at pan-Asian ideas and ideologies particularly on the issue of monetary integration. As a matter of fact, it was the aborted Japan’s initiative to create an Asian monetary fund that gave origin to the Chiang Mai Initiative, which established bilateral swaps among Southeast and Northeast Asian countries. The potential impact of OBOR, on both economic and geopolitical grounds, has suggested to many that the Chinese vision might have profound similarities with the US Marshall plan for Europe seventy years ago. Many have pointed out that, not differently than Marshall plan, China’s BIS goes far beyond the simple geographic range, to include economic, political and national security considerations. As a matter of fact, ambitious and visionary plans are often based on a complex architecture, encompass different targets covering a broad range of fields, and are grounded on both a short term strategy and a long term vision. They sometimes experience a gradual evolution, following their ability to adapt to changing circumstances. The Marshall plan was initially conceived as a means to rebuild the European economy after the Second World War. But it was also meant to prevent the risk that Europe’s starving populations might fall under the influence of Soviet Union. It therefore might be seen as a tool to reinforce the geopolitical influence of the United States in Western Europe. In spite of the apparent similarities between the concepts of OBOR and the Marshall plan, it is worth stressingalso the differences which make OBOR a vision clearly more consistent with the needs of the global economy of 21^st century than with the bipolar world of the past Cold War era. Indeed, according to the Chinese planners, OBOR is based on the well-known Five Principles of Peaceful Coexistence: mutual respect for each other's sovereignty and territorial integrity, mutual non-aggression, mutual non-interference in each other's internal affairs, equality and mutual benefit, and peaceful coexistence. A fundamentally cooperative initiative, OBOR is meant to be based on principles of harmony and inclusiveness. It advocated tolerance among civilizations, and is meant to respects the paths and modes of development chosen by different countries. It seeks mutual benefit and the "biggest common denominator" for cooperation so as to give full play to the wisdom and creativity, strengths and potentials of all parties. Needless to say, the above principles might find practical obstacles in their implementation. For example, a number of the countries encompassed by the initiative are affected by political instability, corruption and the threat of terrorism. If one looks at the positive side, however,OBOR’s ambitious construction may represent a great opportunity not only for China but for the world at large. By representing a vehicle of modernization conveying market economy principles in several backward areas of the world, OBOR can be viewed as a means to introduce prosperity and therefore political stability in such areas. For its potential security implications OBOR goals should be viewed as bringing tangible benefits to the whole international community. In a world struggling against economic stagnation, and security threats of various nature, a project aimed at boosting infrastructures and trade networks, and therefore overall prosperity; a project endeavoring the enhancement of mutual dialogue and peaceful coexistence may prove, if successfully implemented, as potentially beneficial for the overall international community.

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Juan Carlos Martinez Oliva:Currency and Financial Cooperation under Belt and Road Initiative

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