This article appeared on OMFIF Bulletin (November 2016). The Official Monetary and Financial Institutions Forum (OMFIF) is a global financial think-tank, headquartered in London.

Yaseen Anwar, Member of IMI Advisory Board, former Governor of the State Bank of Pakistan.

Infrastructure development has a vital role to play in helping to stabilise the global economy. The question now is how major gaps in financing will be filled and from where those resources will come. China’s $1.8tn ‘One Belt, One Road’ initiative, which focuses on infrastructure investments, is one strategy that addresses this challenge.

The global economy is still suffering the effects of the 2008 financial crisis. In the first half of January 2016, global stock markets saw $2.2tn worth of capital destruction, while commodity prices are yet to recover from the steep declines of 2014-15. Political events in the US, western Europe and the UK have injected uncertainty into global markets and the international monetary system.

The decades following the second world war witnessed the recovery of the US, Europe and Japan, with huge outlays on infrastructure to support this growth. Asia today is growing faster than the US and Europe, but has yet to harness its considerable potential.

Regional and global integration

OBOR provides the catalyst for the infrastructure investments needed to achieve regional and global integration. Large-scale developments will reduce global imbalances, and allow Asia to absorb shocks from other parts of the world and manage systemic risk.

China’s CITIC Bank has announced plans to invest in 300 projects extending from Singapore to Turkmenistan. Projects include railways, highways, pipelines, power grids, and other infrastructure links stretching from Asia to Greece, Russia, and Oman. These initiatives will create new jobs and markets, impart skills, and generate self-sustaining prosperity.

To help OBOR fulfil its potential, the Chinese authorities have paid attention to important financing gaps. The Asian Infrastructure Investment Bank is a key part of the solution: 57 countries – including many south Asian countries, but also from the Organisation for Economic Co-operation and Development – are signatories to the AIIB charter. To leverage financing needs, a dedicated ‘Silk Road fund’ of $40bn, and capital injections of $32bn and $40bn for China Development Bank and Exim Bank of China respectively, have been established.

Several AIIB projects have been approved for financing in Pakistan, Bangladesh and central Asia. Each project is co-financed by multilateral organisations including the World Bank. These partnerships are evidence of the collective commitment needed to rejuvenate the global economy through the infrastructure sector.

Infrastructure development can generate plentiful employment opportunities as long as there are corresponding government interventions at the federal, provincial, and district levels to manage urbanisation. Infrastructure investment will boost national small and medium-sized enterprise sectors, increase employment, and provide banks with opportunities to diversify their portfolios.

New roads, bridges, and railroads will improve transport networks and reduce delivery costs. Improved telecommunications networks are vital. Investment in power is essential for manufacturing, both for domestic needs and for exports, to ensure a stable trade and current account.

China’s resources and capability to support infrastructure should not be exclusive. Other multilateral institutions will need to mobilise and leverage their capital. The World Bank has increased its staff in Singapore to around 300 from around 70 five years ago, a declaration of intent that it will meet regional demand. Japan has established a $100bn fund in support of infrastructure. The Asian Development Bank has stepped up its co-financing activity in tandem with the AIIB. The European Bank for Reconstruction and Development has formally expressed an interest in collaborating with the AIIB.

Renminbi – an alternative reserve currency

A related, though rarely talked about, opportunity to finance infrastructure is the renminbi as a new alternative reserve currency.

With a more than 10% weighting in the IMF’s special drawing right basket of reserve currencies, the renminbi can be used to facilitate trade under the 36 currency swap agreements executed with China. This would boost regional financing opportunities, provide comfort to Chinese manufacturers invoicing in renminbi and reduce foreign exchange risk and exposure.

Opportunity of ‘dim sum’ and ‘panda’ bonds

As a further example of the Chinese currency’s acceptability, around 15% of German trade with China is now renminbi-denominated. In 2015 the Industrial and Commercial Bank of China became the first institution in Singapore to issue a renminbi instrument. Numerous other issues of ‘dim sum’ and ‘panda’ bonds provide a significant opportunity for multinationals to finance their operations.

As the world’s second largest economy, China will serve as a fulcrum for the rest of Asia. Notwithstanding the headwinds that will generate some dislocations and volatility, the authorities’ strong commitment to addressing those vulnerabilities will contribute to sustained growth in the country.

The advantages of infrastructure development initiatives such as OBOR in stimulating global growth are clear. Ample resources and financing opportunities are available. It is up to the world community to ensure that such opportunities are taken wisely.