Silk Road Fund to aid long-term projects (China Daily)

Central bank chief: Common growth, mutual benefit to direct spending

The Silk Road Fund will target medium- and long-term projects that have strategic significance to support the “One Belt, One Road” initiative, said People’s Bank of China Governor Zhou Xiaochuan.
President Xi Jinping said on Nov 8 that China will contribute $40 billion to set up a Silk Road Fund to provide investment and financing support for infrastructure construction, industrial cooperation and other projects related to connectivity for countries along the Silk Road Economic Belt and the 21st Century Maritime Silk Road.
The fund, which has started operating, is similar to the China-African Development Fund, which focuses on stimulating and facilitating Chinese investment in Africa.
But unlike private equity funds, which usually focus on investment periods of seven to 10 years, the Silk Road Fund will have an investment horizon of 15 years or more to support infrastructure development such as road and rail projects in developing economies, Zhou said.
“The ‘One Belt, One Road’ initiative is far-sighted, because it is flexible in terms of geographic boundaries and will cover a large number of developing countries. It will prompt China to further open up to the outside world and promote the common development of all economies,” he said.
“China’s economic strategy will not just focus on its own interests. It will put more emphasis on the opening-up and common development of developing countries and emerging markets. The executives of the Silk Road Fund will select projects based on the idea of mutual benefit and win-win cooperation.”
He took issue with the comparison that some have drawn between the fund and the Marshall Plan, under which the United States provided more than $12 billion in economic support for the rebuilding of Western Europe after World War II.
“The Marshall Plan emerged from the special status of the US in the post-WWII period,” he said. “China is a middle-income country with per capita GDP reaching just $7,000 and the Chinese are still striving for a relatively comfortable life. The situation of China in today’s world is substantially different from that of the US after the war,” he said.
The fund will make overseas investments using the country’s “excessive deposits”, including foreign reserves, he said.
The first phase of funding is $10 billion, of which $6.5 billion will come from foreign exchange reserves. China Investment Corp and the Export-Import Bank of China will contribute $1.5 billion each, while China Development Bank Corp will provide $500 million.

LPG exported from Kazakhstan arrives at Alataw Pass, Xinjiang. The abundant oil and gas resources in Eurasian countries and China’s expertise in renewable technologies are expected to create the framework for a cohesive partnership among the countries on the New Silk Road. [Photo/Xinhua]
These banks have a long track record of investing in neighboring countries and have closely monitored investment opportunities in emerging markets for many years. The Silk Road Fund will cooperate rather than compete with them, because projects in general need a mix of debt and equity financing, Zhou said.
For instance, the fund will take equity stakes along with other investors, making it easier to launch projects that have difficulty borrowing from banks.
The Ex-Im Bank and CDB could follow up by extending loans to such projects.
Other domestic and foreign institutions are welcome to join the fund as investors in later phases or cooperate with its subsidiaries, he said.
Highlights of the Silk Road Fund
·A limited liability company of the fund was registered on Dec 29 and the first board meeting was held on Jan 6.
·The fund is not a sovereign wealth fund but rather a private equity fund with a longer-term investment horizon.
·The projects it invests in should have a reasonable return for the medium and long term.
·It is not a Chinese version of the Marshall Plan.
·It does not seek to become a multilateral development bank.
·It may set up subsidiary funds based on industries and geographical areas.
·It needs professional staff with knowledge of various fields such as investment and finance, key industries and countries along the “One Belt, One Road”.
·It will cooperate rather than compete with China Investment Corp, the Export-Import Bank of China and China Development Bank Corp.
Related stories:
Xi pledges $40b for Silk Road fund, by Zhao Shengnan, China Daily

President Xi Jinping and leaders from neighboring countries pose for a photo before a dialogue on connectivity partnerships. [Photo/Xinhua]
Thousands of years ago, a persistent man named Yu Gong planned to take decades to improve connectivity by removing mountains near his house with hand tools.
Today, Beijing can act much faster.
President Xi Jinping said on Saturday that China will contribute $40 billion to set up a Silk Road fund that will boost infrastructure and resource development while improving industrial and financial cooperation along the centuries-old Silk Road trading routes.
The goal of the fund is to “break the connectivity bottleneck” in Asia, Xi said during a dialogue in Beijing with leaders from Bangladesh, Cambodia, Laos, Mongolia, Myanmar, Pakistan and Tajikistan.
The Silk Road fund will welcome investors from Asia and beyond to actively take part in the project, Xi said ahead of the APEC Economic Leaders’ Meeting, which is set to begin on Monday in the capital.
Chen Fengying, director of the Institute of World Economic Studies at the China Institutes of Contemporary International Relations, said $40 billion is a big number, but it’s appropriate to boost Beijing’s ambitious long-term strategy of reviving the land-based Silk Road concept to create a modern-day economic belt, while also developing the 21st Century Maritime Silk Road.
Economies vary in different regions in Asia, Chen said, and the less-developed ones need money to upgrade infrastructure.
China can benefit from a more prosperous and stable neighboring environment, she said.
The dialogue on Saturday followed the signing of a memorandum of understanding last month on establishing China’s proposed $50 billion Asian Infrastructure Investment Bank. According to the Asian Development Bank, Asia needs as much as $730 billion annually for infrastructure investment before 2020.
Xi said it’s a priority for China to upgrade connectivity in Asia and to develop rails and roads in neighboring countries.
But connectivity is not only about building roads and bridges, Xi said. It’s also about systems and regulations, as well as personnel exchanges.
He called for countries to improve their communications about policies, facilities, ease of trade, financing and people-to-people ties.
To ease the shortage of professionals in connectivity, Xi said China would provide more than 20,000 training opportunities for neighboring countries in the next five years.
Cambodian Prime Minister Hun Sen said connectivity cooperation with China could narrow the development gap in various regions of Asia and help ASEAN to realize the goal of becoming an economic community in 2015.
Eight risks Silk Road Fund faces, by Wang Tianlin, China Daily

China’s experience abroad shows the great potential of the proposals as well as possible pitfalls
China put forward two major initiatives to promote trade with its neighbors: the Silk Road Economic Belt and the 21st Century Maritime Silk Road (known in short as the Belt and Road Initiative) and the $40 billion Silk Road Fund.
However, given the risky climate in which we are living and the experience of Chinese enterprises overseas, we must be aware that professional risk management in compliance with international norms is key to the development of both these initiatives.
There are eight risks China needs to consider.
First, it should avoid an investment frenzy caused by grand ambitions and political preference.
The country has suffered a great deal from putting politics ahead of economic sustainability. Examples are the Albanian projects and some African projects China carried out during its three-year famine (1959-61) and the “cultural revolution” (1966-76).
When developing the Silk Road Fund, it is essential that we pursue both political and diplomatic benefits in addition to ensuring sustainable development of the fund.
Second, China should avoid risks posed by political changes in other countries.
Many of China’s neighbors are undergoing complicated political, economic and social changes, and it is uncertain how these countries will develop afterwards. A case in point is the Myitsone Dam project in Myanmar. A Chinese investor made a huge investment in the project ($3.6 billion for its first phase) before the new Myanmar government suddenly suspended it in 2011.
We must improve analysis and prediction of the political and economic situations in major projects’ host countries. A method should also be put in place to raise funds and run projects in case of sudden changes brought on by political shifts.
Third, China should avoid the risks of political turbulence in some regions.
The turbulence caused by competition between big powers always leads to economic losses for businesses. For example, many transnational enterprises, including Chinese ones, suffered great losses during the United States-led invasion of Iraq in 2003.
Over the next few years, political turbulence is highly likely to occur in the Middle East, Southeast Asia, Eastern Europe and Northeast Asia, posing a great challenge to the Belt and Road strategy.
Fourth, China should avoid the risks posed by terrorism, which will present a major threat to Chinese businesses operating overseas.
Chinese businesses have already become targets for many local terrorist groups. For example, in 2004, 11 Chinese railway workers were killed by terrorists in Had Bakhshi, Afghanistan. In 2007, nine Chinese oilfield workers were killed by terrorists in the Ogaden region of Ethiopia.
China’s promotion of the Belt and Road strategy will inevitably harm the interests of some foreign and local interest groups. To minimize the risks of terrorist attacks on Chinese businesses, we must therefore enhance intergovernmental cooperation to combat terrorism, strengthen Chinese workers’ understanding of terrorism and how to combat it, take precautions that align with common international practice and develop sound emergency plans.
Fifth, China must avoid risks brought about by an unwise choice of foreign partners.
Experience has shown that choosing foreign partners is one of the most important decisions to make when initiating a project, yet it is often the most difficult decision. The recent setback suffered by a Chinese enterprise bidding for a high-speed railway project in Mexico was due to one of its Mexican partners being sued, and the event triggered a domestic political storm.
Such problems can be solved by communication and cooperation between Chinese and foreign governments and between trade unions and industrial associations, as well as through aid from consulting firms.
Sixth, China must avoid the risks of economic nationalism.
Economic nationalism has become a threat to many international energy enterprises. Bolivia’s nationalization of energy assets in 2006, Mongolia’s rejection of China Shenhua Energy’s participation in the development of Tavan Tolgoi (the world’s largest untapped coal deposit) in 2011 and Indonesia’s ban on exports of unprocessed ore this year have all harmed international enterprises from China and from many other countries.
In the long-term, it is important to understand the roots of economic nationalism in order to prevent Chinese enterprises from falling prey to it.
Seventh, China must avoid the risks brought about by local trade unions.
Deciding how to tackle trade unions is a headache for Chinese businesses, no matter whether they are operating in developed or developing countries. SAIC Motor Corporation failed to invest in South Korean carmaker SsangYong Motor Company partly because it could not effectively work with the local trade union.
To ensure sound development of the Silk Road Fund projects, Chinese enterprises must fully understand the differences between Chinese and foreign trade unions, carefully fulfill their social responsibilities and maintain a sound relationship with local trade unions that upholds the spirit of mutual benefit and equality under the law.
Eighth, China must avoid the risks posed by a lack of knowledge about local markets and a lack of experience running international projects.
Chinese businesses should clearly differentiate between short-term emergency needs and long-term rigid demands to avoid the embarrassment and waste caused by newly built roads with no cars on them and no ships docked in newly built ports.
In 2010, when the China Railway Construction Corp finished a light rail project in Saudi Arabia, it registered a net loss of 4.1 billion yuan ($669 million; 542 million euros). Clearly there is also a great need for Chinese enterprises to improve internal management, learn common international practices and exercise strict control over budgets in compliance with international norms.
So how can we make full use of the $40 billion Silk Road Fund? We must regard it as a long-term global trade campaign aimed at creating both political and economic effects. Efforts should be made to prevent and simultaneously manage risks in politics, diplomacy and business.
The author is a senior research fellow at the Institute of Modern International Relations, Tsinghua University. The views do not necessarily reflect those of China Daily.