The focus of this week's editorial will be an alternative to the BRI, also dubbed 'the Quad' and UNCTAD perception of the finances behind the BRI.
The 'real' answer to the BRI is the recently revived Quad, consisting of the United States, Australia, Japan and India. The raison d'être of the 'Quadrilateral Security Dialogue' was to ensure a free and open Indo-Pacific region. The dormant partnership has now been revived due to China´s assertiveness and ambitions in Asia. Those involved are willing to extend the focal point to economics and development policies. In response, China considers the partnership part of a containment strategy and has sent diplomatic protests before the Quad had even had a formal convention. An important detail is that India and Australia are AIIB-members, whilst the US and Japan are not. [The 'Quad' Is Not A Rival To China's Belt And Road Initiative -- It's A Precursor]. The biggest threat to the success of Quad 2.0 are the members themselves. First, Australia is hesitant to escalate any regional conflicts with China, Australia´s biggest economic partner. Secondly, it remains to be seen whether Japan is able to protect other Quad-members due to its internal legislation (article 9 of Japan's Constitution). Third, India is to a degree non-partisan, especially compared to the rest of the Quad. In short, it is unlikely that Japan, India and Australia would want to allow regional conflicts with China to escalate. In my view, the Malabar Exercise (2018) is the litmus test for the continuity of Quad 2.0 and for it to become a real answer to BRI [‘Quad’ version of Belt and Road feels like a South China Sea Watch].
Recent developments have left the way open for China to establish its position in the world of development finance, see also the finale note of SRH-editorial (January 31st, 2018). In the aftermath of the financial crisis, UNCTAD donor countries are cutting foreign aid. This leaves room for financial institutions (for example: European Development Bank) to step up. But they are limited by their own statutes and the AAA credit-rating they must uphold in order to have favorable interest quotes. However, these limitations enable the institutions to gain the trust of the financial market, i.e. bond investors. These institutions use their equity to attract borrowed money (also known as: leveraging) by using their own equity as collateral. They are allowed to borrow $2 to $5 dollars for $1 dollar of equity (= gear-ratio). This process is considered cumbersome and lengthy. In that respect, China is making bold moves. First, it allows the China Development bank to have a much higher gear-ratio, i.e. maximum of $11 dollars loaned to $1 dollar equity. Secondly, it diversifies its risk with leveraging by cutting up the funds and finance purposes. The objective is twofold. China allows the AIIB to finance ordinary operations with ordinary resources, intended for projects with conservative risks and/or allocated to participating countries with a high level of economic development. And, it allows special operations financed from 'special fund resources', i.e. high-risk projects or countries with a low level of economic development. Usually, for the latter the financial risk is attributed to stand-alone legal entities with their own credit-rating, e.g. the China-Africa Development Bank, Silk Road Fund. This allows the AIIB to achieve a reliable AAA-rating (Moody and S&P 2017), which in return reassures the trust of the financial market. Yet, the (ordinary and special) fund might be utilized for the same project, allowing China to generate $100 billion for the BRI via several funds. [Keep an eye on China's innovations in development finance].
In summary, China utilizes the modus operandi of certain commercial / investment banks to hedge risks, enabling the country to generate a huge amount of available funds, which it can lend faster than its competitors. Thus, China is cementing its financial position within the landscape of development aid which becomes a paramount pillar of the BRI.
A. Cikmazkara
This week's Silk Road Headlines
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