Harbingers of a fairer global financial system

The establishment of the AIIB, part of China’s overall reform and opening-up plan, is of great importance to the Silk Road Economic Belt and 21st Century Maritime Silk Road, whose aims are to strengthen infrastructure and connectivity in the region to better facilitate trade and reform of the global financial system to more objectively reflect the interests of developing countries.

The United States is the only major Western power to question the establishment of the AIIB because, it says, the bank could change the current global financial structure, which would challenge its dominant role. The US also says there is no guarantee the AIIB would abide by established credit and loan standards and be transparent in its operations. But these are just pretexts to oppose the AIIB and attempts to persuade other developed economies from joining it.

In a rare case of disagreement with the US, the United Kingdom, France, Germany, Italy, Luxembourg and Switzerland all applied to join the AIIB. This symbolic development marks the rise of emerging economies, with China as their representative, and is a prelude to the restructuring of the global financial system.

The AIIB and the Belt and Road Initiative could be the platform to turn promises into action for the benefit of all members, developing as well developed.

More importantly, the efficiency with which China transformed the Belt and Road Initiative from a proposal into a grand executable plan in about a year shows its determination to make them succeed.

China’s belief and engagement in trade, cooperation and investment for mutual benefit could further facilitate the success of the AIIB and Belt and Road Initiative, while the cost-performance advantages some Chinese industries enjoy and the country’s huge foreign exchange reserves and high savings are factors that constitute a solid foundation for the country’s “go global” strategy for its enterprises to increase overseas operations.

Although China still has a long way to go in catching up with the US in terms of technology and productivity, the overall production capacity of its manufacturing industry is about 1.4 times that of the US. The “go global” strategy can help China export its excess capacity to many developing countries on the principle of mutual benefit.

Chinese enterprises, in fact, have made fast progress in entering the global market over the past decade. China has few parallels in terms of cost-performance ratio in construction projects, for instance, with Chinese enterprises’ contract volume increasing from just US$10 billion (Bt323.5 billion) in 2000 to more than $140 billion last year.

However, how to respond to the changes of targeted countries’ political and economic policies, and how Chinese enterprises can adapt to local social and natural environments are the challenges that the Belt and Road Initiative faces. China’s leadership, therefore, should coordinate the 

going-out strategies of Chinese enterprises to ensure they don’t end up competing with each 

other and losing money in the process.

The enterprises, for their part, should conduct professional risk assessments, devise mature risk management systems and look at the bigger picture. Entry into the world market does not necessarily mean instant profits. The learning curve could be demanding. But patience and the right strategy can bring success.

*The author is a professor of economics at Peking University. This is a translation of his speech at a recent forum in Shanghai on China’s macroeconomy that was co-hosted by the university and the Shanghai municipal government.