China’s Belt and Road Initiative (BRI), a strategy initiated by the People’s Republic of China seeks to connect Asia with Africa, to improve regional integration, increase trade and stimulate economic growth.

Over time to accommodate trading activities, the BRI has been associated with developing infrastructures. Indeed, infrastructure investment is a key aspect of the BRI. Hence, foreign exchange inflows through international financial connectivity are crucial.

Since its inception in 2013, China’s overseas investment strategy has been steadily increasing. However, the total investment from China into the 138 BRI countries declined to about US$103billion in 2019 and US$47 billion in 2020, possibly attributed to the Covid-19 pandemic.

Financial connectivity – an important pillar of the BRI – requires joint investment and financing cooperation from all countries. There are several important channels to achieving greater financial connectivity.

First, an enabling financial ecosystem across borders can help support inclusive growth. Major infrastructure developments presented by the BRI will not only require extensive capital flow, but it has to be managed safely.

According to International Monetary Fund (IMF) Managing Director Christine Lagarde at the 2019 Belt and Road Forum Session on Financial Connectivity, capital flow openness holds the potential to reduce financing costs, improve the efficiency of the financial sector and support high-quality investments and employment. However, capital markets liberalization requires proper regulation, with special attention on fiscal stability in order to succeed. The BRI features long-term projects which require substantial financing demands, and this is where financial development can play an important role. Financial development emphasizes on the ability to operate independently on an international market, as well as the capacity to generate long-term investments and inculcate financial sustainability.

Next, promoting financial connectivity calls for an increased presence of financial institutions and services in an expedited manner. Financial institutions should be encouraged to expand their network and offer financial services to facilitate trade and investment activities related to the BRI.

This also includes supporting financial services such as risk analysis and management, as well as funds settlement. To support the development of the countries and enhance financial cooperation in the region, the Asian Infrastructure Investment Bank and the New Development Bank were established. These banks act as the financial arm of the BRI and aim to attract international capital on a financial cooperation platform that is transparent, equitable, and mutually beneficial.

A newer channel for a more effective BRI is to promote financial inclusion. According to the IMF, in 2018, almost half of the adult population in low and middle-income Asia-Pacific economies did not possess a bank account, and less than 10 percent had borrowed from a financial institution.

China has seen significant progress in promoting financial inclusion, where community banks represented by rural credit unions strive to improve rural financial services and pool local savings.

Discussions of fintech adoption under the BRI – often referred to as the digital Silk Road – have paved the way for other countries to transition into promoting mobile and internet payment. The Asian Financial Cooperation Association (AFCA) was established in 2017 to provide extensive support for financial connectivity in Asia. The AFCA is devoted to building an exchange and cooperation platform for Asian financial institutions by encouraging regional financial resources integration while jointly safeguarding financial stability and supporting the development of countries in the region.

Furthermore, Chinese development and commercial banks such as the China Development Bank, EXIM Bank and Industrial and Commercial Bank of China have supported numerous projects in several BRI-linked countries, such as Pakistan, Indonesia and Malaysia.

By partnering with Chinese operators, BRI partner countries can benefit from China’s technological competency and dexterity. Over the years, Malaysia has positioned itself as a vital partner of China for trade and investment, given its longstanding relationship with China. Its welcoming stance has tapped on the BRI to increase inflows of FDI into the country, with investments spread across various sectors. Leveraging on the BRI framework, cooperation and joint investments between these two countries are pivotal. In October 2018, a joint report on BRI and Southeast Asia was launched in Kuala Lumpur. The report highlights ASEAN and China’s collaboration and outlines strategic ways to ensure the success of the BRI in the region.

Going forward, BRI investments should focus on financially sustainable projects to ensure the continued success of financial connectivity. The BRI Green Development Coalition (BRIGC) established in December 2020 aims to do just that. BRIGC encourages investors to inculcate environmental impact assessments and risk management, to ensure that projects implemented under the BRI minimise environmental-related damages.

To recap, the BRI allows foreign exchange inflow through international activities, with high potential to promote monetary expansion in the economy. High financial connectivity with the ability to safeguard a stable financial system is crucial for all BRI countries, as it leads to rapid improvements in quality of life.

Dr. Sonia Kumari Selvarajan is a Senior Lecturer at the Department of Development Studies, Faculty of Business and Economics, Universiti Malaya. The views expressed here are entirely the writer’s own.

The SEARCH Scholar Series is a social responsibility programme jointly organised by the Southeast Asia Research Centre for Humanities (SEARCH) and the Centre of Business and Policy Research, Tunku Abdul Rahman University College (TAR UC), and co-organised by the Association of Belt and Road Malaysia.