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Monday, September 18, 2017

China’s Belt & Road Initiative Helps Central & Eastern Europe Accelerate Economic Development

~ CEIBS Warsaw Forum

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Prof. Jiang Jianqing is Chairman of the SINO-CEE Fund & Director of CEIBS Lujiazui Institute of International Finance. This is a translated and edited version of the keynote speech he gave at CEIBS 1st China-CEE Development Forum in Warsaw on September 15, 2017.

“The Belt and Road Initiative was proposed in response to developments arising from globalization. It aims to achieve cooperation and win-win results among the countries involved via “policy coordination, facilities connectivity, unimpeded trade, financial integration and people-to-people bonds”. We have long thought about how to use finance as a leading factor in the promotion of the construction of the Belt and Road. When I addressed the CEIBS Europe Forum in Munich two days ago, I proposed to push forward the implementation of the Initiative with the idea of “cohesiveness”. Namely, we should stick to the principle of openness and cooperation – “cohesiveness leads to mutual benefit, connection, and win-win”; we can strengthen collaboration by grasping the opportunity brought about by the Belt and Road Initiative. Today, I’d like to share three viewpoints about the initiative revolving around the word “belief” in light of the theme of this forum and based on the focus of the Sino-CEE Fund.

First, a belief is a common view. Openness, inclusiveness and collaboration are the ultimate goals of globalisation. The Belt and Road Initiative proposed by Chinese President Xi Jinping is designed to work with many countries in a joint effort to pursue lasting economic growth and maintain world peace through multi-lateral negotiation and cooperation. This is not done for China’s own interests, and it is not a political union between several regions and countries or an effort seeking short-term benefits, but is a global value proposition committed to cooperation and win-win development as well as the embodiment of openness, inclusiveness and collaboration.

It was with this belief that Deng Xiaoping proposed China’s Reform and Opening Up policy in 1978. By effectively introducing foreign funds, opening the market, and reinforcing collaboration, China has seen about 830,000 Sino-foreign joint ventures and solely overseas-funded ventures founded and the introduction of more than USD 1.6 trillion in funds which have propelled the fast growth of the Chinese economy and helped build the Chinese manufacturing industry’s powerful brand into one with international influence. Deng Xiaoping said that development is an unyielding principle, but it was not always smooth sailing. After Opening Up, a tremendous number of national manufacturers went bankrupt and shut down due to the entry of advanced foreign industries. Many employees at state-owned companies were laid off; many traditional brands died out. However this did not stop China from moving forward. The country was not afraid of opening up or competition. It learnt while doing. By learning, progressing and innovating in open competition, the Chinese economy and industry have been transformed.

In 2016, China’s GDP surged by 202 times to RMB 74 trillion and ranked second globally (it has maintained this position since 2010), accounting for 15.1% of the total world economy. This represents an increase of 13.3% compared to 1978. Its per capita GDP increased by 140 times to RMB 53,817; its foreign-exchange reserve exceeded USD 3 trillion and continues to be the first in the world; the average urban per capita disposable income increased 97 times to reach RMB 33,616. In addition, the rural population in China living in poverty has dropped by 94.4% to 43.35 million people; the incidence of rural poverty plummeted to 4.5%, a 93% drop. China’s 22,000 kilometres of high-speed rail lines currently exceeds the total mileage of high-speed rail in the countries ranked 2nd to 10th combined; it ranks first in the world in the output of more than 200 industrial products including steel and vehicles. China’s total volume of foreign trade in 2015 was RMB 3.95 trillion, accounting for 11.9% of the world’s total trade volume. China became the world’s largest exporter and the second largest importer. In 2013, it became the world’s largest trading nation, overtaking the US which had held that position for the better part of a century. It has also become the world’s largest manufacturing country, second largest foreign investor, and third largest foreign investee. China’s implementation of the Reform and Opening Up policy enabled the world’s most populated country with the largest poverty-stricken population to achieve these remarkable accomplishments after almost four decades of development. This is a very spectacular and important historic phenomenon for China and humanity. China’s success comes from to sticking to peace and development, cooperation and win-win, as well as actively engaging in globalisation and the global division of labour. It can also be credited to the country’s ever-improving and wide-ranging implementation of Opening Up and its persistence at the decisive role of the market in resource allocation.

It is because of globalisation that trade between China and European countries including Poland and the rest of the world has developed rapidly. As an important EU member country and the leading country in Central and Eastern Europe, Poland’s growth rate has remained above the average level of the EU for about a decade, and it has successfully ridden out the economic crisis. It also has a relatively strong competitive advantage in various fields including automobile manufacturing and the aviation industry. Thanks to its continuous economic openness and collaboration policies, the scale of foreign investment attracted by Poland tops Central and Eastern European countries. Now we all have an historic opportunity brought about by the construction of the Belt and Road. We need to work together to maintain and develop an open world economy and propel economic globalisation to develop in a more inclusive direction.

Second, belief is the premise. We need to be confident in the implementation and advancement of the Belt and Road Initiative as well as China-CEE cooperation and its development in the future. Central and Eastern Europe is the emerging market that the Belt and Road Initiative should pay special attention to, and the potential for future cooperation and development is huge. As an important component of the Asia-Europe economic belt, Central and Eastern Europe is a lynchpin in the construction of the Belt and Road. Geographically, Central and Eastern Europe is located at the intersection of the integrated markets of the EU, Russia and Central Asia. It has the only route where the Silk Road extends westwards. In terms of economic growth, Central and Eastern Europe is the potential growth centre for Europe. Compared to the Western European market, Central and Eastern Europe has the advantage of strong economic vitality, low labour costs and high-potential market; in contrast to Russia and Central Asia, thanks to industrial upgrading and capital transfer in Europe, Central and Eastern Europe has begun economic transformation at an early time and has been making rapid progress. It has set up a relatively sound market mechanism and a production factor allocation system. Its market is more mature and the product competitiveness is stronger. Despite the sluggish recovery of the global economy, most of the Central and Eastern European countries are enjoying a steady and positive economic increase at a faster pace than Western European countries. The GDP growth rates of Poland, Romania, Slovakia and Bulgaria were all above 3% in 2016. In terms of industrial structure, there is a diversity in the industrial distribution in the Central and Eastern European countries, and most of them boast unique advantages in resources, technology and management, for example, the automobile industry in Poland, Czech Republic and Hungary; the digital industry in Hungary and Slovakia; the tourism industry in Czech Republic, Hungary and Croatia; and agriculture in Poland, Serbia and Bulgaria. All represent pillar industries in those countries and have relatively strong external market competitiveness.

China and Central and Eastern European countries have continued to deepen their cooperation. Their annual total trade volume has maintained double-digit growth. Their total trade volume was USD 58.65 billion in 2016. A 9.5% year-on-year increase, it accounted for 10.2% of the total volume between China and Europe in the same period and it is evident this growth was against trend. Investment has grown very fast, with China’s direct investment in Central and European countries exceeding USD 8 billion in 2016. Generally speaking, Central and Eastern Europe has become an increasingly important destination for China’s foreign investment and economic collaboration. The areas of collaboration have expanded to include regional governments and enterprises, with wider coverage and better connection. This is beneficial to improving China-Europe relations on the whole. Therefore, the Belt and Road Initiative is also regarded as an historic opportunity and a project that will run throughout the entire 21st century in Central and Eastern Europe.

Third, belief is the foundation and trans positional consideration is necessary. In the process of investment and cooperation, we must improve policy communication, and seek sameness while maintaining difference, while also understanding, trusting and supporting each other. The 2008 global financial crisis has heavily impacted transnational investment and fund flow. Global cross-border liquidity in 2016 was almost one third of what it was in 2007, and there was an imbalance in the structural distribution. Although Central and Eastern European countries have a steady political and policy environment, a sound legal and regulatory system, and they are making a relatively successful transformation to market economies, transnational direct investment and capital markets in those countries are still at the early stages of development. They have not yet attracted interest from international equity investors, and offer relatively few fund-raising channels for enterprises; projects lack structural design and many industries have not yet found favour with investors. In recent years, Chinese investors have become very popular with the governments and enterprises in Central and Eastern European countries. They are appealing destinations for joint development and are willing to provide supporting policies and project investment opportunities. They are hoping to further strengthen the connection with Chinese industries and capital, however they often run into challenges during implementation. For example, the popular multi-lateral development fund is long-term and low-cost, but it is difficult for it to meet the overall needs of Central and Eastern European countries. There are also some difficulties in providing a government guarantee for the investment in the infrastructure construction initiated by the country. Therefore, China can share its abundant successful experiences and cases on how to invest in infrastructure construction via the combination of development funds and commercial funds. China has also joined the European Bank for Reconstruction and Development. Figuring out how commercial investments can work with multi-lateral development funds to serve the infrastructure construction in Central and Eastern Europe will be a future area for collaboration. Much remains to be done in terms of how to attract and make the best use of the abundant commercial funds from numerous sources in order to serve these countries’ needs for infrastructure construction, industrial upgrade and development, improvement of trade and consumption, as well as promotion of technology innovation.

In the aftermath of the global financial crisis, some countries are now grappling with economic decline, sluggish recovery and a high unemployment rate, which has led to the re-emergence of trade and investment protectionism. Among the 16 Central and Eastern European countries, 11 are EU members, and have a relatively high degree of marketization and complicated legal systems. Whether one is carrying out investment activities or offering financing support, there is a relatively high access threshold. The diverse political, economic, social, cultural and industrial environments of Central and Eastern Europe have also posed many challenges to external investors. The more challenges there are, the stronger belief is needed, and we need to improve communication to seek the “great common denominator” in the corporation.

Taking the regional features and requests for development of Central and Eastern Europe into consideration, the Industrial and Commercial Bank of China (ICBC) established the Sino-CEE Fund, a new bridge of investment collaboration between China and Central and Eastern European countries. ICBC is the largest bank in the world, ranking first among the top 2,000 global companies according to Forbes, and provides comprehensive financial services. The Sino-CEE Fund is a market-driven and commercially-run fund. It attempts to create a benevolent cycle of trans-regional market development and value creation by connecting to global capital with the backing of China and an integrated solution characterised by “investment + investment bank + commercial bank”.

The Sino-CEE Fund’s target market is Central and Eastern European countries, as well as the rest of Europe and other related regions. The target scale in future is EURO 10 billion and a credit fund of EURO 50 billion is expected to be leveraged. The main targets of investment are projects worthy of commercial development that reflect industrial collaboration and upgrading, and that can push forward regional development and economic growth. We will bring capital to Central and Eastern Europe as well as Chinese partners in order to help their competitive products and services enter the Chinese market and help the companies in this area to grow big and strong. As of now, Central and Eastern European countries’ investment in research and innovation accounts for 1.2% of GDP, which is 0.9% lower than the average percentage of the EU. Chinese companies can cooperate with the competitive companies in the region to work on R&D and innovation, especially in the fields of e-commerce, tourism service, digital technology and telemedicine. Capitalizing on comparative advantages, the two sides will “turn a corner” and jointly develop the world market.

As a commercially-run organization, we not only pursue reasonable economic return, but also attach great importance to social responsibility and value proposition regarding labour relations and product safety. Throughout the process of investment and development, the Sino-CEE Fund will be managed in a way puts an emphasis on protecting the environment, developing a green, low-carbon economy, and respecting the social and cultural conventions.

At present, the initial fundraising has been progressing smoothly and the Fund has identified a batch of potential investment projects in the areas of infrastructure, industrial manufacturing and mass consumption. These projects are now going through the due diligence and evaluation process. At the same time, many Chinese and foreign enterprises as well as financial organisations have shown great interest in investing in Central and Eastern Europe, hoping to seek partnerships and investment opportunities through our platform to jointly build the new blue ocean of overseas investment and industrial integration.

Finally, according to The Riga Guidelines for Cooperation between China and Central and Eastern European Countries, we would also like to see financial organisations and companies based in Central and Eastern Europe join the Sino-CEE Fund under the recommendation of the government and jointly promote the Sino-CEE connection and related industrial collaborations. At present, some Central and Eastern European countries have reached consensus with us about investing in the Fund. We’d like to see more countries participate in building the Fund with us, and hope that national governments and companies will have extensive communication and collaboration on industrial policies, investment environment, project partnership and mergers and acquisitions.

Globalisation is currently a hot topic. Much can be done to grasp the opportunity made possible by the Belt and Road Initiative, and promote communication and win-win development between China and Central and Eastern European countries in a better way. Sino-CEEF Holding Company and the Sino-CEE Fund, as a new bridge for industrial and financial collaboration under the Belt and Road Initiative, hope to establish an extensive partnership with all parties in order to grasp the new opportunities created by the implementation of the Belt and Road Initiative, and play a leading role in jointly promoting the development of the globalisation of industry and finance.

Thank you all!”