China signs Memorandum of Understanding with Swiss finance giant on ‘Belt and Road’

Railway workers inspect a Kenya Railways freight train before it departs from the port station in Mombasa, Kenya on Saturday, September 1, 2018.

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Beijing last week offered a nod to criticism over its Belt and Road Initiative that puts other countries in debt while gaining a partner in one of the world’s financial hubs.

Swiss President Ueli Maurer meets the Chinese President Xi Jinping on Monday and signed a memorandum of understanding for trade, investment and project finance cooperation in third countries along the routes of Xi’s foreign investment program. The Central European country has a reputation as an international leader in the banking sector.

“I think it is useful that China can engage more European countries for the BRI,” said Zhu Ning, professor of finance at Tsinghua University in Beijing. global banking and financial services.”

It comes as Beijing seeks to reclaim the image of the Belt and Road, which has been tarnished by criticism is a vehicle for “debt trap diplomacy”.

“The accumulated debt involved in the BRI has prompted China to think more carefully about the sustainability of BRI projects and how to combine state and market power to make it work, for Chinese and global participants,” Zhu said. “This becomes an even more important and urgent issue given that Internationalization of the RMB the process is not going as fast as it was a few years ago and it will pose challenges for China’s currently strong foreign reserve. »

The Belt and Road Initiative is widely seen as Beijing’s effort to increase its global influence, starting with construction of rail, sea and other transport routes stretching from Central Asia to Africa. Projects can provide the necessary infrastructure. But critics say Chinese companies, often state-owned, tend to benefit more since they are usually the contractors or providers of financing.

This gives China control of overseas assets if a country cannot repay its loans. Earlier this month, US Secretary of State Michael Pompeo called some of China’s lending practices with other countries “predator.”

While it is encouraging that Chinese officials are talking more openly about prioritizing debt sustainability and environmental sustainability, real change will take more than signing token documents.

Jonathan Hillman

Director of the Reconnecting Asia project at the Center for Strategic and International Studies

The United States and India, another country critical of the China-led agenda, did not send official representatives to the second Belt and Road forum that concluded in Beijing last weekend. Thirty-seven national leaders attended the event, including the Russian President Vladimir Poutine and Italian Prime Minister Giuseppe Conte.

Xi used his opening speech recognize some of the shortcomings of the program during its first six years of existence. Analysts also noted that he made no statement about China’s financial commitment to the Belt and Road.

“We should pursue high-level cooperation to improve people’s lives and promote sustainable development,” Xi said, according to a statement. official english translation of his remarks in Mandarin Chinese. “We also need to ensure the commercial and fiscal viability of all projects so that they achieve their planned objectives as planned.”

A day before Xi’s speech, China’s Ministry of Finance released a “Debt Sustainability Framework for Countries Participating in the Belt and Road Initiative”. The document provides voluntary guidelines for granting loans and a mathematical formula for determining a country’s ability to manage its debt.

Marie Diron, managing director of Sovereign Risk Group, Moody’s Investors Service, said in an emailed statement on Friday that the framework is “comprehensive” and based on principles similar to those other institutions use to try to ensure that a level of indebtedness is not excessive.

“Applied effectively, it can help reduce the financial stability risks that some borrowing countries face due to the additional debt burden incurred by Belt and Road projects,” Diron said. framework will depend on its scope of application, since it is not a mandatory tool, the capacity of borrowing governments to provide the elements necessary for the analysis of debt sustainability and the use of tool by lending banks in their decisions.”

Chinese financial institutions have provided more than $440 billion in financing for “Belt and Road” projects, People’s Bank of China Governor Yi Gang said during a speech at the forum, according to an English-language statement by Chinese state media.

“A country’s overall debt capacity should be considered as a means of controlling debt risks and ensuring debt sustainability when it comes to investment decisions,” said Yi. He added that future financing and investment cooperation should be market-oriented and mainly from commercial funds.

The agreement signed by Switzerland is technically concluded between the country’s federal departments of finance and economic affairs, education and research and the Chinese National Development and Reform Commission. The memorandum lists initiatives to connect Swiss, Chinese and third-party leaders to create trade agreements and establish a “Belt and Road Initiative skills-building platform” in Switzerland.

“The cooperation will be based on five key principles: private capital for private projects, sustainable treatment of debts, consideration of social impacts, environmental protection criteria and transparency”, according to a press release from the Swiss Embassy.

A representative did not immediately respond to a CNBC request for further comment on the deal.

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“We focus our analysis on the credit implications of China’s lending to frontier and emerging markets,” Moody’s Diron said in an email Tuesday. “We see no significant credit implications of Switzerland’s memorandum of understanding with China.”

Last Wednesday, International monetary Fund Managing Director Christine Lagarde and Chinese Finance Minister Liu Kun also signed a new memorandum of understanding for a three-year agreement to improve debt sustainability analysis, among other areas of finance-related cooperation.

Still, it remains to be seen whether complaints about the Belt and Road debt deals recede.

“While it’s encouraging that Chinese officials are talking more openly about prioritizing debt sustainability and environmental sustainability, real change will take more than signing token documents,” said Jonathan Hillman, senior researcher and Director of the Reconnecting Asia Project at the Center for Strategic and International. Studies said in an email over the weekend.

“For example, rather than launching a vague ‘Clean Silk Road’ initiative, China could make the terms of its agreements public.”

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