Belt and Road Initiative needs good laws

Tourists ride camels on the Mingsha Sand Dunes during a visit to Crescent Moon Spring on the outskirts of Dunhuang county. [Photo/China Daily]

Since its introduction by Chinese President Xi Jinping in 2013, the Belt and Road Initiative (the Silk Road Economic Belt and the 21st Century Maritime Silk Road) - an ambitious plan to revitalize the ancient Silk Road overland and maritime trade routes linking East and West - has attracted considerable attention. And for good reason: The project, which involves more than 60 countries and quite a few international organizations, implies unprecedented opportunities - and challenges.

From China's perspective, the logic behind the strategy is clear. With its sources of GDP growth coming under increasing strain, China must continue to make progress in opening-up the economy. That means building mutually beneficial relationships with neighboring countries, which can benefit by taking over some of China's lower-value-added activities. That promises to boost their own growth while creating space for the Chinese economy to move up the value chain, where productivity and wages - important determinants of consumption - are higher.

China's comparative advantages, including a global financial center in Hong Kong and a regional financial center in Shanghai, reinforce its leadership role. Add to that the recent surge in fast-growing, innovative companies - such as Huawei, Alibaba, and Wanda - and China is well placed to implement Xi's grand vision.

But it will not be smooth sailing. Like any cross-border initiative, the Belt and Road Initiative will require wise diplomacy to manage relationships with diverse countries and careful planning to scale up effectively.

Each country along the "Belt and Road" faces a unique combination of risks and challenges. Many face macroeconomic risks, owing to exchange-rate volatility, large debt burdens, and non-diversified, unsustainable economic structures. On the microeconomic level, risks include, for example, weak banking sectors.

Governance failures, ranging from corruption to inefficient implementation of reforms, also pose a serious challenge, as do social and political tensions (and, in some areas, the threat of terrorism). And one must not forget the ever-present risk of natural disasters, exacerbated by climate change.

Then there are the complex and varied laws, rules and regulations shaping the business environment in each country. Of course, it is virtually impossible for Chinese enterprises to understand fully each environment before entering it. But any violation could put a company's entire operation and investment at risk.

The challenges may be complex, but the formula for navigating them is simple. First and foremost, there can be no corruption, which would not only hurt the Belt and Road Initiative, but would also undermine China's ability to pursue other cross-border initiatives in the future. Second, no infrastructure project should be pursued without careful consideration of both its financial costs and benefits and its ecological impact, such as air pollution and destruction of ecosystems. Finally, all projects must be transparent and include effective checks and balances.

To reinforce this approach, the provision of financing for "Belt and Road" projects must adhere strictly to market rules. Given the scale of most investments, project finance - which is based on projected cash flows, rather than sponsors' balance sheets - will prove highly useful, as will effective risk-sharing mechanisms.

Furthermore, sponsors should look beyond a project's construction to the achievement of its long-term objectives, such as ensuring profitability and managing its lasting impact on the local community and the environment. Consultants, lawyers, auditors, NGOs, and other entities with international experience can play a vital role in all of these efforts.

There are also practical steps that can be taken to mitigate specific risks. For example, to minimize the risks associated with operating in an unfamiliar regulatory and legislative environment, businesses should establish links in advance with a local entity to guide their activities.

Realizing the Belt and Road Initiative will not be easy. But China has all of the tools it needs to succeed. As long as it uses them in a way that is clean, green, and transparent, China and its neighbors will reap vast rewards.

Liu Mingkang is a former chairman of the China Banking Regulatory Commission.

Lu Wenzhi is a research assistant at the Hong Kong University of Science and Technology.

Project Syndicate