In the introduction section, the Global Financial Crisis (GFC) of 2008–2009 is described as an important reason for the inevitable economic downturn in China. This possible scenario created a momentum for a grand infrastructure program called ‘One Belt, One Road’ (OBOR), intended to look like a new global economic order. This ‘Belt and Road Initiative’ (BRI) aims to ‘break the bottleneck of Asian connectivity’ and could be seen as a way of ‘helping oneselves by helping others.’ Though with the stimulus package implemented in 2010 the Chinese economy seemed to be back on track again with double-digit annual GDP growth rates, the flip side of this injection was a legacy of debt with many ‘ghost’ cities, bubbles in the housing and stock markets, a rise in ‘bad’ assets and the creation of massive excess capacity in many industrial sectors from steel to cement. Combined with the slowing economy and the sluggish international demands, it is anticipated that the overcapacity will squeeze corporate profits, increase debt levels, and make the country’s financial system more vulnerable. The biggest weakness of the system is that it lacks the ability to allocate credit according to market-conform risk assessment principles and leads to excessive debt growth. Finally as a way to reach a more sustainable growth path, this habit of debt-financed growth due to the so-called financial dependency triangle has been addressed with the implementation of a policy of ‘deleveraging’. One of the most crucial objectives as part of this ‘new normal’ economy is to induce an economic shift that will steer the country away from a reliance on exports and investments toward growth driven by domestic consumption and innovation. The restructuring of the Chinese economy entails two essential adjustments to the financial system: first, the need to improve the efficiency of banks and financial markets and expand their services to dynamic sectors of the economy and beyond the state sector; and second, the need to avoid instability in the increasingly complex financial sector stemming from either the NPL/credit overhang problem in the banking sector, and/or a crash in the asset market, and a negative spillover from an over-expanding shadow banking sector. In this environment, it becomes increasingly important to strengthen systemic risk oversight and to further improve regulation and supervision. From this perspective, a vital part of implementing the BRI would be to enhance financial integration between countries. Although there is no agreed-upon definition for what qualifies as an OBOR project, but so far it is clear that the funding mainly comes from China’s huge, but shrinking, financial resources. Since the RMB, despite its internationalization, is still not a fully functioning global currency, the BRI largely requires dollar-denominated financial resources to fulfill its objectives. This ‘dollar-constraint’ obviously reduces the leeway for OBOR projects to be financed by China, at least in hard currency. Against this background, different financing options and implications are considered for the BRI plan within a policy trilemma context.
Keywords‘One Belt, One Road’ Asian connectivity Stimulus package Double-digit annual GDP growth rates ‘Ghost cities’ ‘Bad’ assets Debt-financed growth ‘Financial dependency triangle’ ‘Deleveraging’ ‘New normal’ economy NPL/credit overhang problem Shadow banking sector Systemic risk oversight ‘Dollar-constraint’ Policy trilemma context
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