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China’s Financial Deepening and Its ‘Belt and Road’ Funding Dilemma in a Global Context

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The Financial Implications of China’s Belt and Road Initiative

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Abstract

In this chapter, the contemporary development of the Chinese financial market is presented. Financial opening and liberalization of capital flows are necessary for China for its further successes on the international level. The BRI exerts a great pressure for the processes of domestic financial market growth, cross-border financial transactions increase and RMB internationalization. All of these processes can be described from two dimensions: the development of financial architecture (what is related to broadening of the scope and size of the financial market) and as important multidimensional contributors to the economic growth. A special consideration is given to the Mundell–Fleming policy trilemma. It means that fostering a ‘Going-Out’ strategy will exert an impact on further liberalization of the financial market with consequences for monetary and foreign exchange policy. China must define its priorities in the three areas, but there are possible several options to cope with the trilemma in the ‘new normal’ economic development. The best option is strictly related to the effective implementation of the BRI project. The rapid development of the Chinese financial market, together with an unstable international background, leads to the necessity to carefully balance the trade-off between financial liberalization and financial stability. The rapid liberalization and development of the Chinese financial markets have led to the expansion of the unregulated shadow banking system. The system is an important alternative for the traditional banking and offers many lending options. It became an important contributor to both the encouragement of financial liberalization in China and enhancement of the BRI financing. The BRI poses many financial pitfalls to the economy. Among them are the growth of unsustainable debt as a consequence of the undertaken investments, lack of transparency and unpredictability of the investments in the long term, and some specific problems of participating countries. The successful strategy requires from the Chinese government not only the choice of a balanced policy, but also implementation of an associated effective regulatory environment.

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Notes

  1. 1.

    This model relates to the feature that borrowers do not think like investors and the commercial logic (rate of return) is secondary to political motivations.

  2. 2.

    China still to a certain extent uses a ‘dual-track’ interest rate system, with deposit and lending rates set with reference to benchmark rates while money market rates are decided entirely by the markets.

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Authors and Affiliations

  1. Faculty of Management and Social Communication, Jagiellonian University, Kraków, Poland

    Piotr Łasak

  2. Faculty of Business, Finance & Marketing, The Hague University of Applied Sciences, The Hague, The Netherlands

    René W. H. van der Linden

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  1. Piotr Łasak
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  2. René W. H. van der Linden
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Correspondence to Piotr Łasak .

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Łasak, P., van der Linden, R.W.H. (2019). China’s Financial Deepening and Its ‘Belt and Road’ Funding Dilemma in a Global Context. In: The Financial Implications of China’s Belt and Road Initiative. Palgrave Pivot, Cham. https://doi.org/10.1007/978-3-030-30118-7_5

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  • DOI: https://doi.org/10.1007/978-3-030-30118-7_5

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  • Publisher Name: Palgrave Pivot, Cham

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