by David Drake
The Silk Route Fund is one of the Chinese government’s initiatives to expand the country’s agenda for development across Asia. The state-owned investment fund was launched in 2014 and aims at fostering increased investment within the “One Belt, One Road” which covers Eurasia.
China has been ambitious in its plans to increase trade links, especially towards the west and into Central Asia. The initiative intends to revive the ancient Silk Road.
This started taking shape when the government put $40 billion into the fund. The shifting of foreign currency by the government into a special fund has helped the initiative take on a life of its own.
Sourcing for Silk Route Fund Initiative
The Chinese State Council is supposed to tap into the nation’s reserves currencies where 65% of the $40 billion trade and infrastructure financing mechanism is to be obtained. The remaining amount will be sourced from the China Development Bank Capital Corporation, Ltd. (CDB) and the Export-Import Bank of China, two of China’s policy banks, which will contribute 5% and 15% respectively.
Also, the Chinese government’s sovereign wealth fund, the China Investment Corporation (CIC) will contribute 15 percent on the tranche. In case there is higher demand for investment, more funds could be injected into the fund.
The Silk Road Fund happens to be one of the 4 major outbound investment programs that have attracted major financial backing from Beijing over the past few years. The projects are expected to add to the other existing multibillion-dollar funds, which were launched by the Chinese government to support development in Southeast Asia and Africa.
China launched several funds in partnership with other countries, including the $100 billion fund for the establishment of the New Development Bank based in Shanghai. This is a joint venture that brought together China and the BRICS (Brazil, Russia, India, China and South Africa) bloc.
In addition, the bank is expected to help finance infrastructure projects in developing countries, as well as improve resilience against fluctuations of international financial markets for the member countries. The Silk Route Fund is very significant to China due to its perceived influence according to financial experts.
Unlike other funds that the country has previously established and where the stakes are shared equally with its partners, China is the sole funding source of the Silk Road Fund. The brainchild of President Xi Jinping, the fund was proposed in September 2013 in an address delivered at Nazarbayev University, Kazakhstan.
The president was later to sell the idea for the new Maritime Silk Road during his address to the Indonesia’s parliament. Then, President Jinping pitched the Maritime Silk Road and Silk Road Belt initiatives before the APEC conference held in Beijing in November 2013.
This was followed by China announcing the formation of the Fund, with $40 billion added to it boost trade links and finance infrastructure across Asia. Investors were invited to contribute to the Fund.
Xi noted that the Silk Route Fund will admit investors who intend to actively participate, and they will be drawn from Asia and beyond. The fund was expected to benefit only participating countries. However, financial analysts have noted that it has great domestic benefits as well which China is hoping to take advantage of.
Domestic Benefits Arising from Silk Road Fund
It is obvious that China was rooting for the fund with a give-and-take attitude. While other countries will benefit from the fund, Chinese companies will reap big via overseas infrastructure projects thanks to the railroad building and heavy equipment supply by companies such as China Railway Construction and XCMG Group respectively.
China was rooting for the fund with a give-and-take attitude
According to analysts, the Silk Road Fund will help take up some of China’s excessive capacity affecting the manufacturing sector by providing them with business opportunities closely associated with the improvement of the neighboring countries’ infrastructure. The companies also get a chance to expand their business to other regions, as well as expand their client base.
The two Silk Road Initiatives are well calculated since they target countries in need of a solid framework, such as roads and railways but have no sufficient capital to fund these projects. According to the Asian Development Bank, countries targeted by the project have a combined GDP of around $21 trillion, but require an annual infrastructure investment of $730 billion by 2020.
The inter-government cooperation fund will help bridge the huge financial gap in the region. The Silk Road Fund will be managed strictly via a consensus on every decision made based solely on members whose countries will receive the funding. Despite the fact that China is the fund’s originator, negotiations will be necessary for project operations to take place and, also, to get local support.
Possible challenges ahead
There have been other oversea financing initiatives in the past. All these projects were supposed to bring high returns while encouraging bilateral ties between financing recipients and China.
China will also need to balance between economic performance and political inspirations
However, these initiatives were met with many challenges which can be avoided in the Silk Route Fund. One of these challenges was slow growth which falls short of expectations.
Some of the investments have only seen minimal funds put to use due to lack of support from target regions including Africa. As such, caution should be taken when approaching investment proposals, especially in politically unstable countries.
Political stability will be a key concern when deciding on countries and projects eligible for financing. Other risks that the fund is expected to face include tax policies and legal environments in different countries.
The Silk Route Fund management has to seek special arrangements regarding market access and administrative conditions. China will also need to balance between economic performance and political inspirations if the initiative is to succeed.
David Drake is the Chairman of LDJ Capital, a multi-family office; Victoria Partners, a 300 family office network; LDJ Real Estate Group and Drake Hospitality Group; and The Soho Loft Media Group with divisions Victoria Global Communications,Times Impact Publications, and The Soho Loft Conferences. Reach him directly at [email protected].
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