(Yicai Global) Aug. 14 -- The traditional development finance model may struggle to meet the construction funding needs of the Belt and Road Initiative and the leverage effect should be used to enhance the effectiveness of financing, said Yin Yong, deputy governor of China's central bank.
The traditional model doesn't use the leverage effect of funds well, Yin said at a forum held on Aug. 12.
China can learn from developed countries that efficiently utilize government funds, he added. One example is the US, which ran the USD700-billion Troubled Asset Relief Program from 2008 to 2014 and injected equity to increase the efficiency of funds during the subprime mortgage crisis. The EU also has the Juncker Plan, an infrastructure investment program running from 2015 through 2017. The International Monetary Fund drives private capital investment through the fund and offers assistance to beneficiary countries. It also plays a role in the development of policies for economic reform.
"Take the European model as an example," Yin said. "The leverage can be expanded 15 times. Some EUR33.5 billion (USD39.6 billion) in principal can become a EUR500 billion investment to meet capital demand." This leverage should play a role in making development finance more effective, he added.
Yin believes that equity investment should be used as much as possible to leverage more debt financing and that low-quality capital should be used to leverage more equity investments. He also thinks public-private partnerships can leverage private sector investment and money put into infrastructure and similar plans will leverage more investment from other commercial projects.
Risk can be managed through smaller projects with a stronger focus or through diversification, Yin said. "Countries along the Belt and Road could reach an average annual growth rate of more than 4 percent. If we could get a similar rate of return, it would be very impressive."
Yin believes that as long as investment remains decentralized, financial institutions will be aware of the safety of these funds, which could have good prospects over long periods.
We have a competitive advantage in providing yuan-denominated funds, so the currency should be able to play a bigger role in Belt and Road construction, Yin added.