Financial Cooperative Potential Between China and Belt and Road Countries

ABSTRACT

Along with the increasingly frequent economic exchanges between China and the Belt and Road countries (BRCs), bilateral and multilateral financial integration within the region has become a current trend. This article quantifies the level of cooperative potential by designing an index based on the investment demand in China and the financing needs of the BRCs. Using this index, this article analyzes the distribution of the financial cooperative potential among the BRCs and uncovers its influencing factors. The statistical findings are that countries with higher financial cooperative potential have closer economic ties with China. These countries are mostly low-income or middle-income countries with a shortage of infrastructure investment, while their economic development is stable. The research results provide guidance for the overseas strategic layout of the Chinese financial institutions. More funds should be injected into China’s trade and investment counterparts that have stable economic growth and a strong demand for infrastructure investment, such as countries in Northeast, Central, and Southeast Asia.

KEY WORDS:

• Belt and Road countries
• financial cooperative potential
• financial integration

JEL CLASSIFICATION:

• F34
• F36
• F65

Acknowledgments

I would like to show my gratitude to Professor Biliang Hu for his invaluable advice and guidance.

Notes

^1. According to the IMF’s data notes, the FMD index is built on the data on stock market capitalization to GDP, stock traded to GDP, international debt securities of government to GDP, and total debt securities of financial and non-financial corporations to GDP. Therefore, it is a reasonable instrument variable to measure the size of a country’s financial market.

^2. The data source of the annualized real interest rate is the World Bank WDI database. This indicator is drawn by subtracting the inflation rate as measured by the GDP deflator from the average lending rate. It is noteworthy that the terms and conditions attached to lending rates differ by country, which has limited their comparability. However, we were unable to find a more internationally comparable data source than the World Bank and IMF database. Therefore, we still used the real interest rates offered by the World Bank, for international comparison.

^3. The annualized lending rate is sourced from the IFS database of the International Monetary Fund. The exchange rate is the exchange rate of the national currency against the SDR. The currency appreciation rate is calculated by dividing the exchange rate at the end of the current year by the exchange rate at the end of the previous year.

^4. Data source is the IMF’s DOTS database.

^5. The data source for the Financial Development Index is the IMF’s Financial Development databases. The index consists of two first-level indicators and six second-level indicators. Among them, the two second-level indicators are the financial institution index (FI) and the financial market index (FM). The financial institution index covers three aspects: the financial institution’s depth index (FID), the financial institution’s access index (FIA) and the financial institution’s efficiency index (FIE) . The financial market index also covers three aspects: the financial market depth index (FMD), the financial market access index (FMA) and the financial market efficiency index (FME).

^6. “N/A” denotes that data is missing for this country in 2015 and 2016.

Additional information

Funding

This work was supported by the Beijing Normal University [Interdisciplinary Research Project/No. B10.1,Young Teacher Foundation 2017/No. 310422109];China Postdoctoral Science Foundation [Post-doctorate Fund No. 61/No. 212400201];