ADB’s loan reform can offer model for B&R financing

As of the end of December, the loan reform of the Asian Development Bank (ADB) had lasted for one year, and with the international rating agency Moody's rating the bank at the Aaa level, it has attracted wide attention from the international community.

This reform not only has had an immeasurable impact on international development finance, but also provides us with abundant experience and a reference to guide domestic development-oriented financial reform and offer more efficient financing support to the promotion of the Belt and Road (B&R) Initiative.

The ADB's practice of combining soft and hard loans is a necessity to cope with the changes in the economic structure, which has had the slowest and weakest recovery since the economic crisis broke out. At the same time, as an important measure to stimulate economic growth, infrastructure investment has large shortfalls in both developed and developing countries. As a result, the ADB has had to explore new paradigms to enhance its ability to raise and lend money.

The reform of the ADB involves merging the two windows of soft loans and hard loans. The soft loan window supplies the Asian Development Fund (ADF), which is an endowment fund with replenishments every four years. This fund mainly provides preferential loans (long-term loans at low interest rates) and grants to disadvantaged countries like Pakistan, Bangladesh, Vietnam, Nepal and Cambodia. Meanwhile, the hard loans window offers ordinary capital resources (OCR), which are quasi-market interest rate loans for middle-income countries. The ADB's reform had the following aspects.

First, there was the integration of the ADF's equity and loan businesses into the OCR's balance sheet. Second, the ADF issued as a grant-only endowment fund for eligible countries. Third, the lender continued to provide underdeveloped countries with expanded OCR concessional loans with the same terms and conditions as ADF loans.

The reform relaxed restrictions on the ADF and OCR, converting the ADF's share capital into OCR capital stock (general reserve component) and making more efficient use of the enlarged OCR balance sheet.

On the one hand, the reforms increased ADB funding for disadvantaged countries (formerly ADF countries) and allowed the countries eligible for ADF access to continue receiving preferential loans from post-expansion OCR on the same terms and conditions as ADF loans.

On the other hand, the reforms increased the non-preferential business from the enlarged OCR and helped to further support the transition from a country receiving only ADF support to a mixed country and from a mixed country to a country receiving only non-concessional funds.

As China's economy follows the new normal trajectory, global economic development is also slowing. Pressure on infrastructure investment will be inevitable. This is because infrastructure investment is constrained by a number of factors, including capital shortages, high costs, long payback periods and unbalanced distribution of benefits. In the case of limited financial expenditure, more financing channels should be considered.

As the B&R initiative proceeds, why don't we draw on the ADB's experience in reform, innovation and development of financing models? We can expand the capital base and increase the liquidity of loans so as to provide more public products to the markets involved.

First, we can offer more favorable terms. There are similarities between preferential loans and preferential export buyer's credit in terms of management agencies, loan procedures and capital investment. We can promote the combination of the two loans at the operational level, endow the Export-Import Bank of China with more decision-making and review power, and enhance its accountability to reduce the risk of loan repayments and increase the capital flow rate.

Second, we can expand mixed loans. We may offer free aid, interest-free loans and concessional loans combined with sovereign wealth funds and commercial loans. These sources will be capable of jointly funding large infrastructure construction projects across regions. By doing so we can give full play to the policy-guiding role of aid funds. We can also flexibly design loan repayment conditions, reduce moral hazard and accelerate the return of funds.

Third, private capital can be mobilized. Some B&R markets have strict foreign exchange controls, making it difficult to repatriate the profits of Chinese enterprises. We can issue bonds and private equity financing in markets along the B&R route and realize the combination of government aid and private capital through such channels as public-private partnerships and build-operate-transfer.

The author is an associate researcher with the Chinese Academy of International Trade and Economic Cooperation.