Complementarity between Regional Comprehensive Economic Partnership (RCEP), the Belt and Road Initiative (BRI) and Internationalisation of RMB
By Herbert Poenisch, international Committee, IMI, former senior economist, BIS
A new world order where China leads the way has only just begun, with RCEP and BRI joining the existing China-led organisations. These are the Shanghai Cooperation Organisation (SCO), the Asia Infrastructure Investment Bank (AIIB) and New Development Bank (NDB). These are only regional organisations. On the global scene China, for the time being, has to join and work with the existing multilateral setup, mostly dominated by Western powers. China has also exerted influence by an increasing number of executive posts at international organisations.While this approach makes sense in the medium term, playing by international rules on a global scale, while setting regional rules, China can cement its leading position in the region under certain conditions which will be spelt out below. Both new regional organisations under the aegis of China offer a chance to underpin the already undisputed economic leadership of China in Asia. It will supplement physical infrastructure investment in progress with further trade integration and other areas of cooperation to strengthen connectivity among partner countries in the Asian region.The issues under investigation here is how these three strategies, RCEP, BRI and RMB internationalisation can complement each other to achieve the mutually beneficial goal for increasing welfare among partner countries. There will be four parts, first the characteristics of RCEP, the characteristics of the BRI, the present state of RMB internationalisation, allcompared with historical examples and finally, how to mobilise synergies between the three, complementing and re-enforcing each other.
Characteristics of RCEP
The signing of the RCEP comprehensive agreement in November 2020 among 10 ASEAN members and 5 major Asian countries aims at strengthening further integration by promoting free trade and investment as well as covering other areas supporting trade in goods and services such as rules of origin, customs procedures, sanitary measures, standards. RCEP goes even further than existing free trade agreements (FTA) as the name ‘comprehensive’ implies. It includes investment, intellectual property, electronic commerce, competition, small and medium enterprises, regional supply chains, market competition, and government procurement.There are already a number of regional free trade agreements (FTA) in various regions of the world. These are the European Free Trade Area (EFTA), which paved the way for some members to form the European Union (EU) and the wider European Economic Area (EEA). In the Americas there are NAFTA, but also Mercosur and in the Caribbean CACM and CARICOM. In Africa there are COMESA, ECOWAS and SADC. The Soviet Union was followed by CIS and Eurasia. Gulf countries signed up to the GCC. In Asia the precursor of RCEP is ASEAN plus one (ie China). All these regional FTAs have notified and are recorded by the World Trade Organisation (WTO).Regarding currencies, most FTAs use the USD but also the currency of the dominant country as unit of account and settlement, such as SADC which uses the South African Rand and the EU which even created a common currency, the euro.The European Union is a unique regional experiment beyond a free trade area. It was based on common values among the founding members but has been seriously hampered by new members joining which do not fully share these values. The result is an organisation with strong internal investment, such as through the European Investment Bank (EIB), free trade in goods and services among members and a regional development budget for weaker members of the community.Some members have even joined a common currency area. Many other areas such as fiscal policy and social policies remain in the national domain. The welfare gains for EU members have been undisputed throughout the region.The RCEP proposal has similarities, joint investment projects to strengthen links and connectivity between countries, moving towards free trade and investment, without infringing on national sovereignty regarding labour, environment, role of the state sector and other areas. A number of RCEP chapters, such as competition are not subject to the dispute settlement chapter.
Characteristics of the Belt and Road Initiative
It is not quite appropriate to call the BRI in its present form a regional multilateral arrangement, as it is a sum of bilateral agreements between China as donor and the recipient countries. It includes countries in other regions of the world among its 70 members. It has five key cooperation priorities, policy coordination, facilities connectivity, unimpeded trade, financial integration and people to people contacts. It has no formal institution, but is under the leadership of the China National Development and Reform Commission (NDRC) as well as the State International Development Cooperation Agency (SIDAC), thus firmly based in the Chinese government structure.Equally, the funding and thus all risks remain with Chinese institutions, such as the three policy banks ABC, ExImbank, CDB, the major state owned banks ICBC, BOC, CCB, two state owned funds, the China Investment Corporation (CIC) and the Silk Road Fund (SRF), and finally three international development banks, the AIIB, the NDB and ADB. The latter have their own risk assessment.From its five cooperation prioritiesit could, however, evolve into a multilateral arrangement with far reaching integration among partners, even further than the EU. Policy coordination among partners is a tall order and difficult to achieve among such diverse countries as the BRI beneficiaries. In the same vein, facilities connectivity will need derogation of national rights in many domains, such as water, energy, transport, communication etc. The need for unimpeded trade is the objective of the RCEP and requires progress in most chapters of the agreement. While RCEP aims at liberalisation of financial services, the BRI aims at financial integration, including coordination of monetary policy and set up of financial institutions. Such ambitious endeavours are difficult even in the EU, where coordination of monetary policy among euro members and non-euro countries and setting up financial institutions under the EU passport scheme are ongoing challenges. Finally,the demand for people to people contacts is also included in the RCEP under movement of natural persons.The present undertaking follows historical examples where prosperous countries entered into generous arrangements with partner countries for the benefit of allegedly both, donors and recipients. In the 18th and 19th century the colonial powers, first and foremost, Britain undertook extensive infrastructure projects in its colonies for a one sided benefit. Another example is the US foray into Latin America in the early 20th century, another one the generous assistance of the Soviet Union to countries in its orbit, but also the Japanese attempts to share their prosperity with selected Asian countries. In all these cases, the experiments ended up with losses on the side of the donors and disappointment of both sides. The imbalance of economic and political power prevents the evolution of a real partnership, except under Marshall Plan type arrangements.China has pledged USD 1tr or 6.6% of its 2019 GDP for the BRI projects, most of them in the form of loans, with some concessions. Loans have been extended mostly in USD by the financial institutions above.This creates additional risks as neither donor nor recipients can create this currency. Rather both of them might suffer liquidity shortage such as during early 2020.Indicators show that China is already experiencing some limitations, with new lending for BRI projects being cut back by one third in 2020. Reportedly renegotiated projects reached already 25% of the total. In addition, extending the donor ship to other countries as was offered in the BRI Forum 2019 has not materialised. Regarding progress there have been no new entries on the BRI website for 2019 and 2020. Not even the Joint Communique of the 2019 BRI Forum has been posted. It seems that there are now news since August 2018.There are indications that there has been a reassessment of risk borne by the Chinese financial institutions, first and foremost the policy banks and the major commercial banks, but also Chinese enterprises building the projects for which they receive domestic credit. The overall risk is borne by the Chinese central government which provides explicit and implicit guarantees.It is suggested here, that turning the BRI into a transparent structure with well defined realistic goals with clarity as far as participants as well as financing mechanisms would put the project on a sound footing, which can be paired with the RCEP. Overambitious targets and overlaps should be avoided.A model which offers itself is the Marshall Plan after WWII. In that case, the donor country, the USA provided assistance to needy countries after the destructions of the war. Assistance was provided in the form of donations of a defined sum, amounting to 2% of US GDP at the timeby the US Congress. The funds were in USD and channelled into the European Recovery Programme (ERP) which monitored the utilisation of funds. The aim was to assist countries in becoming mature trade and investment partners.The USA realised that without such a programme, reviving trade would be close to impossible. The Plan originated from a ‘mixture of national interest, prejudice, goodwill and misinterpretation of history’. In its result it ‘should be thought of as a large and highly successful structural adjustment program’. At the time, the IMF, whose mandate was and is until today, the financing of structural adjustment and elimination of exchange controls just got off the ground. Thus the USA alone took on this ambitious project.The USA insisted on multilateral trade policies replacing bilateral agreements and exchange control. Under US pressure the programme was institutionalised when the Committee for European Economic Cooperation (CEEC) was set up to ensure further European economic integration as condition for substantial aid. A permanent organisation, the future Organisation for European Economic Cooperation (OEEC)was set up in 1948. This was later converted into the present Organisation for Economic Cooperation and Development (OECD)
RMB Internationalisation
This strategy which was launched in 2009 developed momentum until 2015 but progress has been slow since then. The annual reports on RMB internationalisation by the Peoples’ Bank of China and the International Monetary Institute which were published in mid year report progress in this area. It seems that the strategy has not had whole hearted support neither from official players nor from the financial markets, this points to some doubts and concerns about the possible fall out from RMB playing an international role as reserve currency. The timid internationalisation of the JPY which never took off in the 1980 is still a vivid memory. These concerns are voiced by academics, such as the need to run current account deficits to provide the world with RMB liabilities. Practitioners worry about putting the national currency at the whims of international financial markets. Evidence of these concerns are the hesitant opening up of capital controls.However, international financial markets have pushed Chinese authorities in the direction of a greater reserve role of the RMB. They are currently investing massively into Chinese assets, encouraged by the better performance of the Chinese economy, expectations of higher returns thanks to higher interest rates and expected appreciation of RMB. Chinese authorities have welcome these capital inflows, opening up on the inflow side. Foreign investors which make up only 4% of the Chinese stock market and bond market are not expected to cause increased RMB volatility. This share is low compared with 40% of US equity and 36% of US government bonds (down from 45% in 2008). Chinese authorities have mentioned a cap of 15% of government securities owned by foreigners. They have not yet acknowledged fully embracing the v role.Both Chinese projects, RCEP and BRI do not explicit include the RMB internationalisation. RCEP could have stipulated an increased use of RMB for denomination and settlement of increased trade in goods and services. In addition, the use of the China Interbank Payments System (CIPS) for RMB clearing has not been postulated. Equally, the BRI financial cooperation priorities do not mention enhanced use of RMB for project financing. As the whole BRI is under Chinese control, it would be simple to impose RMB for accounting as well as settlement currency of BRI projects, as the USA insisted for its Marshall Plan assistance.
Complementarity between RCEP, BRI and RMB internationalisation
In their present form, there is limited complementarity between these two organisations. They can be pursued independently of each other. However, as China endeavours for a new world order it would make sense to make them consistent and mutually supporting each other.There are major differences between the two organisations, such as the composition of members. While some homogeneity will help to move the common agenda forward, such as in the case of EU, the members of RCEP and BRI are a jumble of countries without much in common. The lack of a common purpose will not support a genuine partnership but lead to frictions sooner than later. The Chinese notion of harmony, which might be called a win-win situation will become threadbare soon.While RCEP acknowledges that membership comprises countries at different level of development and the BRI strategy is clearly aimed at less developed countries, this offers only short term respite from unequal partnership. Most of them have one dominant partner facing a number of less developed dependents, rather than partners. Foundation ASEAN is burdened with countries at different stage of development, such as Singapore versus Laos at the extremes. Adding China to form ASEAN plus 1 has sharpened this disparity.Whereas the RCEP is a multilateral agreement, the BRI is based on bilateral relations between China as donor and recipient countries, in a hub and spokes model with very limited links between the members on periphery. There is little transparency and contact between members on the receiving end. There is a lack of clear status of membership, no list published, no list of BRI projects with financing, let alone partners, such as creditors and debtors, contract details and conditions.Regarding investment, the RCEP contains provisions covering the four pillars of investments: for protection, liberalisation, promotion and facilitation. These go beyond their multilateral obligations under the WTO Trade Related Investment Measures (TRIMS). So far BRI projects have no such safeguards and are subject to an undisclosed bilateral agreement between the donor, usually a Chinese enterprise, the Chinese government or a Chinese bank and the recipient, usually a government or government sponsored enterprise. Complaints have been aired that there is no tender and transparency of conditions which are subject to bilateral negotiations. Implementation is by Chinese enterprises and financing is provided mainly by Chinese banks, including the policy banks.Moving forward in making RCEP, BRI and RMB more complementary the following steps should be taken. BRI should create the physical infrastructure first and foremost in the transport, energy and communication sectors plus digitalisation. RCEP should facilitate trade, investment and other applications such as telecommunication along these new lines of connectivity.Refocus the organisationsWhile RCEP has been signed and is in the process of ratification by members countries, the changes would affect mostly the BRI and RMB strategy. The BRI should be set up as a separate multilateral organisation, with a clear mandate, operating principles and secretariat. The Marshall Plan could serve as a case study.The aim should be confined to investment and connectivity only. The other cooperating priorities should be dropped. Policy coordination is a tall order which touches on national sovereignty. Unimpeded trade is the main aim of RCEP. Equally, financial integration should be taken from the annex on financial services in RCEP. There should be no references to monetary policy or criteria for setting up financial institutions. These touch again national sovereignty. Finally, people to people bonds are included in RCEP under the Temporary Movement of Natural Persons chapter.The mandate should be a partnership, similar to RCEP with a number of donors and partners. The mandate should be confined to creating the physical infrastructure and connectivity such as the digital silk road. The mandate should clearly stipulate that the physical infrastructure should allow recipient countries to graduate into genuine partners. Only if they can efficiently use the real infrastructure to strengthen their position as trading partners will they be able to generate enough income to service their debt. Some projects might have to be scaled back to ensure sustainability.The operating principles should include the usual project parameters. These cover tender processes, technical specifications, implementation schedule as well as after sales services. They would also state the financing terms, whether on commercial terms or with concessionary components. The projects should be denominated and financed in RMB, thus boosting its internationalisation.Using RMB has the clear advantage that exchange rate and liquidity risk are reduced. Chinese enterprises account in RMB and financing institutions have ample RMB liquidity. Reducing exchange rate risk will put Chinese bidders in a favourable bidding position.A permanent secretariat would lend increased visibility to the BRI. This would make it easier to interact with other donors, who would be more inclined to join a transparent project in the tender process or as cofinancing institutions. The financial aspects of projects as well as the bilateral partners could be easily analysed and opened to foreign investors, such as through securitisation of BRI loans by the participating financial Chinese institutions. The BRI should use the present favourable attitude of foreign investors to Chinese assets. BRI could offer such RMB denominated assets with various forms of Chinese government guarantees.For BRI member countries not joining RECP, such as in Africa, Middle East, Eastern Europe and the American continent, a BRI secretariat once set up could consider joining the UNCTAD initiative ‘financing for development’. After all, UNCTAD is already working with the major international organisation in furthering partnership through trade and investment in an UN environment which China is broadly supporting.
Conclusion
In its present form the RCEP, BRI and RMB are standalone arrangements under Chinese leadership. It is up to Chinese authorities to adjust these programmes, to integrate them in order to achieve complementarity and to use the synergies for the common benefit. While it is clear that they support each other, it has been suggested here how to adapt them to become mutually supportive. Clarity of purpose, with explicit interlinked mandates, offering transparency of the mutual contributions will show China’s partners, first and foremost in the Asian region how enhanced infrastructure investment will allow trade to flourish. They will see that benefits will arise for both sides, the donors and recipients, increasingly putting welfare gains for all partners within reach.