OPINION

Reinvesting Asia's Money in Asian Infrastructure

As Asia becomes increasingly integrated, underdeveloped infrastructure and a lack of connectivity have become a bottleneck that constrains the region's growth. If Asia wants to realize sustainable development, it has to solve this problem.

Development of infrastructure is severely imbalanced between Asian countries, with infrastructure conditions in middle- and low-income countries lagging far behind. In addition, there is a huge financing gap in Asia's infrastructure construction, with many problems remaining to be solved in terms of financing channels, financing measures, financing entities and financing mechanisms. Some Asian countries have low power capacities and can only power their citizens for 10 hours a day. Railways have been out of repair for years; shabby rural highways, power grids, telecommunication and water facilities have seriously affected the livelihood of local residents. Thirty years of experience in China indicates that infrastructure and connectivity are the foundation for increasing jobs, improving people's lives and developing the economy. Investment in infrastructure is not only the new engine for growth in Asian countries, but also a mid- and long-term driver for global economic growth.

Asia's infrastructure development has lagged behind its economic growth, with the quality and quantity of infrastructure conditions remaining far below international standards, therefore posing a threat to the region's future growth. According to Asian Development Bank estimates, a total of $8.22 trillion worth of investment is needed for infrastructure construction in Asia in the coming 10 years, or $820 billion a year, whereas the combined GDP of Asian economies excluding China, Japan and South Korea only reached $8 trillion in 2013. The World Bank says mid- and low-income countries have an enormous financing gap in infrastructure investment. For instance, India needs $1 trillion for its infrastructure construction in coming years, and it can hardly raise that much money, even if it factors in $21 billion worth of loans from the Asian Development Bank and aid from global institutions like the World Bank.

In sharp contrast, Asia has huge foreign exchange (forex) reserves. As of June 2014, the forex reserves of Asian countries had reached an all-time high of $7.47 trillion. Taking China for example, the country's forex reserves have exceeded $4 trillion, making it the world's third largest outbound investor. However, these hefty forex reserves have limited channels and fields for investment. Asia's forex reserves and savings have been invested in the international bond markets in the United States or the EU during the past decades, whereas local economic development, especially infrastructure construction, has remained insufficiently funded.

Moreover, inter-regional connectivity projects, such as Trans-Asian railways and Trans-Asian highways, can hardly be pushed forward because many countries are involved and a hefty amount of investment is required with no returns for investment in sight. Those programs can only be possible with the planning, coordination and investment from a multilateral development organization.

Against this backdrop, China proposed the establishment of an Asian Infrastructure Investment Bank (AIIB) as an innovative multilateral financing platform. Indonesia became one of the bank's 22 prospective founding members, whose collective initial capital totals $50 billion.

The establishment of AIIB will not only forge a solid foundation for Asia's economic growth by offering efficient and reliable mid- and long-term financial support to the region but also enhance utilization efficiency of Asian capital and promote overall connectivity within the region. China emphasizes that the AIIB should follow a principle of open multilateralism and give Asian countries priority in the bank membership process. In the future, the AIIB will become a financing and investment platform by supporting infrastructure and connectivity projects in Asia.

To establish a more diversified financing system in Asia, China's existing investment funds should play a bigger role in financing infrastructure construction, long-term bonds should be issued, and various types of innovative financing instruments should be invented to fund infrastructure construction. Furthermore, private capital should be fully tapped in the process by actively promoting public-private partnership (PPP) so that infrastructure projects can appear more attractive to private investors.

A blueprint to adopt PPP programs in infrastructure construction was passed during the APEC Finance Ministers' Meeting on October 22. Under the guidance of the blueprint, members will create a better environment for the implementation of PPP programs. Multilateral banks can push forward the issuance of bonds denominated by local currency and the development of local debt financing to attract long-term clients who invest in infrastructure-related PPP programs.

Various sources can contribute to infrastructure projects that require hefty investment, including mid- and long-term loans from global financial organizations, financial revenue of local governments, official development assistance from foreign countries and co-financing between domestic firms and financial institutions.

In a nutshell, Asia's savings should be used for Asia's construction to promote Asia's development.

This is an edited excerpt of an article by Zhang Monan, an associate research fellow at the China Center for International Economic Exchanges, published in Securities Times

NUMBERS

1,361

Number of companies listed in China's New Third Board, or the National Equities Exchange and Quotation system as of November 25, which allows for small and medium-sized companies to transfer shares and raise funds

2.09 mln units

China's auto sales in November, up 2.3 percent year on year

$700 mln

Investment to China's popular taxi-hailing app Didi Dache on December 9, marking the biggest investment ever in China's mobile Internet sector

11,114

Number of punishments that China's environmental authorities handed out in the third quarter

1.21 bln yuan

Subsidies to China's 146 small airports for 2015 from the Civil Aviation Administration of China

$600 mln

Amount of money for which Bank of China plans to buy 7 Bryant Park, a 28-story office building in Manhattan, New York City

QUOTE

"The State-owned Assets Supervision and Administration Commission of the State Council (SASAC) is confronted with the pressing need to reform itself...It bit off more than it could chew, and some enterprises are complaining."

Shao Ning, Vice Chairman of the Financial and Economic Committee of the National People's Congress and former Vice Minister of the SASAC, in an interview with Xinhua News Agency