I. Introduction
In the first decade of China’s Belt and Road initiative (BRI), much scholarly focus has accumulated on the emergence of this imaginative and grand connectivity effort in the development of the world economy. This focus has ranged from the critical to the descriptive, from the sycophantic to the quixotic. Legal scholarship has, however, been fragmented, although by no means absent—despite the opaqueness in the BRI legal instruments involved, and the lack of clear governance structures involving the initiation and implementation of the BRI. Some fundamental questions have been addressed viz., the largely soft law character of the modus operandi in the establishment and implementation of the BRI with the respective partner countries; the international heritage of mankind and international public good character of the BRI; and the endeavor to discern the appropriate applicable law governing the BRI. Moreover, so much has now emerged, both in practice and scholarship, that it is possible to frame certain fundamental questions concerning the BRI’s coherent development within the international monetary and financial system. In this paper, BRI tensions with the institution of the IMF and its law are the subject of focus, from the standpoint of coherence in international monetary and financial policy formulation and implementation.
Coherence here refers to consistency and compatibility of the relationship between China’s BRI and the functions of the IMF. It refers to coherence of the BRI with international monetary law and the international economic system as a whole. But its significance in legal analysis is, as Thomas Franck put it, in the holistic manner in which it allows for a rule to be located and understood; in its connectedness with the greater whole and particular fundamental principles within it; and in the legitimacy it accords to a normative framework, in particular the compliance pull it contributes to.
But what of legal analysis in the monetary sphere—which also has a soft-law modus operandi as the BRI? A strictly legal approach does not sit generally well in international monetary relations. But nevertheless, it is there and needs to be understood—just like “minimal art” is recognized as art. Moreover, to speak in the nomenclature of law, of norms, of codes, of soft law, of nascent law, indeed even of “normative impact” could be considered heresy in the diplomatic sovereignty obsessed world—in particular in the realms of international monetary diplomacy. Such construction and deconstruction could even be considered a spoiler in the underlying long-term strategy to design orderly monetary conditions. But in important spheres of International Economic Law, soft law approaches are notable. Thus, the International Centre for the Settlement of Disputes (ICSID) is said to have been initiated as a dispute resolution mechanism to bring normative order in the investment sphere, given the reluctance for a multilateral investment agreement at the time of its creation. It has become increasingly apparent over the years that it has served to spawn a law on international investment. Similarly, the IMF Stand-by Arrangement, a principal vehicle for imparting IMF Conditionality, expressly negates the idea of it being a binding international agreement, inter-alia on policy grounds to massage the sovereign egos of sovereign borrowing member States. Moreover, IMF Article IV surveillance exercises are consultations that involve advice to the member(s) undergoing surveillance of a “best efforts nature” without necessarily binding consequences as such. But they can have a normative impact incrementally given that some of the deliberations are now being published—and centre around a discussion not only partaking of economic analysis, but also of conformity with different sets of voluntary codes and obligations under the IMF Articles of Agreement of a member. In the same vein, the WTO Trade Policy Review Mechanism expressly carries with it the proviso that the reviews are not intended to have legal significance.
This soft law sophistication (or perhaps sophistry in political economy) in international economic relations doubtless has served well the international community in ultimately injecting order where otherwise order as such would not have been accepted. But in an independent scholarly focus there is room (nay need) to flash out shades of normativity and normative impacts to engage in their further development. This is because first, normative impact that is consequential to consultations, technical advice and financial health checks (without prejudice to their intrinsic need and merits), are primarily driven by international civil servants (albeit well qualified and experienced), who may have national blind spots. Second, and related, lack of transparency and due process in formulating norms can potentially produce incorrect results. Finally, seemingly technical issues, for example, crystalising a technical concept of debt sustainability, could displace national value judgments—to the extent there is a permissible margin of discretion here—about allocation of burdens between current and future generations; about inculcating important social objectives in the conception of debt sustainability; national judgements about the degree of reliance on domestic capital assets and natural resources; about national choices in availing of cost benefit analysis in taking risks—indeed, even national aspirations in engaging in universal benevolence and constructing a multilateral architecture for mankind.
It is against this background that the focus in this paper is set viz., of two different regimes with traits of soft law. The primary purpose of this focus, however, is to highlight the challenges for the IMF in ensuring coherence in the international monetary system from a legal and policy perspective in the light of China’s BRI, against the background of Fund Conditionality and IMF surveillance exercises underpinned by IMF law. The lessons from the IMF practice can form the basis for a discourse on the establishment of a coherent governance framework for the BRI. In this endeavour, the paper ends by opening a discourse on the possible codification and progressive development of existing BRI governance related practices.
A. Basic Introduction to IMF with Reference to BRI
The IMF is the principal international institution charged with the organization of some core international monetary functions. These include balance of payments assistance; ensuring currency convertibility and international payments, exchange rate stability; and provision for international liquidity. In fulfilling these objectives, the IMF makes provision for good governance “that aims to promote more systematic, effective, candid, and evenhanded engagement with member countries regarding governance vulnerabilities—including corruption—that are critical to macroeconomic performance.” This focus is wide ranging to include: “(i) fiscal governance; (ii) financial sector oversight; (iii) central bank governance and operations; (iv) market regulation; (v) rule of law; and (vi) Anti-Money Laundering and Combatting the Financing of Terrorism (AML/CFT).” Moreover, members of the IMF are obligated to cooperate with the IMF and its members—given that it is the principal and “permanent institution providing machinery for consultation and collaboration on international monetary problems.”
Against this background, China’s BRI raises a number of important questions in the monetary sphere that call for some legal analysis. First, how does the BRI impact on efforts at adjusting temporary balance of payments disequilibrium of a BRI recipient country? Relatedly, how does it interact with IMF advice under IMF conditionality and surveillance exercises? What kind of attention, if any, has BRI attracted in IMF conditionality and surveillance exercises? Second, is the lack of transparency in BRI arrangements a problem for the IMF in its lending operations and associated conditionality designs? Is it a problem in the IMF’s conduct of its surveillance exercises? Is there an IMF transparency obligation here that is implicated? Third and related, how does the flow of RMB to and from a BRI recipient country affect the exchange rate of the recipient BRI country? In economic terms, does the internationalization of the RMB assist recipient BRI countries, and what consequences are there in terms of IMF obligations on exchange rates and the multilateral payments system? Finally, does BRI implicate the application of IMF good governance codes, and if so which ones?
Moreover, there are bigger questions here viz., what should the role of the IMF be with reference to BRI? Should the IMF be a facilitator for the BRI? A policeman or an international monetary coordinator? Should the IMF BRI focus be through the IMF mandate lenses alone? How can the IMF engage in a focus on the BRI through a BRI recipient country alone, and/or China? Or can it be done more effectively through a regional focus—assimilating BRI countries to a “region”—or through an overarching governance concordat, involving multiple stakeholders?
Prior questions for the IMF are: does it have the mandate to focus on BRI issues as such, beyond the scope of its expressly set out mandate? Should the IMF be concerned of the impact of the BRI on its own competing policy advice functions? Should the role of the IMF be expanded to act as an independent observer to ensure level playing fields for BRI recipient countries, similar to domestic systems such as the Financial Ombudsman or the Financial Conduct authority in the UK? Alternatively, to what extent does the IMF need to further coordinate its focus with other related institutions, such as the Financial Stability Board and the World Bank Group?
This framework of BRI-related questions referencing the IMF involve questions of law, economics, and facts. They also need access to both BRI related documents and IMF related materials, some of which are not normally available in public (for example, details of IMF stand-by arrangements of BRI recipient countries). In particular, they involve questions that touch upon the very architecture of the global monetary and financial system. In this paper not all of the questions raised herein will be addressed specifically.
There is now a special new international lender directly in the form of a State on the international plane. Special because of the scale of the resources involved in the lending; the range of the recipient countries; the nature of the purpose of the lending that has an almost indelible effect on the development of the BRI recipient countries; the nature of the conditions (or lack of) attached to the lending; the lack of overall transparency including in relation to the domestic governance framework within which the BRI is set. Some of these considerations in themselves may not be eye raising but when they coalesce together, they raise questions for discourse. Moreover, they raise questions regardless of which country is involved. Indeed, other countries have also been involved in international lending including for infrastructure purposes; such lending has been the subject of international discourse, including by this author.
II. The IMF Mandate and BRI?
There are three standpoints from which this question can be considered. First, from a focus on China’s obligations as set out in IMF law. Second, by reflecting on a BRI recipient member’s obligations and expectations under the IMF. And finally, with respect to the Fund’s responsibilities as set out in its mandate as informed by its general objects/purposes under Article I of the IMF Articles of Agreement.
A. The International Balance of Payments
1. China and the IMF
China’s obligations as set out in IMF law with respect to its balance of payments surplus are clear at one level—given that there are no express obligations concerning them set in the IMF Articles of Agreement as such. But does that in itself displace any IMF focus on them? This is because the thrust of IMF focus on balance of payments has historically been on balance of payment deficits. Thus, relevant IMF references to balance of payments empowering the IMF and imposing responsibilities on members—such as “maladjustments” in balance of payments, “balance of payments problems;” and “orderly underlying conditions that are necessary for financial and economic stability” have been understood in terms of deficits. Although, these terms are inherently ambiguous. In contemporary times, the spectacle of a member of the IMF having massive balance of payments surpluses is a noticeable phenomenon. Indeed, it is conceived in the US’s lenses as a “maladjustment” that needs to be addressed through increasing domestic demand.
There is no definition as such in Fund law of what constitutes a “balance of payments.” There is some evidence to suggest it might have been deliberate, given the difficulty in arriving at a satisfactory definition. The general assumption is that the reference is to an accounting balance (i.e., the national account) with a record of the economic transactions during a given period, between its “residents” and “residents” of the rest of the world. This is underlined in an authoritative Fund publication on balance of payments itself. Moreover, it covers a balance of payments framework for all types of economies.
The nature of the disequilibrium that is of primary IMF concern in disbursing the Fund’s financial resources is a deficit in the current account balance that is of a temporary nature. But even in terms of this focus, the nature of the balance of payments disequilibria as set in the IMF is not free from ambiguity—both in its economic and non-economic aspects. First, it is not entirely an economic phenomenon. It is in fact, as Machlup put it, disequilibrium with “built-in-politics” or “disguised politics.” Economists are divided as to the correct method of analyzing the balance of payments. The difference of opinion is between conceiving equilibrium in a normative sense, and in a value-free sense. By equilibrium in a normative sense is meant a conception of a desired balance of payments equilibrium that includes certain objectives, e.g., levels of inflation and employment. These objectives are based on value judgments as to what is a desirable state of affairs. The equilibrium is normative because with regard to these objectives it dictates a certain course of action. In contrast, balance of payments equilibrium in a value free sense is an equilibrium which does not have incorporated therein other value derived objectives, and is concerned solely with balancing the account. The point of interest in legal analysis is whether the concept as used in the Articles of Agreement of the IMF is purely neutral and descriptive or in fact evaluative and normative. By analogy, a member’s debt sustainability, a concept of particular interest in the management of the BRI, also posits the same question.
The Articles of Agreement refer to equilibrium with a normative orientation. The equilibrium is normative because it tends to urge a course of action that is infused with social goals. However, the precise goals incorporated formally into the concept of equilibrium by the Articles of Agreement and generally in the Fund’s law are somewhat elusive. Article 1 subsection (v) sheds some light in its proscription of a current account equilibrium, resulting from national measures that are destructive of national or international prosperity. A current account equilibrium by force of abstention that is detrimental to “national and international prosperity” could constitute a balance of payments disequilibrium or problem. The considerations of “national and international prosperity” in article I subsection (v) are ones that a member needs to take into account in addressing its balance of payments. This includes for example, inflation, employment, growth, the absence of restrictions over capital transaction, the equitable distribution of wealth, and even arguably sustainable development. In sum, whilst the framework for addressing “maladjustments in . . . balance of payments” in a manner that is not destructive of national and international prosperity infuses some clarity into the equilibrium conditions, it is nevertheless also of panoramic scope. It raises the question whether States have delegated to the IMF such a carte blanche of social objectives to legislate—through the Fund’s notion of balance of payments equilibrium. Certainly, the Fund’s practice over the years has been to work on this basis. To what extent is the Fund’s debt sustainability analysis informed with this balance of payments equilibrium approach?
Second, it is not clear whether the internal attention on the balance of payments equilibrium focusing on the coverage of the current account deficit, albeit in the normative sense, precludes an evaluation of a balance or balanced relationship as between the different accounts within the overall balance of payments account—in particular in terms of a balanced relationship as between the current account and capital account. In other words, does a disproportionate surplus capital account partake of a balance of payments disequilibria? After all a disproportionate surplus could potentially be a concern to international prosperity in the same manner as unbridled capital liberalization could create havoc in the international economy. Moreover, the state of the capital account has a bearing, for example in the evaluation of the optimum employment rate in the analysis of the current account balance.
In sum, the IMF has the mandate to focus in a holistic manner on the balance of a member’s balance of payments. Does it have a mandate to formulate policies generally concerning a member’s balance of payments? Certainly, the Fund has been so mandated when a member has the need to use the Fund’s resources. The parameters for the formulation of such policies when the use of Fund’s resources come into play are normally to a current account deficit that partakes of a temporary balance of payments problem. Although of late the Fund also has focused on availability resources to address capital account pressures. Thus, Article V Section 3 specifically empowers the Fund to adopt “special policies for special balance of payments problems” in imparting its financial resources to its members. There is, however, no express prohibition on the Fund to formulate policies generally outside this framework. The policies so formulated, however, would lack an effective process for their implementation unless there was an express consent for their formulation and application.
2. Gathering of Information for Balance of Payments Evaluation
The Fund in fulfilling its mandate to focus on balance of payments problems has the authority to gather information and therefore certainly can ask questions. Thus, the Fund has wide ranging powers to “require members to furnish it with such information as it deems necessary for its activities” concerning “international balance of payments, including (1) trade in goods and services, (2) gold transactions, (3) known capital transactions, and (4) other items.” But the powers to enforce the furnishing of information have a soft streak to them.
First, to note is that the furnishing of the information has to be to the best of the member’s ability. Thus, there is no breach of the obligation to provide information if the member is unable to do so. Second, the Fund’s ability is qualified by the requirement that “the Fund will give the member the benefit of any doubt” in its evaluation of the member’s ability to provide information. Third, the process of enforcing the determination of a member not providing information requested is fairly straddled starting from action taken by the Managing Director to actions taken by the Executive Board upon the MD’s request. These involve further requests for the information with various deadlines failing which a series of decisions can be taken by the Executive Board starting from Declaration of Censure to a declaration of ineligibility to use Fund’s resources—and further failing that to the suspension of the voting rights of the member, and finally the compulsory withdrawal of the member from the Fund. In practice, decisions of the Executive Board are made through consensus, including the consensus of the offending country. But the consensus is set against the backdrop of the distribution of the weighted voting rights of the members. A decision by the EB to force a compulsory withdrawal would require seventy percent of votes. If the U.S. and European Union countries joined together, they could block an expulsion of any of them as a bloc—however securing a seventy percent vote against China could be tricky (even taking BRI countries into account) although not impossible. But China is best located within the IMF rather than outside it—for all relevant stakeholders.
The Fund’s ability to obtain information needs to be considered against the background of various standards and codes mostly administered through voluntary mechanisms that promote transparency nationally as a matter of good governance. The consequences of this domestically initiated transparency indirectly could also afford external access to relevant domestic information. This is of course particularly significant where such systems of governance are wanting in terms of capacity and/or cultural or political traits. These fall into two broad categories: (1) the Transparency Standards and Codes which include the data dissemination standards and quality framework, the fiscal transparency code (FTC), and the monetary and financial policy transparency (MFPT) code; and (2) Standards and Codes relating to the financial sector which includes financial supervisory standards for banking supervision (BCP), securities regulation (IOSCO), and insurance supervision (ICP), and standards for financial market infrastructures (FMI) and crisis resolution and deposit insurance (CRDI). The implementation of these can be linked to surveillance and use of Fund resources. Their main focus has been in bringing transparency to the public in the work of domestic fiscal, financial, and monetary public institutions (contra private) in the interest of the domestic economy.
One discreet point here that needs to be noted is with respect to state-owned enterprises (SOE) in China. These can be vehicles of lending for China as much as beneficiaries of contracts arising from the infrastructure projects for which the lending is made. In this respect, given the controversy in world trade of the status of a SOE it is a good question to posit here what the status of a SOE lender is in this discourse on BRI and the international monetary system. Transparency with respect to them would assist in this discourse.
3. Balance of Payments of BRI Recipient Countries
BRI recipient countries when faced with a balance of payments current account deficit and needing to avail of Fund resources to alleviate the disequilibrium are the subject of IMF Conditionality, which may not sit well with BRI commitments. IMF Conditionality emphasizes demand restraint. This essentially involves fiscal and monetary disciplines through “the limitation of public expenditures and the increase in public-sector revenues to reduce or eliminate the expansionary impact of public-sector financing requirements and the limitation of domestic credit expansion.” BRI by its very nature is a force in the other direction. Moreover, even if a member is not on a Fund assistance program, the IMF has opportunities to consult the member about BRI issues, in particular debt sustainability through bilateral and “multilateral surveillance including the World Economic Outlook and discussions of capital market developments, advice to members on the voluntary adoption of appropriate standards and codes, and the provision of technical assistance.” Further, where a member is involved in a Fund-supported program for balance of payments alleviation, the Fund could impose limits on foreign debts in the form of performance requirements, which would concern BRI engagements. The Fund can also prescribe public debt and foreign debt transparency before disbursements are made; full disclosure on BRI engagements specifically upfront; adoption of the Code of Good Practices on Transparency in Monetary and Financial Policies; and avail of the Joint IMF-WB Multipronged Approach to Address Debt Vulnerabilities in particular the debt transparency element of this approach by injecting it in the program of the BRI recipient country.
In the context of a member availing of Fund resources and BRI there is some evidence that aggregate figures of Chinese loans in some cases have been accounted for. It is possible in such circumstances that the BRI recipient country’s obligations of confidentiality technically could be affected with China under agreements with it, depending on the terms. Could the BRI recipient member’s obligations under any bilateral agreement with China (assuming that bilateral agreement has any status under the Vienna Convention on the Law of Treaties and Article 102 of the UN Charter) be informed in their interpretation by the obligations “to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates?” In this paper it has not been possible to systematically review all the IMF input concerning BRI in IMF arrangements for the use of its resources as these are not systematically available nor completely accessible to the public.
B. IMF Surveillance
IMF surveillance is conducted at the country, regional and global levels—although the bilateral surveillance exercises comprise the principal surveillance activities of the Fund. The Fund’s mandate to conduct surveillance is set out in Article IV of the IMF Agreement and the Executive Board Decision on Bilateral and Multilateral Surveillance over Member’s Policies. Authority to conduct surveillance is found in the member’s obligation to collaborate with the Fund in order to assure orderly exchange arrangements, and a stable system of exchange rates; as well as the express authority given to the Fund to exercise firm surveillance for such purposes. The obligation to collaborate gives the Fund much room for the determination of the criteria for collaboration. Similarly, a member is obliged to provide information to the Fund in order to facilitate surveillance, and to consult the Fund when requested.
Surveillance essentially consists of consultations between the IMF and a member, conducted on an annual basis, and is confidential. In passing it may be observed that the effectiveness of this process, especially in relation to more powerful economies, has been questioned. But increasingly the outcome of the deliberations with the consent of the member involved are published and certainly these need to be considered to see how effective the IMF advice has been on BRI through this process.
The mandate for IMF surveillance at the bilateral level pertains to a member’s exchange rate and domestic policies. This is defined now in terms of external stability which forms “the organizing principle” for bilateral surveillance. Thus, the 2012 decision defines the surveillance mandate as pertaining to exchange rate policies as well as domestic “monetary, fiscal, and financial sector policies (both their macroeconomic aspects and macroeconomically relevant structural aspects)” as they impinge on the member’s external stability. A member’s external stability is a reference to its balance of payments that is not disruptive of exchange rate movements.
In the context of the IMF’s mandate as it relates to surveillance, the nature of balance of payments that is of concern is much wider. In particular, it is not conceived just in terms of a balance of payments deficit, as in the case of IMF Conditionality. Moreover, the range of domestic policies that are implicated is also wide. They include the “size and sustainability of capital flows against the background of [a member’s] reserves,” the impact of domestic policies on the “stability of the international monetary system,” and “pre-empting and mitigating adverse spillovers.” Indeed, to labour the point they include gender imbalance and climate change. There are two caveats however. First, that surveillance mandate cannot be used to broaden the scope of China’s obligations under IMF law. Second, that compliance with IMF advice on domestic economic and financial policies under Article IV Section 1 is of the nature of “best efforts.” In sum, there are a range of issues here that fall within the purview of Article IV bilateral and multilateral surveillance exercises. Thus, the ambit of China’s BRI could impact on relative exchange rates of the RMB and BRI countries’ currencies; debt sustainability of BRI countries; environment and climate of BRI countries; the nature of the debt exposure of Chinese lending banks; and the coherence of IMF policy advice to its member BRI countries. All of this set against the background of China’s massive foreign currency at $3.288 trillion in August 2024 which has a relevance not only internally but also externally. There is alas not much of significance in the IMF multilateral surveillance exercises between 2013 to 2023 specifically on BRI in the main multilateral surveillance publication of the IMF viz., the World Economic Outlook. A brief mention however is made on its spillover impact in the 2024 World Economic Outlook.
1. IMF Bilateral Surveillance Exercises of China as It Relates to BRI in Practice: 2013-2024
Not surprisingly IMF Article IV surveillance exercises involving China have focused on China’s BRI. In the case of China, the policy advice seems to have had some impact in the way the BRI initiative has evolved. The following can be observed from the IMF’s publicly accessible Article IV Reports—since the inception of BRI in 2013 to 2024.
The first occasion BRI has been referred to expressly is the 2015 Report. The reference here is brief and essentially declaratory emanating from China—expounding the positive contribution this scheme promises to play in integrating and connecting different economies through various infrastructure projects and trade. There are no statistics or specific analysis/review conducted by the IMF in the Report. In the 2016 Report there is no specific reference to BRI nor are any specific statistical data on it. In the 2017 Report, the Fund specifically mentions the BRI with a cautious welcome although with some caveats as follows:
“The ‘Belt and Road’ Initiative (BRI) could foster multinational cooperation in trade, investment and finance, bringing much needed infrastructure and connectivity to the region. Fully reaping the benefits of this initiative will require strong governance of projects to make sure that they are financially viable and that the recipient countries have sufficient institutional and macroeconomic capacity to manage them.”
There are however no detailed statistics relating to BRI in the Report (viz., detailed number of loans/infrastructure projects/amount of BRI related capital outflows); nor any explanation as to the basis for suggesting the need for “strong governance.” Neither is the required capacity for management of the projects by the beneficiary countries is alluded to—given that there ought to be an expectation of due diligence on the part of the lender in project lending as to the viability of the project. Although some general observations are made viz., strengthening regulatory and supervisory efforts and improvements in data availability for effective surveillance.
The 2017 China Article IV Annual Surveillance exercise was coordinated with China’s Financial System Stability Assessment (FSSA). The 2017 FSSA Report came out in 2017. The FSSA is set up under the Fund’s Financial Sector Assessment Program (FSAP). The FSAP is concerned with the resilience of the member’s financial sector through a focus on “on risk analysis, oversight, and safety nets.” China is one of the significant countries that is subject to a mandatory review. The 2017 FSSA Report did not focus on China’s BRI considering essentially the country’s financial sector as it serves and impacts on the domestic economy. But the IMF Executive Board has now emphasized that a member’s financial sector should also be focused in terms of its spillover effects. It has stressed the importance of “heightened scrutiny” of “the spillover effects of the financial sector policies of . . . members, given the risk that they may undermine global economic and financial stability.” In 2024 a FSSA of China is scheduled. It will be interesting to see if there is a focus on the spillover effects of the BRI.
The 2018 Report contains some specific suggestions by the Fund relating to BRI, as follows:
“The BRI has great potential for both China and participating countries. It could fill large and long-standing infrastructure gaps in partner countries, boosting their growth prospects, strengthening global supply chains and trade, and increasing employment. In addition to more opening up by China, the success of the Initiative would be boosted by: a clearer overarching framework governing BRI investment, better coordination and oversight, more focus on debt sustainability of the partner countries, and a transparent mechanism for dealing with project disputes, non-performance and debt service problems, as well as more open procurement and greater transparency over contracts. Supporting capacity development in BRI participating countries (as is part of the agenda of the new China-IMF Capacity Development Center) would also help deliver the economic benefits of investment.
Authorities’ Views. The authorities agreed with staff on the potential benefits from the BRI and policies to maximize them while managing risks, but thought staff had overstated concerns. In their view, project selection and governance were decisions of market entities and were already strong, though they saw scope for further enhancing coordination among agencies and risk assessment.
Many EDs have shown their interest in the Belt and Road Initiative and kindly reminded the authorities of the need to manage various risks. We appreciate the wide recognition of the great potential benefits of the initiative, and in China we are willing to listen to constructive advice and feedback. Also, we welcome broad participation and a joint sharing of risks and benefits. In his recent meeting with the World Bank President, Jim Yong Kim, President Xi made it very clear that China will promote the Belt and Road Initiative based on relevant international standards and rules.”
The 2019 Report continues along the same lines:
“External lending frameworks should be strengthened to support its effectiveness for both partner countries and China. China’s external lending, such as through the Belt and Road Initiative (BRI), has the potential to bring significant benefits to partner countries by directing financing to much-needed infrastructure projects, strengthening bilateral trade, and deepening global value chains. A framework that promotes greater coordination, cooperation, and transparency would help maximize the benefits of China’s external lending to partner countries by directing financing to most needed infrastructure projects. Enhanced debt sustainability monitoring, improved trade policies and customs procedures, and exchange rate and financial sector policies are key. The authorities’ new BRI-Debt Sustainability Framework (DSF) is a positive step to enhancing discipline in external lending and should be complemented by a coordinating body charged with monitoring debt sustainability and overseeing broader BRI issues. Competitive project selection with open procurement and private sector participation and sound project assessment would strengthen resource allocation while mitigating environmental, financial, and corruption risks. Such frameworks should adhere to global standards that promote transparent and sustainable lending practices by fostering cooperation among borrowers, creditors and international organizations and enhance capacity building. Environmental sustainability can be enhanced by ensuring investment projects are green, low-carbon, and climate resilient.
Authorities Views: The authorities underscored the broad scope of the Belt and Road Initiative, that encompasses not only infrastructure projects but also financial and trade connectivity, policy coordination, and cultural ties. The authorities are actively working towards full implementation of their new BRI-DSF by gathering the necessary data and building up capacity among government agencies and financial institutions. They also underscored the recent commitment towards green investment under the initiative. They noted that at present there are no plans to change the oversight framework of the BRI. The authorities have made great efforts to improve monitoring, coordination, and transparency of its overseas lending. The Debt Sustainability Framework for Participating Countries of the Belt and Road Initiative has borrowed a lot from the Fund’s methodology and benefited from staff’s consultation and advice. Based on staff’s monitoring and IMF Executive Board discussions, we have issued early warnings to creditors in China on their potential risks, and these efforts have yielded concrete positive results.”
The 2020 Report did not focus directly on the BRI although alluded briefly in general terms to it. Thus, there is reference to the need for greater efforts to provide “debt relief to low-income countries and sustainable financing for global infrastructure investment, and tackling climate change.”
The 2021 Report is noteworthy for three contributions. First, there is for the first time a quantification of the BRI related capital outflow—-amounting to “18 billion USD, increasing by 12.7 percent YoY.” Second, the need for more efforts at “greening the Belt and Road Initiative,” are noted. In this context China’s announcement to cease funding of new coal projects abroad is acknowledged and suggestions on elaborating the greening of BRI are made as follows:
“Box 9. Making the Belt and Road Initiative Greener
China’s large outward FDI stock in brown sectors implies potentially large environmental gains from updated guidelines on overseas investments. Stricter guidelines can help China project its climate goals internationally, also supporting the development of clean-energy industries. China has one of the largest outward FDI stocks in brown sectors. Around ten percent of China’s total 2019 FDI stock of US $2.2 trillion is in mining, quarrying and electricity sectors, ranking third in the world in absolute US dollar terms. Data for the period 2000–2016 suggest that the capacity mix in China’s outward FDI was especially intensive in coal-fired power plants. In the leadup to China’s announcement in fall 2021 to cease coal investments abroad, the most recent data suggests that overseas energy investments have declined across categories in 2020 at least in part as the pandemic slowed down some projects. In the first half of 2021, and for the first time since the BRI’s inception, China did not finance any coal-fired power plant abroad. The authorities have recently issued updated green guidelines on outward FDI. In July 2021, the Ministry of Commerce and the Ministry of Ecology and Environment issued new green guidelines for foreign investment. The voluntary guidelines state, inter alia, that Chinese firms should consider adhering to international standards where those are more stringent than host-country rules and establishing consultation and complaint mechanisms with local stakeholders. New Green Investment Principles also entail a pledge by financial institutions to incorporate environmental considerations into projects. However, China’s current mandatory guidelines for overseas investments only emphasize the requirement to comply with host-country standards. Internationally, existing policies governing the environmental dimensions of overseas investments are mostly voluntary, except for the requirement to comply with host-country environmental regulations. This implies that current domestic environmental policies can be de facto stronger than those regulating overseas investments. A greener BRI can help China project its climate goals internationally. China would benefit from further strengthening of environmental standards in overseas financing. Changes should include a move from voluntary toward binding provisions, and the adoption of domestic (or international) standards wherever the host countries’ environmental regulations are weaker. Avoiding a proliferation of standards by adopting, where appropriate, existing international standards could potentially also help the development of green finance (see also Box 8). Greater transparency, including in the classification of financing as BRI, will help not only the pursuit of climate goals, but also potentially help attract private investor participation. Making BRI greener would also support growing green industries and mitigate the risk of “stranded assets.”
Third, the 2021 Report touches on general governance issues as follows:
“China can also use this platform to encourage the spread of good governance and anti-corruption efforts, incentivizing countries that are part of the BRI to adopt and apply legal frameworks that prevent and sanction bribery, promote and protect whistleblowers, prohibit the signing of contracts with shell companies, and facilitate transparency and accountability (e.g., procurement rules consistent with international best practice, and the publication of information on contract formation and performance).”
In the 2022 Report the only focus to BRI is in terms of the greening recommendations in the 2021 Report monitored for implementation. The 2023 Report continues with two themes related to BRI. First, it commends China’s continued commitment to greening the Belt and Road and urges further efforts in that direction. Second, China’s involvement in “its support for sovereign debt restructuring in low income and vulnerable countries” is appreciated as follows:
“As a major creditor country, China plays a crucial leadership role as well as financing role in supporting debt restructuring in low-income and vulnerable countries. China’s critical support and participation in recent or ongoing debt restructurings, including its leadership as co-chair of several Official Creditor Committees under the G20 Common Framework is welcome. China is also an active participant at the Global Sovereign Debt Roundtable (GSDR), helping advance the mutual understanding of key stakeholders on issues relating to the sovereign debt restructuring architecture. Continuing progress on the Common Framework and through the GSDR would help ensure effective, predictable, and timely debt resolution processes for vulnerable countries. China’s generous contributions to the Poverty Reduction and Growth Trust and Resilience and Sustainability Trust (RST) are welcome and essential to maintain a well-resourced global financial safety net. China contributed more than twenty percent of its 2021 SDR allocation to the RST, the single largest contribution.”
Domestically, the work of the NFRA (National Financial Regulation Administration (NFRA) in signing regulatory cooperation with financial regulators in fifty-five Belt and Road participating Countries is noted. Internationally, it is noted that the PBC (People’s Bank of China) “continues to support the collection of financial stability data by the IMF. Key indicators are submitted to the IMF on a quarterly basis, with agreed data disclosures on the IMF website. Data has been provided up to Q3 2022.” Ironically to note here that whilst China has been commended for its debt restructuring it has not been invited to be a permanent member of the Paris Club on the grounds that its lending practices can be non-transparent.
Finally, in the 2024 Report there is little direct focus on BRI. But the IMF reiterated its appreciation of China’s role in “supporting sovereign debt restructuring in low income and vulnerable countries.” And the need to data gaps was observed, although the PBC’s “support for collection of financial stability data by the IMF” was also noted.
2. Analysis of IMF Surveillance of China’s BRI
An analysis of whether and how the Fund should and has engaged in the consideration of China’s BRI raises a preliminary question of the relationship between the IMF and China in the context of BRI including the nature of IMF surveillance exercises. Whilst it is the case that the relationship is formally one of—the institution and the member in terms of surveillance—the reality is somewhat removed from this formal “hierarchical” relationship. The way China’s BRI has developed, the scales involved in its deployment of resources, and its future trajectory would place China at another plane—a level that is at the least on an “equal footing” with the IMF. Indeed, according to another view “China has become the largest official creditor, surpassing the World Bank and the IMF,” overshadowing what the IMF provides globally. In effect the IMF the formally premier international financial institution in the international monetary system finds itself facing a member that has taken up the mantle of a development banker in a remarkable manner. Thus, in 2023 the IMF capacity to lend was around $932 billion dollars. In 2023 the value of newly signed BRI contracts alone were to the tune of $227.16 billion year on year, with a total of $270 billion of direct investment in BRI countries between 2013 to 2023. Moreover, the value of “newly signed construction contracts with partner countries reached US $2 trillion, and the actual turnover of Chinese contractors reached US $1.3 trillion.” Note detailed statistics are not available from China. In such circumstances the question may be posited whether the IMF, far from being a lead international monetary institution, is now withering into an outdated indeed odd an institution in the international monetary and financial order? Be that as it may the more important question surely is whether at the helms of the international monetary system there should be one nation or a multilateral independent organization?
In such circumstances, with respect to IMF surveillance there are two questions. First, does the IMF surveillance exercise provide a complete lens through which to reflect upon China’s BRI phenomenon? The answer here is in the negative. This question perhaps may seem not directly relevant in this section. But it has a purpose. From the broader perspective of International Economic Law and policy discourse, it is conceivable that there may be considerations to address that go beyond the remit of an Article IV consultation. For example, many International Development Banks prohibit taking into account political interests in their deliberations. And where as China’s foreign policy is based on the principle of non-interference in domestic affairs, the fact of this aspect of China’s foreign policy being a factor in BRI decision making does not ipso facto displace the need for further scrutiny. The inculcation of foreign and national policy in trade and investment connectivity in BRI, including national preferences in procurement policies, could raise questions with respect to non-discrimination provisions in WTO and international investment disciplines. In the same vein, the broader question of BRI’s subjection to any relevant general international law disciplines, such as they may be, does need to be posited. For example, has the practice of international development banks left an imprint in the body of Customary International Economic Law given that in “certain cases the practice of international organizations also contributes to the formation, or expression, of rules of customary international law?” And finally, China has on its own initiative and to its great credit accepted that the BRI aims for “high standards and sustainability.” To this end, at the domestic level, there is State practice providing for disciplinary frameworks within which a creditor has to operate to protect borrowers. To what extent are these relevant and can be transposed, to the extent that they are not already, at the international level to China qua lender (or any other lender of similar import)? In sum, not only are there broader questions for exploration with respect to the BRI, but these questions provide the context and background from which the IMF BRI surveillance needs to be evaluated.
Second, this “equal footing” relationship, if indeed it can be described as such, could potentially inform the manner (whether lenient or appropriate) of the Fund’s surveillance of China—particularly its BRI. After all, at a time when the world is crying out for development funding to be mobilised, is this the time to probe too deeply into what is, after all, an extraordinary endeavour to achieving important development goals that are of concern to both the IMF and China—ranted the IMF is strictly not in its immediate concern a development institution as such—although its later day venture into structural adjustment could be seen as one akin to the BRI endeavour though not completely identical.
And finally, the nature of IMF surveillance is that the process is soft. The principles implicated under Article IV are of a soft law nature. And moreover, given the IMF is engaged at the international level in this process dealing with a sovereign member—its approach and language is diplomatic—sugar-coated reflecting this background. One is reminded of positive reinforcement in child psychology as a way to bring behavioural changes. But such an approach does not sit well with Article IV Section 3 (b) which speaks of “firm surveillance”—albeit with respect to exchange rate policies alone.
Against this background, what more can be said about the IMF surveillance exercises specifically? The Fund’s response has been to call for an “overarching framework governing BRI investment.” But this is not accompanied by detailed advice on it. Indeed, the onus of formulating such an “overarching framework” seems to have been left to China. Importantly, the IMF consultations have not traced with any degree of vigour, if at all, the spillover effect of BRI lending on BRI beneficiary countries’ monetary/financial policies—specifically in terms of individual countries; the possible tension with IMF policy advice to those countries; and impact on the effective functioning of the international monetary system. Furthermore, whilst the Fund has pointed out the need for enhanced “debt sustainability monitoring,” and commended China for the BRI-Debt Sustainability Framework (DSF) drawing as it does from IMF technical advice, as a “positive step to enhancing discipline in external lending”—it does need to be highlighted that the use of the DSF is on a voluntary basis. Moreover, the DSF does need critical analysis. For example, is it scientific or is there too much scope for judgment? Is it too liberal or conservative in its debt sustainability assessment? What impact does the inclusion of the “2030 Agenda for Sustainable Development and other common development agenda” have on the overall debt sustainability evaluation? Where in the spectrum between neutral and normative is the BRI - DSF normatively orientated?
Further, whilst there is some suggestion that it has been used to forewarn Chinese creditors with effect, it is not clear which creditors and what percentage of creditors are being referred to. Nor whether such considerations would displace non-commercial ones that may be involved in deciding on the lending, given that Chinese creditors involve State owned enterprises.
A related point to debt sustainability involves the nature of the conditions attached in the infrastructure loan agreements. These have been the subject of concern. These are widely understood as not being transparent, as is also evident from the surveillance advice. Moreover, the procurement is understood to be tied to Chinese suppliers. Can the possibility of a review of these be clarified to come under the ambit of an Article IV consultation? Can the conditions be integral to the question of debt sustainability—for example are the repayment conditions too burdensome, or the penalties for non-payment involve forfeiting a vital income generating national asset likely to cripple future debt sustainability? Could the conditions touch on Article IV exchange rate obligations—for example, the impact on the value of the BRI recipient country’s currency in relation to the dollar and/or the RMB if the medium of payment is specified in the dollar or RMB? Could they have a bearing on a country’s balance of payments in the medium or long run—if for example the repayment conditions are too onerous; foresee the carving out of an important asset of the BRI recipient such that it will affect its future capacity to manage its balance of payments; or the infrastructure project calls for large imports? On the other hand, it may be that the Fund cannot embark on judgements about the nature of an agreement or the conditions therein made as between sovereign nations, or involving a sovereign nation. In this case, can they be screened to see if there is a case for their review? Aside from this, could the Fund explore the possibility of extending its authority to accord technical assistance to evaluate the terms of the loan agreements under a more clarified authority to do so under Article V Section 2 (b)? Whilst such technical assistance would be availed on a voluntary basis and cannot be used to impose obligations on a member, prospective BRI beneficiary countries would profit from an independent evaluation of the nature of their arrangements for their balance and suitability. This could save governments internally from the allegation of irresponsible borrowing and China dependence. Indeed, it could also address any unfair allegations of dependency creation on the part of China.
Finally, the Annual Reports are replete with commending China about its role in debt relief for low-income countries. This is primarily the Fund’s business and comes under its remit. Hence, China’s albeit mild riposte in pointing out the “importance of fair burden sharing” in debt restructuring efforts. It is also not very clear what place such commendations have in Article IV consultations. Moreover, China’s benevolence here is distinct from the question of its responsibility, if any, in contributing if it has, to the debt of other countries in an irresponsible manner. The Fund has a responsibility to address this prior question on the creditor’s role, if any, in contributing to an unsustainable debt as part of its role on sustainability of debts. China’s benevolence in assisting in debt restructuring should not displace the necessary vigour in the IMF scrutiny with respect to any possible creditor’s contribution to this—be it China, US, Saudi-Arabia or indeed an international lending agency. The need to ensure effective systems to forestall in the first instance a fall in a debt trap—both in the realms of the State lender as well as the borrowing country is also apparent.
III. Towards a Normative Framework for the BRI: Codification and Progressive Development?
Insights into IMF Conditionality and Surveillance exercises as they relate to BRI call out for normative clarity and the development of an organised framework within which BRI can excel. In this endeavour there are three different normative sources that can form the basis for the monetary and financial aspects of BRI.
First, there are lessons here to be learnt from the IMF’s long-standing arrangement with the World Bank Group to address mandate overlaps, possible clashes and collaborative efforts. To put it bluntly, if the IMF cannot bring itself to effectively “subordinate” China to its established leadership in international monetary and financial matters, it should consider a tripartite arrangement with itself, the World Bank Group, and China (including any other State that has similar functional attributes now or in future as manifested by the BRI). This would be consistent with China’s declared foreign policy modus operandi to seek multilateral solutions in its international economic relations.
Second, there are several forms of IMF related practices that have a normative impact for example through technical assistance and/or “financial health checks” that have emerged but are fragmented and in some cases of a voluntary nature. Thus, the Fund and the World Bank have a Joint IMF-WB Multipronged Approach to Address Debt Vulnerabilities. This approach has “four mutually-reinforcing pillars, which seek to address debt vulnerabilities through debt transparency, capacity building, analytical tools, and debt policies.” This is a work in progress and elements of this approach are in the making. The benefits of the outcomes are voluntary. The purpose of this IMF-WB Multipronged approach is distinct from what is being suggested here in terms of bringing coherence to the common endeavours of disparate stakeholder; and what the objectives of the IMF-World Bank 1989 Concordat are. Nevertheless, the Multipronged approach has a relevance in this discourse on building a coherent normative framework. Similarly, the Santiago Principles in relation to Sovereign Wealth Funds, provide a code, albeit to be availed on a voluntary basis for Sovereign Wealth Funds, to inform their decision making. Finally, of note is the Financial Sector Assessment Program (FSAP) which now has a mandate for a serious focus on spillover effects arising from the state of the national financial sector. Could this rich but fragmented background having normative attributes underpin the governance of BRI—as aspired to in the 2018 China Article IV Consultation Report—for an “overarching framework governing BRI?”
Finally, there is a rich domestic practice that ensures some level of protection to domestic borrowers from unfair or abusive national lending practices. Can these be transplanted at the international level so as to offer protection to BRI recipient countries to the extent that the multilateral efforts through technical assistance or “financial health checks” mentioned above do not cover this? And can there be international institutional support that can assist in pronouncing in some manner independently on the viability of BRI projects—if not through the IMF given its mandate limitations?
IV. Conclusions
The Fund and China have a number of common interests (viz., international financing/alleviating developing country debts, international monetary stability) as well as points of contestation (for example, country debts and balance of payments; economic discipline and its deferral). Along with this, the IMF has a mandate to ensure the effective operation of the international monetary system as the principal institution in the field. As an institution the Fund is facing fundamental existentialist threats from modern technological advances that have introduced different forms of money such as crypto currency in particular Bitcoin and Web 3, along with the arrival of a powerful State lender in the realms of the IMF. In such circumstances the Fund needs to be at arm’s length with its membership; and evolve as it has normative approaches to consolidate its leadership.
Moreover, there is scope for the codification and progressive development, from existing multilateral and domestic practices, of a normative architecture of fundamental principles to bring to bear international governance to BRI (and BRI akin projects and actors) that produces checks and balances, both at BRI recipient level as well as China—and that ensures the internal coherence of the international monetary system given the variety of actors in the field under the leadership of the IMF.
