Belt and Road Initiative: Strengthening Financial Connectivity

May 14, 2017

Governor Zhou, Minister Xiao, Distinguished Guests, Ladies and Gentlemen—good afternoon!

I would like to thank the People’s Bank of China and the Chinese Ministry of Finance for hosting this important discussion on financial connectivity.

Harnessing the resources of governments, investors, financial institutions, and ordinary citizens requires a financial system that works forall. This objective lies at the heart of the Belt and Road Initiative.

How can governments achieve this common goal? Let me highlight three policy priorities:

First, step up efforts to attract foreign direct investment in high-quality infrastructure. The good news is that there is a large pool of institutional funds—about $120 trillion in global assets under management. [1] But only a tiny fraction of that is allocated to infrastructure in developing countries, where projects are often seen as too risky.

Last year, emerging and developing countries received net foreign direct investment inflows of less than 1 percent of their combined GDP, down from 2 percent before the 2008 financial crisis. [2] These countries can reinvigorate FDI inflows by pursuing sound macroeconomic policies, by increasing their openness to trade, and by improving their business and regulatory environment. [3]

The second policy priority is to push for more financial inclusion , especially in developing economies. Think of the small businesses that are held back by a lack of credit. And think of the billions of women who have yet to achieve their full economic potential.

By expanding their access to financial services—by sharing the benefits of finance more widely—growth will be stronger, more durable, and more inclusive. Recent IMF analysis [4] shows a 2-to-3 percentage point difference in economic growth between financially inclusive countries and their less inclusive peers.

The third policy priority is to harness the power of financial technology, or fintech . A good example is the rapid growth of mobile banking, which has boosted the economic wellbeing of hundreds of millions of citizens—from Bangladesh, to Kenya, to Peru. Here in China—in cities like Beijing and Hangzhou—people can live without cash by using online payment platform such as Alipay and Wechat.

Another example is the rapid increase incross-border payments based on virtual currencies. For many companies and households, this is a faster and cheaper way of transferring money overseas.

These benefits are significant—but so are the challenges, including the risk of money laundering and terrorist financing. Fintech providers, financial regulators, central bankers, and international organizations will need to work together to ensure that financial systems are safe and inclusive.

More broadly, IMF analysis [5] shows that having a more inclusive financial system makes it safer—and more beneficial—to relax restrictions on capital flows across borders . By liberalizing their capital account over time, countries can attract more foreign investment, increase the liquidity of local financial markets, and reduce their cost of capital.

In other words, by developing deep, well-regulated financial markets, countries can better mobilize domestic and international resources for investment—while reducing the financial stability risks that come with large capital inflows.

The IMF has shown over many decades that it can help in this effort—by providing policy advice and technical assistance in key areas—from debt sustainability, to macroprudential policy, to managing capital flow volatility in times of distress.

Above all, greater financial integration and connectivity requires stronger international cooperation along the Belt and Road and beyond. As the Chinese proverb goes: “ One chopstick is easy to bend; a bunch of chopsticks are difficult to break .” [6]

By working together, we will have the opportunity to create stronger financial connections and more prosperous economies—in Asia and around the world.

Thank you. Xièxiè.

[1] McKinsey, 2016, “Bridging Global Infrastructure Gaps,” McKinsey Global Institute, New York.

[2] Source: IMF estimates.

[3] IMF Working Paper: Swarnali Ahmed, “The Drivers of Capital Flows in Emerging Markets Post Global Financial Crisis”, February 2017.

[4] IMF Staff Discussion Note: Ratna Sahay, Martin Čihák, Papa N’Diaye, “Financial Inclusion: Can It Meet Multiple Macroeconomic Goals?”, September 2015.

[5] IMF Working Paper: Davide Furceri, Prakash Loungani: “Capital Account Liberalization and Inequality”, November, 2015.

[6] 一根筷子容易折,一把筷子难折断。

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