KARACHI: Pakistan is likely to issue renminbi (RMB) bonds in Hong Kong aimed at financing the multibillion China-Pakistan Economic Corridor (CPEC) project.
This was said by State Bank of Pakistan (SBP) Deputy Governor Riaz Riazuddin while addressing a seminar titled ‘Financial integration under and other research agenda’.
“Construction and operations of the CPEC can also receive an added impetus from financial cooperation between the two countries’ central banks, regulatory bodies and financial institutions. Such cooperation could involve facilitation of bilateral currency swaps, syndicated loans, subsidised financing arrangements, investment funds and insurance coverage for corridor related activities. At some stage, the viability of issuing the bonds in Hong Kong can also be explored to raise capital for CPEC financing,” he said.
He said a direct consequence of the CPEC was an increase of Chinese Foreign Direct Investment (FDI) inflows into Pakistan, as Chinese FDI into Pakistan rose to 53.6 % from 6.6 % in three years. China’s share in Pakistan’s FDI amounted to a mere 6.6 % in Fiscal Year 2012-13, in sharp contrast, this share rose to 53.6 %, on average, for the subsequent three-year period, i.e. FY14-FY16,” he explained.
“Another channel for financial integration is the cross-border expansion of commercial banks and other financial institutions. Both Pakistani and Chinese financial institutions are expanding operations to the partner country. One Chinese commercial bank is already working in our country, while a leading Chinese DFI has partnered with the government of Pakistan to set up a joint investment company to promote development finance in Pakistan. Other players are also exploring the opportunities to enter the market. Similarly, a Pakistani bank, Habib Bank Limited (HBL), is set to expand its footprint with the launch of its branch in Urumqi, China,” he added.
He went on to say: “There is also a substantial scope for Chinese investors to finance the local currency component of their projects from Pakistani banks, which have ample liquidity and strong capital base to meet the financing needs in Pakistan currency. Furthermore, the domestic banks have an in depth knowledge and expertise of their market and the Chinese investors can leverage on this expertise in a win-win situation for both countries.”
“Moreover, an additional benefit that partner countries can derive from financial integration is the transfer of expertise. In the financial domain, this could include the learning that comes from exposure to best practices in regulation, technical capacity building, improved governance and investors’ protection and swift resolution of payment disputes.”
From a broader perspective, he said, Pakistan could also learn from China’s experience in the domain of financial inclusion, given that nearly eight out of 10 adults in China have a bank account. “Pakistan’s National Financial Inclusion Strategy – initiated by the SBP and the government – is looking to expand formal financial access, from 23 percent in 2015 to 50 percent by 2020.”
It may be mentioned here that Pakistan has around nine ATMs for every 100,000 adults as of 2015, compared to 76 for China. “In fact, China has almost as many ATMs per 100,000 adults back in 2006, as we have today. This indicates that China has leveraged technology and digitisation to expand financial access in the past decade, and we can benefit from a close study of its approach to inclusion,” he maintained.
“Financial integration can also induce a new set of challenges. Foremost among these would be the demand for better risk management, at both the micro and macro levels. Cross-border transactions introduce an additional layer of complexity, and institutions need to be aware of legal and regulatory procedures of both countries. Integration also implies that exogenous shocks experienced in one economy can have significant repercussions for its partners, which also needs to be factored into the forecasting frameworks and decision making of regulators and policymakers, in the interest of ensuring financial stability,” he concluded.