New bank and Silk Road Fund can be the driving force for ambitious infrastructure push, Chen Jia reports.

A comprehensive and diversified financial system is needed to support China's plan to restore prosperity to the Silk Road, a plan that will link capital from more than 60 countries, experts have said.

The blueprint is for a stable Asian monetary system, an investment financing system, and a unified credit system, including the opening of Asian bond and stock markets, said Xu Xiujun, a researcher at the Chinese Academy of Social Sciences' Institute of World Economics and Politics.

It is hoped that a well-designed financial framework can connect countries along the Belt and Road Initiative to jointly raise funds for infrastructure construction, given that the Asian Development Bank has estimated an $8 trillion gap in infrastructure financing in developing Asian nations between 2014 and 2020.

The Belt and Road Initiative aims to create a Silk Road Economic Belt and 21st Century Maritime Silk Road and was first introduced as a concept by Chinese President Xi Jinping during visits to Kazakhstan and Indonesia in 2013.

According to the government's plan, the economic belt will link China with Europe through central and western parts of Asia via a network of highways, railways and other infrastructure. The maritime road will connect China with Southeast Asia, the Middle East, Africa and Europe by expanding ports and coastal infrastructure.

"The China-initiated Asian Infrastructure Investment Bank is a breakthrough as a creative multilateral financial mechanism in the region, and it will effectively lead the deposits from high-savings Asian countries to support infrastructure construction," Xu said.

An official signing ceremony to establish the bank's operational framework, attended by representatives of the 57 nations that applied to be founding members, took place in Beijing on June 29. Jin Liqun, formerly with the World Bank and Asian Development Bank, has been nominated to head the bank.

Liu Yue, a researcher with the National Development and Reform Commission, the country's top economic planner, said the AIIB is expected to focus on bond financing.

"Its tools may include the traditional loan and credit assurance," he said. "It can raise capital from the interbank offered credit, issuing sovereign bonds of the funding members, or absorb private capital under the public-private partnership program."

The AIIB will have an authorized capital of $100 billion. China would be the bank's largest shareholder with a subscribed capital of $29.78 billion, or a current 30.34 percent stake. China will also have 26.06 percent of the votes.

Dirk Willem te Velde, the head of the International Economic Development Group in Britain, said the bank "will easily obtain an AAA bond rating, which would allow it to borrow more cheaply and therefore give it a larger portfolio, as it managed to absorb 16 of the world's 20 largest economies as shareholders."

The $40 billion Silk Road Fund, which was established in December, will be another important financial institution, focusing on direct equity investment along the belt and road routes, said Liu at the NDRC.

"The function of the Silk Road Fund will be different from the AIIB, but they are complementary," he said. "The fund will mainly use domestic capital, especially foreign exchange reserves, to invest in medium- and long-term projects through holding companies' shares."

The fund can also absorb foreign investors into its sub-funds to jointly develop projects on a multilateral platform, he added.

Jin Qi, who chairs the fund, said in June that it is looking for high-return projects and that the operation will follow market-oriented rules, which is different from policy and development assistance financial institutions.

The fund announced initial capital of $10 billion: $1.5 billion from China's sovereign wealth fund, China Investment Corp.; $6.5 billion from the foreign exchange reserves; $1.5 billion from the Export-Import Bank of China; and another $500 million from the China Development Bank.

In April, the fund invested in its first project: the Karot Hydropower Project on the Jhelum River in northeast Pakistan.

Zhang Hongli, vice-president of Industrial and Commercial Bank of China, has suggested the establishment of an offshore stock exchange, or "international board," to allow initial public offerings by companies from countries involved in the Belt and Road Initiative.

"If so, that will be a direct connection between Chinese capital and the economy in those countries," he said, adding that the board could be opened in the Shanghai Free Trade Zone or Shenzhen Qianhai Special Economic Zone.

The move would be a creative measure to open up the capital market in the region and allow Chinese capital to support construction in those countries, he added.