The much-dis­cussed Belt and Road Ini­tia­tive has had its name changed, its pri­or­i­ties set vaguely and com­men­ta­tors can’t stop debating it. But what does the ex­pected ex­pen­di­ture of US$1 tril­lion on Asian in­fra­struc­ture re­ally mean for the fu­ture of Hong Ko

The Peak (Hong Kong) - - Contents - STORY LIANA CAFOLLA

What does the ex­pected ex­pen­di­ture of US$1 tril­lion on Asian in­fra­struc­ture re­ally mean for the fu­ture of Hong Kong’s fi­nan­cial ser­vices in­dus­try on the grand scheme of the Belt and Road Ini­tia­tive?

The Belt and Road Ini­tia­tive, the sprawl­ing sig­na­ture pol­icy of Chi­nese Pres­i­dent Xi Jing­ping, has been gath­er­ing pace and head­lines. In May, Bei­jing hosted the Belt and Road Fo­rum for in­ter­na­tional co­op­er­a­tion, a two-day sum­mit hosted by Pres­i­dent Xi and at­tended by about 30 world lead­ers. The num­ber of coun­tries cov­ered by the ini­tia­tive has grown from about 60 to 70, and the 57 found­ing mem­bers of the Asian In­fra­struc­ture In­vest­ment Bank (AIIB) – the mul­ti­lat­eral de­vel­op­ment bank that will be a ma­jor source of funds – in­creased to 77 in May, when an­other group of sig­na­to­ries signed up, in­clud­ing Hong Kong. In June, Deutsche Bank, the big­gest Euro­pean bank, signed a US$3 bil­lion (HK$23.4 bil­lion) agree­ment with China De­vel­op­ment Bank to fund in­fra­struc­ture in Belt and Road coun­tries, and a few weeks later the AIIB made its first eq­uity in­vest­ment with a US$150 mil­lion com­mit­ment to the In­dia In­fra­struc­ture Fund.

The in­crease in in­ter­est re­sulted in many ques­tions. What will be the key pro­jects? Where are the best in­vest­ments? What does China hope to gain from the pro­ject? Who will pay for it? And what are the op­por­tu­ni­ties and risks for Hong Kong?

Many of those ques­tions are still unan­swered. But on the last ques­tion, a con­sen­sus of sorts ap­pears to be emerg­ing among Hong Kong’s busi­ness and fi­nan­cial ex­perts: the Belt and Road Ini­tia­tive

will bring a broad spec­trum of lu­cra­tive op­por­tu­ni­ties to Hong Kong, and the city is ex­tremely well placed and pre­pared to take ad­van­tage of them.

De­spite the gilded talk, there are some se­ri­ous risks and chal­lenges as well. Hong Kong will have to com­pete against some for­mi­da­ble ri­vals to win those op­por­tu­ni­ties. It’s also likely that not all of the pro­jects on of­fer will be deemed prof­itable af­ter go­ing through rig­or­ous risk as­sess­ments. There are po­lit­i­cal risks, as firms try to curry favour with Bei­jing and its sta­te­owned en­ter­prises, thus ex­pos­ing them­selves to the prospect of deal­ing with po­lit­i­cally driven white ele­phant pro­jects.

And some pro­jects will re­quire decades to bring re­sults and re­turns. Many of the pro­posed Belt and Road coun­tries are them­selves dif­fi­cult in­vest­ment lo­cales. Pak­istan's Gwadar Port, a key com­po­nent of the Belt and Road Ini­tia­tive, re­cently saw an at­tack by gun­men, which killed ten con­struc­tion work­ers. The at­tack was com­mit­ted by the Baloch Lib­er­a­tion Army, which claims that lo­cals have not ben­e­fit­ted from oil and gas wealth, and which ad­vo­cates for in­de­pen­dence from Pak­istan. Pak­istan has re­sponded to vi­o­lence by re­port­edly cre­at­ing a spe­cial army di­vi­sion tasked with pro­tect­ing Belt and Road re­lated pro­jects that con­nect Xin­jiang with Gwadar.

Other coun­tries and re­gions that are in­vest­ment tar­gets, such as the Cen­tral Asian na­tions, are rated as highly cor­rupt, ac­cord­ing to Trans­parency In­ter­na­tional.


The Belt and Road ini­tia­tive, or BRI, was first an­nounced in 2013 when it was launched un­der the name of One Belt, One Road (OBOR). Broadly, BRI is a de­vel­op­ment strat­egy de­signed by China and based on the old silk road trad­ing route. The stated aim is to pro­mote eco­nomic and trade co­op­er­a­tion and to con­nect Cen­tral Asia, Europe and Africa through its twin tra­jec­to­ries, which are known as the Silk Route Eco­nomic Belt – the land route – and the 21st Cen­tury Mar­itime Silk Road – the sea route. The pro­ject has five stated goals: pol­icy co­or­di­na­tion, fa­cil­i­ties con­nec­tiv­ity, unim­peded trade, fi­nan­cial in­te­gra­tion and peo­ple-topeo­ple bonds.

To help fi­nance the BRI, China set up a US$40 bil­lion Silk Road Fund that will in­vest mainly in in­fra­struc­ture and re­sources. China also launched the AIIB, which opened in Jan­uary 2016 and will fo­cus on de­vel­op­ing in­fra­struc­ture and other pro­duc­tive sec­tors in Asia, in­clud­ing en­ergy, power, trans­porta­tion, and telecom­mu­ni­ca­tions, among oth­ers.

While many coun­tries and po­ten­tial in­vestors are still pon­der­ing the mean­ing and sub­stance of BRI and how they might get in­volved, some of Hong Kong’s big­gest com­pa­nies have wasted no time get­ting into the scheme.

“If you talk to the MTR, the Air­port Au­thor­ity, CLP, even the tele­com peo­ple, ba­si­cally ev­ery­one is ac­tively working in the BRI pro­jects,” says Ni­cholas Kwan, di­rec­tor of re­search at the Hong Kong Trade De­vel­op­ment Coun­cil.

Those com­pa­nies are mostly working on in­fra­struc­ture pro­jects that will take years to ne­go­ti­ate and build, but much more busi­ness is set to come Hong Kong’s way, par­tic­u­larly in the city’s ar­eas of ex­per­tise in lo­gis­tics, fi­nan­cial ser­vices, le­gal ser­vices, gen­eral trade and fi­nance, and in­vest­ment. Be­cause of its long in­ter­na­tional ex­pe­ri­ence and high stand­ing in these ar­eas, Hong Kong is where for­eign com­pa­nies will want to be based. In par­tic­u­lar, Hong Kong’s use of the com­mon law sys­tem and its un­der­stand­ing of China’s con­ti­nen­tal law sys­tem will make it an ex­cel­lent part­ner in the le­gal process through­out pro­jects as well as in dis­pute res­o­lu­tion, Kwan says.

Kwan cites a ma­jor US power com­pany whose big­gest pro­ject is the China-pak­istan power pro­ject. They told him that they use Hong Kong as a base rather than Pak­istan or China be­cause Hong Kong of­fers a bet­ter op­er­at­ing en­vi­ron­ment and easy con­nec­tiv­ity to the US.

“What helps peo­ple here is that it is a very clear and sim­ple plat­form, le­git­i­mate, so that you will be free from all the bu­reau­cracy and all the hid­den costs,” says Kwan. “We are a free port not just in the sense of ship­ments, but also the free flow of cap­i­tal, of in­for­ma­tion as well as prod­ucts. This is crit­i­cal for any­one who man­ages global busi­ness or in­ter­na­tional busi­ness. That goes back to the orig­i­nal say­ing about the strength for Hong Kong: we con­nect China with the rest of the world,” says Kwan. Even if Hong Kong doesn’t send a sin­gle en­gi­neer to work on the pro­ject, “there could be quite a sub­stan­tial set-up pro­vid­ing all the in­for­ma­tion sup­port, lo­gis­tics sup­port and tech­ni­cal sup­port for this pro­ject. If this is one of the largest pro­jects in the world of this kind, then sup­port­ing all this could still be quite size­able.”


– Ni­cholas Kwan, HKTDC

Ma­bel Chan, pres­i­dent of the Hong Kong In­sti­tute of Cer­ti­fied Pub­lic Ac­coun­tants and head of out­bound in­vest­ment at Grant Thorn­ton, has vis­ited sev­eral of the coun­tries along the BRI route. She be­lieves that prospec­tive in­vestors will want to take ad­van­tage of Hong Kong’s use of in­ter­na­tional fi­nan­cial re­port­ing stan­dards, which may not be used by less de­vel­oped coun­tries, and will seek the ex­per­tise of the city’s ac­count­ing pro­fes­sion­als be­fore mak­ing de­ci­sions.

“Be­fore they put in their money, they need ser­vices like due dili­gence – what is the value of those in­vest­ments? What are the risks at­tached to those in­vest­ments? What is the fo­cus of the cash flow and re­turns of the in­vest­ment, and is it jus­ti­fied in terms of the risk pro­file in­volved?” she says.

Later, when ef­fi­cient in­fra­struc­ture is in place, she says other op­por­tu­ni­ties will ma­te­ri­alise from tourism and trade with the coun­tries along the route. “It’s good to help sup­port the de­vel­op­ment of all these coun­tries,” she says. “They (the res­i­dents) are peo­ple, just like you and me, and they want a bet­ter city; they want a bet­ter liv­ing en­vi­ron­ment.”

The Asian De­vel­op­ment Bank es­ti­mates the in­fra­struc­ture in­vest­ment re­quire­ment in the re­gion at US$1.7 tril­lion an­nu­ally for the next 15 years. Hong Kong has been po­si­tion­ing it­self as the prime lo­ca­tion for ar­rang­ing the fi­nanc­ing un­der the lead­er­ship of the Hong Kong Mon­e­tary Au­thor­ity and its In­fra­struc­ture Fi­nanc­ing Fa­cil­i­ta­tion Of­fice (IFFO), which at­tracted in­vestors with around US$4 tril­lion in to­tal as­sets un­der man­age­ment to its in­au­gu­ral high­level debt fi­nanc­ing and in­vestors’ round­table in March this year. The IFFO aims to be a plat­form to match cap­i­tal and large-scale in­fra­struc­ture pro­jects and help the in­vest­ments suc­ceed so as to at­tract pri­vate cap­i­tal to help the BRI.

Hong Kong is also home to the big­gest RMB off­shore mar­ket, which is likely to prove an­other at­trac­tion for in­vestors. As well as its in­ter­na­tional fi­nance ex­per­tise, Hong Kong is home to many global banks and as­set man­agers, and can pro­vide a “one-stop shop” of fi­nan­cial ser­vices, in­clud­ing in­vest­ment and fi­nanc­ing, pro­fes­sional ser­vices and risk man­age­ment, says Enoch Fung, gen­eral man­ager of the HKMA IFFO.


De­spite all of this ex­per­tise, Fung does not have an easy task. The scale of the fund­ing means pri­vate sec­tor par­tic­i­pa­tion is es­sen­tial, but he says it is dif­fi­cult to get pri­vate funds to fi­nance in­fra­struc­ture. One chal­lenge is the dif­fi­culty in chan­nelling cap­i­tal to in­fra­struc­ture pro­jects in de­vel­op­ing coun­tries.

“At the coun­try level, po­lit­i­cal, le­gal and reg­u­la­tory risks might un­der­mine the fea­si­bil­ity of a pro­ject. At the pro­ject level, con­struc­tion risk, cost over­run, de­mand risk, cur­rency risk, and re­fi­nanc­ing risk would neg­a­tively im­pact the pro­ject’s prof­itabil­ity.” And when the pro­jects are cross­bor­der, these risk fac­tors all in­crease, Fung adds.

An­other prob­lem is the lack of a de­vel­oped pro­ject bond mar­ket in Hong Kong, which Fung says is ac­tu­ally an Asia-wide prob­lem. “The key is for cor­po­rates to broaden their source of fi­nanc­ing by tap­ping into the bond mar­ket, in ad­di­tion to re­ly­ing on bank lend­ing,” he says.

The new bond con­nect scheme, which opened in late June and links

China's on­shore bond mar­ket to in­ter­na­tional in­vestors via Hong Kong, could be­come a source of fi­nanc­ing. "The open­ing up of the Chi­nese bond mar­ket will in­crease op­por­tu­ni­ties for China to raise cap­i­tal in lo­cal cur­rency – ei­ther on­shore or off­shore – with the ob­jec­tive of fund­ing OBOR'S build out and ex­pand­ing global links," said Mark Mcfar­land, chief econ­o­mist Asia, Union Ban­caire Privee, in a state­ment. China, Mcfar­land noted, was get­ting ready to sign free trade agree­ments with many of the BRI coun­tries, and he ex­pects more de­tails about the plan to emerge from the 19th party congress meet­ing in Oc­to­ber.

One source of fund­ing could be Europe. Pri­vate and pub­lic Euro­pean co-fi­nanc­ing of BRI pro­jects are set to in­crease, says Ali­cia Gar­cia Her­rero, chief econ­o­mist for Asia Pa­cific at Natixis, a French in­vest­ment bank. “Euro­pean banks are al­ready the largest providers of cross-bor­der loans to Belt and Road coun­tries so it is only a ques­tion of ac­cel­er­at­ing that trend,” she wrote in a re­cent note. Euro­pean banks, pen­sion funds and in­vest­ment funds could in­vest in BRI and Hong Kong could serve as their plat­form, she says.

But time­frames on pro­jects and lack of in­for­ma­tion are the two big­gest is­sues. “You need a plat­form for trans­parency of those pro­jects,” she says. “HKMA is try­ing, but I think we have a long way to go.”

Po­lit­i­cal con­straints such as sanc­tions are also an is­sue. Rus­sia and Pak­istan-based pro­jects are of­flim­its for Euro­pean in­vestors, as is Iran, she notes, and these are likely to be some of the big­gest re­cip­i­ents of BRI pro­jects.

Once the hard in­fra­struc­ture is built, many associated ser­vices will be needed, and this prospect is at­tract­ing strong in­ter­est of Hong Kong’s pro­fes­sional ser­vices firms. “One of Hong Kong’s most sig­nif­i­cant op­por­tu­ni­ties lies in its ex­per­tise in bring­ing deals to­gether, par­tic­u­larly those re­lat­ing to in­fra­struc­ture,” says Stephen Weatherseed, man­ag­ing di­rec­tor of Mazars Hong Kong.

“I think the in­crease in trade flow­ing through Asia has to be a good thing for Hong Kong, as it will nat­u­rally lead to more ac­tiv­ity, more peo­ple, and more wealth, while bring­ing Asia closer to the rest of the world. Over­all, I think it is a very pos­i­tive thing for Hong Kong.”

“We have been help­ing a lot of Chi­nese com­pa­nies to go to OBOR coun­tries to help them in­vest,” says Gabriel Wong, head of cor­po­rate fi­nance at PWC. He says he sees a lot of big op­por­tu­ni­ties for his firm in ar­eas in­clud­ing fi­nan­cial ad­vi­sory, mar­ket en­try anal­y­sis, tax struc­tur­ing, cus­toms anal­y­sis, tax of­fice ser­vices, deal struc­tur­ing and ne­go­ti­at­ing with counter-par­ties. “It’s not only about in­fra,” he says, speak­ing from his of­fice in Shang­hai. “I think the in­fra sec­tor will be huge in the up­com­ing three, five, seven years. Then will come in­surance, prop­erty, fi­nan­cial ser­vices.”

BRI is such a vast pro­ject that it can achieve var­i­ous ob­jec­tives for China at dif­fer­ent points in time, Wong says. Coun­tries along the route are in­vest­ing in long-term pro­jects such as in­creas­ing agri­cul­tural out­put with a view to ser­vic­ing China’s pop­u­la­tion once con­nec­tiv­ity is in place, he says, and some are al­ready talk­ing about con­nect­ing the grid among the route’s coun­tries in 10 or 15 years, he says.

Be­yond its ex­per­tise in rais­ing cap­i­tal for in­fra­struc­ture, Hong Kong should use its dig­i­tal in­fra­struc­ture to help de­velop the BRIS soft in­fra­struc­ture by digi­tis­ing its trade fa­cil­i­ta­tion and fi­nanc­ing ser­vices, says Pin­dar Wong, chair­man of Ver­ifi Hong Kong, who helped set up the Belt and Road Blockchain Con­sor­tium. Wong pro­poses us­ing the blockchain tech­nol­ogy pi­o­neered by Bit­coin to ex­port le­gal, ac­count­ing and pro­fes­sional ser­vices. This is “a trans­par­ent, ‘trust­less’ tech­nol­ogy which low­ers the cost of es­tab­lish­ing and main­tain­ing trust, and dras­ti­cally sim­pli­fies fi­nan­cial set­tle­ment,” says Wong.

Crit­ics have said the BRI is a way for China to in­vest its US$3 tril­lion in for­eign ex­change re­serves and ex­port its ex­cess pro­duc­tion in sec­tors such as steel. China used only 67 per cent of its own steel ca­pac­ity in 2015, ac­cord­ing to Fitch, a record low and far be­low the av­er­age use of 80 to 85 per­cent in sec­tors that are con­sid­ered healthy.

“In the very short term, China may be ex­port­ing spare ca­pac­ity,” Pwc’s Wong says. “But ac­tu­ally OBOR is mul­ti­di­rec­tional. As I par­tic­i­pate in this, on the ground in China, I do re­ally see this as one of the most in­spir­ing mo­ments in hu­man his­tory, if things re­ally

hap­pen, be­cause the con­nec­tiv­ity is up. It’s not re­ally about the short­term spare ca­pac­ity, ex­port­ing, etc. It can pro­mote lots of trade and multi-di­rec­tional ex­changes.”

China’s mo­ti­va­tion for the BRI came un­der fire for other rea­sons in a note pub­lished by Fitch in Jan­uary. “OBOR is a com­po­nent of China’s ef­forts to ex­pand its strate­gic in­ter­na­tional in­flu­ence and a means of se­cur­ing ac­cess to key com­modi­ties,” the note said. “This sub­ju­ga­tion of mar­ket forces means there is a height­ened risk of pro­jects prov­ing un­prof­itable.”

“What is im­por­tant, is what things the world al­lows to hap­pen,” says HKTDC’S Kwan. “Even if China reaches out, some coun­tries may not want to be reached.”

In any case, BRI could be a strong force to counter the cur­rent anti-glob­al­i­sa­tion trend, he says. “We be­lieve, from our own ex­pe­ri­ence, not just from Hong Kong, China but many other de­vel­op­ing coun­tries, that this is one key way to im­prove our liv­ing stan­dards and make the world bet­ter.”


Prag­matic self-in­ter­est may be a driv­ing fac­tor in get­ting coun­tries in the BRI sphere of in­flu­ence to go along. Speak­ing of China’s in­volve­ment in his coun­try’s power sec­tor, Ah­san Iqbal, Pak­istan’s plan­ning min­is­ter told the Fi­nan­cial Times, “We wanted power in­vest­ments, but no­body came in. The Chi­nese spot­ted an op­por­tu­nity.” As de­vel­op­ing coun­tries in the BRI seek to meet their mas­sive in­fra­struc­ture deficit and build the con­nec­tiv­ity needed to boost trade, they may sim­i­larly ask them­selves who else but China is propos­ing a grand enough so­lu­tion. That said, the China Pak­istan Eco­nomic Cor­ri­dor has been in de­vel­op­ment for years prior to Pres­i­dent Xi’s an­nounce­ment in 2013.

The risk of white ele­phant pro­jects is not un­der­played by any­one, and if Hong Kong com­pa­nies are in­volved, they have the po­ten­tial to be detri­men­tal to Hong Kong’s in­ter­na­tional im­age, says Si­mon Lee, as­sis­tant dean (un­der­grad­u­ate) and se­nior lec­turer of the School of Ac­coun­tancy at the Chi­nese Uni­ver­sity of Hong Kong (CUHK) Busi­ness School. Lee reck­ons that, in seek­ing to gain busi­ness, Hong Kong banks or con­sult­ing firms may sub­ject them­selves to po­lit­i­cal pres­sure, con­tra­dict­ing their own com­mer­cial ob­jec­tiv­ity about the virtue of a given pro­ject. Mazars, which is known for its ex­per­tise in au­dit­ing fi­nan­cial mod­els for in­fra­struc­ture pro­jects, reck­ons that Hong Kong is well equipped to deal with the risk of white ele­phant pro­jects “by do­ing what it nor­mally does”, in other words, by ap­ply­ing ad­e­quate due dili­gence to prospec­tive pro­jects.

The ques­tion of white ele­phants is bet­ter looked at through the lens of the time­frame, sug­gests Her­rero of Natixis. She says a pro­ject that ap­pears in dan­ger of be­com­ing a white ele­phant may turn out to be valu­able de­pend­ing on trade routes that may not yet ex­ist or be known about. The Chi­nese gov­ern­ment may sim­ply be tak­ing a much longert­erm view. A white ele­phant to­day may be a gold mine to­mor­row, in this line of think­ing, but in the ab­sence of an ex­ist­ing need, will in­vestors be will­ing to make a long term play on a Polit­buro di­rec­tive? In the case of the Pak­istani port of Gwadar, prof­itabil­ity seems to have taken a back seat to Chi­nese strate­gic con­cerns – the port al­lows China to by­pass the Straits of Malacca.

The Port of Sin­ga­pore Au­thor­ity, which signed a 40-year agree­ment to run the Gwadar Port in 2007, with­drew from the agree­ment in 2013, de­spite gen­er­ous con­ces­sions, be­cause of prof­itabil­ity and se­cu­rity con­cerns.

“Maybe in the very long run, they

may make sense, given fu­ture trade routes, in eco­nom­i­cally in­te­grated ar­eas, or free trade agree­ments along the BR where there is much more move­ment of goods and ser­vices etc,” she says. “But no­body, no pri­vate in­vestor, would be able to fore­see that un­der the cur­rent cir­cum­stances, when they cal­cu­late their own risk and ad­justed re­turn, it wouldn’t pay off to­day. “The point is, that time­frame is dif­fer­ent: they don’t have share­hold­ers that are ask­ing for re­turns to­mor­row.”

The al­lure of big re­turns from Belt and Road pro­jects is al­ready colour­ing the de­bate about fi­nan­cial reg­u­la­tion in Hong Kong. The South China Morn­ing Post re­ported in April this year that the Se­cu­ri­ties and Fu­tures Com­mis­sion would be more flex­i­ble in al­low­ing list­ings of com­pa­nies that are linked to the BRI.

One fi­nal risk brought for Hong Kong by the ini­tia­tive is the risk of be­ing left out al­to­gether. “We should not un­der­es­ti­mate the num­ber of other in­ter­na­tional com­pa­nies in the US and Europe and Ja­pan who have more ex­pe­ri­ence than us in deal­ing and working with many BRI coun­tries for many years,” says Lee of CUHK Busi­ness School. He cites the ex­am­ple of In­done­sia. The archipelago na­tion is ex­pected to play a promi­nent part of BRI ini­tia­tives and fund­ing, yet Lee reck­ons that Hongkongers re­main largely un­fa­mil­iar with it or other ASEAN coun­tries.

Fail­ing to grasp such op­por­tu­ni­ties risks sidelin­ing Hong Kong’s fi­nan­cial ser­vices in­dus­try. “I am not sure that the Belt and Road Ini­tia­tive needs Hong Kong, as many of its func­tions could be filled by other re­gions. How­ever, Hong Kong’s unique­ness lies in the depth of its ser­vice sec­tor and its ge­o­graphic prox­im­ity to China, so the ma­jor risk that it faces is fail­ing to take ad­van­tage of these op­por­tu­ni­ties,” says Mazar’s Weatherseed.


ABOVE The Yiwu - Lon­don Rail­way Line is a freight rail­way route cov­er­ing roughly 12,000km and is part of the am­bi­tion to es­tab­lish a 'mod­ern day Silk Road'.

ABOVE Chi­nese Pres­i­dent Xi Jin­ping, Rus­sia's Pres­i­dent Vladimir Putin and Ar­gen­tinian pres­i­dent Mauri­cio Macri at the Round­table Sum­mit Phase One Ses­sions of Belt and Road Fo­rum at the In­ter­na­tional Con­fer­ence Cen­ter in Bei­jing on May 15, 2017.

ABOVE A Pak­istani Naval per­son­nel stand guard near a ship car­ry­ing con­tain­ers at the Gwadar port, some 700 kms west of Karachi, dur­ing the open­ing cer­e­mony of a pi­lot trade pro­gramme be­tween Pak­istan and China on Novem­ber 13, 2016.

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