Hong Kong ill advised to sink investment into Belt and Road projects

For Hong Kong’s de facto central bank, the draw of China is proving too tempting to resist.

The Hong Kong Monetary Authority has for a decade diversified beyond traditional bond and equity investments, into private equity and real estate, as well as some infrastructure of late. But now, struggling to hack a profit, deputy chief executive Eddie Yue wants to dip into the central bank’s war chest to invest in Belt and Road projects.

The so-called Exchange Fund is yet to partner with any of the Chinese stateowned enterprises that are driving Beijing’s infrastructure-investment push in more than 80 countries. But the possibility shouldn’t be ruled out, Mr Yue said last week. “We are here to create value – assess and select investment projects with prudence and a discerning eye, yet do not tie our own hands and pass up good opportunities,” he said.

But almost 15 per cent of China’s Belt and Road projects are already in financial trouble, and given the weak credit ratings of the countries involved, that number is bound to grow.

There is little outside validation for these investments, which have proved problematic from Pakistan and Sri Lanka to Malaysia, Thailand and Myanmar. Out of 941 projects tracked by Fitch Solutions, fewer than 100 involve the presence of the World Bank, Asian Development Bank or the International Monetary Fund.

There will be some winners, but does Hong Kong have the expertise to pick them?

At HK$4 trillion (Dh1.87tn), the Hong Kong Exchange Fund is sizeable. However, as much as 44 per cent of it is sequestered as US dollar-denominated, safe and liquid “backing assets” that support the local currency’s peg to the greenback. Only a third of the fund’s accumulated surplus of HK$654 billion, plus half of a HK$220bn “Future Fund,” is available for the monetary authority’s long-term growth portfolio, dominated by private equity and real estate.

Exposure to infrastructure is tiny at just $2.2bn, compared with almost $500bn of such assets under management at Australia’s Macquarie Group.

And when Frank Kwok, the co-head of Asia Pacific at Macquarie Infrastructure & Real Assets, says one of the main drivers of Belt and Road is “for China to exert its influence over the region”, there’s reason to ask why a relatively inexperienced custodian of public money is so eager to get on board with China.

Among other things, the timing would be awful. China’s creeping influence over the special administrative region’s affairs is starting to cloud Hong Kong’s reputation for rule of law. Chief executive Carrie Lam was grilled in Japan about the territory’s refusal to renew the visa of Financial Times journalist Victor Mallet, after he hosted a speech at the city’s Foreign Correspondents’ Club by the leader of a tiny pro-independence political party.

Waning returns amid rising volatility are a problem for all sovereign wealth funds.

Adventures in junk-rated countries are hardly a prudent strategy for shoring up those flagging returns. Besides, where’s the need? The world hasn’t exactly run out of assets with stable cash flows.

Less than six months after taking over from Li Ka-shing, his son Victor Li found a couple: an Australian gas pipeline and UBS’s London headquarters.

Rather than getting pulled into Beijing’s orbit, the city’s central bank should work as hard as its tycoons.