One Belt, One Road – Navigating New Opportunities

The Belt-and-Road initiative provides a visionary blueprint for global economic development in the new world order. New project opportunities for businesses will require comprehensive treasury services and trade financing support spanning multiple regions and currencies, including the Renminbi (RMB).

Newer, Bigger and Better?

The Belt-and-Road initiative has been steadily gaining momentum since first announced by the Chinese President Xi Jinping in 2013. Against the backdrop of rising protectionist and disintegration trends in the US and Europe, the grand plan presents a global bright spot for overcoming trade barriers and enhancing economic, cultural and policy cooperation.

‘One Belt, One Road’ refers to the Silk Road Economic Belt and the 21st Century Maritime Silk Road development strategy, an initiative to link some 60 countries across Asia, Africa, Europe and the Middle East by road, train and maritime routes. The Belt-and-Road region currently accounts for some 70 per cent of world population, 30 per cent of global GDP and more than 35 per cent of the world's merchandise trade. By 2050, the region can realistically aim to contribute 80 per cent of global GDP growth, and advance three billion more people into the middle class, according to McKinsey Global Institute[1].

For China, Belt-and-Road will help export its construction and technological expertise to address infrastructure bottlenecks whilst expediting Chinese companies ‘going global’, a major trend witnessed in the recent years.

‘It is a win-win strategy for China and the Belt-and-Road countries, which will positively impact global economic growth and stability,’ said Biswajyoti Upadhyay, Managing Director, Regional Head of Trade, Transaction Banking, Greater China and North Asia, Standard Chartered.

Unlimited Market Opportunities

Belt-and-Road plans focus on large-scaled infrastructural projects with complex financing requirement.

With US$50 billion pumped into the new Asian Infrastructure Investment Bank (AIIB) and US$40 billion for the Silk Road Fund (SRF), China is leading the capital commitment for this initiative. Chinese President Xi Jinping also announced in the Belt and Road Forum for International Cooperation in Beijing on May 14, 2017 to contribute an additional CNY 100 billion (US$14.5billion) to the SRF and set up special lending schemes of CNY 250billion and CNY 130billion respectively with the China Development Bank and the Export-Import Bank of China to support the Belt-and-Road initiative. 

However, funding from multi-lateral development banks or official government support is far from sufficient. 

According to the Asian Development Bank (ADB), by 2020 the 32 ADB member states in Asia will need over US$8 trillion in infrastructure investment. It is estimated that AIIB, New Development Bank and SRF together with China’s policy banks could potentially support only US$ 1 trillion[2], leaving a significant gap to be filled by the private capital.

In 2016 alone, more than US$490 billion worth of Belt-and-Road projects and deals were announced across seven core infrastructure sectors, including utilities, transport, telecoms, social, construction, energy and environment, according to a report by PwC [3]early this year.

Such projects take years to plan and execute. This creates extensive demand for professional and advisory services – ranging from project management such as project bidding and investment to financial management across M&A advisory, loan syndication, escrow services, liquidity management and trade financing.

‘Companies participating in the Belt-and-Road need to seek expertise from an experienced partner who can advise and provide a comprehensive and holistic financing solution to them,’ commented Upadhyay.

Exciting Opportunities but Tread Carefully

The complexity of the geopolitical situation, local policy risks, and potential cultural and social conflicts create uncertainty. At the same time, insurance protection can be quite limited for specific industries or some Belt-and-Road countries with a high-risk rating.

Companies engaging in infrastructure projects not only require strong competence on the subject construction area but also commitment on their investment, resources over the entire project duration and beyond.  Ensuring a sound business case is essential to support the commercial decision, while the benefits will accrue very slowly or only show in the long term.

Such risk-return profile presents natural opportunities for state-owned-enterprises (SOEs), supported by the Chinese government policies, as the strategic importance and alignment with the government plans and incentives would feature well on their scorecard.

Even so, mitigating risks is always vital. One has to think about where and whom to work with, when it comes to financing.

Belt-and-Road Finance: Hong Kong a Natural Fit

One financial center has placed Belt-and-Road at the heart of its longer-term strategy. Hong Kong Chief Executive made the city’s participation in the plan a major strategic priority, positioning the city as ‘a super connector’ between mainland China and the West.

One of the initiatives includes a HK$200 million fund for the professional service sector to build ties and co-operation with Belt-and-Road countries. Tax incentives will be offered for companies setting up treasury units in Hong Kong, that would include interest deduction provision on intra-group lending transactions as well as profits tax cuts.

Hong Kong enjoys a unique position as gateway to and out of the Mainland, not simply because of its geographic location, but also its size and depth of the financial markets. Rich talent pool, diverse suite of products, and highly liquid USD, RMB and HKD markets give Hong Kong the edge.

Chinese companies view Hong Kong as the default choice when it comes to offshore capital raising. Many set up regional trade finance, invoicing and procurement centers or escrow structures in the city. They also use Hong Kong to issue guarantees into ASEAN countries on behalf of their operating entities.

‘With more window guidance and asset control in China, we expect more SOEs raising funds overseas and Hong Kong is a natural choice for Belt-and-Road projects,’ said Upadhyay.

Furthermore, ‘Hong Kong operates under the same English law system as many countries along Belt-and-Road, making the city a destination-of-choice from governance perspective,’ noted Upadhyay.

In addition, as the world’s largest hub for RMB financing activities, Hong Kong is well positioned to provide long-term support for Belt-and-Road projects.

So far, these projects have been mostly denominated in USD, even though the project funding is led by China, with funding sources mainly originated from China in RMB.

According to a Standard Chartered paper published in 2016, China’s cumulative non-financial overseas direct investment (ODI) is estimated to reach US$2 trillion by 2020, growing at 20 per cent per annum from the end of 2015[4].

‘The Belt-and-Road initiative creates immense opportunities in the long run to boost the global use of RMB to the next level,’ said Frankie Au, Head of Renminbi Products, Transaction Banking, Standard Chartered. ‘With China exporting its capacity and Belt-and-Road investment primarily originated from China entities with RMB as their functional currency, it helps to mitigate the exchange rate risk of the projects and lower the transaction costs by eliminating a third party currency’, he added.

Finding the right partner

Commercial banks continue to play a key role in offering financial management solutions, but an ideal one will also provide advisory and guidance to the companies pursuing Belt-and-Road opportunities on the local market practices, tax, regulatory and compliance requirements.

[Commercial banks continue to play a key role in offering financial management solutions]

Standard Chartered has extensive footprints across the Belt-and-Road countries supported by teams on the ground with in-depth knowledge of local culture and business operating environment, taking advantage of its long history of presence in those markets.

The bank helped one of their key clients negotiate, win and execute an engineering procurement construction contractor on power plant in Oman. ‘We have achieved some early success because we understand both ends – the contractor and the end market – very well,’ said Upadhyay. According to him, in 2016 alone, transaction banking contributed more than one-third of Belt-and-Road business within the bank, with the rest coming from corporate finance and financial markets, indicating that a broad spectrum of banking solutions is in demand.

‘We are best suited to meet our clients’ needs and to service the Belt-and- Road projects,’ said Upadhyay. (END)

Biswajyoti Upadhyay is managing director, regional head of trade, transaction banking, Greater China and North Asia at Standard Chartered, and Frankie Au is head of renminbi products, transaction banking at the bank

 

[1]One Belt, One Road: From dialogue to action, 2015,  McKinsey Global Institute, April, 2015, p.1

[2] On the ground: China – Investing USD 1tn along “One Belt One Road”, Global Research, Standard Chartered, 14 August 2015, p. 3 and p. 4,

[3] B&RWatch – China and Belt & Road Infrastructure, 2016 Review and Outlook, PwC, February 2017, p.7

[4] On-the-ground: China – Significant headway on “One Belt, One Road”, Global Research, Standard Chartered, 17 October 2016, p.5

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