HKTDC Research | 18 Oct 2016

Western China’s High-Tech Potential Woos the Multinationals

Foreign capital has been flowing into China in recent years to tap the potential of its western region. Domestic enterprises in the coastal regions are also casting a covetous eye on the pool of tech talent and ample land and labour supply in the western region in order to tackle rising production costs and other challenges. Great efforts made by cities in the western region to improve their infrastructure, expand their transport networks and upgrade their overall distribution and logistics capabilities have turned this region not only into the target destination for industrial transfer from the coastal areas, but also the preferred destination for foreign companies looking to expand their overseas markets and Chinese companies seeking to further open up domestic sales.

Chengdu in Sichuan province, along with its neighbouring Chongqing municipality, is home to the largest industrial cluster in the western region, and is also the region’s logistics centre and transport hub. The Chengdu-Chongqing district attracts the most capital from companies operating in coastal regions, as well as from foreign firms. Much of this investment is funnelled into high-tech industries, such as those involving semiconductors, computers, communications equipment and automobiles. This has helped to turn Sichuan province and Chongqing municipality from old industrial bases into China’s leading modern manufacturing hubs.

Industries and production activities in the western region are diversifying and embracing higher technology as local industry chains gradually come of age. This not only leads to a sharp increase in demand for a wide range of industrial materials but also spurs demand for various types of supporting services. Business services including product design and technology solutions, brand and market promotion and international logistics should generate good market opportunities for Hong Kong’s upstream suppliers of industrial materials and services.

 

 

Rapid Growth of Foreign Investment in the Western Region

According to the Ministry of Commerce figures, China’s actual use of foreign capital between January and August 2016 showed an annual growth rate of 4.5% (reaching US$85.9 billion), with the western region showing a higher annual growth rate of 31%. In fact, foreign investment in the western region has been growing in tandem with the development of the regional economy. Between 2005 and 2015, foreign direct investment (FDI) in Sichuan and Chongqing increased by more than 10 and 7 folds respectively, representing an average annual growth rate of 27.5% and 22%, respectively, both exceeding the national average of 7.7%.

 

 

Sichuan leads the central and western regions in FDI utilisation and in attracting domestic enterprises from other provinces. For example, 271 Fortune 500 companies – including 202 overseas and 69 domestic enterprises – had established a presence in Chengdu up to March 2016.[1] This shows that like overseas companies, domestic enterprises from other provinces also hope to make the best of the advantages that these regions have to offer in order to expand their businesses.

In 2015, Sichuan’s actual use of FDI reached US$10.07 billion, while investment by domestic enterprises from other provinces totalled RMB911.6 billion (about US$145 billion) during the same period, representing year-on-year growth of 3.6%.[2] Investment went to wide-ranging industries, including those involved with electronic information, equipment manufacturing, food and beverages, oil, gas and chemicals, energy and electricity, and automobile manufacturing. This suggests that foreign companies and domestic enterprises from other provinces see great potential in Sichuan’s development.

 

 

The situation is similar in Chongqing. Its use of foreign investment totalled US$10.77 billion in 2015, including US$3.77 billion in FDI. It also attracted RMB853 billion (about US$135 billion) from other provinces in the year, representing an annual growth rate of 17.7%.[3] In terms of industry sector, outside investment mostly finds its way to electronic equipment and automobile-related industries, as well as to Chongqing’s financial, logistics and service sectors. In particular, more than half of the output value generated by foreign-invested enterprises in Chongqing is from the manufacturing of communications equipment, computers and other electronic equipment. In addition, about 30% of the output value of foreign-invested enterprises comes from the manufacturing of automobiles and auto parts.[4] The investment of domestic enterprises from other provinces is more diversified. Overall, outside investment in Chongqing mainly goes to high-tech industries.

 

Tech Giants Move into Sichuan and Chongqing

It is noteworthy that as leading investors in Sichuan and Chongqing in recent years, multinational companies and domestic enterprises are capitalising on the region’s advantages to satisfy their needs for global business expansion. In the electronics sector, for instance, large numbers of electronics engineers have been trained in the western region. Chengdu and Chongqing, in particular, have an ample supply of tech talent and personnel in the electronics field. The western region also has a well-developed defence industry, with Chengdu and Chongqing as leading centres. Given that the Chinese government is stepping up its efforts to convert defence technologies to civilian use, Chengdu, Chongqing and their surrounding areas have become focal points for highly qualified personnel in the electronics and other technology sectors.

 

Technology Resources of Chengdu and Chongqing

Chengdu

• Technology personnel number about 3.89 million (of which 1.85 million are professional technical personnel, ranking first in the western region)
• 53 tertiary institutions, including Sichuan University, University of Electronic Science and Technology of China, and Southwest Jiaotong University
• 67 national-level collaborative innovation centres, key laboratories, engineering technology research centres and other types of research and development platforms

Chongqing

• More than 890,000 technology personnel
• 67 tertiary institutions, including Chongqing University, Chongqing University of Technology and Chongqing University of Posts and Telecommunications
• More than 1,000 research institutions

Source: Chengdu Investment Promotion Commission; Chongqing Municipal People’s Government

 

Chengdu and Chongqing boast the largest clusters of electronic industries in the western region. For example, the Chengdu High-Tech Industrial Development Zone is home to more than 200 high-tech companies, including Intel and Texas Instruments, and has formed a relatively complete system of integrated circuit industries. Figures released by the development zone suggest that one out of every two notebook computers in the world has its CPU packaged and tested in Chengdu. For upstream parts and components, there are advanced TFT-LCD production lines, LCD glass substrate and other new display projects in the development zone. BOE Technology, a mainland-based group, is investing to build a Gen 6 LTPS/AMOLED production facility in Chengdu.

After relocating part of its production line from Shanghai to the western region a few years ago, Intel now air freights the chips produced in its factories in the United States, Israel, Dalian and elsewhere to Chengdu for packaging and testing. They are then shipped by air to various parts of China or exported to markets around the world, some via Hong Kong. This makes Chengdu one of the main packaging and testing centres for Intel chips produced around the world. Intel is currently upgrading its Chengdu facility, and plans to transfer some of the extended production lines in Israel to Chengdu.[5]

Texas Instruments is also upgrading and expanding the capacity of its packaging and testing facility in the development zone. Foxconn also has production plants for tablet computers, smartphones and relevant parts and components in Chengdu, and started to produce notebook computers for Apple in the city in mid-2016.[6]

 

 

Apart from Chengdu, Sichuan province has another cluster of manufacturers of electronic goods. These include local companies such as Changhong (colour TVs) and Chengdu Guoteng Communications (telecoms/data equipment), together with a supply chain capable of supporting their production activities. Domestic enterprises from other provinces, such as TCL and Lenovo, and foreign companies like Dell, have also invested in Chengdu to produce HDTV, computers and other information-technology products. These, together with the high-tech companies mentioned above, are contributing to the gradual improvement of Chengdu’s – and even Sichuan’s – overall supply chain.

As for Chongqing, the China Silian Instrument Group (electrical equipment, semiconductors and LED products) and CISDI Engineering (energy saving, environmental protection and information-technology equipment) have all made significant headway in the electronics sector and have joined the ranks of China’s top 100 electronics enterprises. Overseas high-tech companies are also actively investing in Chongqing. In particular, HP has increased the capacity of its production plant in Chongqing, and the computers and other information products produced there supply the booming domestic and global markets. Taiwanese manufacturers of information-technology equipment such as Acer, Quanta, Inventec and Foxconn are also setting up plants in Chongqing. These are directly responsible for the surge in Chongqing’s output of computers and other electronic products in recent years.

In fact, due to the policy support given by the municipal government for electronics manufacturing, information technology and other industries, Chongqing’s high-tech industries have been expanding for some years. For example, the Chongqing Liangjiang New Area was established in mid-2010 as a national-level development zone, with a status similar to that of Shanghai’s Pudong New Area and Tianjin’s Binhai New Area. With electronics as one of its target industries, Liangjiang offers preferential land policy, subsidy, credit support and other incentives to investors. Another example is the Chongqing Xiyong Micro-Electronics Industrial Park, which is actively wooing investors from sectors including information technology, integrated circuits and software. Liangjiang and Xiyong have bonded facilities to attract export-oriented production activities.

Against these backdrops, Chengdu and Chongqing have developed into important bases for the electronics industry, and their achievements are clearly evident. The following are some of the latest figures provided by the Chengdu High-Tech Industrial Development Zone, in mid-2016:

• The chips of 50% of all notebook computers produced globally are packaged and tested in Chengdu
• Two-thirds of iPads produced around the world are manufactured in Chengdu
• 40% of notebook computers produced globally are manufactured in the Chengdu- Chongqing district

 

Sichuan and Chongqing as Gateways to Domestic and Overseas Markets

As well as being technology centres, Sichuan and Chongqing are the transport hubs of western China, accessible to cargo transport and logistics networks. Under the “Go West” strategy, they have in recent years substantially upgraded their infrastructure, expanded their road and water-transport networks and improved their overall logistics distribution capacity with the central and coastal areas. Chengdu and Chongqing have also strengthened their air and rail links with other countries, including the China-Europe express freight-train services between Chengdu and Lodz in Poland and between Chongqing and Duisburg in Germany. This has completely changed the old impression that the western region is not in a good position to engage in production activities relating to international trade.

[Note: For more details about the China-Europe express freight-train services, please see: China-Europe Trains: The Express Route for Belt and Road Businesses]

Sichuan’s population of some 81 million people used to be the main source of migrant workers in China’s coastal areas. However, as the cost of living rises in the coastal areas and employment opportunities increase in the western region, many migrant workers are heading home to look for jobs. Chongqing, with a population of about 30 million, has ample labour supply as well. In view of these factors, growing numbers of domestic companies and foreign-invested enterprises operating in the coastal areas are relocating their production facilities to Sichuan and Chongqing, in part to keep their workers engaged while expanding their production capacity.

The governments of Sichuan and Chongqing are also actively looking for companies wishing to shift their businesses inland from the coastal areas where operating costs are high, and are wooing investors of more high-tech industries to set up production plants in this region. Combined with the fact that many multinational and domestic high-tech and electronic enterprises have already moved into this region in recent years, this has stimulated demand for all types of producer goods and prompted some upstream materials suppliers to follow their clients and invest in Sichuan and Chongqing in order to tap the growing market for industrial materials.

These developments have not only turned the western region into a destination for coastal enterprises to transfer some of their more high-tech production, but also made the region an ideal place for foreign and domestic enterprises to expand their businesses and further open up overseas markets and domestic sales. With the continuous flow of investment from outside, the sales value of the Sichuan and Chongqing electronics industry soared to RMB404.8 billion and RMB295.4 billion, respectively, between 2010 and 2014, representing an average annual growth rate of about 30% and 76%, respectively.

The industries in Sichuan and Chongqing have also evolved from having a majority of domestic sales to being export-driven. Exports by the electronics industries in Sichuan and Chongqing in 2014 accounted for 62% and 74%, respectively, of the total sales value, and their total export delivery value ranked fourth and sixth, respectively, among all provinces and municipalities in China. The main export items include computers, integrated circuits and telecommunications products. On the other hand, although the domestic sales ratios of the electronic industries of these two places have been on the decline, the actual sales values have been increasing, although the growth rate is trailing behind that of exports. This shows that more and more domestic companies and foreign-invested enterprises are using Sichuan’s and Chongqing’s leading-edge in technology, labour supply and other resources to expand domestic and overseas markets.

 

 

Implications for Hong Kong Businesses

An increase in investment by outside enterprises reflects the growing attention directed towards the western region. Sichuan and Chongqing have a wealth of technology talent and an ample supply of labour. The region’s rich market potential is favourable for the development of manufacturing clusters of electronics and other more high-tech industries. At present, not only multinational companies but also big mainland and Taiwan companies are investing in Sichuan and Chongqing. Upstream suppliers have also followed in their clients’ footsteps to this region in order to tap the growing market for industrial supplies. The efforts made by the local governments to lure more businesses from the coastal areas where operating costs are high will further stimulate demand for various types of production materials. This will generate opportunities for Hong Kong suppliers of upstream materials.

On the other hand, Sichuan and Chongqing are aiming for a higher technological level and are heading in a more service-oriented direction in their industrial development. Their governments welcome modern services in addition to manufacturing in the hope of achieving diversification. Electronics manufacturing has been extended to cover areas such as communications systems for transportation and rail transport, global positioning systems and logistics management. Greater importance is attached to the research, development and the application of new-energy vehicles to help boost the Sichuan-Chongqing region’s automobile sector. Local enterprises also hope to strengthen co-operation with technology and service sectors in other regions to increase their competitiveness and open up more domestic and overseas markets. Apart from opening the doors for Hong Kong technology companies to enter the western China market, these developments will also generate good opportunities for Hong Kong service providers, such as those providing business services in product design and technology solutions, brand and market promotion, and even international logistics.

With their maturing industry chains and more efficient logistics distribution systems, Sichuan and Chongqing offer an additional option to Hong Kong companies that are considering moving their coastal production facilities and expanding their production capacity inland. Moreover, the supply chain links between Sichuan and Chongqing and the coastal areas are getting closer. As their downstream clients are increasingly being tempted to invest in the western region, Hong Kong’s upstream suppliers may need to consider how they can move inland with their clients or find other ways to give them support.

[Note: For more details on the direction of industrial development of Sichuan and Chongqing and the current situation of industrial relocation, please see Relocating to Chengdu and Chongqing: The Implications for the High-tech Sector]

 

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[1]  Source: Chengdu Investment Promotion Commission

[2]  Source: Statistical Communiqué of Sichuan Province on 2015 National Economic and Social Development

[3]  Source: Statistical Communiqué of Chongqing Municipality on 2015 National Economic and Social Development

[4]  Source: Chongqing Statistical Yearbook

[5]  Source: Chengdu High-Tech Industrial Development Zone

[6]  Source: Chengdu High-Tech Industrial Development Zone

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HKTDC Research | 25 Oct 2016

Relocating to Chengdu and Chongqing: The Implications for the High-tech Sector

China’s western region has an abundant supply of labour and land. With constant flows of foreign investment into Chengdu and Chongqing, the region’s industry chain is moving towards maturity while efficiency of the local logistics and transportation sectors has been enhanced. This has helped to turn the Chengdu-Chongqing region into an ideal base for industrial relocation from the coastal areas. However, as the local economy and industry continues to develop, the Chengdu-Chongqing region is becoming more cautious with land planning and is shifting from merely placing emphasis on the amount of investment projects to developing high-tech and high value-added industries.

Hong Kong companies wishing to expand and take advantage of what the western region has to offer should bear in mind the impact of higher logistics costs on their export businesses, and consider ways of connecting the supply chain in the coastal areas with the western region in the course of their production. They should also note that space for industrial relocation to the western region could diminish over time. Production activities in the Chengdu-Chongqing region, especially in light of the rapid growth of the electronics and other high-tech industries, will directly stimulate demand for a wide range of industrial materials, which could bring about considerable market opportunities for Hong Kong’s upstream materials suppliers.

 

 

Lower Production Costs Offset Logistics Charges

In recent years, the continual flow of foreign investment into Chengdu, the capital of Sichuan province, and the nearby Chongqing municipality has propelled the rapid development of the local supply chain. Technology giants such as Intel and HP have set up production plants in the region, while other foreign companies including Quanta, Inventec and Foxconn of Taiwan have established R&D and production bases there that are engaging in the production and export of information-technology products. The presence of these foreign players, together with mainland enterprises such as TCL and Lenovo, has greatly increased the spectrum of the existing local industry cluster and turned the Chengdu-Chongqing region into the largest modern manufacturing centre in China’s western region.

It is worth noting that the ongoing expansion of production activities in the Chengdu-Chongqing region has attracted many upstream materials manufacturers and supporting industries. Many have invested in the region in order to support their clients’ production activities and to help develop the industrial market in the western region. Moreover, Sichuan and Chongqing are both leading automobile production bases in China with a complete auto-parts supply system. Following the continual growth of other industries, the industry chain in Chengdu and Chongqing is becoming increasingly mature and the two cities have developed into ideal industrial relocation bases for companies from the coastal areas.

 

 

One example is Chongqing Huike Jinyang Technology Co Ltd, headquartered in Shenzhen. The company, which owns the well-known mainland computer brand HKC, relocated part of its production activities to Chongqing from Shenzhen some years ago, establishing a presence in the Chongqing Hong Kong Industrial Park. Chongqing Huike employs more than 1,000 staff in Chongqing, producing LCD display panels, computer monitors and TV sets, as well as conducting R&D and product design activities. About 70% of its products are sold in the mainland market, with the remainder exported to overseas markets like Europe, the United States and Asia.

A Chongqing Huike representative told HKTDC Research that its products made in Chongqing were mainly delivered overland to Shenzhen, where they were gathered with products manufactured in other regions and distributed to the mainland market for sale or exported via ports in the coastal city. A small portion of the products is transported from Chongqing to Shanghai for direct export to foreign clients. Chongqing Huike also acquires some of the materials from Shenzhen to support its daily production activities. As such, the company has to bear higher logistics costs.

Focusing on High-tech and High Value-added Industries

It is worth noting that as the pace of industrial development accelerates, Chongqing is also eager to attract investment projects involving higher technology. For instance, apart from offering preferential tax and land policies, the Chongqing Hong Kong Industrial Park has set up a special industrial development fund aimed at encouraging and supporting industries that adhere to the local development policies. These industries – in addition to the textile and garment trades, which have been given priority for development – mainly include new strategic industries such as laptops, communications, environmental protection equipment, pharmaceuticals, and new materials. This shows that Chongqing, as an industrial relocation base, is gradually shifting from attracting labour-intensive industries to focusing on those of higher value-added business and higher technology.

 

 

As industrial development in the city moves towards maturity, the Chengdu government has become more cautious with land planning in order to prevent land shortage. For instance, the Chengdu High-Tech Industrial Development Zone formed by the South Park and the West Park not only attaches importance to developing high-tech and new and strategic industries, but also advances the development of the financial and commercial services sectors. Such efforts aim to strengthen support for production industries and promote the development of the zone as well as Chengdu’s overall economy.

In view of the fact that the West Park, which was developed earlier, is reaching saturation, the Chengdu High-Tech Industrial Development Zone is currently shifting its focus to developing the South Park. While efforts are being made to develop the next generation information-technology industry, bio-industry and service industry, steps are also being taken to set up related facilities and platforms such as incubators and entrepreneurship centres with a view to turning South Park into an international innovative industrial development centre.

Overall, the Chengdu High-Tech Industrial Development Zone hopes to attract more investment from companies with technological and innovative capabilities. As for industries that are more traditional, have lower technology content and do not meet the development needs of the zone, even though they may wish to relocate to the zone for development, they are likely to have less room for growth.

 

 

 

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[1]  Source: Hong Kong Industrial Park in Chongqing

[2]  These concessions are available provided that the projects adhere to special industrial investment policies. For details, please make enquiries with the Chongqing Hong Kong Industrial Park.

[3]  For more details on Chengdu city, please see Western China: The Route to Success along the Belt and Road

[4]  Source: Chengdu Jiaolong Port Management Committee

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28 Oct 2016

Japan, China and the Trans-Pacific Partnership (TPP) as a Strategic Tool of Choice

RCAPS Working Paper Series

By Benny TEH Cheng Guan, School of Social Sciences, Universiti Sains Malaysia, Penang, Malaysia

Abstract

This paper discusses the role of the Trans-Pacific Partnership (TPP) agreement as a strategic tool for Japan in pursuing its national and regional interests. While it is undeniable that the economic benefits to be accrued from the agreement in terms of boosting Japan’s economic growth are important and well argued, Tokyo’s motivation to engage the TPP is driven more by its geopolitical and strategic calculations. The former serves middle to long term ambition while the latter takes on short to middle term goals. Centering on the latter, the paper discusses three major motivations:

1. the use of the TPP to exert innovation and drive change at home in maintaining its strategic competitiveness;
2. the perceived importance of the TPP as a rule setter for regional economic cooperation; and
3. the significance of the TPP in balancing Beijing’s strategic influence in the region. China’s move to fortify its relations with neighboring countries through its own initiatives in an unending tussle with the US could see the formation of two opposing trade blocs in the Asia Pacific region. Japan can play a significant role in bridging the gap and contribute to the possibility of convergence.

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HKTDC Research | 1 Nov 2016

China-Europe Express Trains: On Track to Access Belt and Road Businesses

Since the launch of the China-Europe Railway Express (CR Express) linking China with Europe by fast-track cargo rail, freight volume has increased substantially, particularly in the past year. The CR Express is of increasing interest to companies wanting to transport Chinese products to Europe while tapping markets along the Belt and Road routes, including manufacturers in western China and companies in the coastal region looking for an alternative to sea freight. Some companies even take advantage of these freight trains’ speed and customs clearance facilitation to bring imports into the booming domestic market.

As the CR Express service is expected to continue to improve, Hong Kong manufacturers and traders could consider using rail as an adjunct to sea transport in order to develop inland market opportunities along the Belt and Road routes in both Asia and Europe. Logistics providers could also strengthen co-operation with railway logistics companies to connect with logistics networks in Hong Kong, so as to further strengthen their niche in international transport and logistics in sea and air transport.

 

 

Fast Expansion of Services to Cover the Whole Country

China’s Europe-bound freight-train service (now formally named the CR Express) was launched in March 2011, with the first train setting off from Chongqing to Duisburg, Germany. As of August 2016, more than 2,100 trains[1] had been dispatched via the Yuxinou (Chongqing-Xinjiang-Europe) International Railway. Currently, the CR Express provides regular rail services to at least 16 Chinese cities, including Chongqing, Chengdu, Zhengzhou, Wuhan and Suzhou, calling at more than 12 cities in eight European countries[2]. Of particular interest is the fact that CR Express services have grown rapidly in the past year, with increasing numbers of mainland companies relying on rail to transport goods to Europe.

 

 

The CR Express provides not only direct railway transport to Europe from China, but also a one-stop service in cargo inspection, quarantine and customs clearance thanks to the support of relevant government authorities. Notably, the technical specifications of the railway system and rail tracks are different between China, countries in Central Asia and Europe. Trains need to change from one rail track system to the others when crossing the China-Russia border, entering Central Asia (countries such as Kazakhstan), and arriving in Eastern Europe and Western Europe. However, such technical issues have been resolved thanks to the concerted efforts of the railway and shipping companies concerned. Today, most logistics operators are capable of monitoring the cargo during the whole process and provide the consignor with clearance on arrival at the railway terminus, warehousing and transshipment to the desired destination.

 

 

 

Currently, the CR Express mainly passes through Alashankou/Korgas in western China to Kazakhstan, Erenhot in northern China to Mongolia, and Manzhouli/Suifenhe in northeast China to Russia. Major lines in service include:

• Chongqing to Duisburg, Germany:     about 11,179km;    about 14 days.
• Chengdu to Łódź, Poland:                 about 9,826km;      about 10 days.
• Zhengzhou to Hamburg, Germany:   about 10,399km;     about 17 days.
• Suzhou to Warsaw, Poland:              about 11,200km;     about 12 days.
• Wuhan to Lyon, France:                   about 11,300km;     about 15 days.
• Changsha to Duisburg, Germany:     about 11,808km;     about 18 days.
• Yiwu to Madrid, Spain:                      about 13,052km;     about 21 days.

Note: Train services are expected to continue to improve. For updates, please make enquiries with the relevant railway departments.

Source: China Railway Corporation; Chengdu Investment Promotion Commission; Yuxinou (Chongqing) Logistics Co Ltd; Henan People’s Government; Jiangsu Department of Transportation

 

 

Supplementing Air and Sea Freight

By helping companies to export goods to Eastern Europe and Western Europe, the CR Express is playing an important role in China’s Belt and Road strategy and helping to strengthen bilateral trade and investment with countries along the route. Furthermore, some logistics operators also provide clients with transit services from the terminuses in Germany and Poland to neighbouring areas, effectively extending the coverage of the CR Express.

Of particular interest is that the CR Express was earlier used primarily for transporting Chinese exports to Europe. But Chinese companies are now increasingly using the service to import goods from Europe. In the first half of 2016, the CR Express operated 619 train services (a 150% increase year-on-year), of which 410 departed from China, and 209 returned (a 318% rise year-on-year[3]), representing 51% of the number of departures.

IT and other electronic products are now the major categories of export goods currently carried by the CR Express. Others include household appliances, machinery and equipment, auto parts, food, clothing, general goods, and e-commerce merchandise. Interestingly, although many e-commerce items are mainly transported by air, they are being carried increasingly via the CR Express. On the other hand, imports mainly include wood products, food, agricultural goods, auto parts and finished vehicles.

Generally, these China-Europe freight trains transport cargo to their destinations three times faster than shipping by sea for one-fifth of the cost of transport by air[4]. While rail freight is still more costly than sea freight, the CR Express can work as an adjunct to sea and air transport, and rail connections are likely to increase as more and more companies use rail services to expand China-Europe trade.

Europe-bound services from the Guangdong province have also been launched, such as the service from Guangzhou to Vorsino in Kaluga, Russia via Manzhouli in Inner Mongolia, which began in August 2016. This was the second Europe-bound train service from the province, following the service from Shilong, Dongguan to Duisburg, Germany, which started operating in April 2016. According to China Railway Corporation’s information, the line covers a distance of 11,500km, taking about 15 days. Clothing, footwear, computer accessories and electronic equipment produced in the Pearl River Delta (PRD) region were shipped using a standard 40-foot container. The railway company is planning to strengthen Europe-bound train services from Guangdong, and is actively working on rail connections with Kazakhstan and Uzbekistan in a bid to transport more goods manufactured in the PRD region and southern China to markets in Central Asia and Europe.

Implications for Hong Kong Companies

The recent rapid expansion and increasing frequency of Europe-bound rail services, and the significantly shorter lead time of 10-12 days for the fastest routes, means rail has gradually become a viable alternative to sea and air transport for export and import enterprises exploring European trade opportunities. Meanwhile, the related railway transport companies are actively working with countries along the CR Express route to negotiate not only transit arrangements, but also the feasibility of stopovers to collect cargoes halfway on the route. This is to align with the current China-Asia CR Express service, whose freight trains are departing from China and heading to Asian countries like Nepal, Kazakhstan and Uzbekistan.

These developments will effectively enhance the transport links between China and countries in Asia and Europe and strengthen the capabilities of related logistics providers of cargo transportation and distribution. Under such circumstances, Hong Kong companies may need to consider the feasibility of the further use of rail transport to enhance their flexibility in expanding into Eurasian markets. Furthermore, logistics operators can also strengthen partnerships and co-operation with the relevant railways, helping to connect them to logistics and transport networks in Hong Kong, and so enhance their advantage in the international transportation and logistics business.

 

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[1]  Source: Information released by China Railway Corporation on 30 August 2016.

[2]  Source: Information released by China Railway Corporation on 18 July 2016.

[3]  Source: China Railway Corp

[4]  Source: National Development and Reform Commission

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2 Nov 2016

One Belt, One Road: China’s Vision of “Connectivity”

By Dr. Stephen Aris, Senior Researcher, Center for Security Studies (CSS) at ETH Zürich

President Xi Jinping has outlined plans to construct huge infrastructural links to better connect China with the rest of the world. This strategic vision of a “New Silk Road” is now more often referred to as the “One Belt, One Road” (OBOR) initiative. Beijing is allocating huge amounts of finance to the project, but China’s neighbors remain wary of OBOR’s geopolitical implications.

Since becoming China’s “paramount leader” in 2013, Xi Jinping has launched a series of both domestic and foreign policy initiatives. All of these aim to ensure political stability and continued economic growth at home and to position China as a new major player within international affairs. What is noticeable about Xi’s various policy initiatives is that they draw an increasingly overt link between domestic and foreign affairs. Arguably, the most noteworthy in this regard is the “New Silk Road” strategic vision, now more often referred to as the “One Belt, One Road” (OBOR) initiative.

Invoking the historical imagery of the ancient Silk Road, OBOR envisions the construction of a set of grandiose infrastructural links that run from China to the rest of the world. The aim is to generate greater trade and enhance connectivity between China and Africa, Eurasia, Europe, the Middle East, and South and Southeast Asia. While a few sections of the New Silk Road are already in place or under construction, currently most only exist on the drawing board. Nonetheless, this vision of connectivity is beginning to catch the attention of the international community. Governments, businesses, and citizens that may lie along the proposed routes are attracted by the huge amount of finance that Beijing has suggested will be allocated and raised to make the vision a reality. At the same time, they are also wary of the geopolitical implications of becoming a node in these Chinaorientated routes of connectivity.

Due to its free trade agreement with China and its growing role as an “offshore renminbi hub”, Switzerland is well placed to play an important role in engagement with OBOR in the European context.

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4 Nov 2016

China Go Abroad (4th Issue) - Key connectivity improvements along the Belt and Road in telecommunications & aviation sectors

Albert Ng, Chairman, China Managing Partner, Greater China, EY:

“China’s outward FDI reached USD99 billion in the first half of 2016, an over 50% increase compared with the corresponding period of 2015. It reflected the increasing Chinese interests in internationalization due to the country’s economic transformation and the changes in global markets. However, the desire for expansion poses a critical test on the overseas investment and operating abilities of Chinese enterprises. “Going out” is not the ultimate goal, rather, the key is how far you can go and how successful you become. EY expects China’s outward FDI in 2016 is likely to exceed USD170 billion for the whole year, reaching another historical record high. In the coming years, the tide of China’s overseas investment will continue to rise and maintain a double-digit growth rate. The challenges for Chinese enterprises are to improve their strategic decision-making and operating capabilities, seize the opportunities and generate new drivers for growth in order to survive ‒ and thrive ‒ in the international markets.”

Loletta Chow, Global COIN Leader, EY:

“Stepping into 2016, Chinese enterprises are performing remarkably well in the global investment market: as a net capital exporter, China's outward investment has exceeded the inward investment. The underlying high growth is the fresh and energetic momentum released by the Chinese outbound investment. A decelerated return growth rate for domestic investment and expectation of renminbi devaluation are the key concerns for capital and funds to look for better alternative opportunities. On the other hand, Chinese enterprises need to accelerate their internationalization process to enhance their competitiveness. In addition, with the implementation of encouraging national strategies such as “One Belt, One Road”, China’s outbound investment is expected to continue to grow in the future.

“The manufacturing industry has experienced a remarkable growth in China’s outbound investments. It indicates that the policies to promote the sector’s “going out” and strengthen international capacity cooperation have been successful. Technology-rich assets are the most sought-after currently as Chinese companies move up along the value chain. Thus, European and American countries with advanced technologies, stable economies, and healthy investment environments continue to be the most popular investment destinations.

“This year, 2016, is also witnessing China’s continued implementation of the “One Belt, One Road” initiative. Spanning more than 60 countries cross Europe, Asia and Africa, the initiative is fueling this round of outbound investment. In our last China Go Abroad report6, we focused on the rising high-end manufacturing power in China - the “going out” of high-speed rail and nuclear power. In this issue, we will turn to another two important sectors which also play an important role in the “One Belt, One road” strategy - the telecommunications and aviation sectors. From the “Information Silk Road” to the “Aerial Silk Road”, both large state-owned and private enterprises are actively developing their investment blueprints. And we expect to see substantial and robust development of the related investments driven by the “One Belt, One Road” initiative in mid-to-long term. However, careful due diligence and risk assessments will become the key for enterprises in their efforts to succeed due to the unique ‒ and often high risk ‒ investment environments along the Belt and Road.

“Outbound investment requires significant funding and needs to consider many sophisticated factors. A good financing structure will increase the success rate of investment. In the regional analysis of this issue, we will focus on Hong Kong and explore its important role in developing the “One Belt, One Road”. Because of its advantages in policy, talent and international experience, Hong Kong can serve as a strong platform from which Chinese enterprises are able to “go out” more smoothly. Relating to this, the EY Overseas Investment Growth Navigator has been developed to help Chinese enterprises to understand their possible financing difficulties and solutions, and we will look at a tax planning case study showing the importance of thorough investment and financing planning.

“For those involved in this new wave of outbound investment, enterprises should not just blindly follow existing trends. Instead, they should foster their own international market perspective and undertake long-term strategic planning. We look forward to seeing Chinese enterprises embrace the world with a better market understanding and show the world a new image of the mature Chinese corporation.”

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

 

 

 

 

 

 

 

 

HKTDC Research | 8 Nov 2016

Western China: Access Belt and Road Markets via Hong Kong

Western China’s thriving economy not only encourages the inflow of foreign investment aiming to tap the local market, but also spurs companies in the region to step up their efforts in “going out” to look for resources to boost their competitiveness and further develop overseas markets.

A survey conducted recently by HKTDC Research shows that as a service platform, Hong Kong is the first choice for these companies “going out” to tap business opportunities in markets along the Belt and Road routes. In fact, companies in western China are very keen to seek professional services support from Hong Kong in brand design and marketing strategy, sales, product development and design, financial and legal matters in order to control the risk of investing overseas, and to establish effective sales channels there. With enterprises stepping up their efforts in “going out” – especially those in economically more developed cities such as Chengdu and Chongqing – to actively expand their overseas operations, an endless supply of market opportunities are being created for service providers in Hong Kong.

(Note: For more information on the service needs of enterprises in western China to invest overseas, please see: China’s “Going Out” Initiative: Service Demand of Western China to Tap Belt and Road Opportunities)

Chengdu Sets Sights on Overseas Project Contracting

For example, Chengdu-based Sichuan Huaxi Group Co Ltd, after 60 years of development, is now one of biggest construction groups in western China, indeed the whole country. Engaged in project contracting on the mainland and overseas, real-estate development, building materials, financing and leasing, it has operations in more than 30 administrative regions throughout China, and more than 20 other countries and territories, including parts of Africa, South Asia and Southeast Asia. Huaxi Group has participated in offshore projects including hospitals and resorts in Kenya, hotels in Egypt, a sports stadium in Fiji, airport facilities in Zambia and Laos, urban facilities in Angola, as well as some of Hong Kong’s infrastructural development projects, such as the Tsing Ma Bridge.

 

 

As for overseas development, Huaxi Group told HKTDC Research that it had a market research team that collected information on overseas markets, which it also monitors through its Hong Kong network, particularly to collect information on laws and regulations as well as the business culture of the less developed countries along Belt and Road routes. This could help the group to effectively manage and control investment risk and reduce barriers to overseas markets.

It is understood that Huaxi Group’s overseas business is largely settled in foreign currencies, which require it to reduce exchange-rate risk using financial instruments. Also, given the many overseas investment opportunities, the group is keen to find cost-effective ways to raise funds through financing in Hong Kong, in addition to mainland financing, in order to promote overseas business development. The group has extensive experience in project contracting, and is very competitive in terms of cost control. In some technical areas, such as water treatment, it also recognises the strength of Hong Kong’s engineering service providers. The group aims to strengthen co-operation with Hong Kong companies in the areas of finance and technology to develop overseas-market opportunities in joint efforts by “going out”.

Chongqing Group “Going Out” to Foster Business Development

Besides, Chongqing Foreign Trade Group Co Ltd is now one of Chongqing’s key enterprises engaging in “going out" business. In recent years, the company has vigorously implemented the so-called “Boat Outward” strategy (i.e., strengthening its international business). It has made great efforts to optimise its business structure and speed up its transformation and upgrading. As a result, it has formed a business structure integrating the development of four business segments – namely, international trade, international engineering, modern finance, and cross-country investment.

Today, Chongqing Foreign Trade Group is a top-100 Chinese multinational company and a top-500 service company, having 16 subsidiaries and employing more than 30,000 people worldwide. It has four regional headquarters in Central and South America, Central and Eastern Europe, Southeast Asia, and Africa, and has set up offices in 39 countries and territories.

 

 

During the 13th Five-year Plan period (2016-2020), the company will focus on creating a modern service and cross-country investment platform in order to foster the further development of its four business segments. It aims to strengthen its “business platform”, “business channel” and “business integration" capabilities.

In making overseas investments and management of international operations, the company pays special attention to the use of various financial instruments in Hong Kong for project financing and reducing the cost of capital. In view of Hong Kong’s rich international information resources, the company has set up a branch office in the city to help manage its international business operations, especially the collection of market information in order to facilitate overseas mergers and acquisitions, and international trade business.

Looking ahead, Chongqing Foreign Trade Group will further strengthen overseas investment, including in countries along the Belt and Road routes like Southeast Asia and Africa. The company is keen to seek more of Hong Kong’s professional services, such as taxation, investment and financing consulting, in order to effectively reduce investment costs and managing overseas investment risk.

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HKTDC Research | 11 Nov 2016

China Takes Global Number Two Outward FDI Slot: Hong Kong Remains the Preferred Service Platform

While the pace of global economic growth is slackening, Chinese enterprises are actively making outward foreign direct investments (FDI) and expanding their businesses overseas. Together with the country’s efforts in advancing the Belt and Road Initiative, and strengthening various forms of economic co-operation with business partners in countries along the Belt and Road routes, this has contributed to the continued growth of China’s outbound FDI. China is now one of the world’s leading sources of FDI, its outflows in 2015 ranking second globally only to the US. During the same period, China’s outward FDI exceeded its inbound FDI, making the country one of the world’s net capital exporters.

In recent years, the Chinese government has substantially relaxed the relevant administrative measures for overseas investments, whereby enterprises may now make outward FDI according to their own development plans. Currently, about 60% of the mainland’s outbound investment flows to Hong Kong, and it is believed that most of this is subsequently channelled overseas through Hong Kong’s service platform for different kinds of investment activities.

 

 

Hong Kong has always been the preferred service platform for mainland enterprises looking to invest abroad, helping industry players in the coastal areas and inland regions to handle matters involving investment and trade in foreign markets. Hong Kong is also the preferred location for mainland enterprises seeking professional services to capture opportunities arising from the Belt and Road Initiative. Its full range of professional services covers such areas as finance, legal service, tax, risk assessment of sustainable operations, and international testing and certification. As the mainland accelerates its pace of “going out” and advances the Belt and Road development strategy, its outward FDI activities will continue to expand, providing more business opportunities for professional service suppliers in Hong Kong.

World’s Second-Largest FDI Source

According to figures released in September 2016 by the Ministry of Commerce, China’s outward FDI flows in 2015 reached US$145.7 billion (up 18.3% year on year), for the first time ranking as the world’s second-largest source of FDI. Its investment amount, second only to the US (US$300 billion) but higher than third placed Japan (US$128.7 billion), accounted for 9.9% of the global total of FDI outflows in the same period.

 

 

Meanwhile, in 2015, China’s outward FDI also exceeded the amount of its utilised foreign direct investment (US$135.6 billion), making the country a net capital exporter. It is worth noting that in this two-way capital flow involving the inflow of foreign investment into the mainland and outflow of Chinese investment abroad, Hong Kong serves as an important platform.

 

 

 

 

 

[Remarks: For findings of the surveys conducted by HKTDC Research in the PRD, YRD, Bohai Rim and western region, please see the following reports – Guangdong: Hong Kong Service Opportunities Amid China’s “Going Out” Strategy (December 2013); Jiangsu/YRD: Hong Kong Service Opportunities Amid China's "Going Out" Initiative (September 2014); China’s “Going Out” Initiatives: Professional Services Demand in Bohai (September 2015); and China's “Going Out” Initiative: Service Demand of Western China to Tap Belt and Road Opportunities (July 2016).]

 

Belt and Road Initiative Adds Growth Momentum to Outward Investment

Meanwhile, China’s great efforts in advancing its Belt and Road development strategy[2] and encouraging more enterprises to conduct various kinds of trade and investment activities in countries along the Belt and Road routes have also contributed to the rapid growth of China’s outward FDI.

In fact, China’s FDI outflows to Belt and Road countries rocketed to US$18.9 billion in 2015 from about US$400 million in 2004, with average annual growth between 2004 and 2015 amounting to some 43%, higher than the 35% average annual growth of China’s total FDI outflows during the same period. In 2015, China’s investment in the Belt and Road countries and regions rose 38.6% year-on-year, more than twice the 18.3% annual growth rate of its total outward FDI for the same period. Moreover, the share of China’s outward FDI flows to the Belt and Road locations in its total outward FDI also climbed to 13% in 2015 from about 7% in 2004. In 2015, China’s investment in the Belt and Road Initiative mainly flowed to Singapore, Russia, Indonesia, the United Arab Emirates and India.

 

 

Strong Demand for Hong Kong Services

As mainland enterprises “go out” further to invest offshore and develop overseas business and expand foreign markets along the Belt and Road routes while seeking foreign technologies, brands, production materials and other resources to enhance their competitiveness, it can be expected that China’s outward FDI, including outflows to countries along the Belt and Road routes, will further increase in the years to come.

Hong Kong, as the preferred service platform for mainland enterprises “going out” to invest offshore, has many ways to help mainland enterprises make direct investment and expand overseas business in developed countries including the US and those in Europe. Hong Kong also serves as the ideal service platform outside the mainland for most Chinese enterprises seeking support to tap opportunities arising from the Belt and Road Initiative.

Findings of the questionnaire survey conducted by HKTDC Research in south China in 2016 show that among the many locations outside the mainland, Hong Kong is where the largest number of surveyed companies (50%) wish to seek support in developing their Belt and Road businesses. Such support includes various market-promotion services in Belt and Road markets as well as professional services related to investments in these markets, such as legal, accounting and consultancy services.

(Remarks: For findings on the questionnaire survey conducted by HKTDC Research in south China, please see: Chinese Enterprises Capturing Belt and Road Opportunities via Hong Kong: Findings of Surveys in South China)

For many years, Hong Kong service suppliers have been assisting large numbers of mainland enterprises in handling matters related to their investment and trade activities in Hong Kong and overseas markets. Hong Kong offers many advantages in supporting mainland enterprises to invest overseas, including the free flow of capital, wealth of global communications resources, and a full range of world-class professional services, covering such areas as finance, legal service, tax, risk assessment of sustainable operations, and international testing and certification. Hence, Hong Kong is the preferred service platform for mainland enterprises “going out” to make offshore investment. As the mainland further relaxes the administrative measures for outward investment, encourages enterprises to “go out” to invest overseas, and advances the Belt and Road development strategy, more business opportunities are set to emerge for service suppliers in Hong Kong.

 

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[1]  NDRC Order No.20: Decision of the National Development and Reform Commission on Amending Relevant Articles in the Administrative Measures for the Approval and Record Filing of Outward Investment Projects and Administrative Measures for the Approval and Record Filing of Foreign Investment Projects (27 December 2014)

[2]  China is advancing the Belt and Road (i.e., the Silk Road Economic Belt and 21st Century Maritime Silk Road) development strategy. In March 2015, China issued a document titled “Vision and Actions on Jointly Building the Silk Road Economic Belt and 21st Century Maritime Silk Road”, proposing to accelerate the building of the Belt and Road in a move to better co-ordinate economic policies of countries along the route, promote the orderly and free movement of economic factors, and advance efficient resources distribution and in-depth market integration in creating an open, inclusive, balanced and mutually-beneficial regional economic co-operation framework.

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22 Nov 2016

China’s Belt and Road initiative: can Europe expect trade gains?

By Alicia Garcia Herrero and Jianwei Xu

Abstract

The Belt and Road initiative, recently embarked on by China, aims to improve cross-border infrastructure in order to reduce transportation costs across a massive geographical area between China and Europe. We estimate how much trade might be created among Belt and Road countries as a consequence of the reduction in transportation costs (both railway and maritime) and find that European Union countries, especially landlocked countries, should benefit considerably. This is also true for eastern Europe and Central Asia and, to a lesser extent, south-east Asia. In contrast, if China were to seek to establish a free trade area within the Belt and Road region, EU member states would benefit less, while Asia would benefit more. Xi Jinping’s current vision for the Belt and Road, centred on improving transport infrastructure, is very good news for Europe as far as trade creation is concerned.

Introduction

The Belt and Road project is undoubtedly the most important international project that China has embarked on in the last few decades. It aims to stimulate economic development over a vast area covering sub-regions in Asia, Europe and Africa. Although there has been no official announcement about what countries are covered by the Belt and Road initiative, some official sources point to the involvement of at least 63 countries, including 18 European countries. Particularly relevant for Europe is that the Road ends where the European Union (EU) starts. Most importantly, this massive bloc between the EU and China accounts for 64 percent of the world’s population and 30 percent of global GDP.

One of the Belt and Road’s key objectives is to ease bottlenecks for cross-border trade, in particular through transport infrastructure. This should reduce the cost of transportation, thus stimulating trade between China and these countries. The same effect should be expected for the other end of the road – the EU – because cheaper transportation should also foster its trade with other Belt and Road countries, as well as with China. This paper measures empirically whether the reduction in transportation costs – shipping or railway costs – will have a positive impact on trade flows for Belt and Road countries and, most importantly, for EU countries.

In addition to estimating the size of the trade gains stemming from a reduction in transportation costs, we explore the possibility that the Belt and Road may eventually go beyond its current objectives towards the creation of a free trade area. To that end, we establish a scenario in which China embarks on a free trade agreement (FTA) with the 63 countries of the Belt and Road initiative. This exercise is particularly relevant at the current juncture because the Trans-Pacific Partnership (TPP), a free trade agreement between a number of Pacific economies and the US, is about to be created. China has so far been excluded from the TPP. In other words, we aim to identify empirically what kind of trade gains countries could expect from a reduction of transportation costs and to compare them with potential trade gains from reductions in tariffs stemming from a potential FTA. While our analysis estimates gains/losses for a large number of countries, our focus is EU member states. Our results indicate that the reduction in transportation costs from the Belt and Road initiative should benefit the vast majority of EU countries, especially landlocked countries. In comparison, if China reached a deal for the establishment of an FTA with the countries of the Belt and Road initiative, the benefits would be concentrated among Asian and non-western European countries. EU countries’ trade, in turn, would be harmed although in a relatively limited way. The reason for this is substitution of EU trade with countries within the Belt and Road as their intra-regional trade tariffs are dismantled. In a nutshell, this paper points to the benefits for the EU of Xi Jinping’s current vision for the Belt and Road initiative, which focuses on improving transport infrastructure rather than on a establishing a free trade area within the Belt and Road region.

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24 Nov 2016

Strategic Perspectives on the One Belt, One Road and ASEAN: Achievements, Challenges, Opportunities and Future Direction

By Dr. Sok Siphana

China and ASEAN are looking to achieve a two-way investment goal of USD150 billion by 2020. Both sides are now working toward upgrading the ASEAN-China FTA in order to spur additional trade growth. They are intensifying the negotiation process of the Regional Comprehensive Economic Partnership (RCEP) in the hopes of concluding it this year, all the while working in parallel to complete the ASEAN-Hong Kong FTA.

ASEAN and China have encouraged greater participation of the private sector to increase business, tourism, and cultural exchanges. Concretely, the China-ASEAN Expo in Nanning, the China-South Asia Expo in Kunming, the ASEAN-China Centre in Beijing, the China-ASEAN Business Summits, the ASEAN Economic Ministers’ Roadshow (just to name the main ones), have drawn great interest from both business communities to promote their products and to develop commercial partnerships. Taken as a whole, these regular activities play an important role in strengthening trade and investment ties by accelerating economic exchanges between ASEAN and China.

It is interesting to note that 2016 marks the 25th Anniversary of ASEAN-China Dialogue Relations. Both sides have coordinated their efforts to boost their economic, trade and investment cooperation as well as enhancing connectivity, particularly in infrastructure development and transport.

Socio-cultural Area

In the socio-cultural area, ASEAN and China have promoted cooperation in social, cultural, education, tourism and people-to-people contacts, including exchanges between youth, academics, media organisations and non-governmental organisations, with the aim of enhancing mutual understanding and awareness among the peoples. Moreover, they have collaborated to coordinate their responses against global and regional challenges such as natural disaster management responses through the exchange of information, early warning, and experience sharing on disaster rescue and relief.

In sum, the ASEAN-China strategic partnership is most dynamic and comprehensive when it comes to the overall external relations of ASEAN with their development partners.

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