By Zhao Hong, Institute of Southeast Asian Studies

Executive Summary

In 2013, Chinese President Xi Jinping unveiled plans for two massive trade and infrastructure networks connecting East Asia with Europe: the New Silk Road and the 21st Century Maritime Silk Road (“one belt one road”). The plans aim to reinvigorate the ancient Silk Roads with a modern network of high-speed rail, motorways, pipelines and ports stretching across the region.

The idea of the New Silk Road and the New Maritime Silk Road was raised because China’s domestic economy is experiencing structural changes that reflect a “new normal” of slower but better quality growth.

More importantly, it signals a shift in China’s strategic thinking and foreign policy towards prioritizing the relationship with neighbouring countries. Hence, it has many implications for Southeast Asian countries.

China’s extension of the New Silk Road diplomacy is driven by both economic and political considerations. It is eager to participate in the construction of ports and other related facilities in Southeast Asia and hopes that outward infrastructure investment will help boost production capacity in its iron, steel, aluminum and cement industries for export purposes.

China sees a huge potential in upgrading infrastructure in Southeast Asian countries and is hence supportive of Chinese companies’ participation in such projects. The competition among Chinese provinces for much of this business is likely to launch a new round of investment projects. Some of China’s local governments have been lobbying and organizing activities for preferential policies and financial support from the central government since the Maritime Silk Road initiatives were announced.

Beijing’s new Maritime Silk Road initiative poses an attractive vision of countries working together in pursuit of mutually beneficial cooperation. This initiative appears all the more seductive when it fits with the Master Plan on ASEAN Connectivity and President Jokowi’s vision of maritime power. Nevertheless, there are a number of challenges that China will have to deal with.

Indonesia is the largest country in Southeast Asia and shares many common interests and visions with China in the context of the New Maritime Silk Road initiative. The two countries can strengthen cooperation on transport infrastructure construction as well as on security.

ASEAN countries badly need more infrastructure investment and perceive that multilateral and private sector organizations are not acting fast enough to meet their needs. However, while China has tried to reassure its neighbours that its rapid rise is accompanied by peaceful intentions, there is no guarantee that this will be the case in the long term. There exists a deep-rooted fear among Southeast Asian countries that China has plans that go beyond building roads, laying railways, upgrading ports and boosting trade.

“China’s New Maritime Silk Road: Implications and Opportunities for Southeast Asia” by Zhao Hong, first appeared in Trends in Southeast Asia No. 3, 2015. Reproduced here with the kind permission of the publisher, Institute of Southeast Asian Studies, Singapore http://bookshop.iseas.edu.sg

By E Zhihuan, Chief Economist, Bank of China (Hong Kong)

In light of the recent global economic landscape, the Chinese government launched the Belt and Road Initiative, a national strategy that represents a new form of cooperation. The initiative is expected to turn a new page in international cooperation, create new synergy for the world’s economic growth, and provide Hong Kong with new opportunities for development.

Four innovations of the Belt and Road Initiative

Regarding international cooperation, the initiative presents four key new ideas:

Driven by multiple cooperation mechanisms, the initiative aims to build a community of shared interests through improving infrastructure and connectivity. This innovative concept and type of economic cooperation is significantly different from the traditional ways of regional cooperation.

The initiative focuses on building six major economic corridors, including the New Eurasia Land Bridge, China-Mongolia-Russia and China-Pakistan Economic Corridors, to enhance the flow of capital and talent around the world.

Under the “One Country, One Policy” principle, China has signed Memorandums of Understanding and formulated roadmaps with countries along the Belt and Road, which sets a new example of international cooperation.

Multilateral financial institutions such as Asian Infrastructure Investment Bank and New Development Bank have been established to raise capital for construction projects.

If the Belt and Road Initiative is implemented smoothly, the region will account for half of the world’s GDP in 20 years’ time, becoming the new driver for global economic and wealth growth.

Five opportunities for development under the Belt and Road

In driving the Belt and Road projects, Hong Kong can play to its collective strength and grasp new opportunities:

Hong Kong can serve as a platform for infrastructure investment and management. The Belt and Road will bring about strong growth in infrastructure investment along the route. When choosing partners in infrastructure investment and management, Hong Kong can give priority to countries with close trade ties with China, or countries which are politically stable, having good cross-border cooperation and strong industrial complementarity.

Countries along the Belt and Road are rich in natural resources with huge reserves in oil and natural gas, presenting high utilization potential. The development of industries such as petrochemical, metallurgy, deep processing, mining, mechanical manufacturing and electronics will accelerate, creating business opportunities for Hong Kong enterprises.

Over the next ten years, bilateral trade between China and countries along the route will exceed US$2.6 trillion. Hong Kong can leverage its advantages in trade, bonded trade, offshore trade, re-export and transshipment trade, with a view of facilitating the flow of trade and goods along the Belt and Road.

The Belt and Road initiative encourages Chinese enterprises to invest along the Silk and Road. Last year, related direct investment reached US$14.8 billion. Hong Kong enterprises can provide professional services such as financing, consultancy, accounting and engineering to Chinese enterprises. As such, enterprises from both sides can capitalize on their own advantages and collaborate on the success of the investment projects.

There will be advantages and opportunities for Hong Kong’s financial sector. Hong Kong can accelerate the establishment of an integrated financial platform serving the six major economic corridors and draw up an integrated financial solution. With a pool of talent from around the world, Hong Kong should strive to become a major overseas operational centre of organizations such as the Asian Infrastructure Investment Bank and a leading international financing platform. As the world’s largest offshore renminbi centre, Hong Kong can offer a range of renminbi financial products and asset allocation tools to the Belt and Road, thereby further enhancing its function as an offshore market.

While capitalizing on opportunities, businesses should not ignore the potential risks. To enhance their core competitiveness, they have to effectively manage the political and economic risks under the Belt and Road Initiative.

This article was firstly published in the HKGCC magazine “The Bulletin” August 2016 issue. Please click to read the full article.

By PwC

PwC B&R Watch: Review of capital project and deal activity in the countries that fall under the Belt & Road Initiative (B&R). The review finds that over US$490bn of projects and deals were announced in 2016 across seven core infrastructure sectors (Utilities, Transport, Telecoms, Social, Construction, Energy and Environment). A third of all these were in China, with the remainder spread across the rest of the B&R region.

• PwC B&R Watch finds a positive picture in 2016, with an increase in the volume and the average dollar value of infrastructure projects.

• In China, the average project size increased by 14% - largely driven by public expenditure on infrastructure as a central pillar of economic policy.

• M&A activity points to a decline in volume and dollar value, reflecting a flight to quality and renewed focus on project economics.

The review uncovers striking growth in the size of capital projects across the B&R region. The value of the average project was 47% higher than in 2015.

Please click to read the full report.

By Michal Makocki, European Union Institute for Security Studies (EUISS)

(Mr. Makocki served as Consul for Economic Affairs at the Consulate General of Poland in Hong Kong in 2007-2008.)

The EU and its eastern partners have found themselves among the focal points of China’s ambitious economic project, the Belt and Road Initiative (BRI), which aims to revive economic, cultural and political exchanges along the ancient Silk Road. Given their geographical location at the crossroads of Eurasian routes, eastern Europe and the Caucasus are expecting to benefit from substantial infrastructure investments and new commercial opportunities. For the EU, China’s endeavour to establish new economic corridors in the region covered by the block’s Eastern Partnership (EaP) policy, poses both opportunities and challenges.

The BRI could potentially support the EaP’s goals by generating wealth in the region and helping to diversify its economy. However, to a substantial degree it is also up to the EU to make sure that the economic promise that BRI carries is actually delivered on and that the high hopes some of the eastern partners have in Chinese investments are justified. Indeed, this aspect is stipulated in the June 2016 EU China strategy, which stresses that ‘it is in the EU’s interest to work with China to ensure that any Chinese involvement in the EU’s eastern and southern neighbourhoods helps reinforce rules-based governance and regional security.’ It is therefore pertinent to look at eastern Europe’s relations with China and explore the best policy solutions to achieve synergy between European and Chinese projects in the region.

On the Road

Not surprisingly, given the ever stronger economic links with China, the BRI was met with   a rather warm welcome from the EU’s eastern partners. For certain EaP countries, China is already one of the most important economic partners. This is, for example, the case with Ukraine, which has become one of the main suppliers of grain to China. In Belarus, China has created an industrial park and promised infrastructure financing as part of the BRI during the last visit by President Xi Jinping in May 2015. China has also joined the European Bank for Reconstruction and Development (EBRD) to tap into investment opportunities in eastern Europe.

China’s promise that the BRI will generate large-scale investments in eastern European infrastructure is seen by many as a panacea to sluggish domestic economic development and a way to bridge the massive infrastructure gap between the region and the EU. Additionally, several eastern European governments hope that BRI infrastructure will extend their trade reach and thus diversify the markets for their own products.

Eastern European expectations concerning the economic potential of the BRI are partly warranted by developments on the ground. In the last year, the land-based container traffic between Europe and China has increased to more than 30,000 containers, an impressive achievement given that four years earlier few (if any) cargo trains operated on this route. And additional Chinese economic engagement and infrastructure projects in Central Asia mean that traffic is to likely increase further.

Further to the south, China’s project is stimulating local investments in support the creation of new freight corridors such as the Trans-Caspian route, which connects Europe with Kazakhstan and China through the Caucasus and the Caspian Sea. This route already allowed trains operated by Kiev to bypass Russia’s transit ban on Ukrainian goods by shipping cargo through the Black Sea, Georgia, and Azerbaijan. Georgia is also betting on increased commercial opportunities and signed up to a Free Trade Agreement with China in the latter half of 2016.

Quality and reality

These early achievements suggest that the BRI might have the potential to open up new economic markets and to create greater wealth and stability across Eurasia. The EU is in a good position to help eastern Europe fully tap into the BRI’s economic potential. The EU can play an advisory role, showing in what areas and ways the BRI creates the greatest possible added value to national economic development and supports the jointly-agreed goals of the EaP. But China’s promises – and their related implications – need to be carefully analysed.

Eastern Europe’s rather positive perceptions of Chinese financing do not necessarily match with the reality of China’s practices. An evaluation of the existing evidence of Chinese investments along the ‘New Silk Road’ suggests that recipient countries and the EU can expect a number of shortcomings. Examples from other regions suggest that it is unlikely that Chinese investments will prove to be a silver bullet for fixing EaP countries’ lack of adequate infrastructure, nor will they help to advance overall, sustainable economic development.

First, the availability of Chinese financing might be working against the governance standards envisaged by the EU with regard to the eastern partners, as the latter may feel less inclined to comply with complex EU rules if presented with an alternative source of funding. China’s objective has been to promote its own model of infrastructure construction which starkly contravenes EU rules on public procurement and state aid. As such, Chinese projects may also work against the EU’s rules and norms, to which EaP countries have signed up to through Association Agreements. BRI-related financing – and the accompanying aversion by Chinese firms to transparency – might also fuel corruption and prop up regional oligarchs who view government predation as a business opportunity.

Second, Chinese investors have a tendency to shift the burden of risks associated with infrastructure investments entirely to the receiving country. Unlike the EU’s financing instruments, for example, Chinese funding rarely involves grants. Instead, Chinese banks extend financing on the basis of sovereign guarantees from the recipient countries. This, in turn, might negatively affect fiscal stability, thereby also reducing the likelihood of recipient countries being able to acquire more funding from other international players, such as the World Bank. A relevant example, albeit from a different region, is China’s BRI-related financing of a motorway in Montenegro. The country suffered a lowering of its credit rating by agencies Moody’s and Standard and Poor’s due to fears that the Chinese loan for the construction of the motorway could ultimately undermine fiscal stability. Another consequence was the withdrawal of the World Bank’s $50 million budget support fund due to the concerns over the same loan. This example draws attention to the fact that Chinese financing can lead to competition over domestic resources and capacities and may crowd out the EaP and other multilateral instruments. Accordingly, China’s model of conducting infrastructure deals may imperil key macroeconomic reforms agreed under the EaP and undermine macro-financial assistance programmes.

Another serious downside of Chinese BRI-related financing is that it (sometimes) has a tendency not to bring real value for money. As this infrastructure financing is often tied to the provision of equipment or services by Chinese contractors, governments are unable to select the best financial offer through open public procurement tenders. For example, Chinese loans extended to Ukraine under the previous regime of President Yanukovych had to be renegotiated due to concerns over their terms and conditions.

Some Chinese companies also have a patchy record of compliance with environmental or social standards. One of the best known examples in the region was the inability of Chinese engineering company COVEC to build a highway in Poland that was in full compliance with EU environmental guidelines, with the company demanding additional exemptions from labour, social and taxation laws for Chinese labour and machinery involved in the project.

EU member states also need to monitor potential shifts in political allegiance among eastern partners. Chinese pragmatism has proven to be a double-edged sword: while Beijing helped Ukraine circumvent Russian transit bans, other Chinese state-owned enterprises (SOEs) were allegedly interested in building a bridge between the annexed Crimea peninsula and the Russian mainland. Moreover, Chinese investments in separatist or breakaway territories in the region may further fuel conflicts, and China’s rapprochement with Moscow may limit its potential to play a positive role in the neighbourhood.

China has already demonstrated that it will respect Russia’s perceived sphere of influence. For example, due to Russian sensitivities, China did not allow Moldova (and possibly other EaP countries) to join the 16+1 mechanism when it was created. Similarly, in May 2014 Russia forced China to formally acknowledge Russia’s role in the post-soviet space and agree to consider the ‘interests of Russia during the formulation and implementation of Silk Road projects’. This agreement was further extended through the officialising of cooperation between the Silk Road and the Eurasian Economic Union, agreed in May 2015 in Moscow. While recent press reports have discussed the possibility of Ukraine joining the 16+1 mechanism, no formal talks on accession have actually been held.

Chinese projects will also have security implications, including the assessment of hybrid threats to the region: because of its political rapprochement with Russia, China may be amenable to Russian pressure. The safest (and politically sensitive) option would be to allow Chinese SOEs to develop non-strategic portions of infrastructure connectivity to China, while supporting the strategically vital ones through EU or domestic funds. This would protect the sovereignty of EaP countries – a key goal of the EU’s partnership initiative.

Engaging China

Looking beyond the economic potential, China’s growing investment role in the EaP countries poses a number of potential challenges from an EU point of view. This makes a structured response to Chinese BRI projects, as called for by the recent EU Strategy on China, even more desirable.

First of all, any response should be guided by the principle of assisting eastern European partners in obtaining the best possible conditions from Chinese counterparts while respecting the mutual commitments to the EaP. Through the EaP, the EU and the region have already established a comprehensive policy framework which can incorporate China. The region’s engagement with Beijing should thus ideally be embedded within European Neighbourhood Policy (ENP) Action Plans or Association Agendas, which every partner country has individually negotiated with the EU. Under the transport component of the EaP, a list of priority infrastructure projects for the regional transport network has already been agreed upon. The best approach could be to identify a pipeline in the list of priority corridors and projects to be undertaken by China, and offer to co-finance or co-implement the initiative. Such an approach would also take into account China’s willingness to tap into existent regional plans or networks.

However, Chinese participation does not have to be limited to the list of priority projects. Additional proposals could be agreed jointly, as long as they fit with the wider regional transport strategy, are linked to TEN-T networks, and comply with EaP principles. Silk Road-related projects embedded in EaP Action Plans and following ENP principles will likely be of higher value than those agreed bilaterally (where China would be able to push projects according to its own priorities). More specifically, the EU could propose co-financing Chinese projects which promise the greatest possible economic added value and which align with EaP goals. For example, EU support could be given to those projects which aim to diversify energy sources and decrease energy dependence on hydrocarbons from Russia, build connections to the EU market or increase intraregional links between EaP countries.

If the fiscal stability of partner countries is a priority, China could be encouraged to participate in the construction of the region’s infrastructure through investments rather than project lending. By investing in the projects, rather than just lending money, China would be forced to take on its corresponding share of risk. That would subsequently act as a guarantee that the Chinese expect projects to be commercially viable. Such an approach will also help make sure that China brings actual development to the recipient countries rather than build ‘white elephants’ or support vanity projects. By embedding Chinese projects in national development strategies, such an approach will share the profits from Chinese projects more equally and beyond political elites. This, in turn, will bring more economic stability rather than exacerbate the socioeconomic fault lines within the region.

The EU may also have to acknowledge its limited leverage when it comes to influencing Chinese corporate behaviour (although it can help shape the environment in which Chinese companies operate). It is local frameworks and structural conditions, rather than the EU’s direct engagement, that will put BRI projects on a sustainable footing. Past records of Chinese undertakings suggest that countries with higher standards of governance are in a better position to properly assess the true costs and benefits of any Chinese deals. Improvements in the rule of law and the business environment will therefore allow EaP countries to get better value for money and address key deficiencies in China’s model of infrastructure construction.

All this means there is a serious demand for the EU’s experience in creating high quality regulatory environments. EU support will be crucial to strengthen environmental and social regulations, thereby boosting the capacity of EaP partners to conduct environmental and social impact assessments of any infrastructure projects, including Chinese ones. For example, the EU could use European Neighbourhood Instrument (ENI) grants to allow for an appraisal of a project’s feasibility and development according to shared European rules and principles. Finally, assistance could also be offered to engage international law firms or consultancies for advice over deals with Chinese SOEs.

Michal Makocki is an Associate Analyst at the EUISS and a former Senior Visiting Academic Fellow at Mercator Institute for China Studies in Berlin.

This article was originally published by the EUISS in February 2017 and is reproduced here with the permission of the Institute.

Please click to read the full report.

HKGCC magazine "The Bulletin"

The Mainland’s Belt and Road initiative seeks to promote regional economic growth through economic and trade cooperation among over 60 countries and regions along the Silk Route Economic Belt and 21st Century Maritime Silk Road. Of the initiative’s five major goals, policy coordination, facilities connectivity, trade and investment facilitation, financial integration and people-to-people bonds; facilities connectivity mainly in the form of infrastructure development has emerged as a top priority.

Hong Kong’s role in the Belt and Road Initiative

As the Belt and Road Initiative covers over 60 countries, this implies complex corporate treasury operations that include such elements as cash flow management, foreign exchange, cross-border payments, risks and liability control. Therefore, a regional corporate treasury centre (CTC) would be required to centralize all treasury functions so that multinational corporations can enhance operational efficiency, reduce foreign exchange exposure and risk, as well as achieve economies of scale in treasury operations.

Hong Kong is already a premier CTC in Asia. Hong Kong’s advantage lies in its well-developed financial infrastructure including but not limited to its deep and liquid foreign exchange and money markets, absence of capital restrictions, stable and free exchange rates, and concentration of the world’s leading banks. Furthermore, Hong Kong possesses a simple and competitive tax regime, a common law system, an excellent pool of well-educated labour force and business professionals, as well as world- class transport and telecommunications infrastructure. More importantly, its proximity to Mainland China and its position as a premier offshore renminbi centre makes Hong Kong a preferred location for fulfilling Belt and Road projects. For all these reasons, Hong Kong is the first choice by far in Asia for many corporations, especially Chinese firms, to raise funds.

Singapore, which also shares many of Hong Kong’s attributes, is another leading regional CTC in Asia. Compared to Hong Kong, Singapore is more attractive to corporates whose main business is in Southeast Asia and India. The city also offers a favourable tax rate of 8% for CTCs, as well as a number of incentive schemes for global treasury businesses. In addition, Singapore has a distinct advantage over Hong Kong in terms of the 80 Double Tax Agreements (DTAs) it has signed. This is in contrast with the less than 40 DTAs entered into thus far by Hong Kong.

Geographic proximity is considered an important determining factor for treasury operations to function effectively. To this end, London is less ideal despite its standing as an international CTC due to its distance from the Belt and Road countries.

In comparison, Hong Kong is an ideal CTC location for Chinese companies that are expanding globally (including those participating in Belt and Road projects). It is also the preferred location for MNCs’ corporate treasury operations, which are increasingly trading in renminbi.

As mentioned above, external financing will be needed to bridge the immense funding gap for Belt and Road projects. Debt financing or debt securitisation can be considered a useful means to provide funding for these projects. In contrast to equity funding, this option allows governments to retain control over public projects while providing long-term investors with guaranteed returns.

This method of financing also has the advantage of supporting another key objective of the Belt and Road Initiative, which is to promote the internationalization of the renminbi. A sizable and market-determined renminbi-denominated debt market is essential to encourage non-resident corporates and investors to hold and use renminbi. The absence of large and liquid capital markets (debt, equities, derivative and money markets) offshore has hindered the global expansion of the renminbi. There is an urgent need for the Mainland to either establish a sizable debt market offshore or open up its onshore debt market as soon as possible. How- ever, as the latter remains heavily regulated and is dominated by public debt, this is unlikely to meet investors’  demands in the foreseeable future.

This is where Hong Kong can play a role. Hong Kong possesses a developed financial infrastructure for both debt securitisation and project financing. Hong Kong also has a diversified investor and issuer base, with foreign currency debts accounting for up to almost half of the local market. Although Singapore shares similar characteristics, Hong Kong has the edge due to a bigger pool of offshore RMB bonds.

In addition, Hong Kong’s vast and diverse investor base includes 201 authorized institutions, 158 insurance and reinsurance companies, and 594 Hong Kong- domiciled SFC approved funds. It is perhaps noteworthy that in 2014, more than 70% of the combined fund management businesses with some US$2.3 trillion in assets were sourced from overseas investors.

Hong Kong is also considered a major offshore RMB debt centre for infrastructure investments, including both structured debts and infrastructure bonds, com- pared to around 20 other offshore RMB clearing centres around the world, including Singapore and London. By the end of 2015, the total value of outstanding Dim Sum bonds in Hong Kong amounted to around 368 bi lion RMB, which far outpaced that of its second-placed rival, Singapore, which accounted for some 50 billion RMB (Q2 of 2015). There is also strong local appetite for diversified and longer-term investment vehicles such as debt, given that the offshore renminbi loan-to-deposit ratio in Hong Kong is still very low at 29.4% in 2015 (versus the overall loan ratio of around 70%). Moreover, continuous improvement of the offshore renminbi market infrastructure in Hong Kong will help attract global investors to trade debt in Hong Kong.

Recommendations

The Hong Kong SAR Government should lobby the AIIB to set up its treasury centre in Hong Kong. This would give rise to a cluster effect by encouraging other enterprises that possess or are planning to set up a CTC to choose Hong Kong for their operations as transactions would be more cost-effective when conducted in one place.

Although the Hong Kong SAR Government has introduced a 50% cut on corporate tax rate on prof- its (i.e. 8.25%) of eligible CTCs that are established in Hong Kong, this is contingent on such CTCs being standalone corporate entities or those satisfying the safe harbour rule under the current regime. It is recommended that this requirement be removed so that multinationals do not have to alter their corporate structure to enjoy the tax benefit. To do otherwise would undermine the benefit of and objective behind the tax concession.

Furthermore, the Hong Kong SAR Government should enter into more regional DTAs to enhance its competitiveness versus Singapore. Presently, some 47 countries have signed a DTA with Singapore but not Hong Kong. Many of these countries are located along the Belt and Road. A special unit under the Office of Financial Secretary should be set up to lead and oversee the negotiation process, with the aim of expediting the expansion of Hong Kong’s DTA network.

Debt financing centre

In light of the vast potential in debt financing of Belt and Road projects, Hong Kong is being presented with an invaluable opportunity to build up an enviable debt market that is comparable in size to that of the U.K. The Hong Kong SAR Government should, in conjunction with the private sector, proactively lobby the AIIB, NDB BRICS and SRF to issue foreign currency bonds, Dim Sum bonds and infrastructure bonds in Hong Kong. The role of the Infrastructure Financing Facilitation Office under the Hong Kong Monetary Authority should be expanded to include the function of a marketing agency for attracting more of such activities to Hong Kong.

The Hong Kong SAR Government should consider providing tax incentives (such as the deductibility of interest income on corporate tax) for companies to hold debt. This includes the extension of a tax exemption on interest income and profits derived from debt instruments issued by governments and multilateral agencies in all types of currencies. Currently, under the Qualifying Debt Instrument (QDI) scheme, interest income and trading profits arising from certain debt instruments are exempted from profits tax in Hong Kong according to Sections 14A and 26A of the Inland Revenue Ordinance (Cap 112). This includes RMB-denominated bonds issued by the Central People’s  Government  of  the  People’s  Republic  of  China in Hong Kong, Exchange Fund Bills and Notes, Hong Kong Government Bonds and Hong Kong dollar- denominated multilateral agency debt instruments. In addition, the Government can also consider exempting profits tax on interest income and trading profits from debt securities issued by specific funds for infrastructure projects.

This article was firstly published in the HKGCC magazine “The Bulletin” September 2016 issue. Please click to read the full report.

By Anastas Vangeli, Torino World Affairs Institute (T.wai)

In 2012 China launched a platform for pragmatic cooperation with the sixteen countries of Central, East and Southeast Europe (called “16+1” cooperation): Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Serbia, Slovenia, Slovakia and Romania. In 2013, after the unveiling of the Belt and Road Initiative (BRI), “16+1” was repurposed as one of the mechanisms for implementation of the Silk Road vision. The visits by President Xi Jinping to Prague, Belgrade and Warsaw in 2016 reinforced the impression that China considers these countries to play an important role in the implementation of the BRI.

In Europe, the main questions on the “16+1” cooperation revolve around its potential effects on the relationship between the European Union (EU) and China (eleven of the sixteen are EU member states). Yet, China’s cooperation with the other five countries – Albania, Bosnia and Herzegovina, Macedonia, Montenegro and Serbia – also raises important questions on issues pertaining to Sino-EU ties. To understand the prospects for a Sino-Balkan relationship and the Silk Road in the Balkans, it is therefore necessary to first grasp the context in which this relationship is developing.

The violent conflicts from the 1990s and the subsequent political and economic decline of the region have led to the Balkan countries losing much of their agency on the international stage. The agenda for the Balkans over the past 25 years has been set by the “international community” – the EU and the United States in primis. They have prioritized peacebuilding, statebuilding and democratization, accompanied by economic neoliberalization, which were to be implemented through a closely supervised process of comprehensive reforms of the countries’ political and economic systems.

Today, in terms of political transformation, the outcomes have been underwhelming – while there may be some stability in the region, political tensions and undemocratic tendencies still loom large. The EU has been seen as promoter of positive change in the past, but nowadays is growingly seen as parts of the problem. In terms of economic transformation, the impression is even worse –neoliberal reforms have resulted in rampant economic devastation. The global financial crisis has cemented the Balkans as a European “super-periphery,” as it was precisely these countries that “suffered the most from the global recession of 2008-09.” Today, labor-intensive trade-processing industries thrive in the region, as manual labor is cheaper than in China itself.

The BRI, therefore, comes to the Balkans at a time when there is a sense of incompleteness and disillusionment with mainstream paradigms from the past 25 years. It is, in fact, based on a very different set of principles compared to those of the West. The Chinese keyword about the Balkans is “untapped economic potential.” The cooperation spans across different policy fields but is dubbed “pragmatic”, meaning that political issues are off the table. The cooperation is focused on conceiving and implementing concrete projects, fostering, “industrial capacity cooperation,”, alongside boosting trade and investment. Slowly but steadily, China has been delivering: highways, energy plants, steel mills and other projects are in the works or have been already completed – although an even greater number of projects is still at the discussion stage. Slowly but steadily, China has been delivering: highways, energy plants, steel mills and other projects are in the works or have been already completed – although an even greater number of projects are still at the discussion stage.

What is important to note, however, is that even though Beijing does recognize the different status of EU
and non-EU countries (saying the latter have more “flexibility” in cooperating with China), it does not perpetuate the orientalization of the Balkans or the “Western Balkans” as an inherently distinct group based on historic and cultural specifics. Rather, it treats Balkan states as subset of a larger region based on structural similarities and geographical proximity. China’s mental geography, therefore, does not see the Balkans as Europe’s hinterland, but as a bridge between different regions. The BRI thus envisions large-scale projects, such as the China-Europe Land-Sea Express Railway, which spans from Budapest to the Piraeus Port in Greece (now 67% owned by COSCO) through Serbia and Macedonia, getting both EU and non-EU countries involved. This also runs opposite the history of divisions and disputes, and stimulates much-needed intra-regional cooperation, allowing for the Balkans to exercise their agency again, and to have a certain degree of ownership over their own development agenda.

Cooperation under the BRI framework is an open-ended process, there is no conditionality, and the results it delivers (in the form of infrastructure investment or trade flows) are easily measurable. Yet, the BRI in the Balkans has yet to mature. Assuming this trend continues, then, what would its end result look like? China does not seek to replace EU and the United States as a major external actor in the region, nor does it have the potential to do so. Records from elsewhere have shown that intensification of China’s economic diplomacy can indeed stimulate better economic performance; but the benefits of China’s presence come at certain costs, as Beijing indirectly influences local debates on domestic policy models and principles, often providing inspiration for leaders who fancy the creation of strong-armed states with free economic zones.

How will other global actors, then, adjust to the advancement of the BRI in the Balkans? The European Union started the so-called Berlin Process on the Western Balkans in 2014, coupling it with its Balkan Connectivity Agenda (BCA) in 2015, putting strong weight on economic development – emphasizing connectivity, infra- structure construction, and economic renewal for the first time. Given the change in tone, some see the BCA as the European “response” to the BRI in the Balkans. Yet, China and the EU are comprehensive strategic partners, after all they have already explored ways to bring together the Juncker Plan and the BRI and, with enough political will, they may be able to make both projects align.

The more important challenge would be, however, to make the BRI work for the benefit of, as Chinese scholars say, “the majority of the people” in the Balkans – a region that has bore the costs of neoliberal globalization. In the official documents, the BRI is framed as a means to contribute to the post-2008 global economic renewal and ameliorate inter-regional inequalities. However, it is also framed as a mechanism to strengthen the very same world economic system that has produced those disparities. The success of the BRI, therefore, is dependent on whether these goals will be attainable in the Balkan Peninsula – a region which, once again, gains renewed centrality as history unfolds.

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By Dr. Gal Luft - co-director of the IAGS and a senior adviser to the United States Energy Security Council

China's Belt and Road Initiative (BRI) is not only the most ambitious and all-encompassing economic development project in the history of humanity but also the core of what is likely to be China's grand strategy for the twenty-first century. It aims to connect China and Europe in a web of roads, high-speed rail, power lines, ports, pipelines, fiber-optic lines and other infrastructure with the goal of stimulating growth in the scores of developing countries in between. New maritime trade corridors provide China with new shipping alternatives while offering its less developed western, northern and southwestern provinces easier access to new markets. While the initiative offers China great strategic and economic benefits it also offers hope to the struggling economies of Europe, Asia and Africa.

Yet, despite the magnitude and promise of the initiative and its interface with almost every region in which the United States has strategic interests – the Middle East, South China Sea, India-Pakistan, Eastern Europe and Central Asia to name a few – Washington has largely ignored it, and in some cases it even took active measures to undermine it. This course of action is wrong. With the BRI territory accounting for seventy percent of the world's energy and almost all of the world's Muslim countries, many of them vulnerable, politically unstable, financially embattled and perplexed by perceived American atrophy, Washington's response to the creation of what could become by the middle of the century the world's largest economic zone will determine to a large extent not only the future of the U.S.-China relations but the fate of the global system writ large. With the global economy facing a potentially prolonged deep freeze and with hundreds of millions of Asians still disconnected from the global market with little hope of rising from poverty, Washington should recall that, like it or not, its fate is interlinked with that of the developing world, and it should thus at the very least give its blessing to those who offer relief. Instead of snubbing the BRI the United States should consider ways to embrace those parts of it that correspond with its geopolitical rationale and ideological worldview while staying away from those BRI elements that undermine its strategic interests. This option leaves the United States with sufficient maneuverability yet it positions it as a willing and pragmatic team player rather than a spoiler. The following recommendations should be considered:

• Adjust the Washington bureaucracy to deal with the BRI's vastness and complexity

• Form a dedicated mechanism to engage with china on BRI matters

• Carve out a role for America

• Join the Asian infrastructure investment bank (AIIB)

• Define red lines

• Initiate transatlantic coordination on the BRI

• Promote U.S.-Chinese understanding at sea

• Leverage the U.S Role in multilateral development banks and international organizations

• Craft a red, white and blue development agenda

• Cease fire in the war on coal

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By CCR Advisory Group

In September 2013, just six months after his election as President of China and ten months after his election as General Secretary of the Communist Party of China, Xi Jinping made a tour of Central Asia. In a speech at Nazarbayev University in Astana, Kazakhstan, he announced, for the first time, the One Belt, One Road (OBOR) project for Eurasian integration, comprised of the New Silk Road and the Maritime Silk Road. Since that initial announcement, OBOR has emerged as a cornerstone of China's economic and political outreach to Eurasia, Africa and beyond.

A Network of Development Banks

Under the OBOR umbrella, China has launched a series of development banks, including the multilateral Asia Infrastructure Investment Bank (AIIB), and the Silk Road Fund. AIIB now has 57 member states, including major United States allies in Europe, as well as South Korea and all the countries of ASEAN. China is one of five founders of the BRICS New Development Bank (NDB), along with Russia, India, Brazil, and South Africa. Between these three institutions, there is a capital base of $240 billion.

The Chinese government, in addition to its capital contributions to these three funds, has invested $62 billion in infrastructure capital through the China Development Bank, the Export-Import Bank of China, and the Agricultural Development Bank of China, outside of the formal structure of the OBOR projects. The China Construction Bank, another Chinese financial institution focused on infrastructure lending, has been investing $40 billion per year since the launching of OBOR in 2013, and has partnered with the Singapore state development board to invest an additional $22 billion for projects, largely in Southeast Asia, which are part of the Maritime Silk Road.

In a speech in Beijing on August 17, 2016, President Xi Jinping reviewed the progress of the OBOR effort, telling the audience that over 100 countries and international organizations have signed on to the project in one way or another.  he One Belt, One Road project has been called "The Second Marshall Plan," but boosters point out that the Chinese initiative is 12 times larger than the Marshall Plan, in constant dollar terms. It extends across all of Eurasia, from eastern China to the Atlantic Ocean and inland ports of Western Europe.

Scope of Major Projects Underway or Planned

The OBOR project extends from the Pacific Far East through Southeast and Central Asia into Europe, the Middle East, and Africa.  Maritime projects intersect the New Silk Road overland rail and road projects.

China is heavily investing in African infrastructure as part of the Maritime Silk Road component. In recent years, China has invested in 1,000 African projects, including the construction already of 2,200 kilometers of railroads and over 3,300 kilometers of paved highways. In trips to South America, Xi Jinping and other Chinese officials have negotiated for the building of a trans-continental railroad, linking the Atlantic coast of Brazil with the Pacific coast of Peru.

Within Eurasia, China has modernized the Greek port of Piraeus. As of August 10, 2016, China's State Owned Enterprise (SOE), China Ocean Shipping Company (COSCO), has bought a 51 percent ownership in the Piraeus Port Authority.

At the heart of the OBOR program is a Eurasia-wide grid of freight and passenger rail, running along three corridors, extending from Eastern China to port cities on the Atlantic coast of Western Europe.  China, in the past two decades, has built more high-speed rail (HSR) than all the rest of the world combined. While some of the rail projects simply involve connecting links between existing regional rail grids, the fact is that there are already regular freight shipments, by rail, between Xian and Belgium, Yiwu and Madrid, and Eastern China and Duisburg in Germany, at the juncture of the Ruhr and Rhine Rivers. The first freight rail train arrived recently in Iran from Eastern China, cutting the travel time by 2/3 to just 14 days, at a greatly reduced cost.

The potential scope of the OBOR project is vast, directly impacting 65 percent of the world population, a third of the world's GDP, a quarter of the world's goods and services, and three-quarters of the world's proven energy supplies.  That translates into 4.4 billion people and $21 trillion per year in economic activity, carried out in the regions directly involved in the OBOR.

This has positioned Chinese SOEs to play a pivotal role in rail construction projects globally.  The trans-continental railroad from Brazil to Peru, cutting through the Amazon Jungle and the Andean Mountains, alone, is a $250 billion project, which China has proposed to finance and construct. As part of the integration of the Maritime Silk Road and the New Silk Road, China is building a high-speed rail system between Belgrade and Budapest, which will link the Piraeus port to the Danube River basin, through additional rail and road grids running up from Southeast Europe. China is also bidding on a high-speed rail project in the United States, running from San Diego through Los Angeles to San Francisco.  China is prepared to finance half the cost of the project.

As part of the Maritime Silk Road, China is building a deep water port at Gwadar in Pakistan on the Arabian Sea, at an initial cost of $1.6 billion. The port will link the New Silk Road and the Maritime Silk Road, and will be part of a larger complex in Gwadar which will include an LNG (liquefied natural gas) facility.  The China-Pakistan Economic Corridor (CPEC), a showcase project of the overall OBOR, is a $46 billion investment from China, which is greater than all foreign direct investment (FDI) in Pakistan since 1970.

Can China's Financial Resources Meet Funding and Governance Demands?

After a period of sharp decline, China's foreign hard-currency reserves have stabilized, and as of September 2016, the People's Bank of China set the reserves at $3.18 trillion. China has the cash to back up the ambitious OBOR plans, and has clearly demonstrated a willingness to "put their money where their mouth is." Between the multilateral development funds (MDF) and the direct Chinese investment in OBOR, a significant amount of long-term credit can clearly be generated. But World Bank and other agencies estimate that Asia alone requires $2-3 trillion a year in infrastructure investment to fill the "infrastructure gap," and the combined efforts of China and the newly-established MDFs can only provide a portion of those needs, at least for the next decade.

However, a 2015 study by the German Development Institute, "Financing Global Development: The BRICS New Development Bank," concluded that, with proper management of its lending, and by partnering with other multi-lateral development funds, NDB alone can provide as much as $34 billion a year in development loans in a short number of years. That would represent a more than ten-fold increase over the $2.5 billion in lending that has been announced for 2017 at the just-concluded BRICS summit in Goa, India. This would put the NDB on a par with the European Investment Bank, which is otherwise the largest regional development bank in the world, with $32 billion in infrastructure investment in 2012.

The German study contained a number of caveats and guidelines for the NDB to achieve those goals: "The scale of lending of the BRICS bank needs to be large enough to make a meaningful impact, given the significant level of needs identified. The impact of a BRICS bank must also be measured in terms of its capacity to enact leverage through its co-financing of projects in the private and public sectors.

"National and regional development banks, as well as the World Bank, will be natural partners. Indeed, the creation of the NDB and the AIIB also reflects a shift toward a greater emphasis on public development banks, regionally as well as nationally. There is a growing consensus that well-run public development banks can play a positive role in funding the real economy, especially in light of the limitations of the private financial system in doing so. This is the case in particular in certain sectors, such as infrastructure, where long-term finance is required before investments become profitable, often beyond the maturity dates that the private banks are willing to lend for, especially in poorer countries."[1]

The first question that must be answered in assessing the feasibility of China's OBOR project is whether the new development banks—the AIIB, the Silk Road Fund and the NDB—can live up to and surpass existing world standards.  From the outset, the Obama Administration expressed reservations about whether a Chinese initiative could meet those global standards.  Following Britain’s announcement that it was joining the AIIB as a charter member, the National Security Council issued a statement to The Guardian newspaper, explaining the Obama Administration’s stance:

"Our position on the AIIB remains clear and consistent. The United States and many major global economies all agree there is a pressing need to enhance infrastructure investment around the world. We believe any new multilateral institution should incorporate the high standards of the World Bank and the regional development banks.

"Based on many discussions, we have concerns about whether the AIIB will meet these high standards, particularly related to governance, and environmental and social safeguards… The international community has a stake in seeing the AIIB complement the existing architecture, and to work effectively alongside the World Bank and the Asian Development Bank."[2]

Now, 18 months later, many of those reservations have been at least initially proven to be over-stated. The fact that so many countries have joined the AIIB and have been given full participation in the designing and staffing of the governing structures of the bank, has actually translated into compliance with those global standards and norms.

The AIIB charter was devised on the basis of the Zedillo Commission study on needed reforms of the World Bank. The Commission, chaired by former Mexican President Ernesto Zedillo, formally called the "High-Level Commission on Modernization of the World Bank Group Governance,"[3] recommended crucial streamlining of the loan review process to avoid costly overhead and long delays in loan approval. Those reforms were absorbed into the design of the AIIB.

Security and Geopolitical Challenges

While the governance issues appear to have been resolved, at least in the initial phase of operations of the AIIB and the NDB, there are other daunting challenges that must be overcome for the full OBOR program to succeed. Those obstacles relate to security issues and geopolitical considerations that pose far greater challenges than structural issues or short-term capital shortfalls.

The flagship China-Pakistan Economic Corridor (CPEC) is itself the best example of the security and geopolitical challenges. Along the route of the CPEC, which is comprised of a road-and-rail link from Western China, a series of oil and gas pipelines, and other infrastructure projects, there are formidable security challenges. At least three major insurgent groups operate along the route, including the East Turkistan Islamic Movement (ETIM), the Pakistani Taliban and several Baluchistan separatist movements. The project has moved ahead slowly, because Pakistani security forces cannot even secure the Chinese workers who are part of the labor force for these roads, railroads, and pipelines. The proposed route of the CPEC also runs through part of Pakistan-occupied Kashmir (POK), which is the Indian name for the disputed border territory.

While India, in hosting the October 15-16 BRICS heads of state summit, chose to focus exclusively on areas of common interest among the five participating nations, the bilateral meeting between Indian Prime Minister Narendra Modi and Chinese President Xi Jinping focused on two major areas of China-India contention: China’s refusal to support India’s membership in the prestigious Nuclear Suppliers Group (NSG) and China's opposition to India’s Comprehensive Convention on International Terrorism (CCIT), which has languished at the United Nations Security Council since 1996, due to China’s reticence to open up ally Pakistan to sanctions for state support of the terrorists who have carried out attacks on India (the Indian parliament attack in 2001 and the Mumbai massacre in 2008, Kashmir 2016).

Writing in The BRICS Post on October 16, 2016, Jabin T. Jacob of the Institute of Chinese Studies in New Delhi called on Indian Prime Minister Modi to adopt a more proactive approach to the disputes, by openly joining in the CPEC project, thus taking a stake in the Pakistan-China economic advancement and providing Indian security assistance. He argued that, under such circumstances, India would be in a stronger position to shift China’s opposition to Indian accession to NSG.  Ultimately it is to India’s advantage to boost trade ties with China and Pakistan. China has already offered to invest in Modi's signature "Brand India" initiative, and in India's major investment in Iran's Chandahar deep-water port on the Arabian Sea.[4]

The China-Pakistan-India case is but one example of the complex geopolitical minefields that China and the other OBOR participating states will have to navigate. Chinese leaders are hardly unaware of these pitfalls. Xu Fengxian of the Chinese Academy of Social Science recently wrote that the biggest challenges to the success of the OBOR initiative are the “unbalanced economic development” of the countries included in the plan and the immense security challenges. He cited the China-Pakistan Economic Corridor as the test case for whether the project can succeed. Can the prospect of economic development trump the ethnic and other conflicts that abound along the New Silk Road route?[5]

There are further concerns related to China's own internal economic growth. While the IMF recently projected that China's GDP growth would remain at a healthy 6.5-7 percent per annum in the coming decade, some analysts project economic turmoil in the next decade, due to bloated SOEs, high rates of internal debt, including in the vast shadow banking sector, and pressure to continue to increase wages and establish a genuine social safety net (Chinese wages have increased at an annual rate of 10 percent over the past decade, the highest rate in Asia). A July 2015 study by the Brookings Institution's David Dollar concluded that the OBOR project will only have a minimal impact on solving China’s SOE-centered over-capacity problems.[6]

But that same study, as well as a more recent presentation by the McKinsey Group, concluded that the potential for conflict between the Obama Administration's signature Trans-Pacific Partnership and China's OBOR initiative is overrated, and that TPP provides the "software" for future trans-Pacific trade, while the OBOR provides the "hardware" in the form of infrastructure for trade growth.[7]

Underlying all of the problems that lie ahead for China's OBOR is a broad-based uncertainty, in many leading nations, about China's motives. President Xi Jinping has branded the OBOR project as a model for "win-win cooperation" aiming towards creating a "community of common destiny."

However, in Washington and New Delhi, the Gwadar port, a key element of the CPEC, is viewed as a future potential base for the Chinese PLA Navy's growing submarine fleet, which is looking to project sea power beyond the nine-dash-line into the heart of the Indian Ocean.

Throughout the West, there is another growing concern over the emerging geopolitical alliance between Russia and China, which in recent months has included a number of joint Russian-Chinese military maneuvers in the Pacific Northeast, including joint naval maneuvers. Already, a preliminary agreement has been reached to integrate China’s OBOR program with the Russian Far East Development Program, and a $40 billion gas deal between Russia and China is already being implemented. The Russia-led Eurasian Economic Union has already signed cooperation agreements with China's OBOR, and the two countries are moving towards bilateral trade denominated in local currencies, potentially bypassing the role of the U.S. Dollar as the reserve currency for global energy trade.

China First, or Genuine 'Win-Win'?

When he visited Seattle, Washington earlier this year, President Xi Jinping assured American corporate leaders that China is a fully responsible player in the existing global financial architecture. He cited, as an example, China's pivotal role during the 2008 financial crisis in stabilizing the U.S. Dollar by maintaining its vast Treasury holdings. But despite those reassurances, there is a persistent concern that, beyond the "win win" rhetoric, there are long-term Chinese global geopolitical ambitions underlying the OBOR. China's assertive moves in the South China Sea, while it is advancing the 2010 China-ASEAN Free Trade Area, has raised concerns among many smaller states of the region, who seek American military guarantees while pursuing Chinese investments and trade expansion.

Over 2,500 years ago, the great Chinese strategist Sun Tzu wrote in his The Art of War that "winning a hundred victories out of a hundred battles is not the ultimate achievement; the ultimate achievement is to defeat the enemy without ever coming to battle." To succeed in the ambitious "Second Marshall Plan," Chinese leaders are going to have to convince skeptics that China is advancing a reform of the global system, and not merely pursuing a "China First" agenda while engaging in a great deception.

1. German Development Institute (Deutsches Institut fur Entwicklungspolitik) briefing paper, "Financing Global Development: The BRICS New Development Bank," Paper 13, 2015, by Professor Stephany Griffith-Jones.
2. "U.S. anger at Britain joining Chinese-led investment bank AIIB," by Nicholas Watt, Paul Lewis and Tania Branigan, Guardian, March 12, 2015.
3. "Repowering the World Bank for the 21st Century, Report of the High-Level Commission on Modernization of World Bank Group Governance," October 2009. http://siteresources.worldbank.org/NEWS/Resources/WBGovernanceCOMMISSIONREPORT.pdf
4. "India and OBOR: It’s Not Complicated," The BRICS Post, October 16, 2016, by Jabin T. Jacob.http://thebricspost.com/india-and-obor-its-not-complicated/
5. "China’s Xi Jinping Talks Up 'OBOR' as Keynote Project Fizzles," Time magazine, August 18, 2016, by Charlie Campbell from Beijing.
6. China's rise as a regional and global power: The AIIB and the 'one belt, one road,' by David Dollar, The Brookings Institution, July 15, 2015. https://www.brookings.edu/research/chinas-rise-as-a-regional-and-global-power-the-aiib-and-the-one-belt-one-road/
7. "China’s One Belt, One Road: Will it reshape global trade?" a McKinsey and Company podcast, July 2016, with Cecilia Ma Zecha, Kevin Sneader and Joe Ngai.http://www.mckinsey.com/global-themes/china/chinas-one-belt-one-road-will-it-reshape-global-trade

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HKGCC magazine "The Bulletin"

Ever since the Belt and Road initiative was announced three years ago, the ambitious intercontinental plan has captured the world's attention, especially countries across Asia where most of it passes through. For Hong Kong, the initiative offers opportunities but the question still remains how to seize them.

There have been discussions about the merits of the Belt and Road initiative, especially given the logistical, geographical and political challenges. These are valid issues but if the plan works out, trade flows and open markets will be the rewards, which would benefit Hong Kong, said Chamber Chairman Stephen Ng in his opening remarks at the second annual China Daily Asia Leadership Roundtable Luncheon.

"Throughout history, economic growth has always correlated strongly with trade flow and open markets. Hong Kong's own success relies entirely on trade flow and open markets. Hong Kong has become too inward looking and less open in recent years, almost 'protectionist.' For over 100 years, Hong Kong opened its market to the world to 'barter' for the world to open its markets to us. We have a small market ourselves and must keep on exploring new markets,” he said.

Ng urged Hong Kong to be more open to the Belt and Road. "The Belt & Road is happening with or without us. It is up to us to decide whether we wish to be left behind. Is Hong Kong open for business? Or is it closed?"

Given Hong Kong's status as an international finance hub and its highly developed financial services industry, we can exploit this advantage for the Belt and Road initiative as well.

"Without capital, the Belt and Road and its massive infrastructural projects cannot leave the drawing boards. Hong Kong can make things happen, and for a host of reasons," said Hong Kong Chief Executive CY Leung.

Hong Kong's expertise in finance goes beyond just traditional areas, with Islamic financing a key developing field. "The success of our two sukuk issuances in the past two years displayed to the world our ability to launch Islamic financial products and manage their financing needs. That can only help us down the road, given the number of Islamic countries backing the Belt and Road," he added.

Leung also announced a new support scheme to help professionals in foreign markets. The Government is allocating HK$200 million for the Professional Services Advancement Support Scheme (PASS), which is intended to support non-profit projects engaged in cooperation with professionals in overseas countries and carry out research and publicity activities to boost the industry.

In addition, the Government launched a scholarship program last December for undergraduate students from Belt and Road countries to study in Hong Kong. The Hong Kong Scholarship for Belt and Road Students began with Indonesia and was just extended to Malaysia.

"The plan is to gradually expand the scholarship to other Belt and Road countries. We have just extended the scheme to Malaysia, offering 10 scholarships to Malaysian students enrolled in undergraduate programmes here, beginning in the next academic year. We welcome the private sector to join us in offering Belt and Road scholarships," said Leung.

He believes there are ample opportunities but that more needs to be done to spread the message. "How do we grab opportunities for all? There is more messaging to be done."

Leung said there are already a lot of Hong Kongers working abroad, "300,000 or 8% of the workforce work in the Mainland. More young Hong Kong architects are knocking on doors in India and moving more to Malaysia and Indonesia."

Panellists also urged the Hong Kong Government to be more proactive in seeking more ties and agreements with other entities.

"Hong Kong can be a super connector but connecting who, what, how? If we can answer these questions, then we can concentrate our resources,"  said  Professor Edward K. Y. Chen, President, Qianhai Institute for Innovative Research.

"How to connect? Simple, you have to establish connections or you will never connect. What Hong Kong lacks is a partner, our partner in many ways can be Qianhai Free Trade Zone, which the Central Government has designated as a supporting hub, and where the financial innovations are being tested as pilot programs. Hong Kong has not been able to see the importance of Qianhai," warned Chen.

"The Government can do more in areas like visa enhancement, trade agreements, tax agreements and new air service agreements," said Ivan Chu, Chief Executive, Cathay Pacific Airways.

Hong Kong is also seen as a regional connector linking the Mainland and nearby countries.

"Going through Hong Kong to ASEAN countries will be smoother, as sometimes it is a bit sensitive, like Vietnam," said Dr Jonathan KS Choi, Chairman, Chinese General Chamber of Commerce.

Foreseeing a winning situation for everybody, Leung called on all segments of Hong Kong to work together to become a key link in the Belt and Road initiative.

"Working together – Government, business and community – we, Hong Kong, will be the 'key link,' the 'super-connector,' for the Belt and Road and definitely between the Belt and Road countries and the Mainland of China. And that can only reward us all."

This article was firstly published in the HKGCC magazine "The Bulletin" January 2017 issue. Please click to read the full report.

By Martina Poletti, Torino World Affairs Institute (T.wai)

In a world beset by economic and political insecurity, uncertainty looms large over which steps need to be taken to boost global development. In particular, Western countries appear as yet sceptical of the medium-to-long-term benefits that may derive from strengthening their economic ties with China, even at a time when it is one of the few global actors articulating a robust agenda for connectivity and growth. Diffuse mistrust of China's strategic intentions – nurtured by concern over the inner logic of its Leninist experiment of state capitalism, and magnified by Beijing's minimal progress in dispelling the political-institutional fog that renders its decision-making so opaque – are proving to be powerful constraints on the potential for more intense cooperation.

Nonetheless, what we currently know about China under Xi Jinping is that the connectivity-oriented Belt and Road Initiative (BRI), launched in 2013, is intended to increase the flows of goods, capital and people moving across the Eurasian landmass. Such flows are expected to proceed along two main corridors: the "Silk Road Economic Belt" – the overland trajectory reaching out from China to Europe through Central Asia – and the "21st-century Maritime Silk Road", which begins in China's main ports and extends to the Mediterranean via the Malacca Strait and the newly enlarged Suez Canal. In 2015, China's trade volume with countries along the latter corridor was equivalent to 1 trillion US dollars, while Chinese investments in the relevant regions reached 15 billion US dollars.

However, the broader significance of this initiative is mostly overlooked by the general public, especially in Europe. Western governments have not fully grasped the scope of opportunities and challenges that a new wave of Chinese investments may bring. Italy, for instance, is still in the process of formulating a coherent, long-term strategy for cooperation with China. Chinese acquisitions of Italian companies over the past few years, in particular, seem to have caught the Italian government by surprise. At the same time, however, China has thus far struggled to couple its initiative with effective means of "soft power" – which could in fact further ease the promotion of China's cooperation initiatives with economic partners across Eurasia.

In such context, getting representatives from key Chinese and Italian government agencies and research institutes to engage in knowledge-sharing initiatives has become crucial to fostering mutual understanding. Last November, Beijing's Pangoal Institute (盘古智库) and the Torino World Affairs Institute (T.wai) jointly ran the "ChinaMed – BRI and the New Centrality of the Mediterranean" workshop in Beijing, as part of the "Pangoal Wisdom Talks" series. The workshop enabled Chinese experts from the National Development and Reform Commission (NDRC), the Ministry of Commerce, the People's Bank of China, the China Institute of International Studies and the COSCO Shipping Group to meet with T.wai's delegation, which included representatives from the Studi e Ricerche per il Mezzogiorno centre (SRM), Intesa Sanpaolo Bank and the Bank of Italy.

In keeping with Pangoal's mission – "applying knowledge for public policy solutions" – panellists joining the workshop went beyond merely addressing what the BRI is and how the principle of "mutual development" lies at its core. Rather, they moved on to examining growth trends across the maritime infrastructure, shipping and finance sectors, and their interplay within the Mediterranean region. Since the launch of the BRI in 2013, Chinese investments across Europe have been mostly directed towards infrastructure development. Some of the projects funded thus far have included not only railways from Wuhan, Chongqing and Zhengzhou connecting to hubs such as Duisburg, Hamburg and Lyon, but also key maritime routes leading to ports such as Rotterdam-Antwerp, Haifa, Istanbul, the Piraeus, Algeciras and Savona-Vado Ligure.

As SRM research points out, since the inauguration of the BRI, the shipping sector has been expanding globally. Key developments include (1) the expansion of the New Suez Canal, which has doubled the number of ships transiting daily and reduced transit times from 18 hours to less than 11 hours; (2) naval gigantism, which has seen the average capacity of transoceanic ships increasing to 20,000 TEUs; (3) the creation of new global shipping alliances such as the Ocean Alliance, led by China COSCO Holdings and three other international shipping companies; and (4) the expansion of the Panama Canal, which will allow larger vessels to move between US Atlantic and Pacific ports with greater ease.

In light of all of these recent developments, the Mediterranean should be taking advantage of this newly reacquired centrality. Italy, for example, has the potential to become a pivotal logistics platform along the Far East-Europe and the Far East-Europe-USA routes, since the enlargement of the Suez Canal and the increase in the TEU capacity of new ships allow for more efficient freight transport from China to the USA. According to the Logistics Performance Index, Italy currently ranks 21st worldwide in terms of competitiveness in logistics, while the Liner Shipping Connectivity Index ranks Italy 16th worldwide. Greater synergy between Italian and Chinese authorities is thus crucial to releasing Italy's untapped potential.

Apart from investments in infrastructure and transportation, Chinese FDI has also been directed at the acquisition of high-tech know-how and renowned brands in a variety of sectors, including industrial machinery and equipment, information and communication technology, tourism, entertainment and fashion. This trend could be explained in light of the recent release of "Made in China 2025", a new industrial policy plan seeking to transform China into a world economic powerhouse, moving its production up the global value chain.

In 2016, for instance, Chinese FDI flows into Europe accounted for €35 billion. The situation remains unbalanced, however, as the value of EU FDI flows into China decreased for the fourth consecutive year to €8 billion. European countries have grown critical of this disequilibrium – that of having to deal with market access barriers when investing in China, while opening up to Chinese companies acquiring segments of key European industries. This "lack of reciprocity" has ignited national security suspicions, causing a number of European countries to adopt more defensive approaches to China. In the long term, however, such tactics have the potential to seriously damage the further strengthening of Sino-EU ties.

If the BRI has so far developed as a new and improved Going Out (走出去) strategy for Chinese companies, the time has come for the EU to evaluate how it could work as an entrance gate for European goods to what is projected to become one of the world's largest consumer markets. Cooperation between T.wai and the Pangoal Institute will continue throughout 2017 to further analyse the strategic implications of the BRI for Sino-Italian relations and China’s footprint in the wider Mediterranean region.

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