By Meg Utterback, Daisy Mallett, Holly Blackwell, James McKenzie, Josephine Lao, and Ma Xiao

China has been at the forefront of a number of recent developments in the dispute resolution space. One notable development is the announcement by the China International Economic and Trade Arbitration Commission (CIETAC) of its new rules governing the arbitration of international investment disputes (Rules) and the CIETAC Investment Dispute Resolution Centre in Beijing (CIETAC IDRC), the default centre to administer those Rules. According to CIETAC’s Secretary-General, the Rules seek to “fill the gap” in the area of Chinese international investment arbitration and develop and promote the international investment arbitration practice in China.

The Rules are intended to support Chinese companies “going out” in furtherance of China’s Belt and Road initiative and to support the independent and impartial resolution of international investment disputes between investors and host countries. The Rules are also intended to provide an alternative for Chinese investors who may be concerned about potential bias against them in offshore forums due to a lack of understanding of Chinese law and practice. The Rules retain traditional arbitration characteristics such as flexibility, efficiency, and economy but incorporate elements of both Chinese and international arbitration law and practice.

How the Rules will be adopted in practice, however, remains to be seen. The Rules could be included in investment contracts between Chinese investors and host country governments. They could also be incorporated into China’s investment treaty regime. Currently, China has more than 130 bilateral and multilateral investment treaties in place, including 56 bilateral investment treaties with countries on the Belt and Road. Many of these treaties were negotiated at a time when China’s role was largely that of host country to foreign investment and provide limited options for investor recourse to arbitration. In many treaties, only claims for compensation for expropriation can be referred to arbitration, and the majority of China’s earlier investment treaties only provide for ad hoc arbitration. Applicable procedural rules vary by treaty and many treaties allow the tribunal the discretion to determine its own procedural rules. 
 
The Rules will be a unique addition to China’s choice of potential procedural rules, should it decide to pursue more expansive protections in either negotiating new investment treaties, or renegotiating old ones. In the nearer term, the Rules are an option (subject to party consent and/or tribunal discretion) in ad hoc arbitrations if disputes arise under China’s existing treaties. The Rules may also provide an alternative for non-Chinese investors and host countries attracted to international arbitration with Chinese or civil law characteristics.

The Rules became effective on Chinese National Day, 1 October 2017. The Rules are designated as subject to “trial implementation”. According to Chinese practice, this means that the Rules are effective but may yet be revised.

Concluding remarks

To date, there have been few China-related investor-state arbitrations, as historically these types of disputes have been resolved diplomatically or by settlement between the parties. This is likely to change, with growing outbound Chinese investment and increased Chinese investor awareness of investment treaty rights. Like other recent developments in arbitration in China, the intent behind the Rules is to provide dispute resolution options that may be more even-handed toward Chinese parties.

The Rules presage China taking its own, distinct role in the resolution of international investment disputes, particularly those involving Chinese investors; a role that has historically been assumed by foreign arbitration institutions and ad hoc tribunals. However, it remains to be seen what gap exactly the Rules will fill. Matters arising on Belt and Road projects may provide opportunities to observe how the Rules might play a role in China-related investor-state arbitrations. In the meanwhile, the Rules are a welcome addition to Chinese international arbitration practice.

Please click to read the full report.

By King & Wood Mallesons

How many Belt and Road (“BAR”) tenderers study and make detailed comments on the draft contract’s dispute resolution clause? Not very many. And yet this clause is one of the most important components of the contract, because claims are bound to arise on BAR projects, not least because many of the projects occur in countries with high political, operational, and legal risk. If the parties cannot settle them, they will need to rely upon the dispute resolution clause to resolve their disputes.

All too often, parties automatically draft in “laws of England and Wales”, “arbitration in England”, “arbitration in Singapore”, “Singapore law”, as this is what they are used to doing. In BAR projects, it is important to give proper thought as to the logic of whether these are really the most suitable provisions to include.

It is worthwhile for BAR tenderers to pause and consider the dispute resolution clause very carefully, and decide whether they need to go back to the Employer and / or the Lenders to explain why more thought about the dispute resolution clause might be beneficial to all parties concerned. Some Employers/Lenders will say: “no, we are not changing this clause”. But others can be persuaded, perhaps as a trade-off for other concessions.

There is no doubt that dispute resolution clauses on BAR projects should utilise arbitration as the principal mode for resolving disputes. International parties prefer arbitration because it is: private and confidential; less formal than court proceedings; and easier to enforce in different jurisdictions. But arbitrate where? And according to the laws of which jurisdiction?

A good dispute resolution clause should contain the following components

Where is the arbitration to be held?

On a BAR project, it will often be thought that CIETAC arbitration in the People’s Republic of China (PRC), or arbitration in the BAR host country, will not be sufficiently neutral to be acceptable to at least one party. That is partly why parties often draft in London or Singapore (sometimes Stockholm or Paris). But what about arbitration in Hong Kong? Hong Kong benefits from the “one country, two systems” legal regime, such that it is still a common law jurisdiction, with very efficient, independent common law judges and one of the world’s foremost courts of final appeal.

But the BAR host often says “we are worried about Hong Kong, because it is not sufficiently independent of the PRC”. That is a serious error by the host. It demonstrates that the host does not actually understand that selecting Hong Kong as the arbitration forum is actually of great benefit to the host BAR participant itself. Why? Because of the “Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and Hong Kong (the “Arrangement”)”, the special agreement which the Mainland Government has with the Government of Hong Kong. In accordance with the Arrangement, where a party fails to comply with an arbitral award made in Hong Kong, the other party may apply to the relevant People’s Court to enforce the Hong Kong award.

The Supreme People’s Court has directed that where any lower court is minded to refuse enforcement of a Hong Kong award under the Arrangement, the lower court must first consult with the Supreme People’s Court, and the Supreme People’s Court itself will decide whether or not to grant the enforcement. Anecdotally, there have been no reported refusals to grant the enforcement of a Hong Kong award under this Arrangement.

In other words, it is for the host’s benefit that Hong Kong should be selected as the forum for arbitration, because of the enhanced enforcement rights that this will give over awards made in London, Singapore, Stockholm or Paris.

For the PRC participant, Hong Kong has obvious attractions, not only as the “brother” of the Mainland, but through its impeccable rule of law, efficiency in processing matters, wide range of arbitration institutions and arbitral rules on offer, plus its cultural proximity.

Governing law

A neutral law can be chosen to govern the substantive disputes, for example, that of Hong Kong, England and Wales or Singapore. There is no difficulty in considering any of these laws while at the same time specifying Hong Kong as the forum. For example, one can have a dispute resolution clause which prescribes Hong Kong arbitration, with the governing law being that of England and Wales…

Please click to read the full report.

By Organisation for Economic Cooperation and Development

Summary

Achieving a growth path that is resilient, inclusive and sustainable is one of the top policy priorities of our time. Governments around the world are facing the triple imperatives of re-invigorating growth while improving livelihoods and urgently tackling climate change, in line with the goals of the Paris Agreement. This report argues that boosting economic growth, improving productivity and reducing inequalities need not come at the expense of locking the world into a high-emissions future. It is the quality of growth that matters.

With the right policies and incentives in place – notably strong fiscal and structural reform combined with coherent climate policy – governments can generate growth that will significantly reduce the risks of climate change, while also providing near-term economic, employment and health benefits. Such a climate-compatible policy package can increase longrun GDP by up to 2.8% on average across the G20 in 2050 relative to a continuation of current policies. If the positive impacts of avoiding climate damage are also taken into account, the net effect on GDP in 2050 rises to nearly 5% across developed and emerging economies of the G20.

Investment in modern, smart and clean infrastructure in the next decade is a critical factor for sustainable economic growth, especially as infrastructure generally has suffered from chronic underinvestment since before the financial crisis. The report estimates that USD 6.3 trillion of investment in infrastructure is required annually on average between 2016 and 2030 to meet development needs globally. An additional USD 0.6 trillion a year over the same period will make these investments climate compatible, a relatively small increase considering the short and long-term gains in terms of growth, productivity and well-being. The additional investment cost is likely to be offset over time by fuel savings resulting from low-emission technologies and infrastructure.

Furthermore, the current fiscal environment provides a window of opportunity to take action now. Low interest rates have increased fiscal space in many countries and, where there is less fiscal space, opportunities exist to optimise the tax and spending mix to align stronger economic growth with inclusive, low-emission, resilient development. Wellaligned climate, fiscal and investment policies will further maximise the impact of public spending to leverage private investment.

Finance will be a key factor: capital must be mobilised from both public and private sources, supported by a variety of financial instruments tuned for low-emission, climateresilient infrastructure. Public financial institutions need to be geared for the transition, while the financial system itself should take greater steps to correctly value and incorporate climate-related risks. Development banks and finance institutions – multilateral, bilateral and national – all have a critical role to play here too, not only using their balance sheets to amplify available resources, but also developing green finance in partner countries, including through policy and capacity building support.

Getting the fundamental climate policies right is essential to aligning incentives. There is a need to accelerate the reform of inefficient fossil-fuel subsidies and broaden the carbon pricing base, focusing on tracking the impact and sharing policy experiences. Making greater use of public procurement to invest in low-emission infrastructure can trigger industrial and business model innovation through the creation of lead markets.

At the same time, we must recognise that sustainable growth also means inclusive growth. Coherent climate and investment policies, effective fiscal and structural policy settings and reforms must work together to facilitate the transition of exposed businesses and households, particularly in vulnerable regions and communities. Early planning for the transition is essential if societies are to avoid stranded assets in fossil-fuel-intensive industries and stranded communities alongside them.

Looking beyond energy production and use, developments in agriculture, forestry and other land-use sectors will enable scaling up the pace of the transformation needed elsewhere in the economy. Current stocks of carbon in tropical forests and other ecosystems need to be protected and their ability to act as carbon sinks enhanced wherever possible. Research and development needs to be significantly strengthened and followed by rapid demonstration and diffusion of technological breakthroughs that will reduce and eliminate greenhouse gas emissions from energy, industry and transport, and improve agricultural yields and crop resilience. In addition, the feasibility to deploy “negative emissions” at scale remains a major uncertainty, despite being an important feature of most scenarios consistent with the Paris Agreement’s goals.

Finally, international co-operation remains fundamental to managing climate risks. Countries’ current contributions to emissions reduction beyond 2020 are not consistent with the Paris temperature goal, and need to be scaled up rapidly. Support for action in developing countries will be important, not just for mitigation but also to improve the resilience and adaptive capacity of countries facing the greatest climate challenges. Climate impacts will grow, even if we achieve the Paris temperature goal. We need flexible and forward-looking decision-making to increase resilience in the face of these risks. Managing the interdependences between climate, food security and biodiversity goals will be critical to achieving the Sustainable Development Goals and long-term robust growth.

Investing in Climate, Investing in Growth, ©OECD, 2017. Please click to read the full report.

By Fleur Huijskens, Richard Tucsanyi and Balazs Ujvari

EU member states can use the China-initiated organization to promote their standards for development financing and perhaps even to pursue geopolitical interests in Asia. This blogpost is a product of the MERICS European China Talent Program in April 2017.

When the Asian Infrastructure Investment Bank (AIIB) was taking shape on China’s initiative, many Western observers feared that the new institution would become a vehicle for China to further its own interests. They warned that China (whose voting share of 27.5 percent would give it veto power within the organization) would use the bank to finance infrastructure projects with the aim of creating international markets for China’s state-owned companies without having to abide by the standards or transparency requirements of established Multilateral Development Banks (MDBs).

Today most would agree that, so far at least, this scenario has not materialized. On the contrary, the AIIB can be seen as complementing, not rivalling, institutions like the Asian Development Bank (ADB) or the World Bank. As of 15 June, the AIIB had approved 16 infrastructure projects, most of which are to be co-financed with other MDBs (e.g. World Bank, Asian Development Bank, European Bank for Reconstruction and Development). And there have been complaints from other members of the bank about Chinese attempts to wield its governance influence or dominate board meetings.

There is an increasingly broad agreement across Western capitals on the AIIB’s close alignment with the policies and standards of established MDBs. In the case of jointly financed projects, the AIIB often relies on partners’ safeguard policies on procurement, disbursements, environmental and social compliance, as well as project monitoring and reporting. The AIIB itself made notable commitments on environmental and social standards, but also on transparency, information disclosure and public participation. This has even triggered hopes that China will use the AIIB as a learning experience and transpose its approaches to its own national development banks.

EU countries have chance to shape standards and practices

European governments played a substantial role in shaping the new organization’s standards and decisions from the outset – and they are in a good position to keep doing so in the future. EU countries currently make up 14 out of 56 official AIIB member states. Most of these countries were also involved in the negotiations that led to the AIIB charter, which was approved in May 2015 in Singapore. The bank officially started its operations on January 1, 2016.

Three of the Bank’s five vice-presidents are from EU countries (Germany, France and the UK), and the German national Joachim von Amsberg, who previously served as vice-president of the World Bank, has assumed responsibility for the AIIB’s policies on procurement, financial management, and social and environmental safeguards. In contrast to the World Bank and the IMF, EU member states are not scattered across the board but are grouped into just two constituencies on the Board of Directors. The constituency grouping Eurozone members is currently presided by Germany, whereas the group comprising the remaining EU countries is led by the UK.

The AIIB’s alignment with established MDBs does not mean that EU member states should not strive for even higher standards. Drawing on the practices of the European Investment Bank (EIB), EU member states could, for example, advocate for an even stronger alignment of the bank’s activities with international agendas such as the 2015 Paris Agreement on Climate Change and the Agenda 2030 for Sustainable Development. They could push for the formulation of strategies on gender and sustainable development or for the incorporation of climate action indicators into lending decisions. The AIIB’s current performance indicators focus on annual lending volume ambitions and the expected contribution of AIIB-financed projects to the GDP growth of beneficiary countries. The EIB on the other hand is also bound to dedicate a minimum of 25 percent of its annual lending to climate action.

Using the AIIB as a vehicle to shape the Belt and Road Initiative

In addition to standards, EU member states might also be able to pursue common geopolitical interests collectively through the AIIB. The AIIB is the main organization that finances China’s Belt and Road Initiative (BRI), whose main objective is to boost connectivity between East Asia and Europe. It could therefore become the vehicle through which the EU can make sure that its own geopolitical interests are taken into account in the BRI. Should EU-China trade shift gradually to land routes as a result of BRI, it may be critical for the EU to ensure that not all of these railway routes and roads cross Russia to not give Moscow additional leverage over the EU (or over China, for that matter). It will be critical for the EU to work with Central Asian governments and business actors on the ground to identify and propose connectivity projects consistent with the objective of creating land connections between Europe and Asia that bypass Russia.

To maximize their influence and successfully promote their agenda within the bank, EU member states will have to speak with one voice. Co-ordination on AIIB matters is already taking place among EU member states in Brussels and Beijing. One entity that appears to have been absent from such gatherings is the EIB, which also has a field office in Beijing embedded in the EU delegation. EU member states could try to pave the way for the EIB’s presence in the AIIB by calling for an observer status for international financial institutions. Finally, with the UK currently presiding one of the two constituencies comprising EU member states and providing one of the bank’s five vice-presidents, the country will remain a crucial partner for the EU in shaping the AIIB. Firmly involving London in the co-ordination of EU countries in the run-up to, but also after Brexit will therefore be essential.

Please click to read the full report.

By Institute of World Economics and Politics Chinese Academy of Social Sciences

This paper attempts to establish a theoretical framework on the relationship between national power and influence to response to the current debate on evaluating China’s national influence. This framework includes three aspects in assessing nation’s influence, that is the strategic resources and measures from influencer; state power of influencer; and the national interests of influence. At the same time, this paper holds that range; weight and dominance can decide state power. Based on this theoretical argument, it uses the data from Asian Barometer to analyze the relation between B&R strategic aim on a new Asian order and Asian countries’ response. First, it argues China’s range and weight is higher than its dominance in Asia; while its economic and diplomatic influence performs better than political, cultural and military influence in this region. Second, its strategic measure of prestige, induce is more effective than defense and coercion; its influence works better on shared culture countries and relatively developed economy. In the short time, China’s strategic aim relies on Asian countries’ response; while in the long run, it will decide by to what extent China could overcome its flaws on influence comparing to US.

Please click to read the full report.

By Bipul Chatterjee And Saurabh Kumar, Executive Director and Policy Analyst, respectively, at Consumer Unity & Trust Society International

China’s signature economic and foreign policy project – the ‘Belt and Road Initiative’ (BRI), also known as ‘One Belt, One Road’ (OBOR) – is the most ambitious global connectivity project ever launched by China or any country. The project aims to connect 65 Asian, African, and European countries comprising two-thirds of world’s population, through various subprojects. The estimated investment cost for realizing this project is $4-8 trillion.

The goal of BRI is to connect China with Asia, Europe, and Africa through a network of railways, highways, oil and gas pipelines, fiber-optic lines, electrical grids and power plants, seaports and airports, logistics hubs, and free trade zones.

The promise of BRI

First, a promising aspect of this initiative is the potential reduction in transportation costs which would reduce the price of trade more broadly. At a time when countries are looking for specific measures to reduce trade costs and shying away from free trade agreements, a reduction in transportation costs as a substitute for trade deals can effectively widen the volume of international trade. A Bruegel study pointed out that a 10% reduction in railway and maritime costs can increase trade as much as 2%, while the effects of a reduction in tariffs would take a much longer time to be felt. An Asian Development Bank and Purdue University study estimated that improvements in transport networks as well as trade facilitation measures could increase the gross domestic product (GDP) by 0.3 % for India and 0.7 % for the South Asian region as a whole.

This type of development is necessary for a country like India, where a lack of infrastructure and connectivity hampers cross-border trade. According to the Global Enabling Trade Report of 2016, India was ranked 102 out of 136 countries, which is indicative of its limited capacity to facilitate cross-border trade. The Doing Business Report of 2017 estimated that the cost to export (which includes border compliance and documentary compliance) is too high in India ($505) in comparison to other South Asian countries such as Nepal ($373), Bhutan ($109) or Sri Lanka ($424).

Second, BRI presents huge business opportunities for companies engaged in infrastructure development. A total of over $900 billion is expected to be invested in roads, ports, pipelines and other infrastructure as part of the project. This could immensely benefit countries suffering from inadequate infrastructure for their economic development.

Third, from the point of view of trade facilitation there are a number of factors that will create dynamic effects. China may accrue significant long-term trade benefits if it reduces tariffs through free trade zones, particularly on products from BRI countries. Beijing is also expected to reduce some of the non-tariff barriers hampering the prospects of foreign firms doing business in China including in those emerging areas such as internet banking and electronic commerce.

Potential Implications

Apart from the sheer number of participating countries, BRI appears to be both economic and strategic in nature. This became visible during the recently held Belt and Road Forum for International Cooperation in Beijing. The initiative came under scrutiny after European Union officials voiced apprehensions over transparency, labor, and environmental standards. This resulted in the EU’s refusal to endorse a trade statement tied to BRI. India’s non-participation due to sovereignty issues relating to the China-Pakistan Economic Corridor passing through part of Jammu and Kashmir also served as a serious dampener.

Even though BRI seeks to create trade infrastructure around India, it also encircles the country by creating a ring through land and sea routes passing through several countries with which India has sensitive relationships. However, India — with around 90% of its international trade through maritime routes and only 10% by rail and road — is comparatively less likely to see much benefit through enhanced connectivity under the initiative. Most of India’s maritime trade occurs from its western ports located in Arabian Sea and via land routes within the Bangladesh-Bhutan-India-Nepal network.

In presenting BRI, China appears to be unaccommodating with respect to political and diplomatic issues as well as economic concerns. Trade facilitation alone cannot drive trade flow upward. There needs to be smart and secure management of trade routes so that end-to-end supply and value chain networks can be strengthened. In recent times, piracy has emerged as a major potential threat for railways and highways as well as maritime routes. BRI does not address these challenges in a
meaningful way.

Although the project was launched around four years ago, it suffers from a lack of key information, operational strategy, terms of reference, and detailed work plan for the role of partner countries. This has eroded trust.

The Next Steps

While it is true that China’s economic and strategic interests are intertwined, it would have been beneficial for the BRI to be planned more holistically in order to give due consideration to the economic and political interests of other participating countries. For a large project like BRI, an international governance structure involving all the participating countries to institutionalize objectives and safeguard the interests of participants has to be established now with a particular emphasis on financial mechanism. The decision-making structure for the execution of BRI should be based on consensus.

Several sub-projects of various Chinese companies to receive political and financial support from the Chinese government are being touted as part of this initiative but have nothing to do with it and should be de-coupled so that ambiguity can be cleared and only official BRI projects can be materialized. Participating countries should also get equal treatment in the financing of BRI, so that they can also reap the long-term benefits of the project, a step in this direction could be the revamping of the New Development Bank. A clear operational strategy for the entire project with an economic and political matrix should now be made to increase trust and transparency. This should clearly indicate relative as well as absolute potential losses and gains of participating countries. Active participation of global institutions such as the United Nations, the International Court of Arbitration, and International Court of Justice should be included for reliability as well as to resolve a potential dispute.

BRI should be executed in a selective manner with focus on economically viable sub-projects developing trade and economic corridors, for example a Bangladesh-China-India-Myanmar Corridor in the case of South Asia.
 
This article was first published on the East-West Centre in the Asia Pacific Bulletin. Please click to read the full report.

A Plus Magazine, Hong Kong Institute of Certified Public Accountants

China’s Belt and Road initiative is heavy on mega-projects, but Hong Kong is positioned to provide vital “soft” infrastructure such as corporate, financial, accounting and legal services as well as insurance, risk management, capital markets and trade assistance. George W. Russell finds out about possible opportunities for CPAs who think strategically about this US$900 billion building boom.

Four years since Chinese President Xi Jinping announced the Belt and Road initiative – comprising a land route, the Silk Road Economic Belt, and a sea link, the 21st Century Maritime Silk Road – headlines are still trumpeting a seemingly unstoppable wave of huge project announcements.

From bridges in Ukraine to railways in Kenya and ports in Pakistan, the initiative has unleashed a flurry of infrastructure plans. The massive sums involved – and the global reach – have inspired awe, with comparisons to the United States’ Marshall Plan that rebuilt Europe after World War II.

“The Belt and Road initiative has become a central strategy for the Chinese government to boost domestic development and cross-continental collaboration,” says Hu Yifan, Chief China Economist at UBS, a major international bank.

As with all ambitious projects, there is some scepticism. For example, there are hazy ideas about what actually constitutes a Belt and Road project: the Chinese-built ports at Gwadar, Pakistan, and Piraeus, Greece, were under way long before the initiative was announced.

In addition, some of the flagship developments, such as the rail link between China and Europe, have doubtful revenue projections. (Recent loads have seemed just for show, hauling low-value goods like socks). Furthermore much of the land route is lawless. In May, several Chinese labourers were gunned down in Pakistan while working on the Gwadar-Xinjiang corridor.

Despite such setbacks, and whether or not some Belt and Road numbers are fudged, the optimism is real. A survey of large corporations by Standard Chartered Bank and Asset Benchmark Research in March and April indicated that 17 percent of those surveyed were already participating in Belt and Road projects, and a further 23 percent were considering the opportunities.

Hong Kong is also energized. For example, Mass Transit Railway Corporation announced on 18 May that it would team up with partners in China to explore Belt and Road-related opportunities. The company’s shares immediately rose on the news.

“I see Belt and Road as a huge, large scale outbound investment by China into multiple countries,” says Patrick Yip, National Mergers and Acquisitions Leader at Deloitte China and a Hong Kong Institute of CPAs member. “There will be this huge flood of funds, talent, expertise and technology.”

Indeed, Hong Kong businesses are already embedded into the initiative: projects announced in the Mainland include partnerships with Hong Kong companies, such as Hutchison Ports, and Hong Kong-listed subsidiaries of Mainland companies, such as Cosco Shipping Ports.

Hong Kong’s pavilion

The Chinese government says it sees Hong Kong as invaluable to the Belt and Road initiative. “Hong Kong is a global financial trading and shipping centre, home to the regional headquarters of many multinationals and a city extensively connected to the world,” explains Song Ru’an, Deputy Com¬missioner of the Ministry of Foreign Affairs in Hong Kong.

Song defines Hong Kong’s prime position through an old Chinese proverb: “The waterfront pavilion catches the moonlight first,” he says, adding that Hong Kong “has developed into an intermediary facilitating two-way cooperation between the Mainland and the rest of the world.”

Carrie Lam, who takes office as Chief Executive on 1 July, wants co-operation agreements with the Mainland to build Hong Kong into a financial hub for Belt and Road projects. “We shall also encourage long-term asset funds to invest and finance Belt and Road infrastructure projects [and] enterprises will be encouraged to use Hong Kong as a platform for insurance and risk management for cross-boundary investments,” she said in April. Chinese companies, initially mostly state-owned enterprises, but later privately owned entities, will in most cases need a platform outside China for overseas investment, says Yip at Deloitte. “Why? Because not all of these companies are very familiar with outbound investments and many of the Belt and Road coun¬tries are not frequent investment destinations.”

These Mainland entities, he adds, will want to know how they can establish an overseas invest¬ment subsidiary conveniently and favourably from a return-on-assets perspective, and with an arrangement that will be acceptable to the host country.

“Then they look at Hong Kong and see it is an international financial centre,” says Yip. “Many Chinese companies have subsidiaries in Hong Kong. There are a lot of Mandarin-speaking people either from Hong Kong or the Mainland. Hong Kong has a great stock market, an established legal system and a very thriving accounting profession.”

The government is also pursuing legislation more friendly to Belt and Road activities. In the last Budget, it announced it would introduce bills to create open-ended fund company structures in Hong Kong and grant tax incentives for qualifying corporate treasury centres.
 
“Once enacted, this should help attract more group treasury and fund activities to Hong Kong,” says Tracy Ho, Tax Managing Partner, Hong Kong and Macau, at EY and an Institute member. “These activities should enable Hong Kong to play an active role as a financier and investor in the Belt and Road initiative.”

Billions to disburse

The big lure for investors is Belt and Road’s large scale infrastructure. The US$50 billion-plus Gwadar-Xinjiang corridor is a core feature, while other big ticket items include a US$4 billion high-speed rail line from Kunming to Singapore and a US$1 billion-plus port development near Colombo.

To fund such mega projects, Beijing has created a raft of new lending vehicles, such as the Asian Infrastructure Investment Bank, supported by 57 countries, which boasts more than US$100 billion of initial capital to be spent largely, though not wholly, on Belt and Road projects.

“Following the most recent financial crisis, governments around the world have understood the importance of infrastructure investment to raise long term economic productivity,” says Danny Alexander, Vice President of the AIIB and a former chief secretary to the British Treasury. “Hong Kong is a very important centre for many of the services the infrastructure projects and the related infrastructure finance need.”

In addition, the US$40 billion Silk Road Fund, launched in 2014 by China Investment Corporation, China Development Bank, Export-Import Bank of China and State Administration of Foreign Exchange, is dedicated to Belt and Road investment. In 2015, three banks – CDB, Export-Import Bank of China and the Agricultural Bank of China – were given a total of US$82 billion in central government funds to lend for related projects.

Among private companies, those that already have experience in infrastructure plan to leverage Belt and Road into more business. Geert Peeters, Executive Director and Chief Financial Officer of Hong Kong-based utility CLP, says the company has detailed knowledge of several Belt and Road countries. “We have established long term relationships with business partners, financial institutions and equipment suppliers in China,” he says. “They are keen to join hands with us.”

Smaller businesses in the Mainland are equally excited about what Belt and Road can do for the economy. “The initiative should be able to increase the influence of China in countries along the route and attract more customers to the China market,” says Stephen Wong, a Shanghai-based Institute member who is CFO of TTL Holdings, which operates high schools in the Mainland that follow a U.S. curriculum.

Beijing has already sought to attract companies to Belt and Road locations. “We see the benefits of tax incentives, easier financing and faster approval of outbound investment in Belt and Road-preferred sectors,” says Steven Li, Vice President (Accounting and Finance, International Division) of the diversified Sanpower Group conglomerate, and an Institute member.

Rocky road ahead

Some Institute members are more cautious. “As the Belt and Road initiative is a national strategy, it will definitely affect Chinese companies,” says Institute member Steven Li, CFO of Changzhou Xingyu Automobile Lighting Company in Changzhou. “The initiative may bring us more opportunities in export markets but currently there is no big effect yet.”

The vast scale of the Belt and Road means that other international financial centres will also be looking to cash in.

In Dubai, engineering, financial and legal firms are combining to build roads and bridges along the route. The design, construction, finance and operation of a Central Asian hydroelectric power plant were coordinated from London.

Yip at Deloitte echoes outgoing chief executive C.Y. Leung’s statement that Hong Kong should be a “super-connector” for the project. “This is Hong Kong’s hook into China to show the world that we are in a way quite indispensable in terms of getting all this financial capital, human capital and technology out to the rest of the world,” says Yip.

Belt and Road is likely to present unprecedented challenges. “The complexity mostly comes from bridging the very different systems involved,” suggests Ji Xiaohui, Beijing-based Partner at the Linklaters international law firm. “Bear in mind,” she adds, “that Belt and Road aims to expand funding to many countries in which the legal and financial infrastructure perhaps needs to catch up with economic growth.”

There will be myriad geo-political challenges: for one thing, not every nation shares China’s enthusiasm for the initiative. “The majority of the G7 group of countries is declining any involvement,” says Alan Woolston, Partner at the Fladgate law firm in London who works on Belt and Road projects. “And India remains suspicious of China’s motives.”

The U.S. and Japan are among major nations that have not joined AIIB. Yet the Belt and Road Summit in Beijing in May was marked by the last-minute attendance of delegations from the U.S. and its key Asia Pacific allies, Japan and South Korea. “This indicated improved relations since the meeting between Xi and U.S. President Donald Trump in April,” says Hu at UBS.

However complicated the initiative seems in the world’s halls of power, it is being embraced at more grassroots levels. “Belt and Road aligns with our group’s ‘get aboard and go big’ strategies,” enthuses Li at Sanpower Group. “We are very excited about it and definitively welcome it as a policy.”

Please click to read the full report.

By Gabriel Wong, PwC China Corporate Finance Leader

The Silk Route once stretched across the entire Asian continent centuries ago but was resurrected after Chinese President Xi Jinping’s state visits to Southeast Asia in 2013. The modern-day Silk Route, which is part of the Belt and Road (B&R) initiative, is redefining economic activities in the greater Asian continent, with its need for economic cooperation and promotion of trade in emerging markets.

Composed of the Silk Road Economic Belt (SREB) and the Maritime Silk Road (MSR), the initiative is expected to become an express lane to facilitate increased trust among neighbour countries and integrate economic collaboration.

Developments are taking place fast. Shaanxi Province, a strategically indispensable area for trade promotions and cultural exchanges, has taken the lead by implementing preferential tariff measures for trading items originally made in or exported to B&R countries.

At the same time, funding has been swiftly and generously put in place. In 2014, Mainland China poured US$40 billion into the Silk Road Fund in hopes of investing in B&R projects, and the following year, provided another US$40 billion in founding capital to the Asian Infrastructure Investment Bank (AIIB) to support infrastructure projects. In the four years from the planning stage to now, Mainland China has started a number of projects including the 420-kilometre China-Laos railway and a US$1.4 billion reclamation project for Colombo Port City, Sri Lanka.

Yet despite all the positive results and effort put into the initiative, some critics still question the intentions behind B&R. Many people believe that this framework is nothing more than a political gimmick by the Chinese government and a geopolitical manoeuvre – yet these accusations are not consistent with the latest news in some of the B&R countries.

Simply put, B&R is not a political tool but a platform to attract countries to join and gain. The long-term goal is to achieve more trade flows, more connectivity, and cultural exchanges.

In April 2017, the London-Yiwu Express train left for Mainland China carrying 30 containers filled with U.K.- made products. This provides a middle ground between costly air freight and time-consuming sea transportation. The London-Yiwu rail trade will help the U.K. expand its foreign trade network and will ultimately come in handy when Brexit becomes effective within the upcoming two years.

While B&R smoothens bilateral trading cooperation, it is also changing the political landscape in Asia. This April, India offered another attractive financing package to Bangladesh, a US$5 billion low-interest loan allowance specifically for national defence and key infrastructure projects. India has actually been investing in the infrastructure sector for decades but has significantly upgraded its competitiveness following China’s B&R announcement. Since then, the country has participated in 17 infrastructure projects including airport and highway construction. The B&R initiative has pushed India to assert its determination to compete with regional superpowers and to have a major defining say in the current economic situation in Asia.

Most importantly, B&R’s core aim is not as an infrastructure program, nor is it an investment portfolio. Although currently at a very preliminary stage, B&R also aims to export Chinese artworks and literature overseas. Since Book of Silk Road Project’s launch in 2014, the organization has entered several inter-translation arrangements with B&R countries including Sri Lanka. These agreements, plus the rising export of classic Chinese literature to over 190 countries, will noticeably increase the presence of Chinese culture in B&R countries and raise cultural exchanges in Asia to a higher and more engaging level.

Bearing this in mind, Hong Kong sits on a prime spot along the Maritime Silk Road and can act as a “super connector.” As a financial megacity situated at the center of international shipping routes, and partially independent of the Mainland under the “One Nation, Two Systems” arrangement, Hong Kong can utilize its unique strategic qualities as a fast track for Mainland China to explore trading opportunities and facilitate RMB internationalization. Ranked no.1 as the freest economy in the world for 22 consecutive years, Hong Kong has accumulated significant experience in capital markets and can serve as a textbook tutorial for mainlanders along the B&R development path. And lastly, not to be overlooked: the unique east-meets-west cultural environment the city has successfully sustained in the past two decades that will be used as a successful city governance example when integrating Chinese culture with B&R countries in the future.

From a long-term perspective, the outlook is bright for B&R trade. The healthcare sector has an optimistic growth outlook due to increasing hospital capacity. The energy sector will likely see significant ramp-ups in national power demand. However, more recent potential can be identified specifically in the railway industry. The trans-Europe rail networks, planned to connect Mainland China to Western Europe, will dramatically reduce the transportation time between Mainland China and European consumer markets. From a more macroeconomic perspective, market expectations will see M&A infrastructure construction rebound in the near future. While the rate of increase will be limited and subject to the outcome of the Communist Party 19th Congress later this year, maturing and consolidation of the Chinese economy should help B&R markets continue to offer riskier but more attractive returns with higher potential for organic growth.

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

By John West, Executive Director of the Asian Century Institute and a Member of the Official Monetary and Financial Institutions Forum (OMFIF) Advisory Board

The Belt and Road is an important Chinese economic diplomacy initiative which should boost development and reduce risks of terrorism in partner countries. Some have called it ‘China’s Marshall Plan’, likening the initiative to the multi-billion-dollar US aid programme which helped rebuild western Europe after the second world war. China’s total investment in the Belt and Road over the next decade is expected to reach $1.6tn.

Many have welcomed China’s bold initiative, which promises to address Asia’s massive infrastructure deficit and could provide a boost to economic growth through market integration. But according to some analysts, countries should avoid China’s infrastructure investment model.

Poorly managed infrastructure investments are one of the main causes of China’s current economic problems. Unless China shifts to a lower volume of higher-quality investments, the country is likely to suffer an infrastructure-led financial crisis.

The rating agency Fitch has highlighted the risks to China’s banking sector emanating from the Belt and Road plan. The agency notes ‘there is a risk that projects could fail to deliver expected returns’ and questions whether China’s banks can identify profitable projects: ‘Chinese banks do not have a track record of allocating resources efficiently at home, especially in relation to infrastructure projects.’

The asymmetries of size and power between China and the participating countries present further challenges. As countries like the Philippines, Vietnam and Japan have discovered, disagreements with Beijing can lead to reduced market access and diplomatic exclusion. China’s assertive behaviour in the East and South China Seas has made Belt and Road partners suspicious of Beijing’s motives.

The upgrade of Sri Lanka’s deep-sea port in Hambantota provoked street protests and opposition by legislators because of the perceived generous concessions to China. When the port became a loss-making burden, the Sri Lankan government entered into a debt-to-equity swap granting state-controlled China Merchant Holdings 85% of the port and a 99-year concession to develop its operations. There are reports of the Chinese navy using this commercial port for visits by military submarines.

Landlocked Kazakhstan could benefit from infrastructure improvements that open the country to Europe. But citizens are protesting against reforms that would allow foreigners to rent agricultural land for 25 years. There is widespread feeling that this would not bring benefits to Kazakhstan, especially since China would import Chinese workers for such projects.

The China-Pakistan Economic Corridor (a $44.5bn package of investment projects) is facing security troubles from the Pakistani Taliban and other militant groups that threaten construction and trade. Meanwhile, provincial administrations and the central government are arguing over the allocation of investment.

As India’s former defence minister, Pallam Raju, remarked, there is a need for more information sharing. ‘China is not necessarily a benign power, and it should be more transparent,’ said Raju. Indian government officials have criticised China’s unilateral, rather than co-operative, approach.

During a 2015 visit to Beijing, Indian Prime Minister Narendra Modi reportedly told Chinese leaders that the China-Pakistan Economic Corridor is ‘unacceptable’ because it passes through Pakistan-occupied Kashmir, an area claimed by India. India fears that Pakistan’s port of Gwadar could become a Chinese naval base, rather than a commercial hub, and understandably fears encirclement in the Indian Ocean by Chinese-financed ports. At the same time, Modi has not offered his neighbours any meaningful alternatives to China’s Belt and Road initiative.

According to Paul Keating, former Australian Prime Minister and now adviser to the China Development Bank, ‘What we’re going to see is a reasonably obvious economic colonisation of the 50-odd states between the western border of China up to at least western Europe.’

Beijing may be able to get some of what it wants by buying the influence of administrators suspected of corruption. But Keating may be underestimating the force of public opinion and popular opposition to China’s perceived colonial ambitions. To realise its goals, the Chinese government will have to take greater account of the concerns and sensitivities of local populations.

Please click to read the full report.

By PwC

The role of international platforms in the Belt and Road initiative

Besides adopting a risk-sharing approach, planning contingency strategies, and strengthening capabilities with key partnerships and government relations, foreign companies can leverage existing international platforms to further position for success. For one, such international platforms help to connect organisations with similar commercial interests, and to facilitate business collaborations and complementary partnerships. Second, they are a resource to gather more knowledge, especially in the case of the B&R initiative, for which portals have been set up to offer more information.

Platforms have been set up by various government bodies and business associations to cater specifically to B&R activities, such as those in Hong Kong and Singapore. In these cities, the platforms are run by government bodies, business associations and non-profit public organisations. In Hong Kong, platforms are offered by the Hong Kong Trade Development Council (HKTDC), a statutory body, and the Federation of Hong Kong Industries (FHKI), a business association. In Singapore, they are organised by government entity International Enterprise (IE) Singapore, and the Singapore Business Federation (SBF), a business association. In United Arab Emirates, the Dubai Chamber of Commerce and Industry, a non-profit public organisation, facilitates B&R partnerships, while the Dubai International Financial Centre (DIFC), a government administered financial hub, provides investors with expertise, legal and regulatory certainty. From the United Kingdom, its business association, the China-Britain Business Council (CBBC), organises events to encourage companies to take up opportunities stemming from the B&R initiative.

Local business communities are well represented at these platforms, as are many global companies, and they play a key role in connecting players across value chains. Their wide international networks often comprise international chambers of commerce, professional services companies and media companies through to infrastructure management consultancies, and private investors and financiers, including venture capital firms and private equity funds, among others. The network of professional services available via these bodies work to provide services from deal making, due diligence and tax structuring to post-deal integration and management.

With a global network of international businesses and professionals, these platforms are meeting points for companies with similar commercial interests. As such, foreign companies that want to establish contacts and look for partners to collaborate in B&R opportunities can leverage these platforms to connect with other global organisations, private investors and local companies from the B&R countries, or network with Chinese enterprises.

Especially with the B&R initiative being led by the Chinese government, international platforms can further play the role of bringing together public and private sector stakeholders ‘with a view to facilitating more efficient and sustainable investment flows into the B&R countries.’

Perhaps more importantly, these platforms are free of government influence and are purely driven by commercial interests and shaped by market demand. Given that the B&R initiative is a strongly China-centric plan, international platforms play a crucial role which is uninfluenced by political interests. In return, this undivided focus then attracts more international participants.

Hong Kong and Singapore as attractive international platforms

Hong Kong and Singapore have positioned themselves as regional hubs for B&R activities. In fact, both countries are already very actively involved in facilitating China’s B&R plans.

Both cities have also traditionally been recognised as excellent gateways for international businesses wanting to do business in their respective regions. This also means that they would have much experience to share in connecting and facilitating a wide established network, having played the role of an international platform and regional hub for many years.

Established international networks of business communities are further key strengths of both Singapore and Hong Kong, in addition to being highly business-friendly, free trade, economically open, low tax regimes, with an absence of foreign exchange controls, a level playing field, a diversified talent pool, world-class infrastructure, and sound and independent legal systems.

They are both strong financial services hubs – with Hong Kong being stronger in RMB currencies while Singapore has the largest foreign exchange centre in Asia Pacific. Also, the Hong Kong Monetary Authority (HKMA) has set up an Infrastructure Financing Facilitation Office (IFFO) to facilitate infrastructure investments and their financing. Singapore already manages about 60% of infrastructure project finance transactions in Southeast Asia.

Despite sharing many of the same strengths, Hong Kong and Singapore also each bear unique propositions as B&R activity hubs.

Hong Kong

Hong Kong’s proximity to mainland China has supported its role as a gateway with access to mainland cities for many global businesses. In the same way it has also been serving as a springboard for Chinese outbound investments and expansion into international markets.

China and Hong Kong have historically had close economic and investment ties, and are bound together by the Mainland and Hong Kong Closer Economic Partnership Arrangement which has boosted trade in the industrial, energy, technology, infrastructure and tourism sectors. According to the HKTDC, about 60% of outbound investments were directed to, or channelled through, Hong Kong. Hence the largest source of foreign direct investment into China in 2015 came from Hong Kong, to the value of US$1.24tn, or 48% of total investment.

Specifically, the key offerings of Hong Kong include a few areas. First, it provides services in global offshore RMB trade settlement, financing and asset management service centres which ‘connect regions along the B&R’ with experience in assisting Chinese mainland enterprises, project sponsors, lenders and private equity funds in structuring and financing public-private partnership projects such as ports, highways and power plants.

Another area is in legal services including arbitration centres and platforms. Also, Hong Kong offers access to information via access to Google Search and channels that may be restricted in China. In some cases, its organisations such as HKTDC have connections to Chinese business stakeholders based outside China. The presence of professional service firms that provide accounting, consulting and tax advisory services is also vital to any B&R project. To date, the HKTDC has connected over 6,100 mainland investors, more than 5,700 overseas project owners and Hong Kong service professionals, and organised close to 4,000 business matching meetings.

Another lesser-known involvement of Hong Kong in the B&R initiative is its expertise in infrastructure management. For example, along the Eurasian Land Bridge economic corridor, a Hong Kong company that originated in Canada was involved in traffic facilitation and logistics management for part of the China–Europe transnational train.

Hong Kong currently plays a key role in B&R activities, which is somewhat overshadowed by other major infrastructure projects in faraway developing countries along the B&R routes. It is almost playing a ‘subject matter expertise’ role in the B&R, and caters to more ‘mature’ B&R activities.

Singapore

With respect to the B&R initiative, Singapore plays a pivotal role as gateway to the Southeast Asia region, which is a key part of the Maritime Belt route. The route connects southern China to Southeast Asia, then connects by sea to South Asia, the Middle East and North Africa.

In addition to being located in the heart of Southeast Asia, Singapore and its corporate enterprises have also always been highly involved in many Chinese-led activities overseas. The country has also been one of China’s largest investors, and had invested up to US$5.8bn in over 700 projects by 2014. On the other hand, it is also one of the top overseas investment destinations for Chinese companies.

Singapore possesses an outstanding business environment that enables it to facilitate investments into Southeast Asia, into which many B&R investments are flowing. As such the Singapore government is positioning the city as an infrastructure financing hub for the region, where a critical mass of international banks is based with project financing capabilities. An estimated 60% of ASEAN project finance transactions are arranged by Singapore-based banks.

Complementing its role as financing hub, Singapore hosts a full suite and increasingly growing ecosystem of players across the infrastructure supply chain – from project developers and EPC firms to professional services providers and development finance institutions. For these Singaporebased businesses, the B&R initiative also presents collaboration opportunities with Chinese companies for infrastructure, logistics, and other projects in the region.

In fact, Singapore itself is an investor in the B&R initiative, having committed about S$90bn (roughly US$64.5bn) worth of financing services for B&R projects across the region, signing off on an MOU with some of the largest Chinese banks last year.

As part of the B&R initiative, Singapore and China have launched a joint project, Chongqing Connectivity Initiative (CCI), which aims to ‘catalyse the development’ of Chongqing in Western China, as well as in Singapore. The initiative focuses on four areas for bilateral collaboration including finance, aviation, transport and logistics, and infocommunications technology. In the financial sector, more than US$6bn-worth of deals were concluded in 2016. In the aviation sector, Changi Airport will work with Chinese authorities in the development and operations of the new Chongqing Jiang Bei Airport. The plan also includes building a transportation and logistics ‘multi-nodal’ hub in Chongqing.

Knowledge and expertise exchange is another key area of collaboration in the B&R initiative. Being renowned worldwide as a clean and green city that has well-integrated urban skyscrapers and highways with greenery and nature, Singapore can work with China to exchange urban planning expertise, complementing China’s strengths in construction and financing.

Evidently, Singapore and Hong Kong are well positioned to facilitate and help companies navigate through the B&R activities, also offering ideal business environments to support business transactions and having set up entities specifically catered to B&R activities. This could greatly support a foreign company in its risk mitigation strategies and to better position itself for success in B&R activities.

This article was first published in the PwC report “Repaving the ancient Silk Routes” June 2017 issue. Please click to read the full article.