By Richard Ghiasy and Jiayi Zhou – Stockholm International Peace Research Institute (sipri)

China has long posited that common security can be propelled and buttressed through economic development and cooperation. Infrastructure, in turn, is one of the essential foundations of economic development and cooperation – no economically prosperous state has been able to progress without it. As the Chinese put it ‘要想富, 先修路’ (‘if you want to be rich, first build a road’).

Large parts of Asia have a critical lack of basic infrastructure such as roads, rail tracks, bridges, airports and power grids, which current national and multilateral developmental institutions are unable to address. This infrastructure deficit is an estimated $4 trillion (pdf) for the period 2017-20 alone. China intends to reduce this deficit in Asia, and in parts of Europe, through the Silk Road Economic Belt (the ‘Belt’) component of its Belt and Road Initiative (BRI).

The Belt has, therefore, quite deservedly been received with enthusiasm among many states of the Eurasian continent since its proposal in 2013. It is an ambitious multi-decade vision to physically, digitally and culturally connect Eurasia, pursue closer Eurasian economic cooperation and mitigate poverty. This grand vision has become a pillar of the President Xi Jinping administration’s foreign policy.

Opportunities and challenges

Foreign policy is always an extension of domestic interests and the Belt intends to serve a wide range of Chinese interests. These include enhancing China’s economic security by increasing its global economic and financial clout, and mitigating current and possible future security threats emanating from its neighbours by promoting their economic growth and subsequent closer economic ties with China. Simultaneously, the Belt is a useful platform to channel China’s surplus production capacity and surplus capital outwards.

As the Belt is a major public goods provider, it could indeed become one of the cornerstones of Asian economic growth and integration. Concurrently, it could lead to closer political and even security cooperation between China and the participating states and among the participating states themselves. Yet, the pathway towards this future is still fraught with obstacles. These include political and popular suspicion of China’s intentions behind the Belt, geopolitical competition, Chinese financial overextension, and lack of local governmental interest and capacity to tap Belt projects for the benefit of the broader population.

Tied to this latter obstacle is the question of to what extent the Belt actually fits into the on-the-ground political and socio-economic realities of participating states. Improved infrastructure can certainly serve as a catalyst for employment and economic activity, but tapping its developmental potential also requires local states’ investment in human and institutional capital, augmented by smart economic policies.

The Belt is an innately political process: many participating states have low levels of political accountability and high levels of corruption, and Chinese investments do not come with corresponding governance reforms to transform these systems. In addition, there may be physical security threats to implementation of the Belt in the form of general political violence or even more targeted attacks against Chinese projects. The Belt will inevitably be impacted by but also interact mutually with these dynamics.

Interaction with security dynamics in Central and South Asia

The Belt fits well into China’s own security concepts, which stress common security through economic cooperation. The Belt will certainly expand China’s overseas interests and will require China to take a robust position on regional security affairs, not least to protect its investments. Thus, China’s non-interference stance, which has already been evolving over the past few years, will likely become much more ‘creative’ as a result of the Belt.

Indeed, China’s evolving stance can already be witnessed in Central and South Asia, where notable examples include the Quadrilateral Cooperation and Coordination Mechanism to combat terrorism established between the armed forces of China, Pakistan, Afghanistan and Tajikistan in August 2016; the stepping-up by China of military cooperation and security assistance to states participating in the Belt; and the ‘outsourcing’ of military protection of the China-Pakistan Economic Corridor (CPEC) – the main Belt corridor in South Asia – to Pakistan.

More broadly, the Belt will interact with Central and South Asian security dynamics in a mutually constitutive way. In Central Asia, it is perceived by the landlocked Central Asian regimes as a means of boosting economic growth, which will have positive spillover effects on security. At the regional level, the financial prospects the Belt offers could also serve to stimulate greater regional cooperation on the range of issues these states face.

However, in South Asia, where the Belt currently only really runs through Pakistan, it has raised regional political temperatures. India has objected to CPEC in the strongest terms (pdf), in part because it traverses territory that is disputed between India and Pakistan. CPEC has exacerbated the pre-existing India-Pakistan rivalry, as well as China-Pakistan competition with India over regional influence and security.

India is concerned about the long-term geopolitical implications of CPEC, particularly that China will gain more regional influence at the expense of India. India fears that investment protection and protection of future transit through Pakistan will increase China’s security role in South Asia, and has concerns about a possible naval base in the port city of Gwadar in Pakistan, one of the BRI’s key strategic investments.

Afghanistan, in contrast to India, welcomes the Belt, but the country’s instability and difficult ties with Pakistan will deter it from becoming an established Belt participating state – at least for the foreseeable future.

A stabilizing or destabilizing influence?

In both Central and South Asia greater economic growth brought by Chinese investment could provide the conditions for increased development and stability. A case in point is that the majority of current CPEC projects focus on improving Pakistan’s electricity grid, important for a country that is plagued by structural power cuts. China hopes that CPEC might instil a ‘change of mindset’ in Pakistan: one that is increasingly oriented towards utilitarian economic development.

However, there are also concerns that Chinese capital could exacerbate some of the structural governance problems in Central Asia and Pakistan, particularly those pertaining to corruption and lack of accountability. In this regard, it could also further entrench a political elite that have proven inept at providing human security and welfare.

It is yet to be seen how these dynamics unfold but it is certain that investment alone will not be sufficient to bring about transformative development to Central Asia or Pakistan. Inclusive and long-term sustainable growth will require institutional reform to address patrimonial practices and state corruption. Central Asian governments and Pakistan will need to prioritize good governance and long-term, inclusive economic growth in addition to short-term economic gains.

Much of the asserted positive spillovers of the Belt therefore still strongly depend on the practical implementation of the Belt, the distribution of the spoils, and how human security in addition to regime- and state-centric security is emphasized and addressed.

This said, it is important to note that most local sources of insecurity in Central and South Asia exist with or without the presence of the Belt. They are not easily resolved of their own accord, and the Belt does at least address a vast Eurasian deficit in infrastructure and economic integration that has few or no large-scale financial alternatives.

The Belt is, at the very least, an opportunity to begin to think about and address these common challenges in pursuit of sustainable development.

This topical backgrounder is based on the report ‘The Silk Road Economic Belt: Considering Security Implications and EU-China Cooperation Prospects’ published by SIPRI and Friedrich-Ebert-Stiftung (FES). The report concludes a year-long project that analysed Chinese, Russian and English sources and interviewed 156 experts, including academics, journalists, policy advisors and policymakers in 7 countries throughout Eurasia.

Please click to read the full report.

Promoting the Development of Overseas Co-operation Zones: Hong Kong’s Role and Opportunities

From the above cases of economic and trade co-operation zones in Asia, it is apparent that they are beneficial to the “going out” of mainland enterprises to develop overseas business and expand sales opportunities in Belt and Road markets. They are also beneficial to enterprises in fine-tuning their overall production layout by making use of local labour forces and other advantages in concert with existing production activities on the mainland. Meanwhile, with increases in investment and production in Southeast Asia, a regional supply chain network that connects to China has gradually taken shape and is getting increasingly tight-knit and complex, promoting commercial logistics and trade development in the process.

In the course of their development, these co-operation zones can also provide Hong Kong with outbound investment opportunities. An overview of the cases mentioned above indicates that manufacturers and traders in Hong Kong, particularly SMEs, can consider using these co-operation zones as platforms to forge into respective local markets or to set up a base to capitalise on local production advantages to expand into the international market. Those in Hong Kong engaging in housing and infrastructure construction, transportation (including container terminal planning and operating), warehouse management and logistics can also consider collaborating with the co-operation zones through investment or providing related services to facilitate the sustained development and competitive advantages of the zones concerned.

Challenges Facing the Zones and Hong Kong Services

Investment Analysis and Due Diligence

The 10 ASEAN countries are not only very different in their economic and population structures, but also in their labour markets, wage levels, stages of economic development, investment policies and in the incentives they offer. Though most ASEAN countries are using industry parks as the main vehicle to drive economic development and attract investment, there are substantial differences in the actual production environment and conditions among individual parks. These include, for example, the park’s location, conditions of the local supply chain, the standards of logistics facilities and services in peripheral areas, the efficiency of inland and international transportation, environmental requirements, the adequacy of skilled and unskilled labour supply, local training of skills and management personnel, etc. All these issues will eventually affect the sustained development capability and competitiveness of a zone.

Therefore, when carrying out investment planning and selecting a location, an investor must properly evaluate the country, the region and the policies concerned to ensure that the development of the zone will align with the local medium- to long-term development plan. This will minimise the hidden risk that an investment project may not have the blessing of the government, and will avoid the difficult scenario of having to co-ordinate and negotiate with the local government to obtain policy incentives and other support. Nevertheless, most enterprises say they do not have sufficient knowledge about the politics, culture and legal regimes of the relatively backward investment locations along the Belt and Road routes, including some of the ASEAN countries. Their problem is compounded by the fact that information is less than transparent in these countries, so it is difficult to ensure that an investment project is in compliance with the legal requirements of the country concerned, or to assess the medium- to long-term benefits and potential risks of the investment in question. Therefore, there is a need to seek professional services support.

Hong Kong’s service providers in this field are not only familiar with the legal and investment regimes of advanced countries, but can also utilise their extensive international networks in carrying out effective risk assessment for mainland enterprises intending to invest in emerging or Belt and Road countries. They can also offer strategic recommendations regarding the feasibility of an investment project, and can conduct special surveys on key or sensitive issues such as the environmental policy and tax incentives of an investment location. This can help investors control risks and ensure the sustainable development of a project after an investment has been made.

Zone/Park Planning and Management

The United Nations Industrial Development Organization (UNIDO) estimates there are more than 1,000 special economic zones in the ASEAN region, of which 893 are industrial parks. In Vietnam alone, there are more than 320 manufacturing-oriented industrial parks. As approximately half of the foreign direct investments entering Vietnam have ended up in industrial parks, competition among them is very keen.

Some industrial parks in Asia are designed so poorly that overcrowding and traffic congestion are common, while a number of old-style park premises lack green spaces and lifestyle recreation facilities, all indirectly leading to a host of labour, pollution and social problems. At the other extreme, some industrial parks are developed so ahead of time that their size and facilities far exceed actual demand. Consequently, enterprises setting up operations in these parks must bear very high management fees, unless they obtain subsidies from the government or the developer.

Furthermore, the designated new economic zones or industrial parks in some emerging countries are located in relatively remote areas in order to play a leading role in regional development and growth. Investors and developers in such cases not only have to concern themselves with the development of these zones, but they must also handle and provide transportation and other infrastructure to connect them to peripheral areas and the main ports.

Take Vietnam’s Longjiang Industrial Park as an example. In response to the expected opening of the Ho Chi Minh City-Trung Luong Expressway in 2010, the management company of the park had been upgrading its internal road system in earnest, as well as speeding up negotiations with the local government to facilitate road construction connecting the park to the expressway and to raise its overall transportation and logistics efficiency.

Hong Kong is a hub for infrastructure and real property services boasting more than 2,100 world-class companies engaging in architectural design, surveying and engineering services. These companies have a lot of experience in developing Hong Kong and overseas businesses and are capable of supporting the mainland in developing various types of industry parks overseas by offering a comprehensive range of project consultancy and management services. These include strategic recommendations in architectural design, project supervision, government-developer collaboration, infrastructure development, sewage and waste treatment, etc. Even for projects as large as the East Coast Economic Region in Malaysia, Hong Kong’s services sector can help add value and inject sustainable development planning concepts through their experience in participating in the development of large-scale integrated communities and the integrative utilisation of infrastructure and land.

As far as the management of zones and parks is concerned, it should be noted that ASEAN’s guidelines for developing and co-operating in special economic zones permit that the developer and operator of an industry park can be different entities. Professional operation services providers offer management and real properties letting services, public utility services such as water and power supply, as well as waste and sewage treatment. They can also offer a host of value-added services such as the setting up of training centres and the provision of services in healthcare, childcare, transportation and employee recruitment.

In Hong Kong, other than local professional real property management service companies, there are also a large number of major international management services companies and consultancies. In addition to providing outstanding management and operation services, these companies are also in a position to recruit clients and match partners for zones and parks through their transnational client networks.

It is highly advantageous for the development of an industry cluster if a park can identify a suitable anchor investor that matches its positioning. The SSEZ has now attracted an industry cluster of about 100 enterprises from the mainland, Europe, the US and Japan that are engaging in textiles, light-industry products and accessories.

Environmental Protection Services

Belt and Road countries are mostly low- to medium-developing economies, but as they gradually industrialise, more and more of their residents are concerned about the resultant pollution. This has forced government planners and developers to pay more attention to environmental protection in industry related projects, and environmental assessment has become one of the investment requirements in many co-operation zones.

As these zones are mostly established in undeveloped or rural areas, industrial development will inevitably impact on the environment. Residents close to some co-operation zones have staged protests against the pollution brought about by mainland enterprises, impacting the zones’ long-term development. Moreover, planning and building environmental protection infrastructure takes time and requires adequate funding. Should the building of such infrastructure lag behind the zones’ development projects, irreparable environmental and pollution problems may result.

Hong Kong’s environmental-protection firms are adept at providing international-standard services in sewage treatment, pollution control and resource economisation. They are also experienced in advanced environmental management and enjoy a good international reputation. Hence they can provide the co-operation zones concerned with various types of environmental services as well as environmental assessment, environmental protection architectural/system design and related advisory services that are in compliance with the standards in advanced countries.

Production and Logistics Services

Belt and Road countries are mostly lacking in key production materials as well as other industrial materials and parts/components. Nor do they have enough skilled workers, technicians and engineers. While on the one hand they have to rely on the importation of certain materials to support production and operations, on the other hand they need different types of skilled personnel to provide production technology support. By virtue of its extensive international logistics network, Hong Kong is capable of effectively linking up goods transportation networks in mainland China, in Belt and Road countries and other important production bases, providing access to the huge production material support from the mainland and from within the region. Moreover, because of its ready supply of personnel in technology application and production technology, and also because of its convenient transportation network, Hong Kong can at any time provide extensive key parts and components, industrial materials and technological support to the production facilities set up by mainland enterprises in the Belt and Road co-operation zones.

Furthermore, as supply chains become increasingly globalised, responsive and efficient, enterprises have to meet their stringent logistics and distribution requirements. Therefore, industrial parks that want to attract enterprises to invest in developing industry clusters have to plan and develop relevant transportation and logistics services.

MCKIP in Malaysia is an example in point. Since it is in collaboration with Kuantan Port to set up a bonded area to attract investment in export-oriented heavy industry and high-tech industries, the future development focus of Kuantan Port is to upgrade its container handling capability and improve its port logistics services. Hong Kong’s logistics services providers have extensive experience in the design of operational processes and the management of operational systems and IT for container terminals. In fact, they have practical experience and track records (including participation in the development of Shenzhen Special Economic Zone) in utilising related infrastructure support, equipment layouts and advanced operational processes in enhancing the overall operational efficiency of ports. Therefore, they are well qualified to offer help to Kuantan Port in developing the business of transporting goods and containers internationally.

Financing and Insurance Services

Enterprises are the main investors in the industrial zones developed overseas by China. Although zones that have passed required assessments are qualified to receive special subsidies and financing services, most funding would still have to be raised in the market. Hong Kong is one the world’s three major international financial centres, and funds are available from various sources and a wide range of financing products. As such, Hong Kong is in a position to match and accommodate funds and meet the insurance needs of different maturation, exchange rates and asset risks.

Adding to this are Hong Kong’s advantages in being an important business platform in the Asia Pacific with a sound legal system, free-flow of capital and information, and a full complement of professional services in law, accounting, etc. In investing in Belt and Road countries, mainland enterprises can make use of Hong Kong’s professional project evaluation and sustainability assessment services to bring in external funds to finance their overseas investment projects and other business ventures. They can also set up a regional office in Hong Kong and capitalise on Hong Kong’s highly efficient business environment to co-ordinate investment projects in mainland China, Asia and Belt and Road countries to enhance overall operational efficiency.

Furthermore, Hong Kong’s services platform can offer different investment options to mainland enterprises, including the use of private-equity investment funds. As a way to diversify risks, mainland investors can also make use of Hong Kong’s international network to identify offshore partners to carry out equity joint investment and other joint-stock co-operations. Mainland enterprises can also make use of their investment partners’ advantages to overcome their own limitations. By generating synergy between their partner’s advantages and their own knowledge and expertise, they can expand the business scopes of their Belt and Road investments.

Conclusion

Over the years, Hong Kong’s service providers have helped many mainland enterprises handle trade and investment business in Hong Kong and overseas markets. In supporting the overseas investment of mainland enterprises, Hong Kong has definite advantages. These include the availability of a full range of international standard professional services in finance, law, taxation as well as risk assessment in sustainable operation and international certification and testing.

As such, Hong Kong is an important springboard from which mainland enterprises can make overseas investments. As the mainland implements the Belt and Road Initiative and encourages the “going out” of enterprises to invest overseas, outbound investment activities, including investment in setting up Sino-foreign co-operative industrial parks, will become increasingly common.

Although mainland enterprises have definite advantages in the general contracting of projects, Hong Kong’s related professional and business services excel when it comes to specialised project segments. Hong Kong also has extensive international experience and is particularly strong when it comes to grasping and analysing overseas information. Therefore, strengthening co-operation between Hong Kong’s services sector and mainland enterprises would be beneficial to promoting China’s overseas economic and trade co-operation zones.

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[1] Special Economic Zones: Performance, Lessons Learned and Implications for Zone Development, Akinci G and Crittle J, 2008, World Bank

 

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones  (1)

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones  (2)

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones  (3)

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones  (4)

Malaysia-China Kuantan Industrial Park in Malaysia

Malaysia, as a major ASEAN economy and an important gateway along the 21st Century Maritime Silk Road, is strengthening its industrial co-operation with China. Industrial parks have been established in Qinzhou in China’s Guangxi Autonomous Region (the China-Malaysia Qinzhou Industrial Park), and Kuantan in Malaysia (Malaysia-China Kuantan Industrial Park, MCKIP). Through this “two countries, twin parks” model of co-operation, China and Malaysia hope to strengthen regional supply chain management, push forward the development of industrial clusters, and promote trade and investment between the two countries. The “Port Alliance” will also be established to improve customs efficiency and expedite trading between the two countries through experiments on joint customs clearance, information sharing and other mechanisms. Malaysia is among China’s largest trading partners and major investment destinations in ASEAN, with the volume of bilateral trade reaching US$88.4 billion in 2016.

Tax and Investment Incentives

In addition to Malaysia’s current incentives package, the Ministry of International Trade and Industry (MITI), together with the ECERDC, has offered special incentive packages for investors in MCKIP (subject to terms and conditions). Below are some highlights of these fiscal incentives:

• Fifteen years of 100% corporate tax exemption from the year of statutory incomes derived, or 100% Investment Tax Allowance on qualifying capital expenditure incurred for five years. (Corporate income tax rate currently stands at 24% in Malaysia.)
• 15% of income-tax rate for qualified knowledge workers in MCKIP until 31 December 2020. (People in the highest income bracket are currently taxed at 28% in Malaysia.)
• Import duty and sales tax exemption for raw materials, parts and components, and plant machinery and equipment.
• Stamp duty exemption on transfer or lease of land or building used for development.
• Investors can apply for Unit Kerjasama Awam Swasta (UKAS) facilitation fund up to 10% of project cost or RM200 million (whichever is lower) to finance the development of basic infrastructure. UKAS was set up by the Public Private Partnership Unit of the Prime Minister's Department.

Port and Logistics Services

Kuantan Port, located 10km from MCKIP, is the gateway for outbound transportation and logistics services in Malaysia’s East Coast Economic Region. Kuantan Port currently handles mainly break-bulk cargoes and liquid-bulk cargoes, such as steel pipes, sawn timber and plywood, iron ore, fertilisers, palm oil, vegetable oil, mineral oil and petrochemical products. Container business mainly handles automotive components for Pekan Automotive Industrial Park.

Kuantan Port is actively developing new terminals as part of its plan to increase its capability in handling break-bulk cargoes and containers. It is also co-operating with MCKIP in developing a bonded area in order to enhance the business content of the port and the industrial park. It is hoped that the bonded facilities will attract investors to set up export-oriented processing plants in heavy industry and high-technology industry, and that this will in turn boost Kuantan Port’s container-transport business and make it an important container transshipment port in eastern Malaysia.

Phase 1 of the Kuantan Port extension project, which is due for completion in 2018, will continue to handle incoming and outgoing break-bulk cargo. Phase 2 will focus on the construction of a deep-water port for the handling of ocean-going container transport. It is estimated that Kuantan Port will be able to berth and handle 200,000 dwt vessels, including 18,000 TEU ocean-going container ships, and provide port users with incoming and outgoing container transport service to ASEAN and international markets.

Kuantan Port is operated by Kuantan Port Consortium Sdn Bhd (KPC) with a strong network of global shipping connections. At present, major shipping lines that operate at Kuantan Port include Evergreen Marine Corporation Ltd, Jardine Shipping Services, Malaysia International Shipping Corporation Bhd and Pacific International Lines. They mainly serve MCKIP and the Kuantan Port Industrial Area, the Gebeng Industrial Estate and the Pekan Automotive Industrial Park.

KPC told HKTDC Research that since the Kuantan Port was lacking in container business and had little or no experience in operating bonded facilities or international customs mutual assistance, it was keen to seek the co-operation of investors with relevant experience in Hong Kong and elsewhere to develop its container-port business. Since Hong Kong operators have rich experience in business process design, operational systems and information-technology management of container terminals, including using relevant infrastructure facilities, equipment layout and advanced business processes to improve the overall operating efficiency of ports, they should be able to assist Kuantan Port in further developing its international cargo and container shipping business.

 

Future Plans

In June 2016, Kuantan Port received approval from Malaysia’s Ministry of Finance to establish a free-zone port. A bonded area will be set up in some port areas, including sections of MCKIP. Economic activities in the bonded areas will be exempt from tariffs, consumption tax, sales tax and service tax. Companies in the industrial park will be offered a variety of value-added services, including transshipment, trading, unpacking and distribution, inspection and testing, repackaging and labelling. Against this backdrop, Kuantan Port will promote the gradual development of MCKIP into an ideal platform for assisting investors in tapping the market in Malaysia, and even ASEAN.

With regard to the development of ocean-going container transport services and bonded ports, steps will be taken to assist MCKIP in attracting investment from China-based enterprises by helping them leverage the strengths of China and Malaysia in terms of land, energy and production materials to improve their overall production allocation in the Asia-Pacific region and further expand their export markets. Apart from helping these enterprises to cut their overall production costs, this will also help them steer clear of trade barriers, such as anti-dumping measures and countervailing duties imposed by the EU, the US and other countries against some of China’s metal and steel products.

In order to meet these goals, it is necessary not only to comply with the trade measures imposed by the importing countries in Europe and North America on raw materials, place of production and place of origin of the restricted products, but also to satisfy the relevant agreements of international customs organisations and the requirements of the importing countries for bonded arrangements, container terminal operation, international customs clearance procedures and customs declaration system. The “Port Alliance” currently being built by China and Malaysia for co-operation between the 10 Chinese ports of Dalian, Shanghai, Ningbo, Qinzhou, Guangzhou, Fuzhou, Xiamen, Shenzhen, Hainan and Taicang and the six Malaysian ports of Port Klang, Malacca, Penang, Johor, Kuantan and Bintulu is expected to cut total time and costs in the cross-border transportation of goods between the two countries. Connections with the ports and customs in other regions have yet to be developed.

These plans should also leave room for future development and build advance supporting facilities in order to meet future demands for transport and logistics services in the export of high technology and high value-added products as the industrial park develops in the long run. The export mix of MCKIP is expected to shift from heavy industry to other sectors following the completion of future investment projects, such as those in the fields of microelectronics, biomedicine and chemical industry, which would generate a far greater demand for cargo transport and logistics services.

Therefore, it is imperative not just to make early plans for relevant facilities and working rules in areas such as customs, bonded services, and cargo inspection and testing to boost the industrial development of MCKIP, but also to make arrangements for necessary logistics facilities such as cold storage, dangerous-goods warehouses and comprehensive distribution facilities, and make use of new-generation information management systems geared to international standards.

It is necessary not just to improve the efficiency of transport and logistics but also to cater to the globalisation trend of the supply chain and satisfy the exacting requirements of clients in the Asia-Pacific region and other countries for logistics and distribution in an efficient mode of operation and production. Experienced investors in port management and planning are needed both in the planning stage and in the actual operation, while support of professional logistics service providers is also necessary. Therefore, the development of MCKIP and Kuantan Port will generate opportunities for Hong Kong companies.

The majority of heavy-industry and technology industry investors in MCKIP come from China and Malaysia, but the industry park also welcomes foreign companies from ASEAN and other countries. For example, the Kuantan Port extension and related infrastructure construction projects, as well as the multi-purpose area in MCKIP 3, all need investment in logistics facilities, commercial real estate, residential property management and hospitality services. MCKIP will generate opportunities for direct investment for Hong Kong and regional investors. As an international financial centre, Hong Kong could also provide project financing, risk management and other services to mainland and other investors, and make use of its rich international market resources to collect market information to help investors reduce their investment risks.

China is one of the world’s major sources of outbound investment and was the second-biggest cross-border investor, after the US, in 2015. More and more China-based enterprises have gone overseas to make direct investment on their own or through acquisitions or mergers in order to open new markets or secure manpower and other resources and promote their long-term development. As a major service platform for Chinese enterprises “going out”, Hong Kong can provide one-stop financial and other professional services to Chinese enterprises investing in MCKIP. For example, Chinese enterprises investing in Malaysia could use Hong Kong to arry out overseas financing for their investment projects and secure more funding for their long-term development. They could also make use of Hong Kong’s deep and broad financial market and choose suitable financing channels to optimise their sources of funds, lower their overall financing costs and open the ASEAN and world markets through MCKIP.

 

Alliance Steel plans to tap the growing demand for steel in the ASEAN and international markets by setting up production facilities in MCKIP. This modern steel complex will make use of advanced Chinese technologies and manufacturing processes and introduce automated production equipment to make top quality high-carbon steel rods, wire and H-shaped bars, while green measures will minimise the environmental impact. The company will also provide training to improve workers’ grasp of metallurgical technology.

Hong Kong’s financial services may directly offer financing to these projects, but can also provide other investment options and help them co-operate with overseas counterparts in the heavy-industry and technology sectors, allowing them to use their investment in MCKIP to expand their overseas market and beef up their strength.

For example, Hong Kong private-equity investment companies could use their extensive global business links to find overseas partners for mainland investors. Through equity co-investment and other forms of joint-stock co-operation, they could provide more investment options to mainland investors who want to expand their overseas presence while containing investment risks. Through equity co-investment, mainland enterprises will not only be able to find partners to share their investment risks but will also be able to draw synergy from the strong points of their partners to venture into new areas and further advance their businesses.

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Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones (1)

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones (2)

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones (3)

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones (5)

Longjiang Industrial Park in Vietnam

Bordering China’s southern region, Vietnam is one of its most important ASEAN trading partners. In 2016, the bilateral import and export trade between China and Vietnam amounted to US$88.2 billion, accounting for approximately 20% of the overall trade value between China and ASEAN countries. Many Chinese enterprises, as well as conducting general trading activities with their Vietnam counterparts, have recently invested in the country and set up manufacturing plants there. The textile, garment and electronics industries of China and Vietnam have gradually moved into co-operation as industrial chain partners, further stimulating the export of Chinese upstream products to Vietnam.

China’s direct investment in Vietnam reached US$560 million in 2015, equivalent to 1.8 times the investment in 2010. At the end of 2015, China’s total stock of direct investment in Vietnam was about US$3.37 billion. Chinese manufacturers investing in Vietnam are not only able to lower their production costs by capitalising on the local labour force and land resources, but their operations in Vietnam can also tie in with their overall production plans and development in China as well as the Asia-Pacific region.

More than 320 industrial parks in Vietnam are dedicated to manufacturing activities. As of mid-2016, the cumulative total foreign direct investment (FDI) in these industrial parks amounted to US$150 billion in terms of registered capital, accounting for about half of all FDI inflows into Vietnam. While the majority of provinces in Vietnam have industrial park management offices offering single-window services to help investors choose the most suitable location, most of the large parks are operated and managed independently by private companies. Foreign investors can approach these industrial park management companies directly to learn about the preferential policies available in the parks.

The Longjiang Industrial Park (LJIP), located in Tien Giang Province of Vietnam, is one of them. A comprehensive industrial park invested and developed by Zhejiang Qianjiang Investment Management Co Ltd, it is a key project undertaken by Zhejiang Province under the Belt and Road Initiative. Tien Giang Province is located in the Mekong River Delta region close to Ho Chi Minh City, Vietnam’s leading commercial hub, in the south of the country. At the end of 2015, with a total of 78 foreign-investment projects, Tien Giang Province’s cumulative FDI inflows reached US$1.53 billion, accounting for 0.5% of Vietnam’s total.

Tien Giang Province has a population of about 1.73 million, according to the General Statistics Office of Vietnam, of which 0.28 million are urban residents and 1.45 million live in the countryside. LJIP is located in Tien Giang Province’s rural Tan Phuoc District. According to the park’s estimates, the population within a 15km radius of LJIP is between 800,000 and one million, which provides an abundant young labour force.

LJIP was granted a 50-year investment licence by Vietnam’s Tien Giang Industrial Park Authority in November 2007. The park has a planned area of 600 hectares, including 540 hectares of industrial area and 60 hectares of residential and service area. Total investment is estimated to be US$100 million.

Tax and Cost Advantages

Companies operating in LJIP are entitled to corporate income tax concessions for up to 15 years. Furthermore, companies engaging in export processing can enjoy import-related preferential tax policies, which include exemption of import tariffs and value-added tax on materials imported for processing and production of products for export purposes. This preferential policy also applies to the import of related production machinery and equipment. [1]

Corporate Income Tax Concessions for Investments in Industrial Parks in Vietnam

• Current standard tax rate: 20% (since 1 January 2016)
• Tax concessions:
  -       Preferential tax rate at 10% for the first 15 years; plus
  -       Tax holiday for four years (counting from the first profit-making year), and
  -       50% reduction in corporate income tax rate for subsequent nine years

It is understood that a number of companies currently operating in LJIP are mainly engaged in export processing, with some of the consumer goods produced exported to markets in Europe, the US and Asia. However, more are engaged in producing industrial materials or intermediate goods, which are supplied to downstream manufacturers in mainland China and Southeast Asia. Some of these products are sold to other manufacturers in Vietnam for further production and export. As such processing activities primarily rely on various kinds of imported raw materials, the exemption of import tariffs offered by the Vietnamese government is of prime importance to these manufacturers.

The convenient transport network and highly efficient logistics services available in LJIP also help enterprises enhance operation efficiency and lower production costs. LJIP is linked to Ho

Chi Minh City, only about 50km away, by the HCM City-Trung Luong Highway [2], which also connects directly to Saigon seaport, Hiep Phuos seaport (also about 50km from LJIP) and Bourbon port (about 35km from LJIP). This road link greatly facilitates the transportation of goods for import and export.

Labour Supply and Upstream Supporting Industries

Companies aiming to invest in establishing factories in Vietnam have to choose the right industrial park and take note of the country’s overall investment environment, especially where labour supply is concerned. The minimum wage in Vietnam is currently less than US$200 per month. However, with the various mandatory fees, such as statutory social security and medical insurance, as well as higher salaries for more experienced and qualified employees, the actual labour costs borne by the employer start from about US$200-250 per worker per month.

While this minimum-wage level is lower than in many regions in China, and while the majority of workers in Vietnam are aged under 35, the workforce available in the local area is mainly made up of farmers, according to LJIP, most of whom lack experience working in modern factories. Moreover, Tien Giang Province itself is in short supply of skilled labourers and technical personnel.

According to statistics compiled by the General Statistics Office of Vietnam, nearly 80% of Vietnam’s labour force have not received any formal education, only 9% are university graduates and 11% have received secondary education or vocational training. Besides, only 21% of the people in employment in the country have received more than three months’ technical training, with the majority of them being classified as non-skilled workers. [3] Hence, manufacturers investing in Vietnam wishing to carry out more sophisticated production processes or conduct semi-automated or fully automated production may have to rely on the Chinese mainland or other neighbouring regions to provide various kinds of support in management, training and technology to their factories in Vietnam.

Moreover, Vietnam lacks support industries and falls short of various kinds of industrial raw materials and upstream production materials, as well as equipment and moulds for processing and production. The Vietnamese government has said it would introduce incentive policies and offer funds to nurture support industries, but even by 2020 these industries will only be able to meet 45% of local production demand. [4]

Vietnam is also short of technical design and engineering personnel, posing challenges to companies investing in R&D in the country in a bid to enhance their capability to design and manufacture the necessary production equipment. Most of the manufacturers currently investing in LJIP have to handle the import and export of production materials and finished products themselves, and at the same time take note of whether their investment projects are able to access effective technical support.

 

Policy Risks

According to LJIP and relevant government departments of Vietnam, where attracting foreign investment is concerned Vietnam continues to welcome mainland Chinese enterprises. However, given the intricacies of international politics and sporadic outbursts of anti-Chinese sentiment, mainland investors must ensure that their operations comply with Vietnamese laws and regulations, as well as local conditions, so as to avoid unnecessary misunderstandings and problems.

Of particular note is that compared with developed countries in Europe and the US, Vietnam still does not have a sound legal system in line with international standards. Its laws and regulations governing foreign investment have much room for improvement and the government departments concerned do not have enough experience in dealing with more complicated foreign investments.

Although this may not affect the examination and approval process for investment projects, it is possible that the government may introduce retrospective restrictions and even demand re-negotiation of investment projects to ensure they are suited to local conditions and do not pose a threat to certain industries or sectors. This could have an adverse impact on the investor’s budget, which in turn undermines the sustainability of the project.

For instance, Vietnamese people are becoming increasingly concerned about industrial pollution, and the government is placing more emphasis on environmental protection in the course of attracting foreign investment. The issue of pollution is particularly sensitive in the rural areas, where protests are becoming more frequent.

In recent years, Vietnam has promulgated a number of national emissions standards aimed at restricting the discharge of pollutants by different economic entities. Since the country’s new Environmental Protection Law came into effect in 2014, many industrial projects are required to undergo environmental impact assessments, while production activities carried out in economic zones and industrial parks must meet the relevant environmental and emissions standards. Meanwhile, LJIP has stated that all companies entering the park must comply with the relevant environmental regulations, and that any acts of unlawful emissions or unauthorised disposal of wastes are strictly prohibited. [5]

When companies set out to plan their investments, action must be taken to ensure that their projects pass the environmental impact assessment and meet the emissions regulations stipulated by the local authorities. They should also gain a good understanding of the actual environment where their investment is located and consider the reactions of local residents.

Where necessary, companies should take the initiative and offer opinions to its investment partners and local government authorities on how it will meet the relevant international environmental standards. By so doing, both parties can thoroughly assess the environmental requirements of the project at the initial planning stage, and conduct consultations to achieve a win-win investment plan rather than simply meet the minimum legal requirements.

What’s more, since mainland enterprises tend to give people a negative impression where environmental protection is concerned, they must strengthen environmental due diligence and observe Vietnam’s laws and regulations as well as local conditions so as to avoid unnecessary hiccups.

Investors should also keep an eye on Vietnam’s foreign-investment policies and its changing business environment to ensure the sustainable development of their investment projects. For instance, when Vietnam opened up to the outside world at the end of the last century, great efforts were made to attract foreign investment in labour-intensive and low value-added industries.

In recent years, however, some foreign investors, including multinational companies from Japan, Korea and Taiwan, have begun to invest in production activities with higher technology content in Vietnam. While such investments mostly involve export processing, the Vietnamese government has on various occasions indicated that, in order to promote industrial modernisation, it hopes to encourage foreign investors to invest in high value-added and high-tech industries, while avoiding obsolete technologies and highly polluting production.

In view of this, when investors formulate their investment plans, they must take into consideration the possible changes that may occur in Vietnam’s industrial sector in the short to medium term instead of focusing on its current or past policies on foreign investment, so that their projects can take advantage of the relevant preferential policies and other industrial support.

In order to plan their projects, investors in Vietnam may refer to the government’s long-term development blueprint for guidance in areas such as the connection between private and public facilities, logistics arrangements and integrated supply chain planning. For example, LJIP is actively upgrading the road system within the park to help take advantage of the HCM City-Trung Luong Highway. It has also expedited negotiation with the local government in the hope of advancing the construction of roads in the park connecting with the highway in a move to enhance the overall transportation and logistics efficiency of the park.

 

Investors that have thoroughly evaluated all aspects of their projects at the initial planning stages can not only better ensure their competitiveness but also enjoy the policy concessions and facilitation offered by Vietnam in support of local development. They can also avoid the prospect of having to re-negotiate with the government at a later stage. Nevertheless, Vietnam still has to resolve many administrative and bureaucratic issues. If an investment project lacks thorough planning resulting in a grey area, such administrative issues could bring problems when the investor negotiates with the government at a later stage, which will in turn incur extra costs in terms of money and time on the part of the investor. Although the government has pledged to deal with these problems and improve administrative efficiency, such difficulties are expected to remain in the short term.

Hong Kong’s professional service providers can make use of their extensive international networks to obtain information on Vietnam and details about investment projects in the country.

Apart from studying the background and data of these projects, they can also make professional assessments of the prospects of investing in Vietnam, offer detailed analysis of the strengths and weaknesses of proposed investment plans, provide accurate future performance and risk forecasts, and make all-round strategic investment recommendations.

As far as environmental protection is concerned, Hong Kong also has a pool of service providers rich in international experience, which can offer custom-made solutions to mainland enterprises for their investment projects in Vietnam. These solutions can meet the needs of the investor and comply with local laws and regulations.

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[1] For more details, please see HKTDC research article (March 2017): Vietnam Utilises Preferential Zones as a Means of Offsetting Investment Costs

[2] Opened to traffic in 2010, the 62km HCM City-Trung Luong Highway connects Ho Chi Minh City with Tien Giang Province and other areas in the Mekong River Delta region

[3] For more details on labour costs, please see HKTDC research article (April 2017): Vietnam’s Youthful Labour Force in Need of Production Services

[4] Source: Vietnam’s Master Plan on Supporting Industry Development to 2020, Vision to 2030

[5] For more details, please see HKTDC research article (April 2017): Vietnam’s Increasing Demand for Environmental Services

 

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones (1)

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones (3)

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones (4)

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones (5)

Background

China is currently promoting the development of the Belt and Road, namely the outward development strategy of the Silk Road Economic Belt and the 21st Century Maritime Silk Road. In March 2015, China published a document entitled Vision and Actions on Jointly Building the Silk Road Economic Belt and 21st Century Maritime Silk Road (Vision and Actions), which put forward the initiative to speed up the development of the Belt and Road with the intention of promoting economic co-operation among countries along its routes. The initiative has been designed to enhance the orderly free-flow of economic factors and the efficient allocation of resources, while furthering market integration and creating a regional economic co-operation framework of benefit to all.

Vision and Actions specifically states that investment and trade co-operation are the major components of the Belt and Road Initiative. In co-operation with the Asian, European and African countries along the routes, the initiative strives to improve investment and trade facilitation, and remove investment and trade barriers for the creation of a sound business environment within the region and in all related countries. This can be done by pushing forward the negotiations on bilateral investment protection agreements and double taxation avoidance agreements with a view to protecting the lawful rights and interests of investors and expanding the scope of mutual investment.

Actions should also be taken to improve the division of labour and distribution of industrial chains by encouraging the entire chain and related industries to develop in concert so as to enhance the industrial supporting capacity and general competitiveness of the region. Co-operation is encouraged in order to build all forms of industrial parks, such as overseas economic and trade co-operation zones and cross-border economic co-operation zones. It is hoped that all countries along the Belt and Road routes can work together to promote the cluster development of various industries.

Development of Overseas Economic and Trade Co-operation Zones

China has embarked on the development of overseas economic and trade co-operation zones since 2006, mainly spearheaded by the Ministry of Commerce. Prior consensuses are reached with the governments of countries that are politically stable and on good terms with China, for approved Chinese enterprises to serve as the principal executors in entering into agreements with these governments for investing in and undertaking development projects in their countries.

Alternatively, these Chinese enterprises may co-operate with enterprises of the host countries in jointly investing in, and undertaking the development of, local industrial parks with comprehensive infrastructural facilities, distinct leading industries and sound public service functions. They will then invite other related enterprises from China, the host countries and other countries to invest and develop in the parks in order to form industrial clusters and build up relatively comprehensive industrial chains. Such a development model is equivalent to direct investment with economic and trade co-operation in the form of group projects.

To further innovate and promote the development of overseas economic and trade co-operation zones and optimise their service provision, the Ministry of Commerce and Ministry of Finance jointly drew up the Administrative Measures on the Accreditation Assessment and Annual Assessment of Overseas Economic and Trade Co-operation Zones (Administrative Measures) in 2013. Under the Administrative Measures, a co-operation zone refers to an industrial park set up with comprehensive infrastructural facilities, distinct leading industries as well as clustering and outreaching effects by a Chinese-funded holding enterprise registered in the People’s Republic of China (excluding Hong Kong, Macau and Taiwan regions) as a separate legal entity (hereinafter referred to as the “executing enterprise”) through an independent corporate body (hereinafter referred to as the “founding enterprise”) established overseas and held by a Chinese-funded enterprise.

Co-operation zones applying for accreditation assessment should play a pivotal role in leading the priority industries of China to “go out” while optimising the country’s industrial structures. They should facilitate the utilisation of resources and the enhancement of resource allocation capacity. They should also contribute in setting up commercial and trade logistics networks and opening up further room for trade development; in securing technological co-operation and raising technological innovation standards; and in promoting the economic and social development of the host countries with a view to achieving mutual benefits with foreign partners.

Co-operation zones passing the accreditation assessment or annual assessment under the Administrative Measures may apply for financial support from a specific central fund. For example, related financial institutions may actively provide the necessary credit support and complementary financial services to the founding enterprises and the enterprises operating in the zones (operating enterprises) that meet China’s policy requirements and related loan financing terms.

According to the Notice of Ministry of Commerce and China Development Bank on Issues Concerning the Support for the Construction and Development of Overseas Economic and Trade Co-operation Zones published in 2013, the Ministry of Commerce and China Development Bank work together to set up a joint mechanism on the co-ordination and information sharing for co-operation zone projects, and provide investment and financing policy support to eligible executing enterprises and operating enterprises of these co-operation zones.

Specifically, China Development Bank supports the industrial clusters that meet the needs of the country’s outward development strategies to “go out” by providing investment and financing services for the development of co-operation zones. It also provides financing support to the executing enterprises of the co-operation zones by actively exploring the financing options of relying on the credits offered by overseas financial institutions, or taking the projects, other assets or the account receivables from land sales as pledges. It provides financing services in the form of sub-loans, syndicate loans and others to operating enterprises in collaboration with well-established financial institutions of the hosting countries.

Overseas economic and trade co-operation zones have become a major format for Chinese enterprises to “go out”, and serve as their important carrier and platform for foreign investment and co-operation. According to the Ministry of Commerce, by the end of 2016, Chinese enterprises had set up 77 co-operation zones in 36 countries with a cumulative investment of US$24.19 billion, drawing in 1,522 operating enterprises with a total output value of US$70.28 billion.

The achievement of overseas economic and trade co-operation zones is particularly impressive in the countries along the Belt and Road routes. These countries are mostly at the initial stage of industrialisation, with good potential for market development and aspirations for drawing foreign investment. At present, China is developing 56 co-operation zones in 20 countries along the Belt and Road routes, accounting for 72.7% of the total number of overseas co-operation zones under construction, involving a cumulative investment of US$18.55 billion and drawing in 1,082 operating enterprises with a total output value of US$50.69 billion. These zones have created about 180,000 jobs for the local communities, helping to promote the industrialisation of the host countries and the development of their related industries – particularly the development and upgrade of key industries such as light textiles, home appliances, steel, building materials, chemicals, automobiles, machinery, and mineral products. [1]

Economic and Trade Co-operation Zones in Asia

China has set up co-operation zones across the continents of Europe, Asia and Africa along the Belt and Road routes. Co-operation zones in different localities show various advantages in respect of resources, markets, traffic and transport, as well as infrastructure. In particular, Asia is the key region for China to launch economic and trade co-operation under the Belt and Road Initiative. Most Asian countries, particularly those in Southeast Asia, have been actively drawing investment through the establishment of special economic zones such as industrial parks, and promoting economic development and creating job opportunities in recent years. China can capitalise on this trend and use economic and trade collaborative development as a major tactic to step up co-operation with the Southeast Asia region and hence establish the China-Indochina Peninsula Economic Corridor.

It seems that the small- and medium-sized enterprises on the Chinese mainland and Hong Kong are more inclined to focus on the development opportunities unfolding in Southeast Asia. Whether it calls for direct investment to set up manufacturing plants for processing trade, for co-operation in production capacity with local partners of host countries, or for exploration of the local industrial materials and consumer markets, these small- and medium-sized enterprises are keen to seize the opportunities offered by Southeast Asia. With their rapid expansion in the industrial production sector alongside investment growth in their infrastructural development in recent years, Southeast Asian countries have gradually formed a close-knit supply chain with China.

Findings of a questionnaire survey conducted by the HKTDC Research in South China in mid-2016 shows that the majority (83%) of the responding enterprises on the Chinese mainland choose the Southeast Asia region, including ASEAN countries, as their desirable destinations for tapping Belt and Road opportunities, followed by South Asia (27%), and Central and Eastern Europe (24%). While many enterprises want to increase their sales of various products to the Belt and Road markets (88%), some would like to set up manufacturing plants in these regions (36%), or purchase various kinds of consumer goods/food items or raw materials from the local markets (35%).

Approved co-operation zones set up by Chinese investors in ASEAN countries include: (1) China-Indonesia Julong Agricultural Industry Co-operation Zone; (2) Laos Saysettha Development Zone; (3) Cambodia Special Economic Zone; (4) Thai-China Rayong Industrial Park; and (5) Vietnam Longjiang Industrial Park. In addition, the governments of China and Malaysia have jointly devised the international production capacity co-operation format of “two countries, twin parks”, whereby two industrial parks have been set up in Kuantan of Malaysia and Qinzhou in Guangxi of China. These parks are expected to serve as the pioneer economic co-operation projects explored and implemented by the Chinese government under the Belt and Road development strategy.

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[1] Source: Ministry of Commerce

 

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones (2)

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones (3)

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones (4)

Belt and Road: Development of China’s Overseas Economic and Trade Co-operation Zones (5)

By Ulrike Solmecke, Department of International Political Economy of East Asia/Ruhr-University Bochum

Introduction

The New Silk Road or the 'One Belt, One Road' (OBOR) initiative aims at nothing less than creating a comprehensive trading network across three continents – Asia, Europe and Africa – thereby integrating around 60 countries with a total of about 63 per cent of the global population, presently generating 29 per cent of worldwide GDP (Wang 2014). The concept of the '21st Century Maritime Silk Road' as a means to intensify China's maritime cooperation with Asian countries and to develop new trade routes via Africa to Europe was introduced in October 2013 by the Chinese president in a speech at the Indonesian parliament…

The Influence of Multilateral Financing Institutions: The Example of AIIB

Important additional performance regulations come from the financing institutions. All financing institutions involved in the OBOR initiative provide regulatory frameworks that address environmental goals; the most comprehensive has been formulated by the AIIB (Asian Infrastructure Investment Bank). Its Environmental and Social Framework (AIIB 2016a: 14) requires, inter alia, private and public clients to undertake environmental and social assessments, including evaluations of environmental data and risks as well as prescribing monitoring and reporting measures for ongoing projects to ensure compliance with the framework. These regulations are complemented by an exclusion list, which expressly precludes the financing of socially or environmentally harmful projects (AIIB 2016a: 46-47). On the whole, the formulation of the guidelines nonetheless leaves considerable room for manoeuvre. They allow for mitigating, offsetting and compensating for adverse impacts, and so on. Being firmly committed to the principles of green growth, the regulations aim to deal as effectively as possible with negative effects, without losing the primary focus on economic growth. While supporting environmentally sounder behaviour among clients, and thereby providing comparatively soft regulatory push, the guidelines cannot be expected to encourage the waiving of unsustainable practices on this basis.

Particularly in connection with multinational transport and construction infrastructure providers, the envisaged AIIB Energy Strategy could theoretically be an important instrument as the energy mix promoted in this context could have a substantial and direct impact on the CO2- intensity of the project units. But here again, the effectiveness of the guidelines depends on the actual strength of the focus on sustainable energy sources. The preliminary issues note (AIIB 2016b) provides for the support of renewable energy, but does not exclude active support of technically advanced fossil fuel based energy production. Push impacts to adopt major sustainability-relevant innovations are restricted within the broad limits of the issues note, thus limiting the immense potential of the regulating strategy.

Conclusion

In sum, economic pressure for European and Chinese multinationals to leave the current path due to slower economic growth in China and a weak economy in the eurozone is apparent as a potential push factor. Investing in 'green economy' strategies as an alternative to business as usual holds forth the promise of economic success. This does not, however, really translate into a need to profoundly change routines or to embark on innovative paths for the industry sectors addressed in this article. One reason is that current stimulus programmes, especially the OBOR initiative, maintain the prospect that a fundamental shift will not be necessary.

Moreover, against the background of enormous demand, particularly as many Asian and European regions are under pressure to catch up economically, the lack of orientation towards sustainable development objectives is unlikely to negatively influence the economic success of the companies involved. The main incentives generated by the OBOR initiative focus on economic growth. Although there are also some environmental goals, they are generally assumed to be compatible with economic growth targets. Without exception, for the industry sectors considered here this results in environmental goals ranking second to efforts to stabilize and promote economic parameters.

Ecological improvements that are triggered by national provisions or self-regulatory initiatives certainly improve environmental performance but they do not bring about structural change. Past experience has clearly shown that quantitative innovations incur a high risk of rebound effects – which are in this case very likely to arise, given the scope of the envisaged project. Multilateral financing institutions generally have great potential to stimulate behaviour changes. But as the example of AIIB shows, these potentials rarely reach fruition; environmental frameworks aiming at innovation push are provided, but they leave much scope for companies to remain on unsustainable paths.

Ultimately, both push and pull factors within the framework of governance arrangements remain weak, as in the preceding discussions of the transport and cement industries. A change of the modal split or a shift towards more environmentally sound building materials are therefore not to be expected on the basis of currently available governance instruments. Instead, institutional regulation and incentive systems support minor 'green' changes but have – on the whole − a rather reinforcing effect on the orientation towards conventional development paths for the multinational enterprises involved in the OBOR project.

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By CGCC Vision

The “Belt and Road” initiative has been facilitating the connection of infrastructures and the integration of trade, industries and finance amongst countries along the Belt. All these aspects have pressing demand for professional services. With its international acclaim for professional services, how can Hong Kong secure a share from the abundant opportunities of the “Belt and Road” ?

Linda Li: Hong Kong’s professionalism to build China’s soft power

“As the country develops its hard power, attention should also be placed on national soft power, which could constantly enhance the comprehensiveness of the country’s overall development.” China President Xi Jinping has emphasized on many occasions that the integrated strength of nationals comprises both hard and soft power. At present, the “Belt and Road” is the grandest national strategy of China. The country must continue to build its soft power to promote collaboration amongst “Belt and Road” countries and to strengthen the mutually beneficial relationship of the parties involved.

Linda Li, Professor of the Department of Public Policy of City University of Hong Kong wrote analysis regarding Hong Kong’s positioning under the national strategy of “Belt and Road”. She proposes that Hong Kong should use its professional service advantage to contribute to the country’s soft power. Lately, she and her research team have received a grant from the Strategic Public Policy Research Funding Scheme of the Central Policy Unit of the HKSAR Government. They will study the role and the sustainable development of Hong Kong’s professional service industry in the “Belt and Road”. The study also organizes and constructs “Sustainable Hong Kong Research Hub”, a cross-disciplinary application research platform that connects universities and local industries.

An amicable lion equipped with both soft and hard powers

What is soft power? Li explained that soft power tends to be an academic concept. “The so-called soft power is a notion relative to hard power. What is hard power? In ancient times, when there were conflicts of interests or when there were differences in beliefs, disagreements were usually solved with armed forces – the strong won and the weak lost. In the modern world economic sanctions are used instead of waging wars to solve similar problems.”

To put it simply, hard power refers to military power and economic strength. Li commented, “Soft power is the opposite. It is neither military nor financial. Rather, it is all about attractiveness. If we use making friends as an analogy, those who associate with you because they are afraid of your force can hardly be called friends; neither can those tempted by your financial strength be considered a friend. Only those who truly like to be with you, who are attracted by your charm, can be called friends.” From the perspective of international politics, the outcome of nurturing Chinese soft power is to build the cultural substance and image appreciated by other countries, which can in turn help to create a stronger regional influence.

In March 2014 during Xi’s visit to France, the famous quote of Napoleon was mentioned, “China is a sleeping lion. When she wakes, she will shake the world. The lion is already wide awake, but it is a peaceful, amicable, and civilized lion.” Li believed that if China is to promote its “amicable, delightful, loveable and respectable” image through the “Belt and Road”, then Hong Kong can play a part in this aspect.

In a global soft power report published by Deloitte in 2016, Hong Kong’s soft power ranks the first amongst all Asian cities. The talents of Hong Kong have come from around the world. About 770,000 people from about 39 global locations are working in our knowledge-based industries. There are 3,491 institutes and enterprises around the world that has direct connections with Hong Kong; we are conducting business with 79 countries. Any companies coming to Hong Kong can easily find a cooperative partner who can meet their expectations.

Facilitating the signing of “Belt and Road” projects in Hong Kong

“We can imagine that there will be more and more commercial and large scale infrastructure projects related to ‘Belt and Road’ in the future. The agreements of these projects can be signed in Hong Kong, and contractual issues can be settled under Hong Kong’s legal framework.” Li added that with Hong Kong’s renowned and professional legal system, international markets are willing to entrust their projects to us and this is the soft power of Hong Kong . For a very long time, Hong Kong has been China’s window to the world. Ever since China’s reform and opening up, Hong Kong has been drawing foreign capital to invest in China. In the past ten years, Chinese enterprises are actively “going international”.

According to Li, soft power, as an economic appeal, usually comes from the country’s own cultural charisma. It is an art to demonstrate cultural charm in diplomatic communications and trade flows between two countries; the requirements would be much more complicated than common business dealings. Li sees that Hong Kong is already equipped with a culturally rich ambience. With its premium professional services, Hong Kong is poised to develop into a soft power hub in the “Belt and Road”.

Li also pointed out that every project involves risk, such as business risks, management risks, sovereign risks, etc; we must stay vigilant to all these risks. She noted that the best way to handle risks is prevention. “Compared to China, Hong Kong is more professional in terms of arbitration and mediation. The technicalities in this area have to be further strengthened, which can be leveraged on to prevent many risks from “Belt and Road” projects in the future.”

The international legal framework for the “Belt and Road”

The legal bases of different countries vary. It is not uncommon that companies tapping into overseas market suffer as a result of the differences in legal perspectives. The same situation happens in China. Apple Inc, New Balance, and renowned former basketball player Michael Jordan, for example, have all had disputes in business law with Chinese companies and government authorities. Li highlighted that with many projects to launch under the “Belt and Road”, the money involved is inestimable. Therefore, the potential issues brought about by legal differences must first be clarified and understood. In fact, there have been proposals to develop an international model for commercial law, which can serve as the reference for judgement when disputes arise in cross-border businesses, and help to reach an agreement.

Li stressed that if China is to establish an international legal framework that can be adapted to the “Belt and Road”, the risks of different business transactions should first be considered. “Under the wider context of “Belt and Road”, we can foresee that the signing parties of certain mega projects will not be enterprises, but rather governments. Some accidents of the same kind took place in the past – as a new term government in a country took over power, the new government did not follow the path of the previous one and invalidated many contracts signed by the previous term. This kind of sovereign risk must be considered when the international legal framework is constructed.” Li believed that as Hong Kong is a robust legal center, it should take a more active role in this aspect of “Belt and Road” affairs. Hong Kong can first begin to conduct preliminary research to measure the risks of “Belt and Road” countries and to prevent high-risk time and locations.

Li emphasized that the professional services of Hong Kong will be adorning the world-facing “Chinese brand” by increasing the country’s resilience against risks. This in turn can lift Hong Kong’s international reputation to a new level, demonstrating the unique advantage of its “One country, Two systems”.

P C Lau: Professional Sectors Have Great Potential under the “Belt and Road Initiative”

When asked about what opportunities the “Belt and Road” Initiative would offer to Hong Kong’s professional services, many members of the professions would tell you capturing these opportunities are easier said than done. P C Lau, Chairman of the Hong Kong Coalition of Professional Services, visited some “Belt and Road” countries to observe and study on site. He has had an in-depth look at how the local professional sectors can tap and expand into the “Belt and Road” markets.

Hong Kong professional services to fill the gap

Lau commented that in the face of a complicated and everchanging global situation, China can no longer merely follow the footsteps of European countries and the US; rather, it is time to create its own rules of the game. The Asia Infrastructure Investment Bank, the Silk Road Fund, and the free trade agreement between China and the ten ASEAN nations are all rising to this opportunity. The strategy of the “Belt and Road” has been put forward under this backdrop.

“About 40% of the world’s population lives along the “Belt and Road”. At present, the aggregate GDP of these countries is not

high, implying they have much potentials awaiting uncovering.” As a member of “old Hong Kong”, Lau frankly commented that Hong Kong has a wide array of strengths. “The fact that Hong Kong has long been an international free port is its primary strength. In terms of social structure, ‘One Country, Two Systems’ is another strength. As a starting point of the Maritime Silk Road, we also have a favorable geographical location. Our free flow of information, talent pool, sound legal system and business ethics also offer confidence to other countries.” He emphasized that Hong Kong’s services are highly professional, and we have the capacity to deliver premium professional service offerings – something that are still lacking in “Belt and Road” countries.

Keeping up with state enterprises in generating business opportunities

Earlier on, Lau visited Kazakhstan, Myanmar, Indonesia, Cambodia and Yinchuan in Ningxia Autonomous Region. He has much to share about choosing which “Belt and Road” country to tap into and the points to note in doing so.

What tips can the Hong Kong professional service sectors use when they expand into the “Belt and Road” markets? Lau responded, “State enterprises and central state-owned enterprises.” He pointed out that basically speaking, when Hong Kong professionals take part in the projects of state enterprises and central state-owned enterprises, they would be able to offer services and collect fees under very low risks. That said, Hong Kong companies should try not to be “too greedy”. They should focus on certain markets with high potentials. “Do not make plans to profit from local companies, but rather from state enterprises and central state-owned enterprises. To put it simply, look for businesses that are settled in USD or RMB instead of the local currencies. This would help prevent currency devaluation risks.”

Lau encouraged Hong Kong’s professional service industry to make good use of their prevailing networks. There are many clansmen associations as well as commercial and industrial associations in “Belt and Road” countries. If we can leverage on our connections with them, we will be able to get a head start. “I recall a few years ago during the Malaysian delegation led by the then Chief Secretary Carrie Lam, she met with Hong Kong expatriates living in the country. Most of them are engineers, which show that Hong Kong has been exporting many professionals.”

Business opportunities are certainly enticing, but Lau also pointed out that to expand into the “Belt and Road” markets, a series of issues must first be overcome. Those who are interested should find out what these are and make early preparation. “The first and foremost are the cultural differences: many Central Asian countries, such as Kazakhstan, are Muslim and there are many taboos. Secondly, there are market risks: for example, the new term of Myanmar government vetoed a reservoir project that was previously approved. Then, there are customer risks: for example, there may not be a local organization comparable to a credit insurance unit. In case something goes wrong, customers would not be protected.”

Despite these shortcomings, Lau still encourages Hong Kong’s professional service sectors to get an early start in these places. Earlier on, he went on a trip to observe and study a few European countries, including Hungary, Poland and Germany, and saw that quite many Mainland enterprises have already tapped into them. They began with an annual profit of USD 3 to 4 million, but are now about 10 times bigger; profits are growing by tens of millions. These countries have good relationship with China. Hong Kong companies can ride on this and offer their professional services.

Drawing on others’ experience to gain a head start

From his trip to Kazakhstan last year, Lau learned that the country had plans to construct a 65km light rail. The China Development Bank has offered a loan of USD 1.8 billion, and a Spanish company will be supplying the trains. China Communications Construction Company and China Railway Construction Corporation are both ready to jump in. All hardware elements are set, but management expertise is lacking. In the end, they seek help from MTR Corporation of Hong Kong for professional assistance.

Over the past few years, MTR’s businesses have expanded into Mainland cities such as Beijing, Tianjin, Shenzhen, etc. Airport Authority Hong Kong also took part in the construction of Zhuhai Airport and Hongqiao Airport. Much experience has been accumulated in these former success cases, which could serve as a reference for companies planning to tap into the “Belt and Road” markets.

Lau quoted Zhang Dejiang, Chairman of the Standing Committee of the National People’s Congress, who spoke about two infrastructure projects in Nepal and Cambodia in the “Belt and Road” Summit held in May 2016 in Hong Kong. Hong Kong consultancy firms were introduced to these two projects to undertake supervision duties. Soon after, Nepal was hit by a large earthquake. Many buildings collapsed, but not those supervised by Hong Kong companies. These fully illustrate the fine quality of Hong Kong’s professional service.

Government should assume leading role

Lau said that as the government has always pursued the consistent principle of “small government, big market”, there are worries that any industry-specific support would be criticized by other industries. However, he considers this approach inadequate under current circumstances. He wished that the government could serve as the industry’s lobbyist and connector – as there may be cases that when opportunities arise in mega-scale business projects, government to government negotiation is required to close the deal. Lau hopes the government can change its way of thinking and actively assist the industries in looking for new business opportunities, rather than simply relying on the industry’s own efforts.

This article was firstly published in the magazine CGCC Vision March 2017 issue. Please click to read the full article.

By Peter Cai, Lowy Institute for International Policy

Implementation Challenges: Lack of Bankable Projects and Moral Hazard

Chinese leader Xi Jinping launched OBOR at the end of 2013. Three coordinating government agencies (the National Development and Reform Commission, the Ministry of Foreign Affairs, and Ministry of Commerce) issued the first official blueprint on OBOR, the ‘Vision and Actions on Jointly Building Silk Road Economic Belt and 21st Century Maritime Silk Road’, just two years later in March 2015. However, there has been slow progress in terms of the implementation of projects outside of China.

At a recent OBOR work conference chaired by Vice-Premier Zhang Gaoli, a member of the Politburo Standing Committee who is overseeing the initiative, Xi urged for some signature projects to be implemented quickly, showing tangible benefits and early success. He wanted the focus to be on infrastructure projects that improve connectivity, deal with excess capacity, and trade zones. “We need to get some model projects done and show some early signs of success and let these countries feel the positive benefits of our initiative”, he told a large gathering of senior party officials and business people. Xi is not happy with the lack of progress, not least because OBOR is part of his political legacy. But the initiative faces multiple, formidable challenges.

First, there is a significant lack of political trust between China and a number of important OBOR countries. Perhaps the best example of this is India. The country’s Foreign Secretary Subrahmanyam Jaishankar has said OBOR is a unilateral initiative and that India would not commit to buy-in without significant consultation. Sameer Patil, a former assistant director at the Indian National Security Council and a researcher at foreign policy think tank Gateway House, says the China– Pakistan Economic Corridor project is a major obstacle to Indian involvement in the initiative.

A second problem is that nearly two-thirds of OBOR countries have a sovereign credit rating below investable grade. Some key OBOR countries such as Pakistan are unstable, which poses significant security risks to Chinese companies as well as personnel working there. The Pakistani military has, for example, promised to raise a special military unit of 12 000 soldiers to protect China–Pakistan Economic Corridor projects.

A third problem is caution on the part of over-leveraged and risk-averse Chinese financers. After Xi announced OBOR, Chinese state-owned financial institutions followed with a raft of policies that echoed the president’s grand vision. China Development Bank, which is expected to play a key role in financing OBOR, says it is tracking more than 900 projects in 60 countries worth more than US$890 billion. Bank of China, which has the largest overseas networks, pledged to lend US$20 billion in 2015 and no less than US$100 billion between 2016 and 2018.56 Industrial and Commercial Bank of China (ICBC) has been looking at 130 commercially feasible OBOR-related projects worth about US$159 billion. It has financed five projects in Pakistan and has established a branch in Lahore.

Yet, despite these public pledges of support, many Chinese bankers and especially those from listed commercial banks such as ICBC are concerned about the feasibility of OBOR projects. They are worried about the many risks associated with overseas loans, including political instability and the economic viability of many projects. As Andrew Collier, Managing Director of Orient Capital Research, has noted: It is pretty clear that everyone is struggling to find decent projects. They know it’s going to be a waste and don’t want to get involved, but they have to do something.” Collier gave an example of one Beijing bank that he said had stopped lending to rail projects in risky places such as Baluchistan in Pakistan.

A chief investment officer from one of China’s largest state-owned financial institutions also told the author about his own reservations: “I prefer to invest in places like Canada and Australia, where I can get safe and decent returns. However, where I have been ordered to invest in OBOR countries, I will only allocate the minimum amount.”

The reservations of Chinese financiers and businesspeople about OBOR also need to be seen in the context of the worsening debt problem within China’s financial system, especially the number of non-performing loans on banks’ balance sheets. This rapid pile-up of debts took place after the country’s massive stimulus package of 2008. China’s leading business magazine, Caixin, has suggested that OBOR could produce a repeat of 2008. Influential economic policymakers in China are also concerned that the political impetus behind OBOR could drive China into investing in white elephant projects abroad. They are worried that some countries will take advantage of OBOR and sign up to Chinese projects with no intention of repaying the loans.

Yiping Huang, an influential economist who sits on the Chinese central bank’s monetary policy committee and a former investment banker, has argued that China needs to proceed cautiously on OBOR projects: “The most effective way to promote the initiative is by getting one or two projects done. If they turn out to be effective, it will be easier to take the next step. If early projects are disastrous, the future path will be hard.”

Huang has also noted the efforts to develop the country’s western region largely failed because the state ignored the fundamental economic issue of ensuring a return on assets.

There are indications that Chinese financiers are demanding tougher terms to ensure OBOR projects are financially viable over the longer term. Negotiations with the Thai Government over the building of a high-profile rail project were hamstrung by disagreements over interest rates, among other things. Chinese financiers demanded a 2.5 per cent return on their concessional loan while the Thai Government wanted 2 per cent, the same rate Beijing offered to Jakarta. When Chinese bankers insisted on 2.5 per cent Bangkok said it would finance the project itself. Xue Li, a senior researcher at the Chinese Academy of Social Sciences and a member of a semi-official OBOR expert panel, says China is likely to lose money on the Indonesian high-speed rail deal, which Beijing is treating as a one-off special case and does not want the generous funding terms to become the norm.

Conclusion

OBOR is President Xi’s most ambitious foreign and economic policy initiative. Much of the recent discussion has concerned the geopolitical aspects of the initiative. There is little doubt that the overarching objective of the initiative is helping China to achieve geopolitical goals by economically binding China’s neighbouring countries more closely to Beijing. But there are many more concrete and economic objectives behind OBOR that should not be obscured by a focus on strategy.

The most achievable of OBOR’s goals will be its contribution to upgrading China’s manufacturing capabilities. Given Beijing’s ability to finance projects and its leverage over recipients of these loans, Chinese made high-end industrial goods such as high-speed rail, power generation equipment, and telecommunications equipment are likely to be used widely in OBOR countries. More questionable, however, is whether China’s neighbours will be willing to absorb its excess industrial capacity. The lack of political trust between China and some OBOR countries, as well as instability and security threats in others, are considerable obstacles.

Chinese bankers will likely play a key role in determining the success of OBOR. Though they have expressed their public support for President Xi’s grand vision, some have urged caution both publicly and in private. Their appetite to fund projects and ability to handle the complex investment environment beyond China’s border will shape the speed and the scale of OBOR. There is a general recognition that this initiative will be a decade-long undertaking and many are treading carefully.

Please click to read the full report.

East European nation hopes to resume mainland poultry exports and find key role within the Belt and Road Initiative.

Polish poultry producers are hoping to resume exports to China by the end of this month. Poultry imports from Poland to the mainland were banned in December last year following outbreaks of bird flu on farms in the west and south of the country.

Technically, imports cannot resume until three months after the last reported case of the avian influenza strain in the country. Poland has, apparently, been free of infection since 15 March this year.

Discussions as to the resumption of such exports were held in Hong Kong in early May. Leading the talks were representatives of Poland's National Poultry Council (KRD), with a number of leading mainland poultry distributors in attendance.

A recent rise in Poland's poultry production levels has seen the country keen to secure new export destinations, with China regarded as one of the most promising of the international markets. Overall, sales to the mainland are particularly valued, given that certain poultry items – most notably chickens' feet – have a ready market in China, while being virtually unsalable elsewhere.

According to the KRD, should exports resume, the total value of the Poland-China poultry trade could exceed US$560 million a year by 2020. Immediately prior to the ban, Polish poultry exports to the mainland were valued at about $84 million annually.

According to the KRD, Poland is emerging as one of the EU's key poultry-production centres. At present, it produces about 2.5 million tonnes of poultry a year, 40% of which is exported. Approximately 80% of all such exports currently go to other EU member nations.

In other moves, the Polish government has high hopes of playing a significant role in China's Belt and Road Initiative. In particular, it is hoping that the mooted Central Polish Airport (CPA) project could form an integral element of China's plans to enhance its European trading routes.

In addition to air-cargo transport, the CPA initiative would also see the construction of fast rail links, integrated transport corridors, dedicated economic zones and a comprehensive upgraded to the region's energy infrastructure. In light of its potential significance to the overall BRI programme, Poland is believed to be seeking funding from the Asia Infrastructure Investment Bank in order to help make the planned CPA a more affordable reality.

At present, Poland, which is pitching itself as China's gateway to Europe, has been keen to nurture its trading relationships with the mainland. In particular, it has been promoting opportunities relating to a number of niche investments, including yachts and designer furniture, while also looking to secure joint opportunities with regard to environmental technologies, medical and mining equipment, cosmetics and the IT sector.

Anna Dowgiallo, Warsaw Consultant

China has become a major trading country and important source of foreign investment around the world as its economic activities with other countries continue to grow. Under the Belt and Road development strategy, Chinese enterprises have stepped up their efforts in “going out” to engage in trade and investment activities in countries along the Belt and Road routes. This has spurred demand for professional services to support these enterprises' growing international business.

China’s coastal areas, including the Pearl River Delta adjoining Hong Kong and the Yangtze River Delta (YRD), have always been major areas for economic co-operation with foreign countries. More and more enterprises in Shanghai and the adjacent areas have been heading for the Belt and Road regions in search of opportunities to boost the development of their businesses.

HKTDC conducted a questionnaire survey in Shanghai, Jiangsu and other places in the YRD in the first quarter of 2017 to gauge the situation. The survey results indicate that the great majority of domestic respondents (84%) would consider tapping business opportunities in Belt and Road countries in the next one to three years. Among these, many enterprises (46%) said that Hong Kong was their preferred destination for seeking professional services outside the mainland for capturing business opportunities. This matches with the findings of a similar HKTDC survey in South China last year. [1]

The Belt and Road destinations that respondents showed the greatest interest in were Southeast Asia (62%), South Asia (32%), and Central/Eastern Europe (28%). Most enterprises (58%) expressed the hope of selling more industrial products, relevant services and technologies to Belt and Road markets, while one in three (32%) would consider investing and setting up factories in Belt and Road countries.

There is no doubt that Hong Kong is the preferred platform for mainland enterprises “going out” to invest overseas. Hong Kong service providers have been helping mainland enterprises handle their trade and investment businesses in Hong Kong and overseas markets for many years. Further efforts by mainland enterprises, including those in the YRD, to tap Belt and Road opportunities are bound to generate more business for Hong Kong. (For more details on China’s foreign investment and Hong Kong as the preferred platform for mainland enterprises “going out” to invest overseas, see: China Takes Global Number Two Outward FDI Slot: Hong Kong Remains the Preferred Service Platform)

Belt and Road: Hotspot for China’s Foreign Trade and Investment

China has become a major world economy and the economic activities of Chinese enterprises abroad have gradually extended from trade to other fields of investment. China’s foreign trade volume stood at US$3.69 trillion in 2016, second only to the US with US$3.71 trillion. [2] During the same period, China’s foreign direct investment (FDI) flows (excluding financial sector investment) reached US$170 billion [3], which was among the highest in the world and exceeded foreign capital inflow. It is now a country with net capital outflow.

Challenges in Business Operation

Virtually all respondents (99%) said that their business operations faced a variety of challenges over the past year. Their foremost concerns were the volatile RMB exchange rate (41%) and rising labour, land and/or other production costs (39%). Other challenges included keen competition in international markets (28%), financing difficulties (26%) and weak overseas markets and inadequate orders (24%).

Most Important Countermeasure: Develop Overseas Markets

In order to tackle these challenges, over 95% of the respondents said either they would consider adjusting their business/operating strategies and making relevant investment in the next one to three years or they had already done so. Almost three out of every four (74%) of the respondents said they would first exert themselves to develop overseas markets. Of these, half (50%) said they would develop further overseas emerging markets and 48% said they would focus on overseas mature markets. More than one in three (37%) said they would develop/promote their own brands, while the same number said they would work on the improvement of product design and technological R&D capability.

Belt and Road Opportunities: Focusing on Southeast Asian Markets

As China continues to promote the Belt and Road development strategy, 84% of the respondents said they would consider tapping business opportunities in Belt and Road countries in the next one to three years.

Among those enterprises that would consider tapping Belt and Road opportunities, most said they wanted to sell more industrial products and related services and technologies to the Belt and Road markets. Just under a third (32%) said they wanted to go to Belt and Road countries to invest and set up factories for production, while 18% said they would like to go to source consumer goods/foodstuff for selling on the Chinese mainland and source raw materials for production on the Chinese mainland. Another 9% said they hoped to set up transit warehouses in Belt and Road countries to improve their international logistics efficiency.

Among those enterprises interested in tapping opportunities in Belt and Road markets, almost two thirds (62%) said they would focus on Southeast Asia, including ASEAN countries. Fewer respondents chose other regions, with a third (32%) picking South Asia (32%), just over one in four going for Central and Eastern Europe (28%) and the Middle East and Africa (27%), and one in five choosing Central and West Asia (19%).

Although there is a slight difference between the preferences of the respondents in this survey and the one conducted in South China last year, the preferences for Belt and Road opportunities and locations of interest are similar, suggesting that most mainland enterprises have the same intentions of tapping Belt and Road opportunities, regardless of where they are based.

Comparison of Survey Findings in South China and YRD

 

Source: HKTDC survey

 

Need to Seek Services Support

Of those enterprises looking to tap into Belt and Road opportunities, half (51%) said they would like to become involved in marketing activities tailored for Belt and Road and other overseas markets. Half (50%) said they would require related financial services, including banking, financing and project valuation. Just under half (45%) said they would like to seek related legal, accounting and other professional services. 40% said they would require business consulting services to help understand the investment environment in overseas markets, including Belt and Road markets.

Seeking Services Support in the Chinese Mainland and Hong Kong

In order to locate these aforementioned professional services, more than half (55%) of the respondents looking to tap Belt and Road opportunities said they would first source these support services locally. However, a significant number said they would also seek various professional services outside the mainland. Hong Kong was the most preferred destination for most enterprises, accounting for almost half (46%) of all respondents who would like to tap into Belt and Road markets. This again matched the findings of the survey conducted by HKTDC in South China last year. Other destinations highlighted as of interest included the US (34%), Germany (27%) and Singapore (23%).

HKTDC Research would like to acknowledge the help extended by the Shanghai Municipal Commission of Commerce in conducting the survey.

 

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[1] For details about the survey in South China, please see: Chinese Enterprises Capturing Belt and Road Opportunities via Hong Kong: Findings of Surveys in South China

[2] Source: Customs Administration of China; World Trade Organisation

[3] Source: Ministry of Commerce of China

[4] On Hong Kong as the preferred service platform for mainland enterprises “going out”, please see: Guangdong: Hong Kong Service Opportunities Amid China’s “Going Out” Strategy, Jiangsu/YRD: Hong Kong Service Opportunities Amid China's "Going Out" Initiative, China’s “Going Out” Initiatives: Professional Services Demand in Bohai and China's “Going Out” Initiative: Service Demand of Western China to Tap Belt and Road Opportunities.

[5] Please see: Chinese Enterprises Capturing Belt and Road Opportunities via Hong Kong: Findings of Surveys in South China