Fung Business Intelligence | 2 Sep 2015

Asia Sourcing South and West Asia Sep 2015

BANGLADESH

GARMENT EXPORTS TO US REBOUND IN 1H15

Bangladesh’s apparel exports to the US bounced back in the first half of the year, as the political situation began to stabilize and safety compliance in factories was showing pr ogress, drawing US buyers back to the country.

In the first six months of this year, Bangladesh’s garment exports to the US rose 9.5% yoy to US$2.68 billion, according to the Office of Textiles and Apparel (OTEXA) under the US Department of Commerce. In 2014, Bangladesh’s garment exports to the US fell 2.2% yoy.

Although the country’s garment exports to the US registered a significant rebound, the growth is still lower than those of other regional contenders. In the same period, garment exports to the US from Vietnam, India and Sri Lanka grew 15.4% yoy, 10.0% yoy and 16.5% yoy, respectively. At the same time, FOB prices of Bangladeshi garments did not increase in line with the rising production cost (particularly due to wage hike and rising electricity prices), raising concerns over the industry’s long-term development.

CLUSTER RELOCATION DELAY POSES RISKS TO LEATHER SECTOR

In the fiscal year 2014-15 (1 July 2014 – 30 June 2015), Bangladesh exported US$1.13 billion worth of leather and leather goods, making the leather sector the second largest contributor to national exports after the garment sector. Key export categories in the sector include leather shoes, travel bags, wallets, belts and finished leather.

For decades, pollution from Dhaka’s tanneries has poured into the Buriganga River, wiping out aquatic life and forcing the city to rely heavily on groundwater for washing and drinking. In response, the country’s high court has ordered tanneries in the city’s Hazaribagh subdivision, which process over 90% of the country’s leather, to relocate to the outskirts of the city at the Savar subdivision, where there will be a modern industrial campus with a central effluent treatment plant (CETP).

On 19 August, the government decided to extend the relocation again from December this year to possibly July 2016, as the installation of the CETP is delayed. The deadline was originally set at June this year. If the relocation cannot be carried out swiftly, polluting activities in Hazaribagh may once again come under scrutiny by environmental groups.

BGMEA PROMISES TO EM PLOY PEOPLE WITH AUTISM

In a unique event on 20 August spearheaded by Saima Wazed Hossain Putul, US-licensed school psychologist and chairperson of the National Committee on Autism and Neurodevelopment Disorders, the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) announced that the garment industry is going to recruit people with autism in a move to create job opportunities for them.

Workers with autism are focused and enjoy repetitive tasks that other workers tend to dislike. They follow routine strictly and are suitable for tasks such as quality control, numbering, placing stickers, collar pressing, button matching, poly packing and cleaning. They can also work as security guard and liftman.

During the event, Putul stressed on the need to create a model for employing people with autism. Autistic children’s training must be started at a very early stage to identify their area of interest, as they will work only on what interest them, and those interests have to be matched with manufacturers’ needs.

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HKTDC Research | 8 Sep 2015

Hong Kong Services for Mainland’s Outbound Investment (5): High-end Logistics Services Help Bolster International Business Expansion

As Chinese investment rapidly turns outwards, many mainland enterprises are seeking expansion by leveraging their overseas investments in conjunction with domestic and foreign supply chains to develop high value-added business. Such moves have generated a keen demand for high-end logistics services. Hong Kong, as a trade and logistics hub in Asia Pacific, is highly experienced in international logistics management. In an increasingly demanding market, local players can provide mainland investors with one-stop logistics services by making use of the latest generation of information technology in areas such as high quality cold chain logistics services and their extensive international logistics networks.

 

 

Meeting Demand for Integrated Services

 

Apart from supplying advanced cold chain logistics services, Lau said that Hong Kong logistics providers use advanced monitoring and Internet of Things (IoT) technology to supervise the whole transportation process. Stringent inspection and testing services are also in place to check goods when they arrive at the cold storage to ensure that the refrigerated goods have not spoiled or been contaminated during the journey. “This, coupled with effective one-stop, value-added services including information and warehouse management, and customs clearance, can satisfy the demand of high-end clients for logistics services.”

Capturing the Belt and Road Opportunities in ASEAN Market

China is currently embracing the Belt and Road development strategy. The Belt refers to the economic belt along the Silk Road, and the Road refers to the 21st Century Maritime Silk Road. As ASEAN’s economy becomes increasingly buoyant, Lau noted that the “go global” strategy of mainland enterprises is embracing investment in manufactories in the ASEAN market. In turn, demand from ASEAN and mainland enterprises operating there for logistics and transportation services is bound to rise rapidly. To effectively serve ASEAN and mainland clients, Kerry Logistics, as a pioneer service provider in cross-border transportation in ASEAN, has launched Kerry Asia Road Transport (KART). This overland cross-border transport network links ASEAN countries and China, and supplies high-efficiency long-haul overland transport and door-to-door delivery services.[1]

 

 

Lau said: “As China’s economy grows, in future the one-sided situation of foreign firms coming to invest in the China market will come to an end. Rather, mainland enterprises will quicken their pace of “going out” to foreign markets to invest and “bringing in” foreign resources. In the course of this “going out” and “bringing in” strategy, they can make use of Hong Kong’s highly efficient logistics services to link up mainland and foreign supply chains. They can also take advantage of Hong Kong’s trade and logistics networks in the Asia-Pacific region to support their investment activities in ASEAN and other Asian markets in preparation for business opportunities resulting from the mainland’s Belt and Road Initiative.”

 

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[1]  KART’s operation headquarters is located in Bangkok, Thailand. Its service network covers seven logistics centres which operate seven routes linking ASEAN and the Chinese mainland, offering cross-border transportation services. Visit Kerry Logistics website for further details.

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HKTDC Research | 9 Sep 2015

Singapore Bids to Play Pivotal ASEAN Role in Belt and Road Initiative

While welcoming the Belt and Road Initiative, Singaporean business leaders, academics and politicians have emphasised the need for 'co-creation' in order to ensure that all participating countries fully commit to China's economic masterplan.

The potential impact of the Belt and Road Initiative on Southeast Asia needs to be viewed through the prism of China's robust relationship with Singapore, as well as its diplomatic ties to the ASEAN bloc, according to many in the region. The complexity of these relationships means that China is obliged to take a distinctly à la carte approach to dealing with the ASEAN nations. In some cases, it would be best to deal with certain countries directly, while others might be best accessed via Singapore, with a number of the remainder more appropriately tackled as a constituent part of ASEAN.

Dr Zhao Hong, a Visiting Senior Fellow with Singapore's Institute of Southeast Asian Studies, has clear views as to the value of the Belt and Road. He says: "China is coming to terms with the 'new normal' of slower, but better quality, growth and this marks a shift in strategic thinking towards engaging neighbouring countries.

"For Southeast Asia, the initiative provides an attractive platform for mutually beneficial economic development in various fields, notably infrastructure and industrial production. It also fits in with ASEAN's Masterplan on Connectivity and the vision of the Indonesian President, Joko Widodo, with regard to enhancing his country's maritime capability."

The fact that Xi Jinping, the Chinese President, chose to launch the Belt and Road Initiative in Indonesia in October 2013 is seen as an indication of the importance that China attaches to its ASEAN partners. Just over a year later, in November 2014, Indonesia announced a US$6 billion plan to develop its port infrastructure across the archipelago.

Xuhua Huang, a Singapore-based Partner with King & Wood Mallesons, a global law firm, sees the initiative as being the key driver of growth for Southeast Asia. He says: "By capitalising on this initiative, Southeast Asia will become one of the primary destinations for those Chinese enterprises seeking to expand globally. Undeniably, China's recent deal with Thailand on the construction of the Thai section of the Singapore-Kunming rail link brings this dream one step closer to fruition. This sees ASEAN members – with Singapore at the centre – inextricably moving closer to forging an impressive pan-Asian trade sphere. Singapore's next step, as one of the region's leaders in infrastructure and logistics, will be to aid neighbouring countries and fellow trading partners in developing their own resources."

With Singapore the most economically advanced country in the Southeast Asian region, Huang sees it as likely to take a lead role in bringing the Belt and Road Initiative to fruition. This was borne out by a March 2015 survey by Grand View, a Chinese think-tank, which ranked Singapore as the country with the highest investment value out of the 64 nations included on China's proposed programme.

Expanding on Singapore's likely role, Huang said: "The country's key industries have already drawn the attention of many Chinese businesses looking to invest in the region. In fact, a significant number of mainland enterprises have already successfully integrated their regional resources and achieved internationalisation through investing via Singapore. It is no surprise that Singapore has established itself as the second leading offshore hub for Rmb trading.

"We also expect to see Singapore's status become more prominent as a shipping and aviation hub for Southeast Asia. There is also likely to be an increase in trade and personnel exchange across the region. This will come as an inevitable consequence of the construction and development of a variety of infrastructure projects, such as ports and airports.

"At the same time, we anticipate that Singapore's central role in Southeast Asia's financial, trade and logistics services will expand significantly. These enhancements will be driven by the Initiative, but complemented by Singapore's established investment and financial services markets, its strong legal system, sound infrastructure and experience in financial systems, as well as by its political and social stability."

At the government level, many are also optimistic as to Singapore's likely role in the Belt and Road. Josephine Teo, Singapore's Minister of State for Transportation, says: "Given the scale of the Initiative – in particular, the maritime component that potentially spans 65 countries across three continents – there is much to be gained by approaching the Belt and Road as a process of co-creation. This will allow participating countries to see themselves as being capable of influencing the outcome, while retaining a sense of ownership over the pace and texture of any collaboration. If this can be achieved, the Initiative will usher in a new era of co-operation that will benefit all concerned."

The Minister also saw opportunities not just for Singapore, but also for Singapore's role within ASEAN. Highlighting this, she said: "Countries along the maritime belt will inevitably benefit from participating in the co-creation of this Initiative. Given Singapore's roots as a regional trading hub, it should adopt a more active role in a number of key areas related to connectivity, namely transport, finance and trade.

"Businesses can also operate out of Singapore to tap growth opportunities in the larger ASEAN and broader Asian region. It is important to remember, that the Initiative is not just ASEAN-related. The Belt and Road also extends to Asia, West Asia, and Eurasia – and we must not forget that. Those who have already set up businesses in China or elsewhere in the region will be able to expand further with every new flow developed under the Belt and Road programme."

Teo's words came in July this year as part of her address to the first Singapore Regional Business Forum, an event organised by the Singapore Business Federation (SBF). The forum saw 400 delegates from 18 countries discuss the implications, opportunities and challenges represented by the Belt and Road Initiative.

Assessing the prospects for the programme, Teo Siong Seng, Chairman of SBF, said: "The Belt and Road is an important initiative in terms of collaboration and sustainable development, specifically with regard to maritime infrastructure, shipping and trade, finance, tourism, hospitality and culture. Its success will inevitably result in huge economic, social and political benefits for Asia.

"As part of this, Singapore will leverage its role as a major financial, transportation, logistics and maritime hub in order to facilitate trade and investment in this fast-growing region."

While the vision is still taking shape, Teo believes that managing the multilateral ties and existing agreements will be critical for its success, especially bearing in mind its multinational scope. He said: "It all has to be achieved through mutual understanding. While the project has been initiated by the Chinese, we have to look at it as being owned by the people all along the route, ensuring that the flow can be truly smooth."

One note of caution, however, comes from Professor David Lee of the Singapore Management University. He said: "It is not possible for China and a number of ASEAN countries to dispel all reservations and co-operate merely on the basis of economic gains. Trusted by both sides, Singapore could act as a platform for China to enter the ASEAN market.

"Furthermore, Singapore could adopt a strategy in line with its Smart Nation policy, which has seen it committed to setting up infrastructure to boost internet finance and inclusive investment. This is seen as not only likely improve the quality of life in the more underdeveloped ASEAN regions, but also as a boost for Singapore's leading role in the bloc."

While it is only logical that Singapore will play a key role in the maritime components of the Belt and Road Initiative, the country sees itself as having a wider remit. In line with this, Singapore has long been investing in building ties with China – most notably with the Shaanxi province, a focal point for the new economic initiative and a region where Singapore has a 25-year trading history.

In April this year, marking this quarter-century milestone, the Shaanxi provincial government and the Commercial Bank of China organised a commemorative forum for industry and government leaders. As part of the event, five Singaporean companies and five Chinese private and government entities signed agreements aimed at furthering their collaborative efforts, with a particular focus on finance, logistics, technology and tourism.

Ronald Hee, Special Correspondent, Singapore

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HKTDC Research | 14 Sep 2015

Africa Welcomes Belt and Road but Still Cynical of Mainland Motives

While many of the aims of China's Belt and Road Initiative are seen as broadly aligning with a number of projects already underway across much of Africa – notably Kenya's Vision 2030 – some need convincing of the mainland's true agenda.

Broadly speaking, China's Belt and Road Initiative could be seen as largely in line with Africa's own plans for economic growth. Infrastructure improvements, resource development, trade integration and improved funding structures have all been identified as priorities across the continent.

At the same time, improved access to Africa's lucrative market is very much a priority for the Chinese government. Chinese investment in Africa has risen sharply over the last 15 years. Overall, Africa has been seen as one of the few areas experiencing robust economic growth, with the continent seen as the new frontier for Chinese business since the early 2000s.

Back in 2014, Li Keqiang, the Chinese Premier, visited Kenya, Ethiopia, Nigeria and Angola. His mission was to pledge further Chinese investment to the continent, particularly with regard to infrastructure development. He also confirmed a US$2 billion boost for the China-Africa Development Fund, an initiative established to invest in Sino-African joint ventures.

During the course of his visit, Li predicted that Sino-African trade would double to $400 billion by 2020. In Kenya, he pledged support for a number of the flagship projects outlined as part of Kenya's Vision 2030 development plan. He also encouraged Chinese financial institutions and businesses to invest in Kenya, while promising to ensure Kenyan products enjoyed enhanced access to the Chinese market.

Overall, the Belt and Road Initiative is potentially hugely significant for many of Africa's economies. For many years, China's growth has been resource-intensive, heavily dependent on – and favourable to – Africa's extractive industries. China's economic development, though, is now seen as having entered a new phase.

Africa, the world's fastest-growing continent, has a combined population of one billion, with its constituent countries now emerging as potentially significant consumer markets for Chinese goods and services in the own right. For this trade to materialise, however, significant upgrades are required in the transport infrastructure of many of the target nations.

In terms of priorities, much of China's activity is currently focussed on the infrastructure and logistics challenges in East Africa, the region seen as the gateway for Chinese economic and political interests. In Kenya, China is playing a key role in the construction of the East Africa Railway. Initially, this will provide a fast freight transport link between the Indian Ocean port of Mombasa and Nairobi, the country's capital. Ultimately, the link will also extend to neighbouring Uganda, Rwanda, Burundi and South Sudan. China is also investing in upgrades to several African ports on both the east and west of the continent. This is in a bid to increase port capacity, while accelerating the interconnection and regional integration of East Africa.

According to a report published by the Forum on China-Africa Co-operation (FOCAC), Africa needs to spend $95 billion a year on new roads, railways, electricity and ports, but lacks dependable local funding sources for such initiatives. As part of the solution to this investment shortfall, the report also highlighted the importance of China's funding for Africa's power infrastructure, tourism and telecommunication sectors.

China's economic integration with Africa is also likely to take the form of offshore manufacturing, an inevitable consequence of China's bid to rebalance its economy. Rising cost pressures in China's domestic manufacturing industries are seen as likely to lead to production being relocated to Africa, as well as to other low-cost regions. Already, a number of Chinese companies are manufacturing textiles and certain FMCGs in Africa.

Sino-African economic relations may well come to be defined by this new model, as Africa needs to remedy the shortfall in its domestic manufacturing resources. Despite this perceived requirement, a number of analysts and policymakers are uneasy over China's growing economic neo-colonial position in Africa and its clearly self-interested agenda. Ultimately, China still has a lot of work to do if it is going to convince many in Africa of the mutual benefits of the Belt and Road Initiative.

Already the process of educating Africa as to the likely benefits has begun, with Hong Kong playing a key role as an emissary of mainland interests. Speaking in South Africa last month, Perry Fung, the Hong Kong Trade Development's Regional Director for the Middle East and Africa, referred to China's slowing economic growth and recent financial market volatility as "the new normal".

Fung, however, contrasted the mainland situation with Hong Kong's ability to maintain a firm hand on the financial rudder as the Chinese markets nosedived. Its global perception as a reliable, established financial and services centre may well see Hong Kong established as the financing platform for many of the countries embraced by the Belt and Road Initiative.

As part of the mainland initiative involves increased Chinese outward direct investment for the emerging markets, Fung was quick to suggest this would be mainly channelled via Hong Kong. He said: "Currently, 57% of the mainland's outbound investment goes to or via Hong Kong.

"Hong Kong serves as a key hub for funnelling China's overseas investment, so the city's service providers can help China seize the Belt and Road opportunities. Hong Kong is the largest offshore capital-raising hub for Chinese finance and has a pivotal role to play in financing the private enterprises involved in the strategy."

At the moment, despite Fung's evangelical zeal, the jury is out. While some see China's Belt and Road Initiative as likely to reinvigorate Africa and boost innovation the region, others believe only Africa can solve Africa's problems, remaining highly sceptical as to China's true motives.

Either way, it is evident that both Africa and China are at a crucial stage in the development of their economies. The Belt and Road strategy clearly demonstrates that China knows where its best interests lie. The challenge remains to convince many in Africa that the strategy also aligns with their own long-term goals.

Mark Ronan, Special Correspondent, Cape Town

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HKTDC Research | 29 Sep 2015

Hong Kong Services for Mainland’s Outbound Investment (7): Effective Tax Planning a Prerequisite for “Going Out”

China has gradually become a net capital exporter with its outbound direct investments recently surpassing foreign investment into the country. Jane Hui, a Hong Kong accountant specialised in corporate mergers and acquisitions (M&As), restructuring and tax planning, reckons that the mainland enterprises involved in such activities will need effective professional services support, notably tax planning. This will help them achieve efficient use of investment capital, as well as long-term, sustainable development goals for their outbound capital investments. With China’s Belt and Road Initiative set to facilitate this “going out” activity, this will further stimulate professional services demand and provide tremendous business opportunities for Hong Kong players.

Diversified Investments Sustained by Professional Services Support

Effecting Tax Planning

Hui believes that in terms of addressing the business environments of different countries, Hong Kong can provide not only tax, accounting, legal and other professional services, but also render considerable support for the many “going out” needs of mainland enterprises. In addition, Hong Kong’s professional services providers are well versed in the tax and regulatory environments of the mainland and overseas markets.

Moreover, Hong Kong has decades of experience in offshore asset management, plus a highly efficient business operation environment and free flow of information, making it well placed to support mainland investors when it comes to effective tax planning and the avoidance of unnecessary tax burdens.

Looking ahead, mainland enterprises are set to “go global” with outbound investments, by capitalising on the Belt and Road Initiative of the central government. This will undoubtedly heighten demand for all kinds of professional services, and present far more business opportunities for Hong Kong’s professional service providers.

 

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[1]  Ernst & Young is one of the world’s largest professional services organisations. It has been providing Greater China with professional services for four decades and currently has a 14,000-strong workforce. Apart from its Hong Kong office, Ernst & Young also runs an extensive office network in China. It was among the first group of international professional services organisations to be granted permission to operate businesses in China.

[2]  Please refer to China’s Enterprise Income Tax Law and related implementation rules for the mainland’s “anti-tax evasion” regulations.

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HKTDC Research | 30 Sep 2015

The ASEAN Link in China’s Belt and Road Initiative

Crucial Position of ASEAN in both the Land and Sea Routes

Chinese President Xi Jinping’s announcement of the creation of the 21st Century Maritime Silk Road during a speech to the Indonesian parliament in October 2013 is seen as an indication of the important role that ASEAN plays in China’s Belt and Road Initiative. In March 2015, when China issued The Vision and Actions on Jointly Building the Silk Road Economic Belt and the 21st Century Maritime Silk Road policy initiative, it came as no surprise that strong emphasis was placed on orienting the trade routes towards ASEAN countries with a proposed China-Indochina Peninsula Economic Corridor.

ASEAN countries have long been the key trading partners of China. Since the launch of the China-ASEAN Free Trade Area (CAFTA) in 2010, improved institutional co-ordination and increasingly sophisticated intra-regional supply chains have driven China-ASEAN bilateral trade to new heights. Bilateral trade has grown significantly at an average annual rate of 18% between 2009 and 2014. To deepen multilateral co-operation, China and ASEAN began negotiating an upgrade of the existing CAFTA pact in 2014, with a focus on strengthening investment, trade in goods and services, and economic and technology co-operation. The discussion, likely to be concluded by the end of 2015, is expected to further enhance ASEAN’s crucial role in the Belt and Road Initiative and to facilitate further regional integration.

Mainland Southeast Asia, or the Indochina peninsula, is connected to China by land. The transnational transport network of the Greater Mekong Sub-region (GMS), of which Guangxi and Yunnan provinces are members, in combination with the proposed maritime silk road that will link major sea ports along the coasts of Vietnam, Cambodia, Thailand and Myanmar, will intensify China-ASEAN trade and industrial co-operation. It will also extend the economic benefits further afield to South Asia and Western Asia when the new multimodal transportation networks are in place.

Transportation Network in the China-Indochina Peninsula Economic Corridor

In building the China-Indochina Peninsula Economic Corridor, China will piggyback on the economic co-operation mechanisms of the GMS. During the Fifth Leaders Meeting on Greater Mekong Sub-regional Economic Co-operation, held in Bangkok in December 2014, Chinese Premier Li Keqiang put forward three suggestions with regard to deepening the relations between China and the five countries in the Indochina Peninsula. These were: (1) to jointly plan and build an extensive transportation network, as well as a number of industrial co-operation projects; (2) to create a new mode of co-operation for fundraising; and (3) to promote sustainable and co-ordinated socio-economic development. Currently, the countries along the Greater Mekong River are engaged in building nine cross-national highways, connecting east and west, and linking north to south.

Land Transportation

The North-South Economic Corridor has been taking shape with the opening of the whole Kunming-Bangkok Highway in 2013, while China has also completed construction of an expressway in Guangxi leading to the Friendship Gate and Dongxing Port at the China-Vietnam border. The highway from Kunming to its borders with Myanmar and Vietnam has also been upgraded.

Building upon existing infrastructure, China and Thailand are working to improve cross-border rail networks. Construction is scheduled to begin in October 2015 on a new dual-track railway that will connect Laem Chabang (Thailand’s largest port) with Nong Khai, an industrial border area near to the Laotian capital of Vientiane, and to run further to Kunming. A high-speed rail link between Kunming and Kolkata in India, crossing Myanmar and Bangladesh, is also under study.

The China-led Asia Infrastructure Investment Bank (AIIB), with its focus primarily on infrastructure projects in Asia, is expected to play a constructive role in bridging the huge investment gap in funding ASEAN’s major cross-border infrastructure projects, such as the ASEAN Highway Network and Singapore-Kunming Rail Link.

Sea Transportation

Maritime co-operation is essential to building the 21st Century Maritime Silk Road. Currently, Vietnam and Thailand have the most developed seaport facilities among the GMS countries.  

Air Transportation

Air connectivity is also key to completing a comprehensive sea, land and air integrated network. The ASEAN Open Skies policy, effective from 2015, is set to enhance regional trade by allowing airlines from ASEAN countries to fly freely throughout the region under a single, unified market. ASEAN has also recently concluded an exchange of fifth freedom air traffic rights between ASEAN countries and China, allowing Chinese carriers to use ASEAN gateway city airports to fly beyond.

Within China, Kunming is seen to be the main airline transit point to ASEAN and South Asia, with more than half of its international flights destined for Southeast Asian countries. In total, Kunming has air routes to more than 20 cities in ASEAN and South Asian countries, including newly added direct flights to Koh Samui and Krabi Island in Thailand, and Siem Reap in Cambodia.

Custom Reforms Fuel Cross-border Trade and Investment

Aside from infrastructure upgrade, GMS countries are keen to enhance regional connectivity through introducing one-stop customs and harmonised administrative measures across their borders. Thailand, for example, has introduced e-logistics at its borders with other GMS countries and a One Stop Export Service Centre to improve logistics efficiency. Laos and Vietnam have recently launched single-window inspection at their border checkpoints, while China and Thailand are also working to streamline their respective import regulations.

In March 2015, China’s General Administration of Customs (GAC) announced it would introduce customs clearance integration reforms in provinces along the Silk Road Economic Belt. Under reforms that took effect in May 2015, companies in Chinese cities within the Economic Belt have the option to go through customs formalities (including declaration, tax payment and goods inspection) either through their local in-charge customs houses, or via port customs through which  goods are either imported or exported.

Accelerating Cross-border E-commerce

E-commerce has played an increasingly important role in stimulating international trade in recent years. With the ASEAN Economic Community (AEC) set for formal establishment by the end of 2015, and the promotion of e-commerce as a means to expand trade under China’s Belt and Road Initiative, cross-border e-commerce is likely to further accelerate.

China has been exploring ways to tap into the ASEAN e-commerce market. Yunnan and Guangxi have taken the lead in this, given their strategic locations and geographical proximity to mainland Southeast Asia. In 2013, the Chinese government designated Yunnan and Guangxi as the border financial comprehensive reform pilot areas, with the aim to facilitate trade and investment activities in the two provinces and to promote the use of the Renminbi in the China-Indochina Peninsula Economic Corridor and the Bangladesh-China-India-Myanmar Economic Corridor. These reform measures help to reduce costs and facilitate regional trade. China has also raised the cash limit that individuals are allowed to carry when crossing the border from RMB20,000 to RMB200,000.

At the seventh GMS Economic Corridors Forum held in June 2015, ministers from the six GMS countries endorsed the GMS cross-border e-commerce co-operation platform framework that China proposed, with a view to promoting cross-border trade and facilitate goods and commodity flows. Key areas of co-operation will cover co-operation of e-commerce enterprises, facilitation of cross-border e-commerce customs procedures, investment in cross-border e-commerce infrastructure, improvement of the e-commerce supporting services systems and building the capacity of e-commerce.

At the China-ASEAN e-commerce summit held in Nanning in September 2015, it was announced that Nanning had become a state-level cross-border e-commerce pilot city, with the establishment of the China-ASEAN e-commerce park and the participation of leading Chinese e-commerce companies such as Jingdong, Tencent, Alibaba and Meiliwan. To provide better services and facilitate trade flows, Guangxi will strengthen co-operation with ASEAN countries in customs, import / export inspection and quarantine, as well as other information exchanges. According to the Regional Department of Commerce Office, Guangxi’s e-commerce trade value rose 65.9% to RMB210 billion in 2014 and increased further by 84.7% to RMB 194 billion in the first half of 2015.

Mainland e-commerce companies are also moving quickly to explore the new models of cross-border e-commerce with ASEAN. Tmall Global, China’s leading e-commerce platform, announced in 2015 that it would launch a partnership duty-free shop project with King Power, Thailand’s largest duty-free group. Under the agreement, Chinese tourists will be allowed to buy stored-value cards online prior to travelling abroad, and be able to collect the purchased items from five of King Power’s duty-free shops upon arrival in Thailand.

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Hong Kong Export Credit Insurance Corporation | 30 Sep 2015

Laos: Benefiting from the Commencement of AEC

Strengths

• Abundant natural resources
• Stable political environment

Challenges

• Weak public finances
• Lack of skilled labor
• Insufficient basic infrastructure

Key Data
Capital	Vientiane
Population	6.7 million
Currency	Kip
Official language	Lao
Form of state	One-party rule

 

Political Trend

Laos has been under the one-party rule of the Lao People's Revolutionary Party (LPRP) since 1975. Elections for the National Assembly are held every five years. The most recent election was held in April 2011, with only four independents being elected and they were vetted in advance by the party-controlled Lao Front for National Construction (LFNC). Thus, although all citizens over the age of 18 are eligible and required to vote, power still remains firmly in the hands of the LPRP. It is expected that the political climate in Laos will remain stable over the coming years, with the LPRP maintaining tight grip on power.

Laos joined the Association of Southeast Asian Nations (ASEAN) in 1997 and the World Trade Organisation (WTO) in 2013. The Laos government will look for greater regional and international integration through the establishment of the ASEAN Economic Community (AEC) by the end of 2015. Meanwhile, Laos also maintains close political and economic ties with China, which is the largest source of foreign investment and the largest export market for Laos. The two countries have agreed to build a US$7 billion high-speed railway project. However, some international agencies warned that China’s growing influence in Laos could lead to an unhealthy financial dependence on China, and that Laos should look to balance China’s influence by drawing support from other Asian countries as well as the West.

Economic Trend

Source: Economist Intelligence Unit (www.eiu.com), World Bank

Lao’s economy continued its robust expansion with growth of around 7.3% in 2014, the ninth consecutive year of above 7% growth, fuelled by the development of the mining industry, the hydroelectric sector and construction. While the Laos economy remains the smallest in Southeast Asia, it has been drawing the attention of foreign investors for a number of reasons, including its abundant natural resources, low-cost labor force, and proximity to China and the fast-growing markets of ASEAN. Rapid growth is also forecast for 2015. Lao’s current account deficit remained large in proportion to GDP over recent years.

Laos mainly imported oil, machinery and equipment, and vehicles from nearby countries. For the first six months of the fiscal year 2014-15, its trade deficit was widened from 3.1% to 6.2% of GDP, with import demand for fuel and vehicles remaining large. Meanwhile, Laos’s foreign exchange reserves coverage was low. These indicators imply significant vulnerability to shocks. The recent trends in fiscal consolidation and credit growth slowdown as well as signs of depreciation will help in curbing domestic demand for imports and therefore lessen the pressure on reserves.

The commencement of the AEC by 2015 is expected to present new opportunities for Laos. The country’s export performance continues to skew towards hydropower and mining exports, as non-resource sectors still operate in a relatively high-cost business environment with low labor productivity. Laos may expect to see new opportunities for foreign investment and some benefits through lower costs of imports and future inflows of some professional services that Laos currently lacks.

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Hong Kong Export Credit Insurance Corporation | 30 Sep 2015

Myanmar: Much Economic Reform to be Done

Strengths

• Rich endowment of natural resources
• Geographic location between Mainland China and India
• Young and low-cost labor force

Challenges

• Political and economic reforms
• Ethnic and sectarian tensions
• Limited economic diversification
• Deficient basic infrastructure

Key Information
Capital	Naypyidaw
Population	51.4 million
Currency	Myanmar Kyat (1 MMK = 0.0009 USD as of 9 June 2015)
Official language	Burmese
Form of state	Multi-party democracy

 

Major Merchandise Exports (% of total, 2013)	Major Merchandise Imports (% of total, 2013)
Fuels and mining products (40.4%)	Manufactured goods (59.4%)
Agricultural products (26.6%)	Fuels and mining products (20.4%)
Manufactured goods (26.4%)	Agricultural products (7.6%)
Top three export countries (% of total, 2013)	Top three import countries (% of total, 2013)
Thailand (41.7%)	China (27.1%)
Hong Kong (21.1%)	Singapore (27.0%)
India (12.6%)	Thailand (11.4%)

Source: Economist Intelligence Unit (www.eiu.com)

Political Trend

Following decades of military rule and isolation from the rest of the world, Myanmar has taken steps in the transition to a more open country and initiated a series of political and economic reforms.

However, Myanmar’s reform process has been slowing over the past three years. The military still dominates key decision-making and the current constitution will continue to entrench the primacy of the military. The authorities announced in late 2014 that a general election would be held in the last week of October 2015 or early November. Even if the opposition wins the election, the military will remain politically powerful.

Apart from the political issues stemming from the liberalisation process, the government also faces other major challenges. Internally, ethnic and sectarian divisions continued. Externally, the relations with the West could still be volatile due to the government’s handling of ethnic, religious and social unrest. Thanks to the political liberalisation, Myanmar has re-engaged with the West. The United States and the European Union have lifted some of their sanctions against Myanmar. A fair election this year would ensure a stronger Western engagement.

Economic Trend

Myanmar's economy is predominantly agricultural, accounts for about 37% of GDP. The country has rich endowments of natural gas, oil, and precious stones. Its Buddhist temples have boosted the increasingly important tourism industry. Since the transition to a civilian government in 2011, the country has begun an economic overhaul aimed at attracting foreign investment and reintegrating into the global economy. Economic reforms included establishing a managed float of the Kyat, granting the Central Bank operational independence, liberalizing the telecommunications sector, and enacting a new Anti-corruption Law. Young labor force and ASEAN's membership have attracted foreign investment in the energy sector, garment industry, information technology, and food and beverages.

The growth prospect of the Myanmar economy remains favorable, should the reforms are sustained. The expectation of interest rate hike by the Federal Reserve and the wide current account deficit will continue to put downward pressure on the Kyat this year. The weaker Kyat suggested imported inflation would worsen. Combined with growing domestic demand, inflation rate would rise to 8.4% in this financial year, before easing somewhat to 7.6% in FY 2016.

Myanmar remains one of the poorest countries in Asia, with GDP per capita of just over US$ 1,200 in FY 2014. From a strategic development point of view, improvements in agricultural productivity is of central importance, as the sector represents the core means of livelihood for the majority of the population.

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HKTDC Research | 5 Oct 2015

Outbound Investment of Chinese Enterprises: Hong Kong the First Port of Call for Professional Services (Executive Summary)

China’s outward foreign direct investment (FDI) grew 14% to US$123.1 billion in 2014, making the country the world’s third-largest source of outward FDI for three consecutive years. In fact, in recent years, the Chinese government has substantially relaxed administrative measures dealing with overseas investments and has built platforms to facilitate the “going out” of enterprises to invest overseas. At the same time, many enterprises are actively “going out” in search of brands, technologies or other resources to raise their competitiveness and to help their transformation and upgrading. Subsequently, China’s overseas investments have gradually diversified into different areas. In addition, with the active promotion of its “Belt and Road” development strategy, China is seeking to strengthen economic cooperation with regions along the Belt and Road and foster related construction by leveraging the mainland’s comparative advantages, including those of the Pearl River Delta (PRD), the Yangtze River Delta (YRD) and the Bohai Rim. It is expected that China’s outward investment activities will expand further.

Hong Kong, in particular, is a key destination for the mainland’s outward FDI. In 2013, 58.3% of the mainland’s outward FDI was carried out via Hong Kong. At the end of 2013, Hong Kong was the destination for 57.1% of the mainland’s cumulative outward FDI. These mainland funds are mostly using Hong Kong’s trading platform as a springboard to invest in other regions overseas.

Hong Kong possesses definite advantages in helping mainland enterprises make overseas investments, including the free flow of capital, abundant international communication resources and world-class professional services. To better understand the intent of mainland enterprises as they transform, upgrade and seek new business partners, the HKTDC conducted three questionnaire surveys from 2013 to 2015 in key outward FDI areas of the mainland, and in-depth visits were paid to local enterprises in areas such as the PRD and the YRD. The latest survey was carried out in mid-2015 in the Bohai Rim area.

The surveys found that a vast majority of enterprises, whether in the PRD, the YRD or the Bohai Rim, have already committed to increasing their investment – or would consider doing so – in order to enhance their competitiveness and to adjust their business and operating strategies for the ultimate goals of transformation and upgrading. The main intention of enterprises in the YRD and the Bohai Rim is to enhance their product design and research-and-development (R&D) capability, followed by the development and marketing of their own brands. PRD enterprises, however, are primarily concerned with the development and marketing of their own brands while product design and technological capabilities are only of secondary concern.

On the other hand, enterprises in both the YRD and the Bohai Rim are more concerned with bringing in overseas advantages in order to develop the domestic markets. This is not quite the same as the strategy of PRD enterprises, which gives equal emphasis to local and overseas markets. Nevertheless, most enterprises in all three areas express the need to look outside for service support, including such professional services as product development and design, branding and promotion strategies, marketing, finance, business consultancy, law and accounting. They are also “going out” to look for business partners overseas. For instance, they will bring in overseas brands to the China market, develop overseas sales networks jointly with foreign enterprises, or engage in technological collaboration with foreign enterprises in an effort to help develop new businesses and new markets.

Moreover, more than half of the enterprises surveyed express keen interest in going to Hong Kong to look for services they need or to identify suitable overseas partners. Indeed, 65% of the surveyed enterprises in the PRD, 56% in the YRD and 60% in the Bohai Rim rate Hong Kong as the most preferred service platform for “going out”. Secondary choices include the United States, Germany and Taiwan.

Hong Kong’s services suppliers are clearly able to render effective support to mainland enterprises in investing overseas. This is particularly true of Bohai Rim enterprises. Although they are geographically farther away from Hong Kong than their counterparts in the PRD and the YRD, many are still willing to go through Hong Kong or even set up office there in order to utilise its cost-effective professional services and to help them solve problems with their outward investments. Their views include:

• As an international financial centre in the region, Hong Kong can help mainland enterprises raise funds and provide trade-related financial services such as credit negotiation and discounting. It can also help them raise funds for offshore investment projects in Hong Kong or international capital markets.

• Other than finding low-cost financing channels for investment projects, Hong Kong’s services suppliers also provide effective due diligence for investors and make appropriate assessments for investment projects to ensure the sustainable development of their investment businesses and to control risks within reasonable confines.

• With its professional accounting and auditing services, Hong Kong can provide appropriate international tax planning for overseas investment projects from the mainland and spare them unnecessary tax burdens.

• Other advantages such as the free flow of international information and the abundance of communication resources also afford mainland enterprises a timely grasp of the latest investment environment, trade barriers and other market situations overseas. This will prove very effective in helping enterprises formulate global investment strategies.

• Hong Kong is also a trading centre for technology in the region. As such, it is an ideal platform for mainland technology enterprises to open up overseas markets, look for collaboration opportunities with foreign technological partners and raise funds for offshore technology projects.

Over the years, services practitioners in Hong Kong have helped countless mainland enterprises handle their trading and investment businesses in Hong Kong and overseas markets. Other than the services mentioned by Bohai Rim enterprises, Hong Kong also provides professional services in law, branding strategies, risk assessment of sustainable operations, licensing arrangement, international certification and testing, among others. As the mainland quickens its pace of “going out” and “bringing in” and advances its “Belt and Road” initiative, more business opportunities will become available to services practitioners in Hong Kong.

 

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15 Oct 2015

The China Effect on Global Innovation

By McKinsey Global Institute

How innovative is China? How innovative does it need to be? These are the fundamental questions underlying this research. The answers are somewhat surprising. In many ways, we find, Chinese industry is more innovative than is generally acknowledged. Chinese companies have established strong positions in two types of innovation—developing new products and services that address consumer needs, and process innovations that make manufacturing more efficient. We also find that China has a growing need to innovate more broadly, across more industries, and raise innovation performance in engineering and science. China needs to evolve from an innovation “sponge” to an innovation leader to sustain GDP growth in the coming decade as other drivers of growth—an expanding labor force and capital investment—decline.

We conclude that China has the potential to meet its “innovation imperative” and to emerge as a driving force in innovation globally. The “China effect” in global innovation would be felt in several ways. As the nation with the largest population and the second-largest economy in GDP terms, China will be a growing source of innovation to serve the needs of an enormous and increasingly demanding consumer market. It is also a logical location for R&D and rapid commercialization of new ideas by global companies—for China, for other emerging markets, and for the rest of the world. Finally, the Chinese model of rapid, low-cost innovation can be applied around the world, potentially disrupting a range of industries…

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