By Martin Liao (Legislative Council Member, Commercial (Second) Functional Constituency)

The traditional Key Industries in Hong Kong, including the Finance Services, Trading and Marine Services Industry, as I have mentioned in my previous article in this series, surely can benefit a lot from the economic activities arising from the vision of “One Belt and One Road”. For the emerging economic sectors, they can find new directions for development from it as well.

Seize the opportunity to realize the potential of e-commerce

E-commerce is one of the emerging economic sectors that has great potential. It is reported that the scale of the global e-commerce market is expected to reach US$2.3 trillion in 2018, of which the Asia-Pacific region would account for 38% of the market share. And the “One Belt and One Road” is bound to generate more multilateral trade to further “expand the economic pie”. Hong Kong should accelerate the marriage of e-commerce and our traditional advantageous industries to capture these opportunities. The HKSAR Government has already named financial technologies as a new direction for the future development of Hong Kong’s financial industry, and is committed to further enhancing the operational efficiency of the industry and pioneering new development models for new technologies such as payment and settlement systems, big data analysis, cloud computing, information and risk management, and network security. Should the Steering Group on Financial Technologies succeed in its promotion of Hong Kong as a Fintech (financial technologies) hub, a new era of e-commerce would surely come with it. By then, Hong Kong with its advantages in freedom of information technology, convergence of talents, well-established legal system and intellectual property rights (IPR) protections, is absolutely well-positioned to be a Fintech hub for the countries and places along “One Belt and One Road”.

Another emerging economic sector is innovative technologies, which is quite a hot topic in Hong Kong these days. Although the innovative technologies industry in Hong Kong , for various reasons, has failed to play a major role over the years, it has high potential for development as many world-class researchers has been attracted to come and do their researches here. This year, a research team from the City University of Hong Kong, which has developed a specific biological technology for detecting toxins, was awarded the Grand Prix at the Geneva International Exhibition of Inventions. The “One Belt and One Road” is sure to provide a broad platform for Hong Kong’s innovative technology talents to maximize their potential. In this regard, the government too should take advantage of the chance and capitalize on Hong Kong’s well-established legal system and IPR protections to promote intellectual property (IP) trading and smooth its way to become an international IP trading hub.

Well-positioned to be an IP trading hub

“One Belt and One Road” not only can bring new development opportunities to Hong Kong’s creative industries, it can also bring new aspirations to our cultural and creative industries through the cultural exchanges with the various countries and regions far and near lying on the relevant economic corridors. As a matter of fact, creative industries have served as an economic engine for many countries and enhanced their economic strength. By comparison, creative industries in Hong Kong have lagged behind with the percentage share of value added in GDP stood at about 5% at 2013. But according to past records, Hong Kong’s entertainment industry was once dominant in the Southeast Asia market, and the influence of its kung fu movies reached as far as Europe and America, an indication that Hong Kong’s unique culture has full export potential. The HKSAR Government should help to create a favorable environment for Hong Kong’s creative industries to take off again, like assisting the industries to understand the cultures and traditions of the “One Belt and One Road” regions and facilitating various exchanges activities, thereby opening up the market and enhancing Hong Kong’s soft power at the same time.

The fore-mentioned are just a few examples of the numerous opportunities arising from the “One Belt and One Road” vision that I manage to cite in the limited length of this article. Actually it requires the joint efforts of the Government, business community and public to search out all the valuable new economic directions that “One Belt One Road” could render us. The Chief Executive has said that the leading industries of Hong Kong would not be the only ones that can “go global”. I believe our society is expecting the HKSAR Government, after the “13th Five-Year Plan” finalized officially, to keep the public informed of the specifics of the opportunities “One Belt and One Road” can bring to the various sectors in Hong Kong and what support schemes will be provided by the government.

The Government is expected to take the lead

As a matter of fact, if we are to seize all the opportunities arise from the “One Belt and One Road” vision, efforts on the part of the business sector alone is not adequate. Also this is not an efficient way for allocation of resources for society as a whole. In conclusion, the Government needs to play its part in creating a favourable environment in the background, actively participating in negotiating multilateral agreements to facilitate trade and safeguard investment, increasing the number of Asian Economic and Trade Offices, channeling resources and talents to “One Belt and One Road”- related key areas, and effectively helping the business community to capture opportunities. In addition, the Chief Executive has mentioned that he would ponder setting up a dedicated agency to support our country’s “One Belt and One Road” development, and would coordinate with various business associations and professional bodies to participate in the “One Belt and One Road”. These are very good ideas. I hope they can be put into execution soon enough so that the HKSAR Government can start assuming a leadership role and joining hands with the business community to translate the “One Belt and One Road” opportunities into substantive economic benefits.

This article is firstly published in the magazine CGCC Vision 2016 January issue. Please click here to view the full article.
(Remark: This is a free translation. For the exact meaning of the article, please refer to the Chinese version.)

By Martin Liao (Legislative Council Member, Commercial (Second) Functional Constituency)

This year is the year when China starts to build the “One Belt and One Road”, and the steady progress of this strategic initiative is an important part of the “13th Five-Year Plan” that the country is currently focusing on formulating. The HKSAR Government should provide leadership and support to various industries to promptly capture the opportunities arising from the “One Belt and One Road” and seek a new direction for Hong Kong economy’s as a whole.

Provide leadership to industries to promptly capture opportunities

China has started discussions with the countries and regions along the Silk Road Economic Belt and the 21st-century Maritime Silk Road on building a new framework for regional economic co-operation and constantly enriching the contents and approaches of co-operation under the initiative. Hong Kong indeed needs to participate as soon as possible in order to benefit from it. Therefore, following my request for the Chief Executive to obtain information at the government level on the latest developments of the “One Belt and One Road” for Hong Kong’s business community earlier this year, at the beginning of the current legislative year recently, I put forward a motion at the Legislative Council, urging the HKSAR Government to provide leadership and support to the various industries to promptly capture the opportunities arising from the “One Belt and One Road” and seek a new direction for Hong Kong’s economy as a whole.

The motion was eagerly deliberated and adopted by the Legco members. It is evident that despite the diverse political views within the Legislative Council, the vast majority of Legco members agree with the need to capitalize on the “One Belt and One Road” to seek a new direction for Hong Kong’s economy. In fact, because Hong Kong has been slow in economic restructuring over the years, some of its inherent advantages have gradually faded. Coupled this with the external economic uncertainties, Hong Kong is indeed facing both external and internal problems. As the “One Belt and One Road” spans across Asia, Europe and Africa, it will be the world’s longest economic corridor and largest economic engine. With an overall economic value estimated to be as high as HK$163 trillion, its development potential is quite amazing.

China’s “Vision and Actions” on building the “One Belt and One Road” have given rise to a very broad space for industrial development, including transportation, port infrastructure and e-commerce, among which are many industrial areas where Hong Kong has advantages. The problem is that, specifically, where should Hong Kong’s industries start?

Dare to look beyond

The Chief Executive has said that he will first study and then select the industries suitable for participating in the “One Belt and One Road”. I very much agree with this. However, more importantly, I believe that we should set our vision higher and farther, not only to find current opportunities, but more so be bold enough to seek a new direction for Hong Kong’s sustainable economic development over the next five decades or even longer.

First, the industries where Hong Kong traditionally has advantages can capitalize on the “One Belt and One Road” platform to expand into new markets, as well as to upgrade and restructure. For example, in the financial sector, as one of the three major global financial centres, Hong Kong not only has the world’s largest offshore RMB business, but also boasts the largest pool of RMB funds outside of China. In addition, it has a sound financial system, professional financial division of labour, highly transparent and diverse financial products, as well as an excellent financial regulatory system and discipline. It also offers first-class asset management services, bringing together a group of the world’s top financial talents. With these advantages, Hong Kong is fully capable of becoming the premier multichannel financing centre for companies in the countries along the “One Belt and One Road”. According to estimates, just infrastructure construction alone, the “One Belt and One Road” has an investment scale of US$1.04 trillion and transnational investment of about US$52.4 billion. Hong Kong is well-positioned to become a treasury centre of the “Asia Infrastructure Investment Bank” to provide financing for construction projects in the countries along the “One Belt and One Road”.

Strengthening of RMB business hub

In order to meet the huge demand for funds due to the “One Belt and One Road”, China has set up the “Silk Road Fund” and the “Asia Infrastructure Investment Bank”, which also brings huge financing opportunities for Hong Kong, helping to develop its bond market and improve its financial strength. In addition, with the increase in economic and trade exchanges among the countries along the “One Belt and One Road”, the RMB will be used more frequently and financing needs will be more substantial. Plus, with financial reform and opening up, China is striving to build a RMB-dominated regional monetary system in Asia and expand the channels for the RMB to flow back. This is positive for the development of Hong Kong’s RMB market and will strengthen its role as an offshore RMB business hub. The Financial Services Development Council of Hong Kong pointed out that if the RMB is included as a reserve currency, an estimated RMB500 billion to RMB 600 billion will flow out from China, and Hong Kong will be able to play a greater role in RMB capital projects and going global, taking the opportunity to develop into a financial market offering a full range of products and services. Besides, the “One Belt and One Road” spans across many Islamic countries, which could significantly improve the Islamic bond market that has been developing well in Hong Kong in recent years. The development of wealth management, fund management and privately offered funds in Hong Kong will also benefit with the “One Belt and One Road” boosting interoperability among Asian financial markets.

The shipping industry, where Hong Kong still has advantages for the time being, is also likely to scale new heights. As an international shipping hub, a goods distribution centre and a place where logistics enterprises gather, Hong Kong has a world-class international airport and port transportation management facilities, with flight and shipping routes spanning across the globe. Its efficiency in custom clearance for cargo is second to none. Hong Kong can help the regions along the “One Belt and One Road” to replicate inland port cities, and drawing from its experience in rapid custom clearance, it can also help the countries establish cooperation networks to promote cooperation in areas such as joint supervision, data exchange and mutual law enforcement assistance.

Professional support centre for “One Belt and One Road”

Commerce and professional services, which are also Hong Kong’s pillar industries, are likely to improve and form a Professional Support Centre for the “One Belt and One Road” projects. Last year, China surpassed Japan for the first time to become Asia’s largest foreign investor. Hong Kong has always been a platform for Chinese enterprises under the “One Belt and One Road” initiative. According to the Ministry of Commerce, as of end of 2013, the Mainland had made foreign investments of as much as US$370 billion through Hong Kong, accounting for about 57% of its total investment. However, Chinese enterprises are actually still at the initial stage of “going global”, and the “One Belt and One Road” is bound to drive more Mainland enterprises to “go global” and increase their overseas investment and M&A activities. Hence, they will have increasingly stronger demand for Hong Kong’s professional services. Hong Kong is Asia’s leading centre for professional services, and it brings together highend service personnel and professional services. Coupled these with its wealth of international experience, in-depth industry knowledge, rigorous professional conduct and enormous business contact network, Hong Kong can naturally provide the necessary legal, arbitration, mediation, accounting, risk assessment, management and consulting services for the “One Belt and One Road” projects.

This article is firstly published in the magazine CGCC Vision 2015 December issue. Please click here to view the full article.
(Remark: This is a free translation. For the exact meaning of the article, please refer to the Chinese version.)

By PwC’s Growth Markets Centre

February 2016: Over the past year China has increasingly made headlines in global news, creating a constant stream of articles, background reports and opinion pieces. Many of the events covered are having an impact well beyond the country and its own economy. Some of the main events that have dominated global news recently have included the ongoing slowdown of the Chinese economy, culminating in the slowest annual growth in 25 years, several severe stock market crashes, official recognition by the IMF of the Renminbi as a reserve currency and a significant devaluation while it slowly moves towards a more market-determined exchange rate, as well as many other government interventions and policy easing. In the midst of all these developments, it may be challenging to keep an eye on China’s long-term goals, ambitions and initiatives, most notably, the massive efforts China’s leadership is putting into its ‘going global’ strategy. These efforts are shaped more and more by the so-called ‘Belt and Road’ (B&R) initiative, an initiative that is gaining wider recognition and momentum in public opinion in China, but not necessarily yet outside the country…..
 
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By Norton Rose Fulbright

China’s Belt & Road Initiative (B&R) could see up to USD1.5 trillion invested in the 60 countries that comprise the B&R. This will make China the largest funder of power in the region. The sweet spot for Chinese banks, contractors and equipment suppliers, is difficult jurisdictions like those that make up the B&R – in these countries Chinese pricing of kit and debt is competitive, funds are deployed relatively quickly and importantly, Chinese capital comes with a partial fix for host country political risk. For any investor in emerging power markets, Chinese capital cannot be ignored. In this outline we look at how to tap it ……

This article was first published by Norton Rose Fulbright and is reprinted here with their full permission.

Please click here for the full article and related information (in Chinese).

By Tom Luckock (Norton Rose Fulbright)

China's ‘Belt and Road’ initiative – the flagship foreign policy of President Xi Jinping – has the potential to open a raft of new development opportunities for African infrastructure, mining and power projects. The extent to which the initiative covers Africa is still a little unclear but it appears to cover North Africa and parts of East Africa at the very least, with Kenya acting as the gateway to the initiative’s links to Africa through its modern ‘Maritime Silk Road’.

Although the practical application of the initiative is still developing, to date we are seeing greater focus by Chinese SOEs on countries subject to the initiative, shorter and easier outbound approvals and easier credit approvals within Chinese banks. Chinese SOEs have been preparing business plans for investment in the Belt and Road projects and countries, as well as demonstrating progress against those plans internally. Chinese companies will insert long explanations on links to the Belt and Road in all of their approval applications. One immediately obvious consequence is the number of previously shelved projects being dusted off and started again as part of The Belt and Road Initiative.

The key opportunity for non-Chinese sponsors is to tap Chinese capital for The Belt and Road projects in North and East Africa. One way is by working with a Chinese EPC contractor to bring in Chinese banks and Sinosure cover.

There are a number of issues to think about when tapping Chinese funding, including the following:

The Chinese EPC contractor is the key route to the banks
It is important to remember that the contractor, not the borrower/sponsor, is the bank’s customer. That means using the contractor to obtain good financing terms and overcome negotiation obstacles.

Establish finance support up-front
Contractors frequently promise finance on attractive terms, but the key is to understand the substance to that support as early as possible. Many projects stall when credit approval falls through late in the day.

To the extent possible key finance terms should be agreed up-front
Negotiate key points, such as pricing, parent support, and change of control, up front when the contractor is competing hard for the project. This is not always easy to achieve but on some occasions sponsors have stapled a finance term sheet to the back of terms agreed with the contractor.

China Inc. and information flow
The sponsor will be surrounded by Chinese kit, EPC, debt and export credit cover. Information flows freely within China Inc. but does not flow so freely across to a foreign sponsor. It’s important to be aware of this.

Maintain competitive tension as long as possible
Chinese negotiations can drag and sometimes an EPC contractor will pull out because of unexplained outbound or state owned asset approvals difficulties, or because of credit approvals issues. Maintaining competitive tension as long as possible avoids the downside if this occurs and also keeps the pressure on the Chinese contractor.

Keep documents and structures simple
As far as possible, use structures that have been approved and negotiated before, as these can typically be negotiated and approved much more quickly. New structures are possible, particularly for strategically important projects, but the contractor, as the bank’s customer, will need to assist to push these through.

Partnering with foreign sponsors is a key aspect of The Belt and Road initiative. This is an important aspect to being sensitive to host country concerns, diversifying risk for China and also an important element to China's SOE reforms which aim to see China's SOEs partnering with the private sector. It also should in theory reduce some of the moral hazard concerns that SOEs with strong policy support may build projects that don't need to be built.

This article was first published by Norton Rose Fulbright and is reprinted here with their full permission.

Please click here for the original article.

By China-United States Focus (He Yafei, former Vice Minister, State Council Office of Overseas Chinese Affairs)

China’s One Belt, One Road (OBOR) initiative has been gaining attention since its proposal by President Xi Jinping in 2013, along with the recent Asia Infrastructure Investment Bank and the Silk Road Fund.

OBOR has been proposed as an innovative method of co-operation in global governance in the face of a worsening economic climate and simmering geopolitical problems worldwide. This solution follows eight years of slow recovery since the financial crisis of 2008, which arguably witnessed the failure of “neo-liberalism” and its infamous economic reform recipe enacted by the “Washington Consensus.” China’s economic growth might give the world its only hope, with an annual GDP increase of 7% that contributes over 30% to global economic growth.

The dire prospects for global development and the re-emergence of geopolitical troubles in the Middle East, Ukraine and elsewhere are pressing for elusive answers. What should we do to promote global peace and common development in the age of fast-paced globalization? Given the reality of the world today, what is so innovative and trailblazing about OBOR? Can it really offer a way out of the quagmire in which the world finds itself? I will try to illustrate my points as follows.

First, founded in the idea of building a new network of global partnerships, OBOR provides a fresh way of thinking about regional and global co-operation, by including both bilateral and multilateral co-operation in political, economic, cultural and other fields. It emphasizes the adaptability of development strategies in China and other participating nations, in order to produce benefits that are shared by all in an economic “win-win” outcome.

In a nutshell, OBOR envisions the creation of multiple economic corridors encompassing more than 60 countries in East Asia, Southeast Asia, Central Asia, South Asia, West Asia, North Africa and East Africa, linking the most dynamic East Asia Economic Zone with the advanced European Economic Zone. If we visualize OBOR, it is an economic partnership map with multiple interconnected rings. President Xi describes OBOR as a “chorus”, not a soloist singing. OBOR transcends different Free Trade Agreements (FTAs), including the newly concluded TPP, in both scale and content. It envisions regional integration beyond pure economic union, forming a political community founded on common interest in an attempt to forge, as much as possible, a common cultural identity.

Second, OBOR looks to build “five connectivities” with a view of creating a community of nations with a common destiny. These “five connectivities” include policy consultation, infrastructure connectivity, free trade, free circulation of local currencies, and people-to-people connectivity. In sum, these connectivities denote the “big trends” in economic globalization and socialization, the information revolution, and shared economic growth.

Policy consultation is placed first in the OBOR plan, because its success depends on the participants’ adoption of parallel development strategies and policies. Regular policy consultations align participants’ economic growth strategies, macro-economic policies, and major growth plans. The importance of infrastructure connectivity is easily understood, since OBOR’s economic growth and regional economic integration depends on the sophistication and connectivity of both “hard and soft” infrastructures.

Free trade is necessary for OBOR in that Asia as a whole needs to upgrade its place in global production and value chains, with a freer and more integrated production network that embraces individual countries’ advantages. Free trade should also come into play with regional production capacity realignment, i.e., moving excessive production capacity to countries that are in need to build up their own economic frameworks. The end result will be a more open regionwide economic system.

Free circulation of local currencies will be integral to the new economic structure OBOR creates. The Asia Infrastructure Investment Bank (AIIB) and the Silk Road Fund have shown the way to global financial system reforms and offer a new avenue of infrastructure investment funding. According to the Asia Development Bank, from 2010 to 2020 there was an $800 billion gap in Asia Infrastructure funding. Mackenzie Consultancy estimates that over the next two decades the global need for infrastructure funding will amount to a staggering $57 trillion. Intraregional free trade and infrastructure funding will enable a more efficient use and circulation of currency in the involved countries, thus reducing or avoiding the risks associated with a complete dependency on a U.S. dollar-centered financial system for project funding.

People-to-people connections result from more frequent exchanges at all levels and create a common cultural identity and affinity that will go a long way in providing a solid social foundation for building OBOR. People will only accept and engage with OBOR when they get to know other ethnic groups better.

Third, OBOR is not only a great opportunity for China to further her opening-up and reform, it also provides a large, multi-layered platform all countries along OBOR can use to reap greater economic and social benefits by opening up to one another. It is clear that China will be one of the major economic engines in the first half of the 21st century, with projected outward investments of $500 billion and over 500 million outbound tourists in the next five years. “Made-in-China,” Chinese capital, China’s market, and Chinese consumers will be hallmarks in the new round of worldwide economic growth.

Fourth, OBOR will be the cushion for China and the United States, as rising and incumbent powers seek to avoid falling into the proverbial “Thucydides Trap”: The Belt and Road initiative will help both nations in a profound manner to have an appropriate strategic assessment of each other’s intentions, by showing China can create solid co-operation in a strategically significant region. OBOR is also useful, as it involves both countries in policy consultation and economic collaboration, shaping the future of our bilateral relations.

I am happy to note that after the historic visit to the U.S. by President Xi, President Obama’s administration has reversed its position on OBOR and the related AIIB, adopting a more open and welcoming attitude. This year, as we celebrate the 70th anniversary of the founding of the United Nations, all nations big and small are reminded that it is necessary to improve the current global governance system. I am convinced that with joint efforts and determination, OBOR will prove its worth to China and its participants, including the United States, as a new path to mutual trust and a better future in global governance.

Please click to read the full article on the website of China-United States Focus.

By China-United States Focus

In 2015, the Chinese government unveiled a new slogan – “industrial capacity cooperation” – as it pursued trade and investment deals abroad. At the time, the Chinese economy was headed for serious trouble, with manufacturing profits dropping and worrisome bubbles preparing to burst in domestic financial markets. In essence, China now seeks to export its excess industrial capacity as a means to cope with its economic troubles. On the one hand, this is a strong sign that China is becoming a mature industrial power, following in the footsteps of nations like the United Kingdom and the United States before it. Yet global economic conditions suggest that China may not be able to export its way out of the present crisis.

A country exports its industrial capacity when it invests industrial capital – factories, machinery, and so on – overseas. For example, a Chinese firm might open a factory in Ethiopia with its own money and machinery. We can tell that China is trying to export its excess capacity by examining the international deals and statements that the Chinese government has made over the past year. In May 2015, the Chinese government announced a $70 billion plan to export spare capacity from industries including railway construction and telecommunications technology. Officials and state news agencies heralded the new plan during a Latin American tour that included stops in Brazil, Chile, Peru, and Colombia. Further ventures were announced throughout the year in countries as far apart as Ethiopia and Kazakhstan. Recently, China signed a memorandum of understanding with Saudi Arabia pledging to jointly pursue China’s One Belt, One Road (OBOR) initiative, including industrial capacity co-operation.

The industries China has highlighted as key priorities for its industrial capacity co-operation initiatives are those that suffer from chronic overcapacity problems: steel, construction materials, electrical power infrastructure, and rail manufacturing. During its economic rise in recent decades, China became the globe’s preeminent manufacturer of many of these industrial commodities. Now, global demand simply cannot keep up with China’s capacity to produce goods like steel, leading to a steep decline in prices. By exporting excess industrial capacity that simply cannot profitably produce in domestic conditions, China may hope to relieve some of the pressure on its industries.

Of course, investing capital abroad will help China increase its international influence. Exporting industrial capacity is a key component of Chinese initiatives like OBOR and the new Asian Infrastructure Investment Bank (AIIB), and most countries are more than happy to welcome Chinese investment. If Chinese construction equipment cannot be put to use in China, it can be used in Central Asia to develop infrastructure that will open markets to Chinese goods and allow further penetration of local economies.

Exporting both excess commodities and industrial capital is a classic strategy that developed economies use to cope with saturated markets and diminished opportunities for investment at home. Lenin famously argued that the struggle to export excess capacity motivated imperialism in the late 19th and early 20th centuries. Both the United Kingdom and the United States followed this path as they rose to global prominence, becoming creditor nations that dispensed industrial and financial capital around the world. Where economic power led, political influence often followed; where capital could not enter on its own, armed force opened the way.

Given these historical precedents, China’s transformation into a capital-exporting economy suggests that it is maturing as an industrial power and that its international influence will continue to expand. China and today’s United States occupy remarkably similar positions to yesteryear’s United Kingdom and a rising United States in the early 20th century, albeit with some notable differences. Foreign investment is still extremely asymmetric, with developed nations far outspending their developing counterparts. From 1980 to 2008, the foreign direct investment of firms from the advanced capitalist economies (the U.S., Europe, and Japan) grew from $500 billion to nearly $14 trillion. By the end of this period, the foreign employment and sales of these companies exceeded their domestic numbers. Firms from developing countries also increased their foreign investments, but these totaled up to less than a fifth of the advanced countries’ investments. The Netherlands, a country of only 16 million people, had more investments abroad than Brazil, Russia, India, and China combined.

Despite its implications for China’s international power and prestige, there is good reason to be skeptical that exporting excess capacity will rescue the Chinese economy in the short term. As I have written in earlier articles, today’s economic troubles reflect unique structural conditions that are unlikely to disappear without some kind of major destruction and devaluation of global capital.

The problem is that China is trying to export its way out a local crisis caused in large part by a global glut of commodities. Moving excess industrial capacity abroad will do little to alleviate the fact that the global supply of many key goods is now far in excess of demand unless those local markets happen to be heavily protected from international dynamics. Given that countries like Brazil, a key Chinese partner, are also experiencing collapsing prices, it is hard to believe that there are many suitable outlets for this strategy. Put simply: Building Chinese-owned factories in Brazil may not be particularly profitable if no one buys what they produce.

Like its historical peers, China is starting to mature as an economic powerhouse. However, it is coming of age in a time of severe economic turbulence and uncertainty. It remains to be seen how China’s rise will be impacted by the difficult conditions of the present day. Whatever the case, we should expect Chinese foreign investment to continue to grow, spurring a commensurate rise in its political influence.

Please click to read the full article on the website of China-United States Focus.

By BDO Singapore

“This initiative will directly affect 4.4 billion people with a collective GDP of US$2 trillion once completed.”

The “One Belt One Road” (OBOR) initiative was announced by President Xi Jinping of China in 2013. This initiative was brought forth during his visits to Kazakhstan and Indonesia in 2013, when he formally announced the Silk Road Economic Belt and the 21st Century Maritime Silk Road initiatives. This subsequently became a vital foreign policy for China in many aspects, mainly with the intention of promoting economic cooperation amongst countries along the “Belt” and “Road” routes.

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By Julian Vella (Asia Pacific Head of Global Infrastructure, KPMG International)

China’s bold vision can make a significant contribution to bridging the Asian infrastructure investment gap. But Chinese investors should be aware of the heightened expectations that come with selecting and managing projects in new markets.

Over 2000 years ago, the Silk Road was established as a trade route connecting China with Eurasia and the mighty Roman Empire. The road, in various forms, lasted over 1500 years before a decline in political powers ended its influence. Fast-forward half a millennium, and China’s plan to rebuild its old trade links with Europe and Asia has aroused renewed excitement.

The “One Belt, One Road” initiative envisages a path by land from China through Central Asia to Europe, with the maritime route flowing through Southeast Asia, the Indian Ocean, the Middle East, and Africa to Southern Europe.

By building essential infrastructure and boosting financial and trade links, the belt and road aims to enhance commerce and spread prosperity across 60-plus countries with a combined population well in excess of 4 billion. Financing comes from a number of sources, such as the Asian Infrastructure Investment Bank (AIIB), the Bank of China, The China International Trust & Investment Corporation, (Citic), and the Silk Road infrastructure fund. To date, approximately 250 billion dollars (US$) of related projects have been contracted, much of them involving Chinese machinery, raw materials and construction firms.[1]

Choosing the right projects

Given its huge domestic development in recent decades, China is hardly a newcomer to managing major projects. However, taking its infrastructure show on the road, across such a diverse range of countries, raises a number of fresh challenges.

Firstly there is the sensitive issue of sovereignty. With China emphasizing that it will respect sovereign rights, project selection will in many cases be at the discretion of each of the nations along the route – whose priorities may or may not align with those of China. A proposed railway line that stretches through to Thailand, for example, could support the latter’s ambitions to become a regional logistics hub, and the former’s need to access key export markets, offering a win-win for both countries. On the other hand, some prospective projects could potentially be viewed as primarily benefiting either China (e.g. by securing its energy resources) or the country in question (e.g. building local infrastructure unrelated to the One Belt route). Under any circumstances, choosing the right projects to prioritize can be quite a challenge. When dealing with governments inexperienced in infrastructure development this is compounded, particularly as project selection can often become highly politicized. When you factor in concerns over lack of transparency, corruption, an uncertain legal and regulatory environment, unpredictable financial systems and foreign exchange exposure risks, then decisions become even more complex. China’s domestic infrastructure program has been largely government financed, and carried out at breathtaking pace to accelerate economic growth. Conducting projects outside of its borders, in emerging markets, is a far more complex and prolonged affair, with the involvement of an array of stakeholders, which can slow the pace considerably.

These issues make it doubly difficult to please financiers (either banks or funds), who expect a good return on their investment through carefully chosen, efficient and well-managed projects. Project leaders, must, therefore, show a high level of understanding of the unique regulatory, political, legal, financial and project risks associated with potential projects, such as resource nationalism, transparency and labor unrest. It’s especially important to earn a ‘social license to operate’ by creating a good working environment, contributing to communities and minimizing the carbon footprint.

Amidst this complexity, China should, therefore, exert ‘soft’ power through comprehensive and early engagement with all governments along the route, to ensure that every project is positioned as a collaborative venture that brings rewards to all parties. This may involve investment in areas of infrastructure that do not directly benefit China, such as healthcare, education and housing.

A new game with different rules

Chinese businesses have relatively less experience in managing overseas projects, except where they are directly tied to China’s economic and trade objectives. This opens up opportunities for players from more mature infrastructure markets such as Australia, UK and Canada, to offer new ideas and technical knowledge as part of their project development and project management support. With its recent US$880 million acquisition of Australian construction giant John Holland, The China Communications Construction Company (CCCC) has gained access to invaluable technical expertise; a move that could be replicated.

Hong Kong also has a significant role to play in supporting infrastructure development as well as facilitating trade and investment along the belt and road given its location, its connectivity with mainland China, and its strength in financial services, transport and logistics, and professional services.

In addition, Chinese investors must also acknowledge that some of the countries in the proposed route have traditionally strong links to other nations with a vested interest in the region, and may resist China’s overtures. Equally these powers, namely Japan, India and especially Russia (which has a big influence in central Asia) may not support China’s efforts, and could seek alternative trade routes and blocs. Japan has not signed up to the AIIB, having nailed its colors to the mast of the established Asian Development Bank (ADB) as one of the largest shareholders. Since the One Belt announcement, Japan has stepped up its game, pledging to increase its investment in the ADB by US$110 billion over 5 years, with an expressed intent to build infrastructure such as roads and railways while reducing pollution.[2]

India, meanwhile, has its own programs, namely the Spice Route between Asia and Europe, and the ‘Mausam’ project that revives ties with its ancient trade partners via the Indian Ocean, stretching from east Africa, along the Arabian Peninsula, past southern Iran to South Asia, Sri Lanka and Southeast Asia.

While commentators have sought to describe the “One Belt, One Road” in various ways, it is clear that the initiative does reflect the Chinese government’s recognition that its own prospects are inextricably linked with those of its trading partners, and that it must take a more global role to further these ambitions.

With an annual Asian infrastructure gap estimated to be US$800 billion[3], there is plenty of room at the table for the AIIB, the ADB, and, indeed, other interested investors from around the world. The ADB has said that it is prepared to co-operate with China and has welcomed the entry to the region of new institutions for funding and supporting development projects. Despite fears that the main players are trying to assert an unhealthy influence, their combined efforts can make a real contribution to sustainable, inclusive growth for dozens of emerging economies.


Please click to download the original PDF file on KPMG’s website.

[1] China’s ‘One Belt, One Road’ looks to take construction binge offshore, Reuters, 6 September 2015.
[2] Japan unveils US$110 billion plan to fund Asia infrastructure, eye on AIIB, Reuters, 21 May 2015.
[3] Building China’s “One Belt, One Road,” Center for Strategic & International Studies, 3 April 2015.

By Carolyn Dong & Simin YU (DLA Piper)

China’s 'One belt one road' initiative was first introduced by President Xi Jinping during his visits to Central and Southeast Asia in September and October 2013. With the dawn of 2016, it is appropriate time to take stock and review what has been done so far in implementing the initiative, and its future direction.

Set out below is an overview of the One Belt One Road (shortened to OBOR) initiative. As detailed further below, with the initiative successfully launched, key funding institutions established, a regulatory framework deployed and eager diplomats entering into multiple bilateral agreements across the globe, 2016 is now likely to see a rapid acceleration in the uptake of OBOR projects. The potential now exists for powerful partnerships to be established between international and Chinese enterprises to leverage off this initiative.

'One belt, one road' in a nutshell'

'One belt, one road' is a development strategy and framework, proposed by the highest levels of PRC Government that focuses on connectivity and co-operation among countries along two main routes, the land-based 'Silk road economic belt' and oceangoing 'Maritime silk road' which run through the continents of Asia, Europe and Africa, connecting vibrant East Asian economies at one end and developed Western European economies at the other, while encompassing more than 65 countries along the route. The OBOR initiative covers countries as diverse as Singapore, Georgia, Kenya and the Netherlands.

The strategy underlines China's push to take a bigger role in global affairs, and its need to export China's production capacity in areas of overproduction such as steel manufacturing and infrastructure construction. However, the OBOR initiative is a broad initiative and captures everything from regional arts festivals and book fairs through to the establishment of the $100 billion Asian Infrastructure Investment Bank (AIIB), the $100 billion BRICS New Development Bank and the $40 billion Silk Road Infrastructure Fund. In March 2015 China’s National Development and Reform Commission (NDRC), Ministry of Foreign Affairs and Ministry of Commerce jointly issued the Visions and Actions on Jointly Building Silk Road Economic Belt and 21st Centruy Maritime Silk Road ('Visions and Actions Plan') for the OBOR initiative, which, similar to a strategy paper, acknowledges that the OBOR is a pluralistic and open process of co-operation which can be highly flexible and does not seek conformity.

However, at its core OBOR demonstrates a high level political commitment in China to work with participating countries to facilitate an increase in trade and investment flows and interconnections. A key focus of this is on reducing barriers to trade – both overcoming literal barriers (such as inadequate port, rail and road infrastructure) and also overcoming less tangible barriers (such as enhancing trade liberalisation and easing customs and quarantine processes).

OBOR calls for an improvement on the region’s infrastructure, with a call for greater energy and power interconnections and to establish a secure and efficient network of land, sea and air passages across the key routes. Additionally, the initiative calls for greater policy co-ordination (such as opening free trade areas and improving co-operation in new technologies) and financial integration (such as carrying out multilateral financial co-operation in the form of syndicated loans and supporting foreign countries to issue RMB denominated bonds). Furthermore, whilst the OBOR is firmly rooted in the Silk Road’s thousand year old heritage, it also clearly looking to the future – greater e-commerce interconnectivity and advancing the construction of fibre optic cables is encouraged.

OBOR: 2+ years down the road

Since OBOR’s 2013 launch, we have seen the successful launch of the Asian Infrastructure Investment Bank (AIIB), the $100 billion BRICS New Development Bank and the $40 billion Silk Road Infrastructure Fund (SRF). The former two institutions (AIIB and BRICS New Development Bank) are not exclusively directed towards the OBOR (although they are indeed relevant), but the latter, SRF, as the name suggests, has OBOR projects as a prime focus. Moreover the SRF has already started being a particularly active investor along the OBOR routes. For example, in April 2015 the SRF announced its first OBOR investment project – Pakistan’s 720-MW Karot hydropower project. In June 2015, the SRF (together with one of China’s largest chemical enterprises, ChemChina) announced agreements to seek to acquire Italian tyre manufacturer Pirelli. In September 2015, SRF concluded a framework agreement with one of Russia’s leading independent gas producer, Novatek, on the acquisition by SRF of a 9.9% equity stake in the Yamal LNG project. The SRF has also been an active investor in recent Hong Kong initial public offerings, taking cornerstone stakes in each of China International Capital Corporation’s October 2015 IPO and China Energy Engineering Corporation’s November 2015 IPO.

Other projects announced in connection with the initiative include a number of private Chinese companies’ foreign expansion and joint venture plans in a OBOR countries, such as the strategic co-operation agreement between Anhui Conch Cement and the Bank of China to see Anhui Conch Cement investing to establish new project sites in South East Asia; and machinery maker XCMG Group’s opening of new joint venture factories in Uzbekistan.

Additionally, Chinese regulators have continued to lay the regulatory and diplomatic foundations to support the OBOR initiative. Domestically, under the guidance of the March 2015 of the Visions and Actions Plan (which lays out the broad strategy of the initiative (see above)), 2015 saw other key Chinese regulators issue supporting guidance. This included China’s State Administration of Taxation releasing the 'Notice Regarding the Tax Services and Administration to Implement the Development Strategy of the ‘One Belt One Road’' regarding tax services and improvements contemplated for the OBOR route and the Ministry of Transport drafting supporting plans and measures. Additionally a number of Chinese provinces have published guidance notes and plans relevant to their local areas, for example Guangdong (June 2015); Hunan (August 2015); and Henan (December 2015). Each of these localised plans focuses on the geographical benefits and respective strengths of each province. For example the Guangdong plan focuses on developing shipping and cross-boundary infrastructure in the Pearl River Delta (covering the Guangdong-Shenzhen-Hong Kong and Macau bay area); whilst the inland province of Henan plans on positioning itself as an access point for the opening up of China's inland regions to the outside world.

On the international front, China’s diplomats have been busily engaging with relevant counterparties, with international agreements or memoranda issued jointly with countries as diverse as India, Hungary, Kazakhstan and Russia.

Successfully utilising OBOR opportunities

A large portion of China’s foreign investment and trade going forward are expected to take place in OBOR countries. However, the OBOR is not only outward looking from China - it is a two-way street, with the Visions and Actions Plan specifically welcoming companies from all countries to invest in China whilst also encouraging Chinese companies to participate in infrastructure construction and undertake other investments in other countries along the route.

Key industries for the OBOR initiative include: infrastructure and projects; energy and power; transport and logistics; information technology and industrial development; and financial markets.

Successfully implementing projects along the OBOR will not be without risks and challenges. Overcoming these risks will require thorough due diligence exercises and robust partnership and joint venture arrangements. More importantly success will depend on enterprises finding the right partners and having the right support networks providing a thorough understanding of local conditions, regulators, market players and, more generally “ways of doing business” in both China and the foreign host jurisdictions. This will be essential to be able to adequately identify, quantify and overcome risks and opportunities; to achieve this, an on the ground presence and knowledge of suitable partners and relevant contacts (both for foreign parties in China; and for Chinese parties in the foreign jurisdiction) is a perquisite.

Importantly, whilst China has allocated significant capital and resources towards implementing OBOR, China cannot implement the OBOR alone. Success of this initiative requires co-operation between Chinese enterprises and foreign counterparties in a raft of sectors and regions, covering everything from small scale trade and investment, to the delivery of large scale multi-jurisdictional game-changing infrastructure... and consequently the OBOR initiative offers countless opportunities for foreign companies to partner with Chinese companies, enterprises and financial institutions.

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