18 Nov 2015

Special Report – Global Supply Chains: New Directions

By Standard Chartered Bank

Summary

Global supply chains (GSCs) have transformed trade and the world economy in the last 30 years. We argue they will continue to expand, though more slowly than before, and could significantly boost productivity. But patterns will likely change.

Robotics could challenge the low-wage model while 3D printing could bring a shift to customised products, made locally. Offsetting this, better communications such as mobile and the Internet of Things should boost GSCs in both manufacturing and services.

The centre of gravity of low-cost manufacturing looks set to trend west from coastal China, inland and to ASEAN, India and eventually Africa. Improving infrastructure and new trade pacts including the Trans-Pacific Partnership and China’s initiatives may be key drivers.

Services trade is likely to grow fast as digital technology advances. Also, horizontal supply chains – trade between countries at the same wage level, based on firm-level excellence or consumer choice – are likely to grow, and expand among emerging countries.

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18 Nov 2015

Special Report – ASEAN – Growth in the Fast Lane

By Standard Chartered Bank

Summary

ASEAN is a high-growth region. Since 1980, growth has averaged around 5.4%. This is well above the global growth rate of 3.4% over the same period. It is also faster than other regions – including Latin America, Sub-Saharan Africa and Middle East and North Africa – over the same period. During the 1980-2013 period, ASEAN growth outpaced global growth by 2ppt on average. As a result, the per-capita GDP gap between ASEAN and the world narrowed to 2.7x in 2013 from 6.0x in 1980. We believe more than half of ASEAN has the potential to increase potential growth to 7% or higher. Countries such as Myanmar, Laos and Cambodia are already growing at such fast rates. At 7% growth, an economy doubles in size every 10 years.

We see tremendous growth potential for the ASEAN consumer market by 2020, owing to rising urbanisation and income growth. The anticipated shift in labour structure and demographics should create significant new demand. It should also cause a shift in consumption patterns as ASEAN consumers allocate a larger share of spending to high-quality products and services. We believe demand in Indonesia, Vietnam and Myanmar will surge, given their relatively large populations and low penetration rates for consumer durables and services. There are also potential challenges. The region’s diversity suggests that companies looking to tap its strong growth potential will need to develop multi-pronged strategies to cater to different cultures and tastes. Furthermore, protectionist measures are possible in strategic industries in the absence of strong domestic players. Even so, we expect the ASEAN consumer market to offer strong growth and substantial opportunities by 2020.

ASEAN will benefit from the shift in investment from China as China loses cost competitiveness and its labour supply tightens. ASEAN also has a demographic edge. ASEAN’s median age was about 27 years as of 2013. This is much younger than China’s estimated 32 years. ASEAN will also continue to add to its labour force over the next few decades. Compared to 2010, ASEAN’s labour force is expected to grow by 70mn by 2030, while China’s labour force is expected to contract by almost 70mn (source: UN data).

ASEAN economies need infrastructure development to attract investment that is shifting from China, and to compete with neighbours such as India. ASEAN economies are relatively advanced in telecommunications and have good access to electricity. Improvements are needed in transport infrastructure. To date, the focus has been on developing national infrastructure, but seamless regional transport infrastructure across ASEAN is needed to more closely integrate the region in the longer term.

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18 Nov 2015

Special Report – PRD’s Pain, China and ASEAN’s Gain

By Standard Chartered Bank

Summary

Companies in the Pearl River Delta (PRD) – China’s leading manufacturing hub – still face plenty of challenges, according to our sixth annual survey of manufacturers in the region. A labour shortage persists, and wages are likely to rise 8.4% this year.

The PRD’s short-term pain is part of China’s longer-term pursuit of a more sustainable growth model, in our view. Rising wages reflect China’s improving productivity and the increasing complexity of the goods it produces as it moves up the value chain. Rising FDI flows into the services sector reflect this shift.

Investing more in automation and streamlining processes is the most common response to labour shortages and rising wages for PRD manufacturers. Among those planning to relocate factories, the preferred offshore destinations are Vietnam and Cambodia.

ASEAN – with its lower wages, abundant labour supply and rising household affluence – is well positioned to benefit from the PRD’s shift towards high-end manufacturing and services. Infrastructure development would allow it to become Asia’s next PRD, in our view.

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18 Nov 2015

OTG Indonesia – Reality Check

By Standard Chartered Bank

Summary

President Joko Widodo (Jokowi) appears to be struggling to deliver on his promises to the electorate. Some polls suggest the president’s popularity has waned since he assumed office in October 2014. The Jokowi administration is unlikely to meet many of its ambitious economic targets for 2015, including the 5.7% real GDP growth target and 30% increase in tax revenues from last year. We believe financial market players and investors should moderate their expectations of the Jokowi government.

We think an unfavourable global and domestic environment is making it difficult for the government to meet its targets. Weak commodity prices are hampering exports (almost 50% of which are commodity-based). FDI has slowed as a result of pressure on the Indonesian rupiah (IDR) on market concerns over the current account (C/A) deficit and risk of capital outflows when the US Fed starts hiking policy rates. Meanwhile, household consumption and investment slowed in Q1-2015, presumably due to Bank Indonesia‘s (BI’s) monetary tightening stance and slowing economic activity in commodity-producing provinces. Government spending on infrastructure, which was expected to propel real GDP growth this year, also slowed in Q1.

Factoring in recent developments in Indonesia’s economy and the global environment, we revise our real GDP growth forecasts to 4.9% (from 5.2%) for 2015 and 5.3% (from 5.5%) for 2016. We maintain our year-end headline inflation forecasts at 3.7% y/y for 2015 and 4.5% y/y for 2016, but adjust our annual average forecasts to 6.5% (from 6.0%) and 4.5% (from 5.0%). We maintain our call on the BI rate – a 25bps rate cut in Q2 (presumably in May) and 25bps hikes each in Q3 and Q4, to reach 7.75% by end-2015.

We maintain a Neutral outlook on IDR bonds. Although IDR bond valuations have turned somewhat attractive, we see scope for further improvement. The key near-term concerns are IDR weakness and slowing foreign demand for IDR bonds. Given renewed market expectations of further monetary easing, and its spill-over impact on the IDR, we revise higher our trajectory forecast for IDR bond yields.

We maintain our view of continued IDR weakness in the coming months. We keep our USD-IDR forecast at 13,700 by mid-2015 and 13,500 by end-2015. With both domestic and external market conditions favouring an acceleration in IDR weakness, we revise down our short-term FX weighting on the IDR to Underweight from Neutral.

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HKTDC Research | 19 Nov 2015

An Overview of Central Asian Markets on the Silk Road Economic Belt

Central Asian countries (CACs), consisting of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan, are not yet key export markets or investment destinations for Hong Kong companies, but they are playing an increasingly pivotal role in the China-Central Asia-West Asia Economic Corridor. This is very much integral to the Silk Road Economic Belt (SREB), which is aimed at deepening and expanding mutually beneficial cooperation in such areas as trade, investment, finance, transport and communication. The national development strategies of the five CACs all share common ground with the SREB or the land-based component of the Belt and Road Initiative (BRI) being driven by China. As a "super-connector", Hong Kong is ready to deliver game-changing solutions for the 60-plus countries along the Belt and Road, including China's immediate neighbours in Central Asia.

Central Asia : A Vibrant yet Challenging Region

Best known for its trans-Asian commerce, via the ancient Silk Road, harsh geography (a lack of ocean access, an arid or steppe climate and mountainous landscapes) and sparse population are common images of Central Asia. Thanks largely to the region's vast amounts of natural resources, which were underexploited during the Soviet era, the past decade's high commodity prices have boosted the performance of the Central Asian economy. Combined, the five CACs – namely Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan – make Central Asia a US$339-billion, 68 million-strong economy, with varying levels of development and purchasing power.

Benefiting from abundant mineral resources such as petroleum, natural gas, antimony, aluminium, gold, silver, coal and uranium, the energy sector has a key role to play in the economic development of the five CACs. Aside from having rich mineral deposits, the agricultural economy is also an important economic driver, with cotton, meat, tobacco, wool and grapes being major agricultural exports.

Given the abundance of rich and varied resources, economic growth in the five CACs has recently been curbed by nosediving oil and commodity prices. This, together with the spillover from sanctions applied by the West (the EU, the US, Canada, Australia and Norway) on Russia, continues to exert pressure on the overall GDP growth of Central Asia. Against this backdrop, the average growth in the five CACs is therefore estimated to slide from 6.6% in 2014 to 4.4% in 2015, before climbing back up to a brighter 5.3% in 2016.

Intra-regional trade in Central Asia has not been as significant as in Southeast Asia. For instance, in 2014, it only accounted for 7% of the total trade in Central Asia[1]. The relatively low dependency on regional trade, however, indicates a higher readiness to trade with partners further afield, including the CACs’ nearest neighbours, such as Russia and China. Moreover, the need for a more diversified economy, particularly in terms of manufacturing development, also indicates investment opportunities for Chinese companies.

While Central Asia is becoming an increasingly dynamic region connecting Eastern Europe and West Asia under the BRI, it can also be a challenging region for many new-to-the-market traders and investors. For instance, out of the five CACs, only Kyrgyzstan (since 20 December 1999) and Tajikistan (since 2 March 2013) are currently WTO members. Kazakhstan, whose accession is expected in early 2016, and Uzbekistan, are only observer states, while Turkmenistan has not even presented its candidature to the WTO.

Against this backdrop, customs clearance in Central Asia is often said to be overburdened, with bureaucratic obstacles leading to significant delays. Problems such as arbitrary seizures of goods, frequent changes in customs procedures without prior notification, excessive documentation and a lack of proper protocols to ensure that an appropriate appeals process is in place can make the importing process very uncertain, costly and time-consuming.

To a similar extent across all five CACs, business and cultural ties with Russia penetrate almost every area of daily and business life in the region. Not only do most people communicate with each other in Russian, they are also deeply accustomed to Russian culture, including movies and music. Russia also remains the most influential trading partner for most of the CACs, buying large amount of raw materials from and exporting a great deal of consumer and capital goods to all five countries.

The Customs Union, which became the Eurasian Economic Union (EAEU) from January 2015 and involves currently Kazakhstan, Russia, Belarus, Armenia and Kyrgyzstan, has further strengthened Russia’s influence in Central Asia’s trade development. While this has its advantages, it can also cast clouds, however. The recent recession in Russia and the sharp depreciation of the ruble have taken a toll on the Central Asian economy, imperiling the financial lifeblood of many Central Asian households and businesses.

Central Asia Under the Belt and Road Initiative

Central Asia has been crucial to the BRI ever since the Initiative was first suggested by President Xi Jinping in Kazakhstan in September 2013. In particular, the China-Central Asia-West Asia Economic Corridor, one of six economic corridors spanning Asia, Europe and Africa, runs from Xinjiang in China, then exits the country via Alashankou, joining the railway networks of Central Asia and West Asia before extending to the Persian Gulf, the Mediterranean coast and the Arabian Peninsula. The corridor covers all five CACs, as well as Iran and Turkey in West Asia.

In conjunction with the BRI developments, the Sino­Kazakh Cooperation Centre is located right on the border between China and Kazakhstan, in Khorgas. China's youngest city, Khorgas was officially established on 26 June 2014, and attracted nearly two million traders, from both sides, in that year alone. China is also extending its wings to encompass many of the region’s infrastructure and logistics projects, including various oil and gas pipelines, dry ports and railway tunnels – including a 19-kilometre railway tunnel under the Kamchik Pass in double-landlocked Uzbekistan linking the country’s populous Ferghana Valley with other major cities such as the capital, Tashkent.

China has also signed bilateral agreements on the building of the SREB with Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, with a view to further deepening and expanding mutually beneficial cooperation in such areas as trade, investment, finance, transport and communication. The national development strategies of the five CACs – including Kazakhstan’s “Path to the Future”, Tajikistan’s “Energy, Transport and Food” (a three-pronged strategy aimed at revitalising the country), and Turkmenistan’s “Era of Might and Happiness” – all share common ground with the SREB’s objectives. Furthermore, at the third China-Central Asia Cooperation Forum held in Shandong, in June 2015, a commitment to “jointly building the Silk Road Economic Belt” was incorporated into a joint declaration signed by China and the five CACs.

Central Asia: A Trading Partner for Hong Kong and the Chinese Mainland

Investment, and therefore improvements in energy and transport infrastructure, under the BRI are expected to boost CACs’ trade, particularly with other Belt and Road economies such as Hong Kong and the Chinese mainland. The resultant trade facilitation will therefore allow CACs to better realise the advantages their resources give them and to increase and diversify their trade in terms of export/import destinations and product variety.

In terms of trade, Kazakhstan is the No.1 Central Asian trading partner of both Hong Kong and the mainland. In 2014, the country accounted for 57% of Hong Kong’s trade with Central Asia and 50% of the mainland’s trade with Central Asia. Also noteworthy is that all the five CACs are overwhelmingly export destinations, rather than sources of imports, for Hong Kong. The pattern is repeated for the mainland, except as regards Turkmenistan.

Product-wise, nearly 90% of Hong Kong’s exports and imports to and from Central Asia in 2014 involved electronics/electricals or related parts and components. A further breakdown shows that Hong Kong’s trade with Central Asia is predominantly concentrated on telephone sets, computers and related parts and components. This is largely due to the fact that more and more Chinese, Russian and even European telecommunications equipment companies have set up production facilities in Central Asia in order to take advantage of cheaper production costs and proximity to markets in Eastern Europe and West Asia, giving rise to a high demand for related inputs.

With respect to the mainland, the trade portfolio is much more diversified. Major exports to Central Asia in 2014 included apparel and clothing accessories (representing 22% of the total), electronics/electricals and related parts and components (21%), footwear (13%), vehicles other than railway or tramway rolling-stock, and parts and accessories (5%), and articles of iron or steel (5%). In the other direction, the mainland’s imports from Central Asia in 2014 were mainly energy resources and commodities, including mineral fuels (representing 71% of the total), chemicals and compounds of precious/rare-earth metals (9%), copper (6%), and ores, slag and ash (6%).

Central Asia: An Investment Destination for Hong Kong and the Chinese Mainland

Prior to any increase in investment stemming from the implementation of the BRI, Kazakhstan is by far the largest recipient of outward direct investment (ODI) from the Chinese mainland, while no significant investment flows between Hong Kong and CACs have so far been tracked. In 2014, Kazakhstan accounted for 75% of the mainland’s ODI in Central Asia, followed by  Kyrgyzstan (10%) and Tajikistan (7%). In terms of industrial distribution, oil, gas and metals receive the lion’s share of the mainland’s ODI in Central Asia, while infrastructure projects such as roads, railways and pipelines are also attracting investment.

To better encourage foreign investment, all CAC governments have committed to improving their respective business environments, but some have been more successful than others. For instance, the government in Kazakhstan has targeted a reduction in the time required to register a business from ten days to one hour, while the paperwork needed for customs procedures and other business operations is to be cut by 60%. The country has also extended and expanded its visa-free entry scheme for a number of countries in order to boost tourism and foreign investment. Furthermore, a US$3 billion stimulus package in 2015-17, part of the country’s latest five-year economic plan, is aimed at investment priorities such as the development of the transport and logistics sectors, and improvement works on utility networks and energy infrastructure, foreshadowing greater ease and better prospects of doing business.

Tajikistan ranked low in terms of ease of doing business in 2015 but its array of business reforms include the implementation of new software at a one-stop shop for public service delivery and the further simplification of business registration procedures. These changes led it to rank as the top improver out of 189 economies surveyed.

Turkmenistan, however, does not even have an ease of doing business ranking for international investors to assess its business environment. This indicates that foreign investment is rare in the country but also that there is a clear lack of accurate and comprehensive information on different sectors. This makes market entry not only difficult, but also highly risky.

A Closer look at the Five “Stans”

As a regional giant, the size of the Kazakh economy is almost double that of the other four CACs combined. As a more advanced economy, Kazakhstan also leads in purchasing power, which was nearly 50% higher than the first runner-up, Turkmenistan, and 10 times bigger than the least-ranked, Tajikistan. As the region’s second most populous country, Kazakhstan’s average GDP growth rate between 2009 and 2014 was, however, only about half that of Turkmenistan (10.3%), and ahead of only Kyrgyzstan (3.6%) in the region.

Thanks to its significant mineral reserves of oil, natural gas, coal, chrome, lead, tungsten, copper, zinc, iron and gold, Kazakhstan is an important world energy supplier. Processing of metals and steel production are also leading industries in the country. Combined with other smaller manufacturing sectors such as the production of machines, chemicals and food and beverages, industry accounts for about a third of GDP. The rest of the economy is mainly comprised of construction and agriculture, as well as an extensive but mostly small-scale service sector that includes wholesale/retail trade, real estate, finance and insurance.

As an important component in the BRI, Kazakhstan has been striving to upgrade and modernise its logistics and trade infrastructure. Aside from various oil-and-gas pipelines, the passages of the Yuxinou Railway linking Chongqing with Duisburg, Germany and the Chengdu-Europe Express Railway linking Chengdu and Lodz, Poland, the free trade zone developing on the border crossing at Khorgas, on the Kazakh-Chinese border, is expected to open huge prospects for transit of cargo through Kazakhstan.

Together with the Zhetygen-Khorgas and Jezkazgan-Beineu railway lines, the Western Europe-Western China motor road corridor, and the port of Aktau on the Caspian coast, this infrastructure represents a wide array of logistics and distribution options for traders across the region. Meanwhile, expected WTO membership in early 2016 will provide traders with further relief on customs duties and import barriers, making the country an even more attractive transit point for Asian/European-bound cargo and centre for regional distribution.

The economy of the region’s most populous country, Uzbekistan, meanwhile remains highly bound up with the growing and processing of cotton, fruits, vegetables and grain (wheat, rice and corn). Aside from being a world leader on reserves of gas, coal and uranium, Uzbekistan was also the sixth-largest producer and the fifth-largest exporter of cotton in the world in 2014. However, such industries as automotive (General Motors began production of Chevrolets in November 2008, for example), agricultural machinery manufacturing, biotechnology, pharmaceuticals and information technology have increased in importance over the years since independence in August 1991.

Following the signing of an agreement with China in June 2015 regarding the extension of economic cooperation under the framework of the BRI, bilateral cooperation in such sectors as business, transportation and telecommunication will increase between China and Uzbekistan, while bulk stock trading, infrastructure construction and industrial park projects will also be developed. The rapid development and extension of railway and road networks in Uzbekistan, including the 19-kilometre railway tunnel connecting the capital city, Tashkent, with the populous Ferghana Valley, is an early sign of success.

Blessed by large budget surpluses stemming from the exploitation of energy sources and commodities such as gas (abundant gas deposits lie underneath the Karakum Desert – including the Galkynysh gas field, which has the second-largest volume of gas in the world, after the South Pars field in the Persian Gulf), Turkmenistan has the worst record of economic and trade liberalisation among the former republics of the Soviet Union. Unlike countries such as Kazakhstan and Kyrgyzstan, which have rapidly reformed their economies in a more market­oriented direction, Turkmenistan has stuck to a “national way of development” and put less effort into modernising.

As a result, Turkmenistan’s participation in the world economy remains very low, even when compared to its Central Asian neighbours. Not only has Turkmenistan not presented its candidature to the WTO, it is also not a prospective AIIB founding member, the only exception among the five CACs.

In addition to various energy production sharing agreements (PSAs) with the Chinese mainland, Russia and Germany, the gas-rich country has announced plans to boost its gas output and is seeking ways to diversify its portfolio of export markets to encompass Belt and Road countries such as China and Iran, via new pipelines. In line with President Gurbandguly Berdymukhamedov’s leadership and declaration of an “Era of Might and Happiness”, the BRI is poised to give the country new incentives to reach out to other economies along the Belt and Road, including the Chinese mainland, notably in the transportation and infrastructure sectors.

Rich in antimony, aluminium, gold and silver and having substantial hydropower and agricultural (cotton and wheat) potential, Tajikistan is the poorest country in terms of per-capita GDP among the five CACs, thanks in part to its challenging geographic location – 90% of its territory is covered by mountains, with half being 3,000 metres above sea level. Its southern border with Afghanistan often adds uncertainty to the business environment as terrorism and drug trafficking are a menace. NATO’s withdrawal from Afghanistan last year poses a further threat to the country’s stability as the possibility of a spillover of unrest and terrorist activity from Afghanistan increases.

Close ties with Russia notwithstanding, Tajikistan’s trade with China has been increasingly vibrant in recent years, with Chinese enterprises staffing many infrastructure projects, including the Sahelistan Tunnel and Tajik-Uzbek Highway, as well as various resource extraction projects. Thanks to growing Chinese investments, the impoverished state broke its annual production record for cement and increased gold output by roughly 25 percent in 2014.

To revitalise the economy, the Tajik government has set three strategic goals in relation to energy independence, advancement in transport networks and food security. These national goals resemble most if not all of those of the BRI. In particular, more resources are expected to be pumped into the development of telecommunications, transportation and electricity networks. Meanwhile, better use of available infrastructure can make the nation attractive not only for businesspeople, but also leisure travellers. After all, thanks to its varied landscape and dramatic geographical features, Tajikistan was named No 2, behind Malta, in travel guide Globe Spots’ top-10 list of countries to travel to in 2014.

Heavily reliant on the production and export of gold, mercury, natural gas, uranium and agricultural products such as cotton, meat, tobacco, wool and grapes, Kyrgyzstan is a mountainous country with one-third of its population living below the poverty line. Due to its mountainous landscape, livestock farming has a prominent position in the country’s agricultural economy, which also boasts a vibrant food processing industry consisting of sub-sectors encompassing sugar, fruits, vegetables, meat, milk and oil.

Billed as the eastern door to Central Asia, Kyrgyzstan has been a WTO member since 1998. The relatively long tradition of adopting laws according to WTO regulations has helped Kyrgyzstan comply with international standards of trade and business. Furthermore, in May 2015 Kyrgyzstan signed a law ratifying treaties on the country’s accession to become the fifth member of the Kremlin-led Eurasian Economic Union (EAEU). It finally acceded in August 2015, and customs control at eight checkpoints along the Kyrgyz-Kazakh border have been abolished.

Jump-starting Trade and Investment with Central Asia

Situated in Central Asia, deep in the Eurasian continent, Kazakhstan occupies an area of some 2,724,900 km². It is not only the biggest landlocked country and largest Central Asian economy in terms of geographical territory and GDP, but a good platform and partner for Hong Kong companies to tap into the Central Asian market under the umbrella of the BRI.

As a strategically important player under the BRI, Kazakhstan has signed a series of agreements (33 co-operation agreements worth US$23.6 billion in March 2015 and 25 agreements worth US$25 billion in September 2015) on closer cooperation in various sectors such as railway, electricity, nuclear energy and agriculture. Observing the growing impetus, many Chinese and other Asian companies (such as South Korean companies) have established operations in Kazakhstan.

The country, along with Kyrgyzstan, Tajikistan and Uzbekistan, is a founding member of the Asia Infrastructure Investment bank (AIIB), which is expected to play a pivotal role in supporting the development of infrastructure and other productive sectors, including energy and power, transportation and telecommunications, rural infrastructure and agriculture development, water supply and sanitation, environmental protection, urban development and logistics in the region.

In order to overcome volatility in global energy prices and create a stronger base for economic growth, President Nursultan Nazarbayev announced in November 2014 a new economic plan. "Path to the Future" puts infrastructure development top of the country’s list of priorities. Aside from sizeable infrastructural projects including road, rail and special economic zones, there will also be financial support worth KZT100 billion tenge (US$0.5 billion) for SMEs, creating some 4,500 additional jobs as well as incentives for Kazakh companies to internationalise.

For the time being, Kazakhstan is the only CAC with a consulate office in Hong Kong. This, together with reciprocal 14-day visa-free status for HKSAR and Kazakh passport holders, makes business connections between the two economies far easier than with other CACs. In addition, direct flights (twice a week on Tuesdays and Fridays) between Hong Kong and Almaty – the largest city in Kazakhstan and its key business city – give the country a further advantage over other CACs in terms of being Hong Kong’s first port of call in Central Asia.

Moreover, some Kazakh companies have chosen to list in Hong Kong. Kazakhmys PLC, a leading natural resource group and the first Kazakh company to list on the London Stock Exchange, listed in Hong Kong in 2011, while its marketing and logistics arm also relocated to Hong Kong from London in October 2012. The country’s imminent WTO membership in early 2016 is poised to trigger stronger trade and investment flows to and from Kazakhstan, and will provide a wealth of opportunities in international logistics and financial services for Hong Kong companies.

 

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[1] Intra-regional trade share refers to the percentage of intra-regional trade to total trade of the region. A higher share indicates a higher degree of dependency on regional trade.

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23 Nov 2015

Down to Earth – Opportunities Offered by China’s One Belt One Road Strategy

Presented by Thomas Chan, China Business Centre, The Hong Kong Polytechnic University on 17 Oct 2015

This is a presentation for the Open Forum: Innovation and Entrepreneurship – Government Policy, Society & Technology co-organised by the University of Warwick, the Hong Kong Polytechnic University Manufacturing Alumni Association Limited and the City University of Hong Kong Engineering Doctorate Society.

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23 Nov 2015

Tajikistan, Central Asia and One Belt One Road Strategy

Presented by Thomas Chan, China Business Centre, The Hong Kong Polytechnic University on 29 Oct 2015

This is a presentation for the Conference on Silk Road Strategy (Series II): Focus on Tajikistan” organised by the China Business Centre, The Hong Kong Polytechnic University and the Silk Road Economic Development Research Center.

Please click to download the presentation file.

 

 

 

 

23 Nov 2015

Belt and Road Initiative: Implications for Trade & Investments

Presented by Thomas Chan, China Business Centre, The Hong Kong Polytechnic University on 18 Nov 2015

This is a presentation for the session “Belt and Road Initiative”: Implications and Opportunities for Trade and Investments at Asian Logistics and Maritime Conference held in Hong Kong Convention and Exhibition Centre.

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HKTDC Research | 25 Nov 2015

Tapping the Cross-Strait and Maritime Silk Road Opportunities of Fujian Free Trade Zone

Promoting Liberalisation of Investment and Trade between Fujian and Taiwan

According to the overall plan for the FJFTZ, its development goals are to give full play to its Taiwan advantages, adopt innovative cross-Strait cooperation mechanism, and promote the free flow of goods, services, capital and personnel. The move will enhance economic ties between Fujian and Taiwan, as well as serving to take the lead in introducing liberalisation measures for investment and trade with Taiwan, including:

For instance, the FJFTZ has already given the green light to Taiwanese architects holding certificates issued by relevant organisations in Taiwan to start business in the FJFTZ upon obtaining approval. At the same time, Taiwanese professionals who have obtained the mainland’s Class 1 registered architect or registered structural engineer qualification are also allowed to act as partners, and to set up construction and engineering design offices and supply relevant services in the FJFTZ in accordance with the corresponding qualification requirements. [2]

Opening up to Regions Other than Taiwan

The overall plan also pointed out that the FJFTZ will open up to regions other than Taiwan at the same time. This will take advantage of being at the frontline of opening up to the outside world, accelerate the formation of a new pattern of trade interaction at a higher level, and expand in depth and breadth exchanges and cooperation with countries and regions along the 21st-Century Maritime Silk Road under China’s Belt and Road development strategy.

The FJFTZ is among the second batch of free trade zones launched by China in April 2015. [3]  Since the launch, steps have been taken to reform the administration and management system, lower the market access threshold for foreign investors and simplify procedures for foreign investment. It is hoped that after three to five years of reform and experimentation, a free trade zone offering investment and trade facilitation, prominent financial innovation features, sound service systems, highly efficient and convenient supervision, and a regulated legal environment will be established. Detailed policies and measures include:

1.  Lowering market access threshold for foreign investors

Where foreign investment access is concerned, the FJFTZ, in line with the Shanghai, Guangdong and Tianjin FTZs, has simplified foreign investment management by way of adopting the negative list and record filing system and using the same negative list for approving foreign investment access. As a result, the degree of opening up of all the above mentioned FTZs to the outside world is similar.

In the Special Administrative Measures (Negative List) on Foreign Investment Access promulgated by the State Council on 8 April 2015 (hereinafter called the Negative List), it is stated that for sectors falling outside the scope of the special administrative measures for foreign investment access on the Negative List, the principle of national treatment for foreign and domestic investors will apply. This replaces the system of advance approval for foreign-invested projects and the system of examining and approving the contracts and articles of association of foreign-invested enterprises by the record filing system. Foreign investors’ access to the mainland market by way of investing in FTZs will be greatly enhanced as a result.

The Negative List also specifies that Hong Kong investors in FTZs will be subject to the provisions of the Negative List. However, where liberalisation measures provided for under CEPA are applicable to FTZs and offer even more preferential treatment to qualified investors, CEPA provisions will prevail. Hence, Hong Kong investors wishing to take advantage of the FJFTZ to enter the mainland, especially coastal regional markets such as Fujian, should refer to the provisions of both CEPA and the FTZ Negative List so that they can make full use of the market access advantage to develop mainland opportunities.

[For more information on the Negative List and its relations with CEPA, please see Guangdong Pilot Free Trade Zone: Opportunities for Hong Kong released by HKTDC in June 2015 and Market Opportunities in the Tianjin Pilot Free Trade Zone released in September 2015.]

 

2.  Changing government functions to raise administration efficiency

The FJFTZ is also devoting efforts to accelerating reform of the administrative examination and approval system, as well as improving the mechanisms for such services as intellectual property administration and enforcement, dispute settlement, and arbitration. Meanwhile, government functions, including asset appraisal, certification, and inspection and testing, which used to be undertaken by government departments, will be gradually turned over to professional service suppliers in the legal, accounting, credit rating, inspection, testing and certification sectors. One of the examples is to set up, both at the various areas in the FTZ and online, a unified window and integrated services hall serving companies, as well as implement the “one licence, one code” unified enterprise registration system in a bid to raise the government’s efficiency of administration and management over domestic-funded, Taiwan-funded and other foreign-funded enterprises. [4]

3.  Introducing innovative customs clearance mechanism

At the special customs supervision areas within the FTZ, system innovation will be implemented with emphasis on trade facilitation, and efforts will be made to streamline requirements for the submission of certificates of origin by Hong Kong products meeting CEPA rules of origin and by Taiwan goods imports meeting ECFA requirements. This aims to facilitate the development of international trade, bonded processing and bonded logistics, while promoting domestic sale facilitation. Currently, enterprises can use terminals such as mobile phones to make appointment with Customs for inspection, while local Customs uses RFID technology to carry out paperless and fast-track customs clearance of vehicles going through customs. The Fujian entry-exit inspection and quarantine bureau has also reformed and simplified procedures for the issuing of certificates of origin [5].

 

Liberalisation Measures and Tax Concessions in Pingtan Area China’s main objective for launching free trade zones is to advance system innovation, implement administration and management system reform, and strengthen opening up to the outside world, but not to offer preferential policies. As such, the overall plan does not embody any tax and fee reduction or exemption incentives. However, Pingtan Area in the FJFTZ is not only eligible for the liberalisation policies of the FTZ, but also entitled to the preferential policies offered by the Pingtan Experimental Zone, as the Area falls within the Fujian Pingtan Comprehensive Experimental Zone. Pingtan is the largest island in Fujian, with a total area of 392 km2 and a population of about 400,000. The Pingtan Experimental Zone is a demonstration zone playing the role of a first-mover in exploring cross-Strait exchanges and cooperation, as well as a pilot zone for the development of the Haixi Economic Zone. Planning in this zone focuses on undertaking the industries relocated here from Taiwan and other regions to establish an advanced manufacturing base; develop emerging industries, such as electronic information, marine biology and clean energy; as well as developing into a modern ecological island city. [6] Enterprises operating in the Pingtan Experimental Zone can enjoy up to 28 preferential policies, including more relaxed customs supervision, Class 1 port liberalisation, an integrated reform pilot for land management, a cross-border e-commerce pilot, and a marine transport pilot. Moreover, enterprises in Pingtan Experimental Zone engaging in specified industries in encouraged categories are even entitled to a reduced enterprise income tax rate of 15%. These industries include: √  High-technology                           √  Equipment manufacturing √  New materials                              √  New energy √  Modern logistics                           √  Commercial services √  Cultural and creative industries      √  Technical and business services √  Agricultural & marine industries      √  Ecological and environmental protection √  Public facilities management Meanwhile, production-related goods sold to Pingtan from other parts of the mainland will be treated as exports and are thus entitled to the VAT and consumption tax rebate policy. Goods within the area sold between enterprises in Pingtan are also exempted from VAT and consumption tax. As Pingtan Area in the FJFTZ also belongs to the Pingtan Experimental Zone, enterprises wishing to take advantage of Fujian to tap the mainland market and capture export opportunities can consider making use of Pingtan’s special position to enjoy the liberalisaton and preferential policies offered by both the FTZ and the experimental zone. [7]

 

Exploring New Horizons of Trade with Taiwan and Other Regions

Under the premise of opening up to the outside world, the FJFTZ proactively develops all kinds of trade with Taiwan and other regions in the hope of enhancing its competitive edge in foreign trade by way of technology, branding, quality and services. Its key development directions include:

• Developing cross-border e-commerce, and improving the relevant customs supervision, inspection and quarantine, cross-border payment and logistics systems

• Building international and domestic bulk commodities trading platforms

• Allowing the local futures exchange to set up a bonded futures delivery pilot

• Promoting service outsourcing with regard to creative industries, information/data processing, supply chain management, and aircraft and parts maintenance

• Establishing a pilot point for parallel imports of automobiles, with importers responsible for after-sale service, product recall and the “three guarantees” (guaranteed repairs, guaranteed replacement and guaranteed return of goods)

 

Exploring Cross-Border E-Commerce Import Opportunities in FJFTZ China has, up to now, approved seven cross-border e-commerce import services pilot cities. According to information released by the Fujian government, Fuzhou and Pingtan are tipped to become new pilot cities. In view of the increasing demand of Fujian and other mainland consumers for quality import products, many companies are devoting greater efforts to developing cross-border e-commerce. Taking advantage of FJFTZ’s determination in developing cross-border e-commerce, these companies can make use of the facilitation measures offered by the FTZ in such areas as customs supervision, inspection and quarantine, and cross-border payment in order to develop e-commerce import business. They can also apply for permission to pay personal postal articles tax on their import goods and enjoy the relevant preferential treatment. This development generates additional opportunities for Hong Kong companies wishing to make a foray into the mainland market by way of the cross-border e-commerce platform. [More …]

 

 

Enhancing Shipping Services

Apart from goods trading, the FJFTZ also looks into new development systems and operating modes for the shipping industry in the hope of enhancing its shipping services. Fujian is one of the coastal provinces in China which had an early start in development. For instance, Xiamen port in the province is not only one of leading foreign ports in the mainland, but also an international shipping centre in southeast China, a shipping logistics centre on the west coast of the Strait, and a major port for shipping to and from Taiwan. In 2014, Xiamen port’s cargo throughput reached 200 million tons, up 7.4% from a year earlier; while container throughput topped 8.57 million TEUs, up 7.05% from a year earlier. Its container port ranked 8th in China and 17^th worldwide. [8]

Against this backdrop, FJFTZ is determined to enhance the province’s international shipping services and strengthen the shipping and industrial development of the ports in the various areas of the FTZ. For example, the positioning of Haicang Bonded Port Zone in the FTZ’s Xiamen Area aids the development of shipping logistics, bonded logistics, bonded processing and international trade. The zone implements the policy of “tax rebate for those entering the zone and tax exemption for equipment imported into the zone”. It also adopts investment, taxation and foreign exchange administration policies applicable to export processing zones, bonded zones and bonded logistics parks. Currently, a number of well-known international companies have established a presence here. These include: Hella, one of the world’s largest suppliers of automotive relays; Xiamen Tungsten, the world’s largest tungsten products company; Kerry Logistics of Hong Kong; and Kodak (China). The zone is now moving in the direction of developing into a modern industrial cluster, with emphasis on high value-added industries and service outsourcing.

The industrial development within different areas in the FJFTZ, together with the seaport and airport of Xiamen, not only serve the international trade in import/export goods conducted inside and outside Fujian province as well as its surrounding regions, but also cross-Strait trade. This will in turn propel the development of related international shipping and logistics industries. Moreover, FJFTZ’s overall plan and measures for enhancing shipping services also include:

• Allowing the establishment of wholly foreign-owned international ship management enterprises

• Relaxing restrictions on the foreign equity ratio of Chinese-foreign equity joint-venture and Chinese-foreign contractual joint-venture international shipping enterprises set up within the FTZ

• Allowing foreign investors to engage in public international ship management business in the form of equity joint venture or contractual joint venture, with foreign equity ratio capped at 51%

• Streamlining procedures for obtaining international shipping transportation business licences

• Allowing the FTZ to conduct (on a trial basis) the business of transshipping and consolidating express parcels to and from Taiwan, Hong Kong, Macau and foreign countries

• Allowing “flag of convenience” cruise ships belonging to mainland-funded cruise enterprises registered in the FTZ to carry out cruise business between the mainland, Taiwan, Hong Kong and Macau, on approval

In fact, under the CEPA framework, Hong Kong companies are, in general, entitled to certain shipping liberalisation measures similar to those offered by the FJFTZ. For instance, under CEPA Hong Kong service suppliers can set up wholly-owned shipping companies in the mainland, as well as set up equity joint-venture enterprises in the mainland holding equities not exceeding 51%, in order to provide third-party international shipping agency service [9]. However, it can be expected that the FJFTZ will introduce more liberalisation measures for shipping services, encouraging cross-Strait and international trade, as well as advancing the business of transshipping and consolidating express parcels to and from Taiwan, Hong Kong, Macau and foreign countries. All these efforts should provide more convenience to Hong Kong companies wishing to expand the coastal markets in southeast China through Fujian.

 

Capturing Opportunities Arising from 21st-Century Maritime Silk Road FJFTZ is positioned to expand the depth and breadth of exchanges and cooperation with countries and regions along the 21st-Century Maritime Silk Road, under China’s Belt and Road development strategy. Fujian province, as home to major ports along the ancient maritime Silk Road, as well an important foreign trade province in the mainland. With its advantages of being an international shipping centre in southeast China, the FTZ is making greater efforts to establish ties with countries along the Maritime Silk Road, in the hope of further promoting investment and trade. It can be expected that its demand for relevant support services will generate opportunities for companies wishing to capitalise on the Road and Belt initiative. [More …]

 

 

Advancing Financial Liberalisation and Innovation

In order to complement the development of different industries and services in the zone, apart from introducing measures encouraging cross-Strait financial cooperation, the FJFTZ will also further open up its financial sector and enhance investment and financing facilitation and efficiency for the benefit of enterprises within the zone. Specific areas of liberalisation include:

• Improving the mode of managing RMB foreign accounts, further expanding two-way cross-border RMB financing business

• Piloting capital account convertibility under a quota system, allowing qualified institutions to conduct such transactions as direct investment, merger and acquisition, debt instruments and financial investment under a quota system

• Foreign exchange capital under the foreign direct investment account may be settled any time

• Giving support to multinational companies to centrally operate and manage their RMB and foreign currency two-way capital pool

• Giving support to the setting up of cross-border RMB equity investment funds to develop two-way cross-border RMB investment

• Giving support to enterprises to conduct various offshore financing activities, such as international commercial loans

• Allowing enterprises and financial institutions in the FTZ to issue RMB bonds offshore and channel the funds back to the country for use

• Advancing RMB interest rate marketisation

• Allowing banks, payment institutions and trust companies in the FTZ to conduct cooperation in cross-border payment with offshore banks and payment institutions

Under these development directions, the Fuzhou, Pingtan and Xiamen Areas are also planning to undertake different projects in order to complement their own positioning and meet their respective needs for industrial development.

 

Appendix: According to the overall plan for the Fujian FTZ, the FTZ covers a total area of 118.04 km2 and consists of three areas: 1.  Fuzhou Area With an area of 31.26 km2, the Fuzhou Area of Fujian FTZ comprises two zones: Fuzhou Economic and Technological Development Zone and Fuzhou Bonded Port Area. The two are further divided into six sub-zones, known as “two zones, six sub-zones”. The Fuzhou Economic and Technological Development Zone has an area of 22 km2 and is divided into four sub-zones: namely Majiang-Kuai’an, Chang’an, Langqi and Nantai Island. The zone also houses two special customs supervision areas: Fuzhou Free Trade Zone (0.6 km2) and Fuzhou Export Processing Zone (1.14 km2). The Fuzhou Bonded Port Area has an area of 9.26 km2 and is divided into two sub-zones: Zone A borders the west port (or Xigang) to the east, Xinjiang Highway to the south, Jinqi Road to the west and Weiliu Road to the north; Zone B borders berth No. 14 to the east, Xinghua Road to the South, the mudflat (or Tantu) to the west and Xinglin Road to the north. The Fuzhou Area will be turned into an experimental ground for reform and innovation with the creation of an international, market-oriented business environment with sound legal system, revolving around the strategic requirements of gaining a foothold across the straits, serving the country and keeping abreast with the world. As pioneer in reform, it will take the lead in promoting investment and trade with Taiwan and give full play to the advantages of being a provincial capital city, with proximity to Taiwan and the ocean, and focusing on the construction of an advanced manufacturing base, important platform for the 21st Century Maritime Silk Road and demonstration zone for cooperation in cross-Strait service trade and financial innovation. 2.  Pingtan Area Covering an area of 43 km2, the Pingtan Area of Fujian FTZ will focus on boosting ties with Taiwan and attracting foreign tourists to the island. It will implement more liberal measures to facilitate investment and trade, capital and personnel exchanges. Pingtan Area consists of three functional zones: Port economic and trade zone (16 km2). The zone’s positioning: accelerating the construction of port logistics cluster, business services cluster, and electronics industry cluster; focusing on the development of international trade, modern logistics, business services, and electronic information equipment manufacturing; and building cross-Strait free trade demonstration area, regional comprehensive bonded industries demonstration zone and the cross-Strait electronics industry integrated development cluster; and gradually expanding into an international free port. New- and high-tech industrial zone (15 km2). The zone’s positioning: exploring cross-Strait cooperation in building high-tech industrial bases; connecting the Pingtan high-speed rail hub with the central business district and science, technology, culture and education districts; accelerating the construction of R&D headquarters cluster, marine industry cluster, high-end light manufacturing industry cluster; giving full play to policy advantages of place of origin; focusing on the development of marine life, medical equipment, packaging materials and light equipment manufacturing and other high-tech industries; and promoting cross-Strait in-depth cooperation in high-tech industries. Tourism and business zone (12 km2). The zone’s positioning: being a window to Taiwan, the zone will give full play to the tourism resources including fine beaches, headlands and sand dunes, linking the international tourism development of the city centre and Pingtan, focusing on connecting Taiwan tourism and tourist services, accelerating the construction of coastal tourist enclave, cross-Strait tourism business cluster, agricultural and fishing products processing industry cluster to enhance service standards of international tourism, focusing on the development of coastal resort, sports tourism, leisure and wellness, tourist shopping and other tourism products, extending and expanding the high-end sector of tourism, striving to create an international coastal resort island, international maritime cultural and sports base, international tourism and leisure destination, and gradually expanding into an international tourist island. 3.  Xiamen Area The Xiamen Area of Fujian FTZ which comprises the cross-Strait trade centre core zone and the southeast region international shipping centre Haicang port area, is a unique pilot FTZ in China featuring joint development of land and sea ports, airports and cruise homeports. The cross-Strait trade centre core zone covers an area of 19.37 km2 (including the 0.6 km2 Xiangyu Bonded Zone and 0.7 km2 Xiangyu Bonded Logistics Park). The positioning of the zone is the development of new- and high-tech R&D, information consumption, airport-based industries, international trade related services, financial services, professional services, cruise economy and other emerging industries and high-end services as well as building the cross-Strait economic and trade cooperation region to become a regional centre for international trade facing the Asia-Pacific region with foothold in the mainland. The southeast region international shipping centre Haicang port area covers an area of 24.41 km2 (including the 9.51 km2 Haicang Bonded Port). The positioning of the port area is the development of modernised port-based industries such as shipping and logistics, import and export, bonded logistics, value-added processing, service outsourcing, commodities trading, and the building of an efficient and convenient, green and low-carbon shipping logistics network service system to become an important container hub port of the Asia-Pacific region based in Haixi with global shipping resources capacity facing the world, providing service across the Straits.

 

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[1]  CEPA here refers to the Mainland and Hong Kong Closer Economic Partnership Arrangement and its supplementary agreements.

[2]  For details, please see HKTDC’s Business-Alert China article: Fujian FTZ Announces Third Round of Initiatives (29 July 2015).

[3]  Following the establishment of the China (Shanghai) Pilot Free Trade Zone in September 2013, the second batch of pilot free trade zones in China was officially launched in April 2015, including China (Guangdong) Pilot Free Trade Zone, China (Tianjin) Pilot Free Trade Zone and China (Fujian) Pilot Free Trade Zone.

[4]  Starting from 1 October 2015, Fujian province has fully implemented the “one licence, one code” registration system for enterprises and farmer cooperatives in the province. For details, please see Circular of the Provincial Industry and Commerce Bureau on Deepening the “One Licence, One Code” Registration System Reform forwarded by the Fujian People’s Government Office (Min Zheng Ban [2015] No.130 (16 September 2015)).

[5]  For details, please see HKTDC’s Business-Alert China Fujian FTZ Announces Third Round of Initiatives (29 July 2015).

[6]  For details, please see Overall Development Plan for Pingtan Comprehensive Experimental Zone (November 2011).

[7]  For details on Pingtan’s preferential tax policies, please see Circular on Enterprise Income Tax Preferential Policies and Catalogue of Preferences for Guangdong Hengqin New Area, Fujian Pingtan Comprehensive Experimental Zone, and Shenzhen Qianhai Shenzhen-Hong Kong Modern Services Cooperation Zone (Cai Shui [2014] No.26) and Circular on VAT and Consumption Tax Policies for the Development of Hengqin and Pingtan (Cai Shui [2014] No.51).

[8]  Source: Xiamen Port Authority

[9]  For details, please refer to the preferential treatments granted to Hong Kong service suppliers under CEPA.

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HKTDC Research | 25 Nov 2015

Hong Kong’s Growing Ties with ASEAN Countries

Asia has witnessed an increase in integration in recent decades, evidenced by strong intra-regional trade and capital flows, negotiated trade agreements, the formation of trade blocs and, more recently, the Belt and Road Initiative. These developments are highly relevant and important to Hong Kong, which is expected to grow with the region by facilitating trade and investment between China and ASEAN economies, and by providing trade-related fundraising and business services for the region.

Stronger Trade Ties with ASEAN Countries

Bilateral trade between Hong Kong and other Asian countries has ballooned in recent years. In the past five years, Hong Kong’s total trade of merchandise with China and ASEAN countries increased by 9.6% and 10.1% a year, respectively, with electronic parts and components comprising a large and growing segment. To put this into perspective, Hong Kong’s total merchandise trade with traditional markets – the US, EU and Japan – grew at an annual rate of 4.8% in the same period.

 

 

The trend has reflected the vertical specialisation in Asia and Hong Kong’s role as a trading and logistics hub. Asia’s transformation from a fragmented production base into a sophisticated production network for electronics engenders heavy intra-regional traffic. Japan, South Korea, Taiwan and Singapore – the more developed economies in the region – supply higher-value electronic components such as semiconductors, while countries including Indonesia, Malaysia, Thailand and China focus on the more labour-intensive production of other electronic components, testing and assembly works. Lately, Vietnam has emerged as an alternative assembly base due to the rising costs of production in China.

Despite the complete implementation in 2010 of the China-ASEAN Free Trade Area, where tariffs between China and ASEAN countries were removed, Hong Kong still assumes an important role by providing efficient logistics and distribution services between them.

Along with the strong trade flows of merchandise, the trade in services between Hong Kong and ASEAN countries has also recorded remarkable growth in recent years. In 2013, this bilateral trade in services amounted to HK$117 billion, representing an increase of 11.1% a year from 2009 to 2013 and accounting for 8.4% of Hong Kong’s total trade in services. Transport, travel and other business services constitute Hong Kong’s major services trade with ASEAN countries.

Further Regional Integration Envisaged

ASEAN countries are expected to see further industrialisation and economic development. An important development in the region is the establishment of the ASEAN Economic Community (AEC) by the end of 2015. The AEC envisages four characteristics: a single market and production base; a highly competitive economic region; a region of equitable economic development; and a region fully integrated into the global economy.

One of the AEC’s goals is the reduction of tariffs on merchandise trade among ASEAN countries, which has largely been realised. However, progress on liberalising non-tariff barriers, movements of people and capital, and trade in services are lagging behind. Pressure to protect domestic industries still runs high and there is little transparency and standardisation in investment regulations. Furthermore, liberalisation has been hampered in many areas by the built-in flexibilities of the AEC, which allows member states to liberalise according to each country’s readiness. The economic, language and cultural diversities among ASEAN countries are also major hurdles in creating a common economic area as envisaged in the AEC’s statement of aims.

According to a survey conducted by JWT Asia Pacific in 2013, in which a total of 2,400 people aged 20 to 49 in Thailand, Singapore, Malaysia, Vietnam, Indonesia and the Philippines took part, 67% of respondents were aware of the AEC. Awareness was the highest in Thailand (97%) and Vietnam (88%), while the lowest was in Singapore (42%).

 

Indeed, expectations of the AEC are not running high in Singapore’s private sector, according to our conversations with the trade. The sector generally believes that the AEC will be launched in 2015 but that its initial impact will be minimal. Change will not happen overnight, and 2015 should be seen as the beginning of ASEAN’s economic integration rather than the ultimate deadline.

In any case, the ASEAN bloc is moving towards the goal of an attractive business environment through simplifying tax, customs and foreign investment, stamping out corruption and upholding the rule of law. And with reduced trade and investment barriers, intra-regional trade will increase and investment will be further drawn to lower-cost areas in the region, forcing middle-income countries such as Malaysia, Thailand and Indonesia to move up the value chain.

The Hong Kong-ASEAN free-trade agreement, the negotiations for which are now underway, will be critical in matching the anticipated stronger demand for services in the region. While Hong Kong has minimal production and does not apply any tariffs on imports, the significance of the free-trade agreement will be on the reduction of non-tariff barriers and the promotion of economic, technical and intellectual-property cooperation in areas of mutual interest.

Impetus from the Belt and Road

The China-proposed Belt and Road Initiative will further strengthen regional co-operation. The initiative aims to orient the trade routes towards ASEAN countries with a proposed China-Indochina Peninsula Economic Corridor and a maritime route linking coastal China to Europe through the South China Sea, the Indian Ocean, the Persian Gulf, the Suez Canal and the Mediterranean Sea.

The Chinese government is cooperating with Thailand, Cambodia, Laos, Myanmar and Vietnam – the five ASEAN countries in the Indochina Peninsula – to jointly plan and build an extensive transportation network, as well as a number of industrial co-operation projects. They also aim to create a new mode of cooperation for fundraising and promote sustainable and coordinated socio-economic development. Meanwhile, China and the maritime ASEAN countries are actively investing in their maritime infrastructure.

Leveraging on its strength as an international financial centre in the region, Hong Kong is expected to serve as the fundraising and financial platform for these large-scale infrastructure projects and offer offshore renminbi services, including cross-border trade settlement and bond issuance. Hong Kong’s service professionals will assume an active role by providing services in areas of law, banking, accountancy, insurance, architecture and engineering, etc., amid the expanding trade and economic activities in the region.

 

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