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Belt and Road: Under the Radar

By Helen Sloan, Editor of The Bulletin, HKGCC

Major infrastructure projects along the routes of the historical Silk Road are at the heart of the Belt and Road Initiative. But beyond these plans to build highways, ports and telecoms networks, the initiative is creating opportunities in some less expected areas.

Being geographically a long way from the traditional Silk Road, Latin America, at first, did not have an obvious role to play in the Belt and Road.

This changed last year when the Mainland described the region as a “natural extension” of the Maritime Silk Road. With this green light, investment and trade is likely to increase.

As Le Xia, Chief Economist for Asia at BBVA, explained, economic cooperation is not new. Trade has boomed in the past decade, with Latin America exporting everything from oil and copper to soy beans to China.

“If we look at interdependency, it is not only that Latin America depends on China,” Xia said, “but also China to some degree depends on Latin America for commodities. So, this interconnectedness between China and Latin America has increased quite a lot in recent years.”

Policy change

The shift in policy is still likely to have an impact. Chinese government agencies have targets to meet related to the Belt and Road, so if they are looking for ways to boost their performance in areas like exports, they have an incentive to consider the region.

China’s foreign direct investment (FDI) into Latin America, however, has lagged – it is much smaller than Japan’s total investment, for example.

“In the past China didn’t have a lot of FDI,” Xia said. “But gradually, investment has been picking up.” He expects that, in the near term, investment in energy and infrastructure will grow, as well as in sectors including telecoms, transportation, logistics, IT, electricity, mining and aviation.

Central Government policy is already driving investment in certain industries. Chinese Premier Li Keqiang has proposed a “3 x 3” model for boosting China-Latin America collaboration focusing on logistics, power and information.

Many of the deals that have hit the headlines have been huge agreements involving China’s state-owned companies – for example, State Grid’s acquisition of Brazilian power group CPFL Energia and Shandong Gold’s purchase of a 50% share in Barrick Gold’s Veladero mine in Argentina, one of the biggest gold mines in the world. Other Chinese companies active in the region recently include HNA, Three Gorges and COFCO.

Smaller private firms may find more difficulties investing in Latin America, among other overseas markets, due to “some headwinds from the policy side,” Xia said, referring to the crackdown on capital outflow.

“There is some concern that small companies want to move their production outside of China for the purpose of moving money overseas. For the short or even medium term, in the next couple of years, these small enterprises will face a lot of pressure from Chinese government regulations.”

However, this does not mean an outright ban, and manufacturers with a legitimate reason to make investments will still be encouraged.

Hong Kong companies, meanwhile, may find an outlet for their skills in finance, legal and arbitration. Xia reports that this is happening already, as companies including Chinese SOEs use Hong Kong to finance their projects in Latin America.

“As a part of China, Hong Kong is still the most international business-oriented place so it’s easier for Hong Kong to play this super-connector role in the Belt and Road.”

Latin America, of course, is not a uniform market. Traditionally, some nations have had strong relations with the U.S while others leaned more towards Mainland China. But the presidency of Donald Trump and his promises of more restrictive trade policies means that a change in attitude is in the air.

“Now, it seems more and more countries in Latin America are starting to realize the importance of China,” Xia said.

Bearing this out, a BBVA study has revealed a shift in attitudes towards China in the region. “We do find that Latin America countries now show more enthusiasm for Chinese investment. This is a very good sign. We can see it lays a good foundation for bilateral relations.”

PC Yu, Chairman of the Chamber’s China Committee, has also seen the term ‘Belt and Road’ attract increasing attention in Latin America.

“Chinese enterprises have established more than 2,000 businesses in Latin America, and bilateral trade in the first 10 months of 2017 exceeded $210 billion,” he said. “The region is becoming an integral part of joint efforts in developing the Belt and Road Initiative, and the synergy between the initiative and the development blueprints of the Latin American countries will help open a new window of opportunity for growth.”

He added that as China boosts trade with Latin America, it is increasingly interested in developing a robust infrastructure network that can efficiently ship goods from producing centers to export hubs along South America’s Pacific coast. “Investment in infrastructure, and in the areas of agriculture, energy and natural resources, reflects the fact that China’s presence is quite important in South America.”

Yu also expects that the growing cooperation between the Mainland and Latin America will benefit Hong Kong. “Under the principle of ‘one country, two systems,’ Hong Kong will assume an important role in areas such as finance and investment, infrastructure and shipping, economic and trade cooperation and promotion, people-to-people ties, and project interfacing and dispute settlement.”

Challenges ahead

Tracy Wut, Partner at Baker McKenzie, noted some of the challenges that investors may face in the region.

“A lot of these countries may not have a very strong legal regime to protect your rights when there is a dispute,” she said at a recent Chamber seminar.

Getting things done can also take a long time, she added. In Mexico, for example, a merger is not legally effective until it is registered with the public register, which can take two months.

But sometimes, a problem can turn out to be not quite as bad as it initially seemed. Understanding the key issues and whether they actually impact your deal are particularly important, she said.

“We cannot emphasis enough the importance of due diligence – not just paper, but the need for face-to-face meetings and Q&A sessions.”

Political instability and corruption in the region may also be of concern to investors. But, as Wut pointed out, this volatility has also presented opportunities.

“The most recent wave of Chinese investment has been supercharged by a corruption investigation that has swept Brazil,” she explained.

Known as Operation Car Wash, the probe has uncovered a web of corruption linking top politicians, state-owned firms and private contractors. It has bankrupted several companies and forced others to divest assets.

“This last, and perhaps most important factor, is the driver of a lot of investment in recent years because, suddenly, everything is for sale, from ports and highways to airports and railways.”

Green Opportunities

Another way companies can find less obvious opportunities arising from the Belt and Road Initiative is to use their specific and world-class industry knowledge. And green technology is one area where Hong Kong companies have got experience and expertise.

Steve Wong, Managing Director of energy consultancy BillionGroup Technologies, noted that sustainability is a priority of many Belt and Road projects. This is a change from when the Mainland started to open up.

“China in the last 40 years has been successful in lifting people out of poverty,” Wong said. “But at the same time, it generated a lot of environmental problems.”

Lessons have been learned and the Belt and Road will not continue with this polluting model. “That is why we must talk about a green One Belt One Road – and about ecological economic development, not just economic development.”

This demand for green development is also creating opportunities for legal and financial professionals to provide a framework for these cross-border deals. Wong also pointed out that Hong Kong’s role as a hub means that local companies are well-placed to call on the necessary global talent.

An engineer by training, Wong set up BillionGroup in 1991 as a building consultancy, changing focus to the energy sector in 2000. Wong admitted that this switch was a little bit “too early,” but now the group has found a market for its specialized skills across the globe in countries including Vietnam, Indonesia, and Bangladesh.

BillionGroup focuses on energy, waste management and infrastructure – all of which are in strong demand in developing countries along the Belt and Road. The company’s success in winning contracts is an example of the opportunities for businesses with specific expertise.

For Hong Kong companies seeking to get involved in Belt and Road projects, Wong advised that they need to offer services “to the top level, to even above the international level. We have to strive for excellence.”

To successfully bid for these contracts, Wong said: “You have to be the number one leader in your niche market, not the second.”

This article was first published in the magazine The Bulletin March 2018 issue. Please click to read the full article.

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