16 Nov 2017
Building a backbone
A Plus Magazine, Hong Kong Institute of Certified Public Accountants
China’s Belt and Road initiative is heavy on mega-projects, but Hong Kong is positioned to provide vital “soft” infrastructure such as corporate, financial, accounting and legal services as well as insurance, risk management, capital markets and trade assistance. George W. Russell finds out about possible opportunities for CPAs who think strategically about this US$900 billion building boom.
Four years since Chinese President Xi Jinping announced the Belt and Road initiative – comprising a land route, the Silk Road Economic Belt, and a sea link, the 21st Century Maritime Silk Road – headlines are still trumpeting a seemingly unstoppable wave of huge project announcements.
From bridges in Ukraine to railways in Kenya and ports in Pakistan, the initiative has unleashed a flurry of infrastructure plans. The massive sums involved – and the global reach – have inspired awe, with comparisons to the United States’ Marshall Plan that rebuilt Europe after World War II.
“The Belt and Road initiative has become a central strategy for the Chinese government to boost domestic development and cross-continental collaboration,” says Hu Yifan, Chief China Economist at UBS, a major international bank.
As with all ambitious projects, there is some scepticism. For example, there are hazy ideas about what actually constitutes a Belt and Road project: the Chinese-built ports at Gwadar, Pakistan, and Piraeus, Greece, were under way long before the initiative was announced.
In addition, some of the flagship developments, such as the rail link between China and Europe, have doubtful revenue projections. (Recent loads have seemed just for show, hauling low-value goods like socks). Furthermore much of the land route is lawless. In May, several Chinese labourers were gunned down in Pakistan while working on the Gwadar-Xinjiang corridor.
Despite such setbacks, and whether or not some Belt and Road numbers are fudged, the optimism is real. A survey of large corporations by Standard Chartered Bank and Asset Benchmark Research in March and April indicated that 17 percent of those surveyed were already participating in Belt and Road projects, and a further 23 percent were considering the opportunities.
Hong Kong is also energized. For example, Mass Transit Railway Corporation announced on 18 May that it would team up with partners in China to explore Belt and Road-related opportunities. The company’s shares immediately rose on the news.
“I see Belt and Road as a huge, large scale outbound investment by China into multiple countries,” says Patrick Yip, National Mergers and Acquisitions Leader at Deloitte China and a Hong Kong Institute of CPAs member. “There will be this huge flood of funds, talent, expertise and technology.”
Indeed, Hong Kong businesses are already embedded into the initiative: projects announced in the Mainland include partnerships with Hong Kong companies, such as Hutchison Ports, and Hong Kong-listed subsidiaries of Mainland companies, such as Cosco Shipping Ports.
Hong Kong’s pavilion
The Chinese government says it sees Hong Kong as invaluable to the Belt and Road initiative. “Hong Kong is a global financial trading and shipping centre, home to the regional headquarters of many multinationals and a city extensively connected to the world,” explains Song Ru’an, Deputy Com¬missioner of the Ministry of Foreign Affairs in Hong Kong.
Song defines Hong Kong’s prime position through an old Chinese proverb: “The waterfront pavilion catches the moonlight first,” he says, adding that Hong Kong “has developed into an intermediary facilitating two-way cooperation between the Mainland and the rest of the world.”
Carrie Lam, who takes office as Chief Executive on 1 July, wants co-operation agreements with the Mainland to build Hong Kong into a financial hub for Belt and Road projects. “We shall also encourage long-term asset funds to invest and finance Belt and Road infrastructure projects [and] enterprises will be encouraged to use Hong Kong as a platform for insurance and risk management for cross-boundary investments,” she said in April. Chinese companies, initially mostly state-owned enterprises, but later privately owned entities, will in most cases need a platform outside China for overseas investment, says Yip at Deloitte. “Why? Because not all of these companies are very familiar with outbound investments and many of the Belt and Road coun¬tries are not frequent investment destinations.”
These Mainland entities, he adds, will want to know how they can establish an overseas invest¬ment subsidiary conveniently and favourably from a return-on-assets perspective, and with an arrangement that will be acceptable to the host country.
“Then they look at Hong Kong and see it is an international financial centre,” says Yip. “Many Chinese companies have subsidiaries in Hong Kong. There are a lot of Mandarin-speaking people either from Hong Kong or the Mainland. Hong Kong has a great stock market, an established legal system and a very thriving accounting profession.”
The government is also pursuing legislation more friendly to Belt and Road activities. In the last Budget, it announced it would introduce bills to create open-ended fund company structures in Hong Kong and grant tax incentives for qualifying corporate treasury centres.
“Once enacted, this should help attract more group treasury and fund activities to Hong Kong,” says Tracy Ho, Tax Managing Partner, Hong Kong and Macau, at EY and an Institute member. “These activities should enable Hong Kong to play an active role as a financier and investor in the Belt and Road initiative.”
Billions to disburse
The big lure for investors is Belt and Road’s large scale infrastructure. The US$50 billion-plus Gwadar-Xinjiang corridor is a core feature, while other big ticket items include a US$4 billion high-speed rail line from Kunming to Singapore and a US$1 billion-plus port development near Colombo.
To fund such mega projects, Beijing has created a raft of new lending vehicles, such as the Asian Infrastructure Investment Bank, supported by 57 countries, which boasts more than US$100 billion of initial capital to be spent largely, though not wholly, on Belt and Road projects.
“Following the most recent financial crisis, governments around the world have understood the importance of infrastructure investment to raise long term economic productivity,” says Danny Alexander, Vice President of the AIIB and a former chief secretary to the British Treasury. “Hong Kong is a very important centre for many of the services the infrastructure projects and the related infrastructure finance need.”
In addition, the US$40 billion Silk Road Fund, launched in 2014 by China Investment Corporation, China Development Bank, Export-Import Bank of China and State Administration of Foreign Exchange, is dedicated to Belt and Road investment. In 2015, three banks – CDB, Export-Import Bank of China and the Agricultural Bank of China – were given a total of US$82 billion in central government funds to lend for related projects.
Among private companies, those that already have experience in infrastructure plan to leverage Belt and Road into more business. Geert Peeters, Executive Director and Chief Financial Officer of Hong Kong-based utility CLP, says the company has detailed knowledge of several Belt and Road countries. “We have established long term relationships with business partners, financial institutions and equipment suppliers in China,” he says. “They are keen to join hands with us.”
Smaller businesses in the Mainland are equally excited about what Belt and Road can do for the economy. “The initiative should be able to increase the influence of China in countries along the route and attract more customers to the China market,” says Stephen Wong, a Shanghai-based Institute member who is CFO of TTL Holdings, which operates high schools in the Mainland that follow a U.S. curriculum.
Beijing has already sought to attract companies to Belt and Road locations. “We see the benefits of tax incentives, easier financing and faster approval of outbound investment in Belt and Road-preferred sectors,” says Steven Li, Vice President (Accounting and Finance, International Division) of the diversified Sanpower Group conglomerate, and an Institute member.
Rocky road ahead
Some Institute members are more cautious. “As the Belt and Road initiative is a national strategy, it will definitely affect Chinese companies,” says Institute member Steven Li, CFO of Changzhou Xingyu Automobile Lighting Company in Changzhou. “The initiative may bring us more opportunities in export markets but currently there is no big effect yet.”
The vast scale of the Belt and Road means that other international financial centres will also be looking to cash in.
In Dubai, engineering, financial and legal firms are combining to build roads and bridges along the route. The design, construction, finance and operation of a Central Asian hydroelectric power plant were coordinated from London.
Yip at Deloitte echoes outgoing chief executive C.Y. Leung’s statement that Hong Kong should be a “super-connector” for the project. “This is Hong Kong’s hook into China to show the world that we are in a way quite indispensable in terms of getting all this financial capital, human capital and technology out to the rest of the world,” says Yip.
Belt and Road is likely to present unprecedented challenges. “The complexity mostly comes from bridging the very different systems involved,” suggests Ji Xiaohui, Beijing-based Partner at the Linklaters international law firm. “Bear in mind,” she adds, “that Belt and Road aims to expand funding to many countries in which the legal and financial infrastructure perhaps needs to catch up with economic growth.”
There will be myriad geo-political challenges: for one thing, not every nation shares China’s enthusiasm for the initiative. “The majority of the G7 group of countries is declining any involvement,” says Alan Woolston, Partner at the Fladgate law firm in London who works on Belt and Road projects. “And India remains suspicious of China’s motives.”
The U.S. and Japan are among major nations that have not joined AIIB. Yet the Belt and Road Summit in Beijing in May was marked by the last-minute attendance of delegations from the U.S. and its key Asia Pacific allies, Japan and South Korea. “This indicated improved relations since the meeting between Xi and U.S. President Donald Trump in April,” says Hu at UBS.
However complicated the initiative seems in the world’s halls of power, it is being embraced at more grassroots levels. “Belt and Road aligns with our group’s ‘get aboard and go big’ strategies,” enthuses Li at Sanpower Group. “We are very excited about it and definitively welcome it as a policy.”
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