Hong Kong's strengths in finance, logistics, trade and market infrastructure allow it to play a key role in China's “Belt and Road” Initiative. That could potentially change the centre of gravity of Hong Kong’s economic growth in the coming years.
The “Belt and Road” initiative aims to promote the building of vast infrastructure projects among the 65 countries and territories linked by China’s ancient and emergent trade routes. The plan encompasses the full scope of Beijing’s ambitions. This includes bolstering outbound investment, turbocharging international renminbi usage, fostering economic growth, putting to use the excess capacities that exist in some sectors, and strengthening trade links.
President Xi Jinping expects bilateral cross-border trade between China and countries along the “Belt and Road” routes to increase to some USD 2.5 trillion per year in a decade.
Over the past two years, the influence of this strategy has become evident in China’s outbound direct investment (ODI) flows. In the first ten months of 2015, China ODI in 49 nations along the “Belt and Road” totalled USD 13.17 billion, up 36.7 per cent year-on-year. Top investment spots were Singapore, Kazakhstan, Laos, Indonesia and Russia.
Infrastructure development is the top priority of the “Belt and Road” initiative. Seed funding for infrastructure projects along the “Belt and Road” countries has mainly come from the Chinese government, with strong support from Chinese commercial banks.
Beijing has also launched two financial initiatives specifically to cope with the financing needs of the “Belt and Road” efforts: first, a USD 40 billion Silk Road Fund will support private investment; and second, USD 100 billion will be dispersed by the new China-led Asian Infrastructure Investment Bank (AIIB), which has 57 founding countries and territories members.
Meanwhile, China is channelling investment into a number of projects designed to develop local financial markets along the Silk Road.
Private enterprises are getting involved in “Belt and Road” investment, including telecommunications equipment giant Huawei and e-commerce behemoth Alibaba, which made big investments in India last year.
Infrastructure funds also need to be raised from international financial centres like Hong Kong.
Hong Kong has long been the gateway for mainland China’s trade, investment and finance. It is also the world’s leading offshore renminbi centre. Hong Kong is thus in an excellent position to leverage the strength of its financial service sector to provide financing support to the “Belt and Road” initiative.
It is already one of the premier corporate treasury centres in Asia. It is an ideal location for AIIB and Silk Road Fund to set up their treasury operations outside mainland China. Through Hong Kong, the AIIB and Silk Road Fund could gain more cost-efficient capital and better access to financial and related services to manage their resources.
Hong Kong has always played an important role in helping mainland companies raise funds for international investments, mergers and acquisitions; and of developing professional services such as shipping, trade, legal and consultancies.
The city is now the world’s largest platform for initial public offerings (IPO): a total of USD 33.7 billion was raised via IPOs in the city last year, more than anywhere else. More than half of the market capitalisation of the city’s stock exchange is accounted for by mainland companies.
Meanwhile, the “Belt and Road” efforts will facilitate the renminbi’s internationalisation process as China will shoulder the responsibility for most of the financing. Hong Kong will play a major role in this evolution.
Hong Kong’s pool of offshore renminbi liquidity is the largest in the world. At the end of December 2015, renminbi deposits in Hong Kong totalled 851.1 billion yuan. The total remittance of renminbi for cross-border trade settlement amounted to 667.5 billion yuan in December.
With the easing of Chinese cross-border funding restrictions and the renminbi’s increased international profile, the issuance of renminbi-denominated bonds in Hong Kong has grown rapidly in recent years, topping 390 billion yuan last year. The “Belt and Road” initiative will further boost the issuance of so-called “dim sum” bonds in Hong Kong.
Meanwhile, the Shanghai-Hong Kong Stock Connect scheme, launched in November 2014, has established direct two-way access between those two exchanges, underpinning Hong Kong’s position as the unrivalled global hub for renminbi financing. A similar scheme linking the stock exchanges in Shenzhen and Hong Kong is in the pipeline.
Finally, Hong Kong’s collective “brainpower” is a key asset in this respect. Local and international financial services companies employ more than 230,000 professionals. Many more work in areas such as law, accounting, management, information technology, architecture, engineering, transportation – all of which form a key part of the expertise that is needed to bring the infrastructure ambitions of the “Belt and Road” strategy to fruition.
The “Belt and Road” initiative will propel China to a more active leadership role in regional integration and the global economy. China has painted the broad strokes of the plan which provides a golden opportunity for Hong Kong to play an even bigger role in China's opening up to the world.