Hong Kong's strength in financial services can serve the nation's Silk Road ambitions

Peter Wong says Hong Kong, as the premier centre for offshore renminbi business, would be a natural home for the financing centre of China's ambitious 'One Belt, One Road' initiative

PUBLISHED : Monday, 25 May, 2015, 9:00am
UPDATED : Monday, 01 June, 2015, 10:18am

In response to the expected flat growth of world trade and moderating economic activity at home, China is packaging a series of initiatives to help bolster both. Its recently announced "One Belt, One Road" plan embraces twin goals to tackle these challenges.

"One Belt" refers to the economic belt along the traditional Silk Road connecting China with Europe. The "One Road" is the new Maritime Silk Road between China, Southeast Asia and Africa. The aim is for China to invest in the infrastructure and linkages associated with these "roads" to help bolster its overseas trade. This, in turn, will stimulate production and consumption demand at home.

In one policy, China hopes to address challenging internal and external economic headwinds and rebalance its economy. By "rebalancing", Beijing intends to promote the development of a consumption-led economy, to supplement its traditional success in exports. The policy will also have the planned benefit of spurring economic growth in its laggard western provinces, to complement the economic dynamos in the east. If all goes to plan, President Xi Jinping estimates that "One Belt, One Road" will foster annual trade volumes, between China and the "belt and road" countries, surpassing US$2.5 trillion in the next decade. The policy is expected to benefit a massive 4.4 billion people in 65 countries.

An example of how it is intended to work is in infrastructure development. China has far more steel than it needs. A shrinking construction market at home has meant a surplus is piling up. Meanwhile, many developing countries in Asia suffer from massive infrastructure deficits. China has the capital, expertise and excess capacity to bridge these gaps. By investing in Asia's infrastructure needs, China is helping Asian economic development abroad and priming demand for its domestic heavy industry at home.

The policy will reinforce China's position in Asian trade and transport. Its vast transport and shipping sectors will be the biggest beneficiaries. Agriculture, textiles, telecommunications, financial and hi-tech sectors are also expected to see knock-on benefits.

China's western provinces that are set to benefit from the Silk Road renewal include Gansu , Qinghai , Shaanxi and Shanxi , and there are plans to incorporate Inner Mongolia to the north - a total of 18 provinces and regions have been selected as key development zones.

Beijing has vowed to allocate an initial investment of US$40 billion to set up a Silk Road fund for the construction of major infrastructure such as high-speed railways, bridges and ports in Southeast Asia and Central Asia. This figure is above and beyond the US$64 billion of infrastructure investments already announced.

To cope with the huge funding need, Beijing is launching the Asian Infrastructure Investment Bank, which has garnered support from 57 countries as prospective founding members. This will create a large fund for countries to develop infrastructure throughout Asia. China is proposing to furnish US$100 billion worth of authorised capital, to give the bank the financial firepower needed to turn the plan into reality.

The Asian Development Bank estimated that around US$8 trillion of infrastructure investment would be needed in the Asia-Pacific region between 2010 and 2020. However, it provides only around US$21 billion per year.

This has led to the creation of a number of new multinational, quasi-sovereign entities. From Beijing's perspective, developments under "One Belt, One Road" and via the Asian Infrastructure Investment Bank are part of a bigger picture - to encourage further economic integration of participating countries and the formation of a new regional economic trading and investment bloc.

More importantly, it will expand the global use of the Chinese currency, increasing the speed of the renminbi's internationalisation.

In this regard, Hong Kong has an active role to play as a financial hub. The city is already the world's default trade, services and financial gateway to China. In particular, it provides a wide range of professional services and financing options to facilitate Chinese enterprises going out, and vice versa.

Since China will be responsible for most of the financing for "One Belt, One Road" investments , it is likely that some of it will be provided in renminbi rather than US dollars, to help push the agenda of renminbi internationalisation and capital account convertibility. Renminbi is already the second most used currency in trade finance.

Hong Kong can leverage its strength in financial services as the prime "One Belt, One Road" fundraising hub, to provide a wide range of options, including offshore renminbi financing. Hong Kong has become the premier centre for offshore renminbi business, with the largest renminbi liquidity pool outside mainland China. Last year, renminbi trade settlement handled by Hong Kong banks reached 6.3 trillion yuan (HK$8 trillion) - an increase of more than 60 per cent on the previous year. It is anticipated to grow even further with the "One Belt, One Road" initiatives.

The Shanghai-Hong Kong Stock Connect is a new channel for the cross-border use and circulation of renminbi. A stock connect between Shenzhen and Hong Kong is expected to be launched in the second half of the year. These underpin Hong Kong as the unrivalled global hub for renminbi financing.

Given the huge opportunities that will arise from the "One Belt, One Road" initiative, Hong Kong should convince the Asian Infrastructure Investment Bank and the Silk Road Fund to set up their financing and treasury service centres here.

Hong Kong can provide mainland enterprises and international investors with the broadest range of renminbi services. Cross-border trade settlement, bond issuance and a slew of other services will be catered for.

As trade and various other economic activity along the "One Belt, One Road" expands, so too will the demand for settling in renminbi, initially to mitigate exchange risks.

This is a chance not to be missed. Hong Kong can leverage its strength to play a vital role to support this strategic plan, and also to broadly benefit from the opportunities created.

Beijing's "One Belt, One Road" is a small phrase with big ambitions. The path to success might be long and tough, but China has certainly made an impressive start.

Peter Wong is deputy chairman and chief executive of The Hongkong and Shanghai Banking Corporation