COMMENTARY
Mind the Gap
by

Opinion: Hong Kong is the ideal location for the Silk Road bank’s treasury

PUBLISHED : Sunday, 21 May, 2017, 3:45pm
UPDATED : Sunday, 21 May, 2017, 10:21pm

After a week of self-congratulatory praise, China’s concept of the new Silk Road has acquired the status of prophecy.

All the guarded circumlocution and visionary pronouncements now fade away and reveal the real question: exactly what does Hong Kong get for pledging membership and for the HK$1.2 billion, 0.7 per cent stake in the Asian Infrastructure Investment Bank?

Hong Kong Financial Secretary Paul Chan Mo-po welcomed the decision in March. He said Hong Kong’s participation in the bank could generate new opportunities for services in the city, reinforcing its place as an international financial centre. But exactly how this happens has remained a matter of vague speculation.

While muttering into my weekly ration of whisky at the Foreign Correspondents’ Club, I was approached by a gang of lawyers who despaired about the possibility of having to start business development in Kazakhstan or Uzbekistan. Where was the fertile valley of fees they hoped would originate in Hong Kong?

I hate to represent the segment of ungrateful Hongkongers, but we should ask exactly what Hong Kong will receive for joining the bank as it is not an independent sovereign state like the other members.

After all, Hong Kong’s richest families are running away from the “Belt and Road Initiative” like Superman avoids kryptonite.

The latest evidence is Henderson Land Development’s record-setting HK$23.28 billion offer for the government’s Murray Road commercial plot in Central.

The tycoons do not need the trade initiative’s high-risk, high-return profile when they are satisfied with low risk, high returns in Hong Kong. So the only remaining opportunity is for professionals.

Officials have said Hong Kong could use its position as a leading offshore yuan hub and become the financial centre for the bank.

But that middleman, connector theme is vague, passive and tired. Government officials need to act aggressively and persuade the bank to separate its finance and treasury functions away from its headquarters in Beijing and relocate it completely to Hong Kong.

No doubt its political headquarters must be in Beijing, just like the World Bank Group’s is located in Washington, DC.

Although it has made 13 investments, committing more than US$2 billion in the first year of operations, my experience at the World Bank suggests its finance and treasury operations need to be moved to Hong Kong where it can have better access to global markets, professionals and information.

On top of the US$60 billion in Chinese investment pledged since the initiative was proposed in 2013, President Xi Jinping committed a further US$113 billion to help infrastructure projects around the world. Yet, Beijing’s trade initiative is expected to require at least US$5 trillion in the next five years alone.

The infrastructure bank’s capital market operations need to sustain borrowing and investment to fund projects. It will have to develop the equivalent of World Bank bonds, which are backed by the bank’s 189 sovereign shareholders. They have been rated AAA, the highest possible rating available for more than 50 years by the major credit rating agencies since issuance began in 1947.

The World Bank Treasury manages more than US$150 billion in assets, a US$135 billion derivatives portfolio and borrowings in more than 20 currencies around the world and oversees an extensive client advisory business.

To operate on this scale, the infrastructure bank must locate its treasury department in Hong Kong. This will represent an endless buffet of fees for lawyers and accountants.

Given the massive requirements by the new Silk Road, funds need to be channelled through the infrastructure bank primarily from private sources, with the bank either guaranteeing private lending or selling its own securities on capital markets. This would revive private international lending and investment in the trade scheme.

So, let the lobbying begin.

Peter Guy is a financial writer and former international banker

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