Special Report – Belt and Road

Hong Kong-based companies ready to act as ‘super connector’ in Beijing’s trade initiative

City’s institutions are now well positioned to guide clients and investors through the intricacies of operating in belt and road countries

PUBLISHED : Monday, 19 March, 2018, 2:30pm
UPDATED : Monday, 19 March, 2018, 2:30pm

If the predictions about China’s “Belt and Road Initiative” eventually come to pass, it truly will reshape national economies and international trade patterns in the decades ahead.

However, for financial institutions and investors excited by the overall prospects, there have been two lingering questions: where to focus, and how to start.

It is one thing to hear all the optimistic talk about the need for large-scale infrastructure projects, new power plants, industrial development and the blue-sky forecasts for untapped export potential. But in the cold light of day, banks and finance houses are in the business of assessing risks, and they want to be sure of a reasonable return on investments before plunging in.

Therefore, the approach of many Hong Kong-based institutions can so far be characterised as suitably cautious. They are alert to the emerging opportunities and have made it a strategic priority to explore ways to develop them.

But the first steps are all about doing the groundwork, getting staff and partnerships in place, and understanding the different regulatory regimes. Only then is it possible to feel confident about having the expertise to point clients and investors in the right direction and guide them through the intricacies of due diligence and deal making in less familiar markets.

“Just last month, we signed a memorandum of understanding with China Development Bank to form a strategic partnership that aims to facilitate trade and investment relating to the ‘Belt and Road Initiative’,” says Carmen Ling, global head of RMB solutions for Standard Chartered Bank. “And, last December, we announced a commitment to facilitate financing to the value of at least US$20 billion by 2020.”

Ling emphasises that the bank sees “great potential” in the trade initiative, alongside the continued internationalisation of the renminbi and the opening up of China, but it is also taking a step-by-step approach.

What has helped, though, is being able to take advantage of an existing footprint in more than 40 of the relevant countries. Having a dedicated team of specialists already in place in different markets is a definite plus. It has made it possible to be a little faster out of the blocks, not just in engaging with clients, but also when it comes to offering practical support.

To make the overall initiative a success, the critical factors are transparency, good governance and execution, as well as the commercial viability of any projects
Carmen Ling, global head of RMB solutions, Standard Chartered Bank

As a result, last year alone, the bank was directly involved in more than 50 initiative-related projects, worth more than US$10 billion and covering a wide range of products and services.

“To make the overall initiative a success, the critical factors are transparency, good governance and execution, as well as the commercial viability of any projects,” Ling says. “Hong Kong as a whole can play a significant role as the ‘super connector’ between China and the rest of the world. With its well established financial system, robust legal framework and huge talent pool it can act as a springboard to help mainland enterprises ‘go out’ and invest in the BRI countries [after ensuring the fundamentals are strong].”

Elsewhere, the general tone is similarly balanced. Everyone can see the undoubted attractions being talked up by government officials, think tanks and experts whose money is not at stake.

But no serious investors want to make a name for themselves by leading the charge and then ending up with burnt fingers.

“Risk management is a major topic in our discussions with clients,” says Houston Huang, head of investment banking for China at J.P. Morgan. “We spend a lot of time identifying strategies that can help them manage the risks relating to markets, regulatory frameworks, legal considerations and foreign exchange. For example, it is essential for clients to build in a hedging strategy, especially when their investments relate to countries with [geopolitical] uncertainties.”

That said, he fully expects the trade initiative to become one of the main themes driving the “go global” agenda now being pursued by mainland-based enterprises with cash to spare. Accordingly, the bank is gearing up and steadily deploying extra resources to offer a full spectrum of financial services, as and when demand dictates. That includes for trade finance, overseas mergers and acquisitions, and equity or debt financing linked to the trade initiative’s projects.