HK must use strengths in Belt and Road Initiative

Ho Lok-sang says the city's unique position and major advantages mean it can streamline its dealings with the many nations and cultures involved in the initiative

As the Belt and Road forum opens in Beijing this week, Hong Kong should take a hard look at how it can contribute to what is the international undertaking of the century.

The Hong Kong Trade Development Council has listed six major advantages Hong Kong has in serving this initiative: Proximity to the Chinese mainland, internationality, connectivity to Asia and beyond, quality and diversity of services, synergy offering a one-stop shop for professional services - logistics, shipping, telecommunications, construction and engineering - to meet project needs, efficiency and flexibility. No one can question Hong Kong's strengths in these areas. But for me, Hong Kong can play a unique role in the Belt and Road Initiative. This lies in breaking the ice and fostering trust through its reputation in law and order, fair dealings and regulation, and its expertise in a range of professional services.

President Xi Jinping, in his opening keynote speech to the summit, said:"History is the best teacher. The history (of the ancient Silk Road) showed us that we can move along with mutual respect and development and towards the future of happiness, peace and harmony if we bravely walk the first step." China's commitment to the initiative is for everyone to see. Xi pledged at least 780 billion yuan($113 billion) in extra funding for the plan. Still, with the diversity of countries and cultures, distrust and concerns are to be expected. Indeed,they constitute the biggest threat to the success of the initiative.

There are a number of ways in which Hong Kong can play an important role in dispelling distrust and concerns.

The first is in regard to governance. Hong Kong has just been accepted as a full member of Asian Infrastructure Investment Bank (AIIB). The organization approved an additional 13 countries-territories to its membership in March. With 70 members (after all formalities have been completed) including Australia, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Norway, Singapore and the United Kingdom, the leadership provided by the AIIB is beyond question. The AIIB is a key international organization; it will support the much-needed infrastructure projects throughout the Belt and Road countries and regions. But the governance of Belt and Road projects cannot be taken for granted. Hong Kong can take a role in streamlining the requirements for a project to be deemed a "Belt and Road Project". It can be subject to key governance principles such as transparency, tender, audit, openness in recruitment and safety standards, etc. Projects with the Belt and Road designation should all be listed in a platform so investors and potential workers, including professionals and workers, can find the necessary information to participate in the project.

The second is with regard to risk management. I had the occasion to talk to an entrepreneur who had invested in the Republic of Uzbekistan long before the time of the Belt and Road Initiative. He said he had lost much of his early investments as a result of currency devaluations. He said it would have helped greatly if he could have hedged the currency exchange risk by forward selling on the Uzbek currency. Since many currencies of Belt and Road countries are not international units and trading is thin; exchange loss is a big risk that all investors have to face. Hong Kong, as a financial center, should explore products that can alleviate such risk.

The third is fund raising. Hong Kong's debt market is quite small relative to the stock market. However, growth of the market has been very rapid in recent years, driven in part by yuan-denominated dim sum bonds and by the Government Bond Programme. This has issued inflation-linked i-bonds, and the non-tradable silver bonds, along with bonds that are aimed at institutional investors. A recent Bank for International Settlements report noted that corporate bond market growth has accelerated considerably since the global financial crisis. All this suggests that while the bond market in Hong Kong is still small, it does hold great promise. With the scale of funding required under the Belt and Road Initiative, huge floats of bonds will be expected. I would think that with Hong Kong people's innovativeness, bonds of different varieties can be designed, and they would include bonds denominated in a variety of currencies and currency baskets, bonds that are indexed against inflation and those that are not, Sharia-compliant sukuks or Islamic bonds, green bonds, etc.

Finally, Hong Kong is ready to provide all kinds of professional services to Belt and Road countries and regions: Project management, legal and arbitration services, auditing and accounting, product design, etc. But as I originally argued, with Hong Kong's international standing and tradition of staunch adherence to the rule of law, Hong Kong is in a very good position to help set standards and obligations for all projects given the Belt and Road Initiative designation. This, of course, will need the blessing of Beijing - the proponent of the entire initiative. I would see high standards and strong safeguards as crucial to the initiative's success. I would like to see Hong Kong taking the initiative in doing this.

(HK Edition 05/16/2017 page11)