Jun 07, 2018 03:07 PM

Opinion: Hong Kong Can Be Gateway for China’s Belt and Road Funding

China, through the Belt and Road, will give rise to a new global financial order based on a mixture of capitalism and state-backed finance, different from the Western model of market-driven capitalism that has dominated the global financial order in past decades. Hong Kong is widely regarded as a leading financial hub of Asia, but will become the global capital of this new Chinese financial order, which will permeate the world.

The Belt and Road Initiative is the Chinese government’s vision to connect China with Latin America, Central Asia, Southeast Asia, South Asia, Russia, Middle East, Africa and Europe through infrastructure projects like ports, railway and roads.

The funding needs of such a grandiose project are titanic. For Asia-Pacific alone, if this region wishes to maintain economic growth, it needs at least $1.7 trillion of infrastructure spending per year through 2030, the Asian Development Bank has estimated. The need to raise so much money will spur Hong Kong’s capital markets to increase quantitatively, restructure and financially innovate.

This has occurred in history. During the 19th century, Britain undertook the world’s first and most expensive railway building program. The financing needs for Britain’s railway boom created the stock exchanges of Manchester, Liverpool and Glasgow, according to a book by the British historian Eric Hobsbawm, “Industry and Empire: The birth of the Industrial Revolution.” The demand for financing from the British rail buildout resulted in innovative financial products like railway bonds.

For Hong Kong, apart from the likelihood of restructuring and innovation in its financial sector, the Belt and Road will also see an infusion of Chinese state money. The reason for an increase of Chinese capital in the former British colony is that most local tycoons are reluctant to invest in Belt and Road by themselves.

Most Hong Kong tycoons have made little or no investments in Belt and Road projects. From a narrow commercial perspective, Belt and Road projects can be risky. Imagine building a toll road in Afghanistan, only to have it blown up by terrorists. The Belt and Road Initiative passes through many developing countries with a reputation for corruption, political instability and weak rule of law. In July 2017, for instance, Nawaz Sharif resigned as Pakistan’s prime minister amid corruption allegations. Why would a businessman in Hong Kong or another jurisdiction want to invest in such countries?

A prime example is Li Ka-shing, Hong Kong’s richest man, who retired in May. Li’s companies have stated they prefer to invest in developed countries of the former British Empire, like the U.K., Australia and Canada, whose legal systems are similar to British Common Law.

“For Belt and Road countries, many of them are developing countries, and relevant treaties and regulations are not in place yet. I suggest to private investors that we need to move forward with caution,” Justin Chiu Kwok-hung, executive director at CK Asset Holdings, a company controlled by Li, was quoted saying in Nikkei Asian Review on Nov. 29.

This is where Chinese state capital comes in. China is probably the only country with the financial muscle and will to invest in costly and dangerous projects in Belt and Road countries.

Chinese state-owned enterprises are willing to rush into Belt and Road projects where private companies of Hong Kong, the U.S. and other countries fear to tread. If a project goes awry, a Chinese state-owned enterprise can pass on the risks and losses to the Chinese government.

This is what happened with a light-rail project in Mecca, Saudi Arabia. China Railway Construction Corp. (CRCC), a Chinese rail construction company listed in Hong Kong and Shanghai, was building a light railway to transport Muslim pilgrims in Mecca, a city considered holy in Islam. In 2010, CRCC announced it had suffered losses from this project due to delays and cost overruns. CRCC passed the money-losing project onto its state-owned parent. Although this listed Chinese company suffered financial loss, China benefited in other ways, such as improving relations with Saudi Arabia, a major exporter of oil to China, and gaining goodwill with Muslim countries.

Hong Kong will be a natural gateway for Chinese state investments in Belt and Road projects since the city already services most Chinese outbound investments. In future, the gigantic scale of financing Belt and Road projects will elevate China’s importance in the global financial system. In tandem with the growth of Chinese state capital, China will play an increasingly important role in shaping the world’s financial order, which hitherto has been largely a U.S. creation. Under British rule, Hong Kong was a capitalist window for China. In future, Hong Kong can be a major center of this new world order of capital “with Chinese socialist characteristics.”

Toh Han Shih is a Singaporean writer based in Hong Kong. He has more than 10 years of experience reporting on business and economics related to China.

Share this article
Open WeChat and scan the QR code