27 October 2016
Hong Kong should utilize its strength and resources in financial services to become a major debt-financing center for “One Belt, One Road”. Photo: Bloomberg
Hong Kong should utilize its strength and resources in financial services to become a major debt-financing center for “One Belt, One Road”. Photo: Bloomberg

Hong Kong should further develop debt market to facilitate OBOR

The “One Belt, One Road” strategy needs huge capital to support various infrastructure projects.

These funds should be raised on the international market. Hong Kong should capture the opportunity, and leverage on its advantage in financial services to issue infrastructure bonds.

That would facilitate the development of the local bond market and cement the city’s role as the global capital-raising hub.

Many countries and regions along the “One Belt, One Road” routes are emerging economies. They are underdeveloped in transport infrastructure, energy and telecommunication facilities.

It’s estimated that emerging nations in Asia needs US$750 billion each year to build infrastructure between 2010 and 2020, according to Asia Development Bank. The funding gap is as much as US$8 trillion.

China would provide the seed capital for large-scale infrastructure projects under the “One Belt, One Road” strategy.

Beijing has established several financial institutions to provide additional capital, such as the Asian Infrastructure Investment Bank, New Development Bank BRICS (NDB BRICS), and Silk Road Fund.

These three financial institutions have a combined capital of US$240 billion. All these financial establishments plus the World Bank and Asian Development Bank could provide around US$80 billion.

There is still a gap of 50 percent even if these nations could raise some funds by themselves.

However, China’s fiscal deficit represents 2.3 percent of the GDP last year, compared with 2.1 percent in the previous year.

The “One Belt, One Road” strategy can’t solely rely on the Chinese government. Private organizations should be encouraged to participate through public-private partnership.

In this case, Hong Kong should utilize its strength and resources in financial services, especially in the offshore renminbi business, to turn the city into a major debt-financing center for “One Belt, One Road” and the AIIB.

Hong Kong’s debt market has taken off after the 2008 financial crisis.

The Hong Kong dollar debt market has posted an annual growth rate of 12 percent and hit over US$180 billion in 2014.

Also, Hong Kong can provide a diversified foreign-currency debt portfolio.

Currently, foreign currency debt issuance accounts for almost half of the total market, compared with 1.8 percent in South Korea and 3.7 percent in Taiwan.

In order to encourage foreign companies and investors to hold and use renminbi, there has to be a renminbi debt market of decent size.

The redback is increasingly used in trade settlement and financing, but it still lacks a sizable and highly-liquid offshore market.

That’s why renminbi still lags other major currencies in terms of investment tools.

There are 15 operating offshore renminbi centers worldwide.

Hong Kong is the most well-positioned to become the dim sum bond center for issuing debt to fund big infrastructure projects.

Currently, Hong Kong is ahead of Singapore, South Korea, Taiwan and Britain in foreign-currency debt and dim sum bonds.

In the first 11 months of last year, the city issued a total of 68.7 billion yuan (US$10.5 billion) of dim sum bonds.

Also, Hong Kong has the largest offshore renminbi pool in the world. As of the end of January, the city’s renminbi deposit reached 852.1 billion yuan.

In addition, Hong Kong has a massive investment market. The city boasts 201 recognized organizations by the Hong Kong Monetary Authority, 158 insurance companies and reinsurance companies, and 594 locally registered funds that are approved the Securities and Futures Commission.

In 2014, more than 70 percent of the US$2.3 trillion worth of asset under management came from overseas investors, and 70 to 80 percent of funds managed in Hong Kong invested in Asia markets.

If it could establish a sizable and market-oriented offshore debt market, Hong Kong would be able to lure more bond issuance and investment in the long term, and it would also help China to open up its capital market for global investors.

A more liquid and diversified debt market would improve capital allocation, and lessen excessive dependence on bank loans. It would also expand financing channels for private companies.

That’s a key step for China’s economic rebalancing act.

This article appeared in the Hong Kong Economic Journal on March 1.

Translation by Julie Zhu

[Chinese version 中文版]

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General Manager of HSBC Group and the CEO of The Hongkong and Shanghai Banking Corporation Limited, Asia-Pacific

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