26 October 2016
China should tap into the vast overseas Chinese communities in Southeast Asia to push its One Belt One Road initiative. Photo: Bloomberg
China should tap into the vast overseas Chinese communities in Southeast Asia to push its One Belt One Road initiative. Photo: Bloomberg

Southeast Asia holds key to boosting One Belt One Road strategy

China’s ambitious “One Belt One Road” initiative should start from Southeast Asian nations in order to make big progress.

Southeast Asian nations are more developed than other nations along the routes in terms of legal framework and talents. It’s easier for Hong Kong to collaborate with these countries.

Also, Hong Kong has close contacts with overseas Chinese from Fujian, Guangdong and Zhejiang, who have made successful businesses in Southeast Asian nations.

Both sides can cooperate better because of their common culture and traditions.

This group of overseas Chinese in the region can play a big role in pushing One Belt One Road.

I’ve just returned from a business trip to Malaysia. As a Muslim nation, Malaysia can easily do business with the Middle East and other Muslim nations.

With its help, Hong Kong and mainland China can access other Muslim markets and develop Islamic finance.

China could leverage on Singapore to access Indonesia, India, Pakistan and Nepal, and use Thailand as a bridge to tap into Myanmar, Laos, Cambodia and Vietnam.

Hong Kong people are more familiar with these nations, and we can build on strengths when developing projects in this region.

In that sense, Hong Kong should start from Southeast Asian nations to help implement the One Belt One Road strategy.

The aim is to boost infrastructure investment demand in Asia in the coming years.

For example, the OCBC Bank of Singapore has already set up four offices in Singapore, Indonesia and other Southeast Asian nations that focus on China business in a bid to capture business opportunities related to the One Belt One Road initiative.

I’ve also suggested earlier that multinational banks like HSBC and Standard Chartered should position themselves to take advantage of One Belt One Road.

Both banks have established branches, networks and started businesses along the One Belt One Road routes. Their knowledge of local legal frameworks and culture should support their business growth.

The United States is also trying to enhance economies ties with Southeast Asian nations, and Chinese factories have relocated to the region to take advantage of lower costs.

That would benefit local equity markets and currencies in the medium to long term.

Interest rates

Currently, most countries in the region still have positive interest rates that are above inflation levels.

Most nations have room to cut interest rates to stimulate growth, which would bolster both equity and bond markets. Lower financing costs would benefit economic growth.

Many Asian countries have posted a strong rebound after US dollar fell off the peak. Singapore, South Korea and Australia have seized the opportunity to cut rates.

Malaysia, which reported slower growth for five straight quarters, cut its interest rate from 3.25 percent to 3 percent last week.

The nation’s inflation rate also dropped to 2 to 3 percent from 2.5 to 3.5 percent previously.

Low inflation has given leeway for Asian central banks to cut interest rates.

China’s net interest rate remains high as the inflation eased to 1.9 percent in June.

Renminbi depreciation

The renminbi lost nearly 8 percent over the past year. However, the recent depreciation of the Chinese currency has yet to trigger massive capital outflows and selloffs in the equity markets as investors remain cautious after the Brexit vote.

We expect the renminbi to weaken by another 2 to 3 percent as China cuts interest rates and reduces the banks’ reserve requirement ratio.

That would bolster the competitiveness of Chinese exports and help China’s economy to bottom out.

Currently, many Asian stocks offer 3 to 4 percent dividends, far more attractive than the negative yields offered by some bonds.

Investors should add some stocks, bonds and funds in Asia, particularly in Southeast Asia, to their portfolios.

This article appeared in the Hong Kong Economic Journal on July 21.

Translation by Julie Zhu

[Chinese version 中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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