21 October 2016
Due diligence on the operating and regulatory environment will be crucial because some of the Belt and Road countries that present the greatest opportunities also pose the greatest challenges. Photo: Xinhua
Due diligence on the operating and regulatory environment will be crucial because some of the Belt and Road countries that present the greatest opportunities also pose the greatest challenges. Photo: Xinhua

How HK can gain from financing One Belt One Road

China’s Silk Road Economic Belt and 21st Century Maritime Silk Road initiative, better known as One Belt One Road, focuses on land- and sea-based connectivity to 64 markets in Europe, Asia and the Middle East.

China plans to work with these countries by lending money for projects, with a focus on energy and transport infrastructure.

The numbers speak for themselves. China has backed approximately 315 greenfield investments with a combined value of US$75.9 billion across Belt and Road countries in the 18 months to June 2016 – twice as much as in the previous 18 months.

Over the same period, Chinese investment in non-OBOR countries fell by nearly 29 percent.

Overall, 56 percent of Chinese overseas direct investment has ended up in Belt and Road countries.

Hong Kong’s role has been much discussed, with naysayers predicting we will have very little to do with China’s new initiative.

In the last few months, and even weeks, however, we have begun to see talk replaced with action.

If we continue to see the OBOR initiative gather pace over the next decade we are looking at huge opportunities for businesses in Hong Kong.

The Chinese government has explicitly stated that it sees a role for Hong Kong.

The position was recently clarified by Zhang Dejiang, who stated that the city is central to the outbound plan for China.

He suggested the SAR would be a hub for financial accounting, legal services (for example, project finance and dispute resolution) and consultancy.

In July, the Hong Kong Monetary Authority (HKMA) set up an Infrastructure Financing Facilitation Office (IFFO) and signed memoranda of understanding with the International Finance Corporation and with the Global Infrastructure Hub, a not-for-profit organization that aims to increase the availability of investment-ready projects and help match potential investors with projects.

The IFFO will promote Hong Kong’s development as an infrastructure financing hub by providing a platform to share information and experience, and help with infrastructure investment and finance.

It has linked up with 40 partners, including multilateral development banks and agencies, public sector investors, project developers and operators, commercial banks, asset managers and professional service firms.

It is encouraging to see the HKMA so promptly implementing the government’s stated objective to have Hong Kong act as a focal point for the financing of OBOR projects.

Hong Kong is uniquely placed to do so and with the establishment of the IFFO we should find greater momentum as well as clarity on how the city will be able to fulfill this role.

Chinese investment remains vital to regions around the world, and the OBOR policy and China’s willingness to participate in major capital investments may serve as the catalyst to encourage more companies to get involved in infrastructure development.

There are certainly opportunities there, both locally and internationally, for any company that is prepared to put the work in, and OBOR will only increase the funding push.

However, there are some challenges to be considered for Hong Kong firms.

Firstly, the magnitude of OBOR is immense. Focusing on specific opportunities and identifying those that are commercially and technically deliverable, rather than getting lost in the great scale and depth of the overall policy, will be a challenge.

Some of the OBOR countries that present the greatest opportunities are also countries that are likely to present the greatest investment challenges.

Due diligence on the operating and regulatory environment will be an important first step for any company looking to enter into a new jurisdiction but this will be particularly the case in some of the OBOR countries.

Firms must also recognize that, as OBOR is defined by the involvement of Chinese players, these projects may involve partnering with such players for the first time.

There will be the need to understand these partners, particularly with regard to shareholding or investment structures.

Investment and contracting models are evolving. It is increasingly common to see contractors take equity positions alongside their traditional interests in designing, procuring, building and even operating assets.

The management of these dual roles may require significant effort and resources.

Finally, Chinese banks have established themselves as vital debt providers for international infrastructure investment.

For that reason, investors that flourish will be those that are able to engage with Chinese debt providers and ensure familiarity with matters such as the terms and conditions for Sinosure’s political risk cover.

Ultimately, Hong Kong’s role as a financing hub for OBOR could be very significant, and should also help us to build and bolster connections with far-flung parts of the world, if we can successfully navigate some very particular challenges.

This is an exciting prospect.

– Contact us at [email protected]


Partner at Pinsent Masons

EJI Weekly Newsletter