Belt and Road and Hong KongGood morning ladies and gentlemen. I’m delighted to be here today to discuss Hong Kong’s role as a fundraising centre within the Belt and Road Initiative.
INTRODUCTIONChina’s Belt and Road is possibly China’s most ambitious project economically and diplomatically since the establishment of the People’s Republic. Covering 65 countries, around 65% of the world’s population and about a third of the world’s GDP, the project looks set to confirm and accelerate the global shift in political and financial power to the Belt and Road region. So what does this mean for Hong Kong? As the interface between China and the rest of the world, Hong Kong stands to benefit from the numerous business opportunities which will arise out of the Belt and Road initiative. Hong Kong’s position is unique: it is a part of China, but Under the One Country Two Systems framework it retains its own political and legal system with control over its economic and financial affairs. It thus offers proximity to the world’s second largest economy as well as historic, cultural and linguistic ties. Most importantly, Hong Kong has become China’s most cosmopolitan city and one of the world’s leading international financial centres along with London and New York. Its independent legal system based on English common law has made it a very attractive place for Chinese companies to raise funds and for companies from around the world to invest in China. All the world’s major banks and fund managers have a presence in Hong Kong. The Hong Kong Stock Exchange raises more funds in initial public offerings than any other exchange world-wide. Starting in the 1990s, Hong Kong has become the primary stock market for Mainland Chinese companies to list and raise capital. In turn, investors worldwide have gained access to China’s leading companies through investing in their Hong Kong listed-shares. Hong Kong is also the world’s largest centre outside Mainland China for issuing debt denominated in renminbi (RMB). With its ties to the Mainland, Hong Kong has been the city in which the Chinese Government has experimented with reforms aimed at internationalising the RMB and gradually opening its capital account. As seen with Hong Kong’s establishment as an offshore RMB centre, a move since copied in some 14 other financial centres, including London, Sydney and Doha, Hong Kong benefits from the first mover advantage – Hong Kong is the place China experiments with new opportunities before rolling them out elsewhere. Perhaps the most interesting trend in recent years is that Hong Kong now acts not only as the gateway for foreign investment funds to enter China, but also as the gateway for Chinese funds to invest internationally. By way of example, in 2016, Chinese companies invested US$53.9 billion in the United States, a massive increase of 359% compared to 2015.1 Chinese foreign investment is likely to slow as a result of the stricter controls China has implemented to rein in capital outflow and increasing protectionism in the United States under Donald Trump. Nevertheless, Chinese outbound investment looks set to continue in areas such as advanced technology, clean energy and brands. Hong Kong is thus already a key connector between China and the rest of the world. Its long history of trade with China, its abundance of world-class professionals in financial, legal and accounting services, as well as its lack of restrictions on capital flow, currency convertibility and simple low tax regime will allow Hong Kong to play a key role in facilitating investment under the Belt and Road initiative. Belt and Road – the development over 2016 Looking briefly at Belt and Road Initiative’s progress to date. The Belt and Road initiative made considerable progress last year. In May 2016, the Asian Infrastructure Investment Bank made its first loan to Pakistan for the construction of its M4 highway along the China-Pakistan Economic Corridor. By the end of May 2016, more than half of the total value of China’s overseas construction contracts came from countries along the Silk Road2. In September 2016, “Silk Road Bonds” were suggested and discussed at the Belt and Road Summit: Financing Through Silk Road Bonds in September 2016 co-organized by the International Capital Market Association (ICMA) and Dagong. Designed to be a new asset class recognised internationally, Silk Road Bonds may emerge as an integral source of financing for the Belt and Road Initiative in the near future. By mid-December 2016, China had signed projects worth US$ 926 billion3. The initiative has also provided a huge boost to China’s trade and investment in countries along the Belt and Road. Today Chinese exports to belt and round countries now exceed those to the United States and the European Union. The indications so far are that the Belt and Road initiative is gaining momentum and that considerable progress has already been made. The key areas in which Hong Kong stands to benefit are in:
- The provision of professional services (financial, legal and accounting);
- As a capital raising centre for companies involved in Belt and Road projects – particularly funding infrastructure projects;
- Provision of infrastructure services;
- Information technology services
HONG KONG AS SUPER CONNECTORAs global businesses take advantage of the Belt and Road initiative, Hong Kong has the potential to become a “Super Connector” between the Mainland and other countries along the Belt and Road Region and the rest of the world. As an international financial centre with strong networks with China and internationally, Hong Kong is ideally positioned to manage Belt and Road investment projects and act as a connector between investment projects, investors and service providers. Its fund raising and financing capabilities, expertise in infrastructure development, and independent legal system mean that Hong Kong can help build a bridge between Mainland China and other Belt and Road countries and the rest of the world. This will enable the smooth and efficient flow of capital, goods and services and allow Hong Kong to play a major role as the Mainland’s ‘super-connector’ in the ‘Belt and Road’ initiative. HONG KONG AS A PROFESSIONAL SERVICES PROVIDER The Hong Kong Trade Development Council and Mainland authorities carried out a survey of Guangdong enterprises and at the 13th China-ASEAN Expo in 20164. 60% of the respondents indicated that they would first look locally for support services. A significant proportion of respondents, however, said that they would look for support services outside the Mainland. In relation to Belt and Road business opportunities, Hong Kong is by far the most popular offshore centre for seeking professional services, providing some 50% of professional services related to Belt and Road business. In terms of professional services, Hong Kong provides world-class services in accounting, law and management consultancy through both international and local firms. With years’ of experience in China and Asia, these professionals can advise on tax, legal and risk and assist in dispute resolution, particularly in the area of arbitration. The Big Four accounting firms and the largest international law firms all have a presence in Hong Kong and China. Hong Kong local firms also have a wealth of experience in raising capital for Chinese and other Asian companies and infrastructure finance. Hong Kong is also a place of considerable expertise. It has a large pool of professionals in the fields of banking, accountancy, law, insurance, property valuation, infrastructure development and construction, project management, engineering, technology and telecommunications. These professionals have extensive experience of operating and investing in Asia. Hong Kong can thus offer all the necessary professional services including legal, accounting, risk management, insurance etc. for investments under Belt and Road.
HONG KONG AS A CAPITAL RAISING CENTREA huge amount of capital will be needed for the Belt and Road initiative. Although China has promised that its public banks will take the lead in underwriting projects, the scale of Belt and Road offers plenty of opportunities for private financing. The Asian Development Bank has estimated an annual funding shortfall for Asian infrastructure projects of US$750 billion through 2020. As one of the world’s leading financial centres, Hong Kong will be able to play a leading role in the fund raising that will be required for Belt and Road. Hong Kong has a key role to play in assisting companies investing in Belt and Road infrastructure projects raise funds. In turn, this will consolidate Hong Kong’s position as Asia’s premier financial centre and as the primary gateway for funds to flow into China and Belt and Road countries from the rest of the world. Hong Kong has long served as the entry point for overseas companies to gain access to the China market. More recently, increasing numbers of overseas companies have been looking to invest in infrastructure projects in China and that trend will accelerate under Belt and Road. A key Hong Kong initiative aimed at cementing Hong Kong’s role in facilitating Belt and Road infrastructure investments and their financing was the establishment of the Infrastructure Financing Facilitation Office (IFFO). Established in July 2016 by the Hong Kong Monetary Authority (HKMA), the IFFO aims to collaborate with its partners on facilitating infrastructure financing. The IFFO is not an investor itself and it does not do deal matching. Instead, it provides a platform that enables interested partners to collaborate in identifying infrastructure investment and their financing opportunities. The IFFO’s mandate also includes promoting the advantages of Hong Kong as an infrastructure financing centre. Through this work, IFFO will identify any impediments to attracting infrastructure investments and their financing. Where appropriate, it will recommend ways to address these issues to help make relevant projects more feasible. IFFO also operates as a platform for providing and sharing information, experience and best practices to provide greater access to knowledge on infrastructure financing and investment. In December 2016, the Hong Kong Monetary Authority signed Memoranda of Understanding with The Export-Import Bank of China and the China Development Bank Corporation establishing a strategic framework for co-operation on facilitating the financing of infrastructure projects via the IFFO platform. As at 28 December 2016, the IFFO already had more than 50 partners, including development banks, public sector investors, private sector investors including banks, insurers, asset managers, project developers and professional service providers. IFFO’s current partners include Chinese and international banks such as the Bank of China, the Export-Import Bank of China, Agricultural Bank of China Limited, China Construction Bank Corporation, Citigroup, HSBC, Bank of Tokyo-Mitsubishi, Sumitomo Mitsui Banking Corporation and Standard Chartered Bank. Funds which have become partners in IFFO include Blackrock, Blackstone Group and the Chinese state-owned Silk Road Fund. Infrastructure companies include MTR Corporation while insurance company partners include AIA Group Limited and Aon Hong Kong Limited. Aside from the IFFO, Hong Kong also offers world-class fundraising opportunities for infrastructure companies. One platform Hong Kong offers infrastructure companies to raise capital is by listing on the Stock Exchange of Hong Kong (the “Stock Exchange”). Equity Market Hong Kong’s financial markets have a high degree of liquidity, and operate under effective and transparent regulations. In 2016, Hong Kong raised the most IPO funds worldwide, raising US$24.8 billion, almost US$10 billion more than the Shanghai Stock Exchange which ranked second with US$14.9 billion of IPO funds raised.5 Listings on the Hong Kong Stock Exchange are dominated by Mainland Chinese companies which accounted for 80.5% of IPO funds raised on the HKEX in 2016, according to Thomson Reuters. 6 The depth of liquidity in the Hong Kong market and analyst expertise in the China market are key draws for Mainland companies looking to list offshore. Hong Kong thus plays host to some of the world’s largest IPOs by Chinese companies – Postal Savings Bank of China, for example, raised US$7.4 billion in its September 2016 IPO in Hong Kong, the world’s largest IPO since the Alibaba Group Holding’s 2014 IPO on the New York Stock Exchange. Between January and November 2016, Hong Kong ranked fifth in terms of total equity funds raised, having raised US$53.6 billion, after the Shenzhen Stock Exchange, Euronext, Shanghai Stock Exchange and NYSE with US$ 144.7 billion, US$132 billion, US$114.4 billion and US$106.3 billion respectively.7 A major initiative of the Chinese and Hong Kong market regulators in the last two years is the setting-up of channels for Mainland Chinese investors to invest in the Hong Kong market and for Hong Kong and international investors to invest in the Chinese market through Hong Kong. The first step was the launch of the Shanghai-Hong Kong Stock Connect scheme in November 2014. This provided Hong Kong and international investors with direct trading access to Shanghai-listed shares for the first time, while Mainland Chinese investors gained direct access to Hong Kong-listed shares. This was followed by the launch of the Shenzhen-Hong Kong Stock Connect scheme on 5th December 2016. This provides mutual market access allowing Hong Kong and international investors to make northbound investments in certain stocks listed on the Shenzhen Stock Exchange and mainland investors to invest southbound in stocks listed in Hong Kong through the Shenzhen Stock Exchange. The implementation of Shenzhen-Hong Kong Connect coincided with the removal of the aggregate limits on trading under Hong Kong Shanghai Connect which had previously applied. The launch of the two stock-connect schemes is significant as they created a controllable and expandable channel for cross-border renminbi flow for a wide range of investors. More importantly, they pave the way for the further opening up of China’s capital account and greater internationalisation of the renminbi. The two stock connect schemes do not currently allow investors to subscribe for IPO shares. The Hong Kong and Chinese regulators plan to extend the mutual market access arrangements between Hong Kong and China markets to cover other products, such as Exchange Traded Funds (ETFs), listed bonds and convertible bonds. There are also plans to launch “Primary Equity Connect”, a scheme to allow investors to subscribe for IPO shares through the Stock Connect schemes which is not currently allowed. Listing on the Hong Kong Stock Exchange The Hong Kong Exchange operates two markets, the Main Board and the Growth Enterprise Market (GEM). The Main Board caters for companies with a profitable operating track record or that are able to meet alternative financial standards. GEM, on the other hand, caters for smaller growth companies and has lower admission criteria. GEM also acts as a stepping stone to Main Board listing and provides a streamlined procedure for transfer to the Main Board once a company meets the Main Board admission criteria.。 The Listing Rules allow companies incorporated in Hong Kong, the PRC, the Cayman Islands and Bermuda (“Recognised Jurisdictions”) to list in Hong Kong. Companies can also list in Hong Kong if they are incorporated in one of 24 “Accepted Jurisdictions” which are: Australia, Brazil, the British Virgin Islands, Canada (Alberta, British Columbia and Ontario), Cyprus, France, Germany, Guernsey, the Isle of Man, India, Italy, Japan, Jersey, Luxembourg, Republic of Korea, Labuan, Russia, Singapore, the United Kingdom and the United States (the States of California, Delaware and Nevada). Companies incorporated in other jurisidictions need to meet the requirements set out in the HKEx and Securities and Futures Commission’s Joint Policy Statement Regarding the Listing of Overseas Companies (as amended in September 2013). These include a requirement to demonstrate that the standards of shareholder protection in the company’s jurisdiction of incorporation are comparable to shareholder protection standards under Hong Kong law. Operating history and management requirements A Main Board applicant must have:
- a trading record of at least 3 financial years;
- management continuity for the 3 preceding financial years; and
- ownership continuity and control for the most recent audited financial year.
- a trading record of at least 2 full financial years;
- substantially the same management for the 2 preceding financial years; and
- continuity of ownership and control for the preceding full financial year.
- Under the profit test, a listing applicant must have:
- profits of at least HK$ 20 million in the most recent year, and profits of HK$ 30 million in total for the 2 years before that; and
- an expected market capitalisation at the time of listing of HK$ 200 million.
- The market capitalisation/revenue test requires listing applicants to have:
- a market capitalisation of at least HK$ 4 billion at the time of listing; and
- revenue of at least HK$ 500 million for the most recent audited financial year.
- To meet the market capitalisation/revenue/cash flow test, the listing applicant must have:
- a market capitalisation of at least HK$ 2 billion at the time of listing;
- revenue of at least HK$ 500 million for the most recent audited financial year; and
- a positive cash flow of at least HK$ 100 million in aggregate for the 3 preceding financial years.
- a new high-speed rail line which will run from southern China, through Laos, to Thailand’s industrial east coast.
- China has made new pledges to Laos for the construction of a US$6 billion railway line between Laos’ capital Vientiane and China’s Yunnan province by 2020.
- China has a contract to build Indonesia’s first high-speed rail link. The US$5.1 billion project will build 150 km of railway to link Jakarta to Bandung (Indonesia’s third city).
- Hong Kong can develop as the international financing centre for companies involved in Belt and Road projects.
- Hong Kong can support the internationalisation of the RMB and the gradual easing of controls of China’s capital account.
- Hong Kong can respond to Belt and Road’s capital demands by developing an Asian bond market and establishing greater bond market connectivity.
- Hong Kong is the obvious market to launch the “Silk Road Bonds” which have been proposed as a fundraising source for Belt and Road projects.
- Hong Kong can capitalise on its position as the premier offshore market for the listing of Chinese companies. The Hong Kong Stock Exchange is going to conduct a public consultation on establishing a new third board for listing tech companies. If this goes ahead, it could offer an important source of funds for tech companies interested in getting involved in Belt and Road projects.
- Belt and Road offers tremendous opportunities for Hong Kong companies involved in construction, engineering and infrastructure development to get involved in regional infrastructure development projects like building railways, roads, gas pipelines, ports and maritime facilities in countries along OBOR. Opportunities also exist for its telecommunications and technology firms.
- For overseas construction and engineering companies, Hong Kong can provide a key link to investment projects and finance providers.
- Hong Kong law is based on English common law. It has been used for many years as the governing law for financing and commercial contracts for trade and infrastructure development in Asia. Hong Kong law provides confidence to investors. Hong Kong also has first class dispute resolution and arbitration capabilities.
- More than any other international financial centre, Hong Kong offers access to the world’s banks and investment funds. They in turn offer access to the world’s investors.
- With numerous experienced professionals in project management, financing, legal, accounting, construction and engineering, Hong Kong is the one-stop-shop for companies looking to take advantage of the opportunities offered by China’s Belt and Road Initiative.
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1 “China Investment in the US Hit an All-time High in 2016, But Don’t Expect the Same in 2017”. Forbes. Ellen Sheng. 18 December 2016.
5 Source: HKEx Market Statistics 2016
9 CY Leung’s Speech at Boao Forum for Asia Financial Cooperation Conference opening on 5 July 2016.