As Asia’s premier international financial centre, Hong Kong is important to the success of China’s Belt and Road Initiative.
Although geographically far from many likely Belt and Road projects, Hong Kong is still best placed to deliver the necessary funding and investment that these projects need, as well as auxiliary professional and risk-management services.
The aim of the Belt and Road action plan, which China unveiled in 2013, is to build a secure and efficient network of land, sea and air passages from China to Europe and Africa. It is why Hong Kong is seeking to become a major hub for infrastructure finance and investment by continuing to serve as a gateway for outward Chinese investment, supporting the work of the Asian Infrastructure Investment Bank, and finding better ways to channel private capital to infrastructure projects.
The potential for infrastructure development across the vast Belt and Road region is enormous. In Asia alone, the infrastructure funding needs are estimated by the Asian Development Bank to be $1.7 trillion per year between 2016 and 2030.
To help bridge the funding gap, lots of private sector investment will be needed. But private sector participation has been limited so far. According to the International Finance Corporation, just 20% of the total infrastructure spend each year in emerging economies is financed by private funding.
A key reason for that is the lack of bankable projects for investors and financiers, especially greenfield projects without secured revenue streams.
At a country level, political, legal and regulatory risks might undermine the feasibility of a project. At a project level, construction risk, cost overrun, demand risk, currency risk, and refinancing risk would negatively impact the project’s profitability. And all these risks are magnified in the case of cross-border or regional projects.
To help address some of these challenges, the Hong Kong Monetary Authority set up the HKMA Infrastructure Financing Facilitation Office (IFFO) in July 2016. IFFO has since built up a network of over 60 partners covering development banks, project developers, and operators, financiers, institutional investors, and professional service providers, from both public and private sectors and from both East and West.
At a series of roundtables in March 2017, IFFO drew together about 100 senior executives from various organisations, including sovereign wealth funds and pension investors with total assets under management of $4 trillion. Among the initiatives developed was a reference term sheet for infrastructure investment in emerging markets, which seeks a common language acceptable to both investors and developers. It also sets out various factors to be considered for investment so project developers can better address the concerns and expectations of investors when seeking funding.
Working with AIIB
Another way in which Hong Kong can crowd in private sector capital for infrastructure investment and funding is by supporting the work of the Asian Infrastructure Investment Bank.
The HKMA would very much welcome the opportunity to collaborate with the AIIB, which can use the Hong Kong platform for its own financial operations including bond issuance and treasury management. The more Hong Kong develops into a key infrastructure financing centre, the more it can also serve as a hub for the AIIB to source investment opportunities, prospective investors, and financing partners.
Hong Kong has long served as a springboard for investments between China and the world. To date, Hong Kong is the largest source of foreign direct investment into China and the largest recipient of China’s overseas direct investment, handling over 60% of China’s FDI and ODI.
China’s ODI has also accelerated in recent years, reaching $146 billion in 2015, up 18.3% year-on-year. Now, having gained scale and knowledge to compete globally and drawn encouragement from the Belt and Road promise of more regional connectivity, Chinese companies are likely to be ‘going-out’ even more in the years to come.
Hong Kong will not only continue to facilitate solutions for many of their funding needs but will also be part of the story that increasingly helps draw them out.
The HKMA has put in a great effort to develop infrastructure financing in Hong Kong. The next step will be to make good use of the cluster of partners at the IFFO to create a more specific new platform that will be instrumental in matching capital and large-scale infrastructure projects and helping to bring investment projects to fruition.
Vincent Lee is an external executive director at the Hong Kong Monetary Authority and deputy director of the HKMA Infrastructure Financing Facilitation Office. An edited version appears in this month's print edition of FinanceAsia as part of our Soapbox series.