HK eyes major role within China’s Belt-and-Road initiative

    Logistics hub:  Employers manage air cargo handling at the Hong Kong International Airport. Hong Kong is gearing up to seize business opportunities generated by the introduction of China’s “One Belt, One Road” infrastructure development initiative. (Courtesy of Hong Kong Air Cargo Terminals Ltd. )

Vincent Lingga, The Jakarta Post, Thu, April 21 2016 | 09:17 am

Government and business leaders here have been gearing up to make Hong Kong the platform for financial, trade and professional services for the new business opportunities expected to be generated by the implementation of China’s ambitious “One Belt, One Road” (OBOR) infrastructure development initiative to link Asia and Europe.

Hong Kong is organizing what it calls the first Belt-and-Road summit to be held on May 18 where government and business leaders, including those from Indonesia, will discuss business opportunities arising from the initiative.

“Hong Kong will play an important role in supporting infrastructure development as well as facilitating China’s investment along the Belt-and-Road route covering more than 60 countries”, Francis Ho, the associate director general of InvestHK, told journalists from ASEAN countries in a pre-summit briefing here last week.

Ho said Hong Kong would bank on its strategic role as the gateway to the world’s second economy--mainland China-- its efficient regional logistics hub for sea and air cargo and its position as the world’s third-largest financial center.

The ambitious OBOR initiative was launched by Chinese President Xi Jinping in early 2014 to link China with Europe through central and western Asia by inland routes and with Southeast Asia by sea routes. Since then China’s policy banks such as China Development Bank, China Exim Bank have been quite aggressive in lending to infrastructure projects in Southeast Asia, especially Indonesia.

William Chui, director of international relations at the Hong Kong Trade Development Council (HKTDC), the summit organizer, said infrastructure development in the ASEAN region would be one of the main themes of the summit.

The OBOR initiative certainly requires huge investment and project contracting and will drive big demand for a wide range of professional services.

“In this connection, Hong Kong should be able to find a considerable array of opportunities in financing, project risk management, infrastructure and real estate services,” Chui added.

Led from the highest levels of the government the OBOR push is backed by substantial financial firepower from the US$50 billion Silk Road Development Fund, the $100 billion Asian Infrastructure Investment Bank that has now been joined by almost 60 other countries, including Indonesia, as shareholders.

Ho cited another important role of Hong Kong as what he called the conduit of investment between mainland China and the rest of the world.

“More than 50 percent of China’s investment overseas was made through Hong Kong,” Ho said, adding that last year alone $58.5 billion worth of mainland China’s investment overseas was made through Hong Kong.

These numbers, Ho pointed out, highlighted Hong Kong’s role as a super-connector, in which foreign companies use Hong Kong as a base to invest in mainland China, and mainland Chinese companies increasingly use Hong Kong as a platform to make global investments and acquisitions and to raise funds.

Latest data at the HKTDC showed that as of last year, 1,400 foreign companies used Hong Kong as their regional headquarters.

Hong Kong is also the second-largest stock exchange in Asia after Tokyo, and is the sixth-largest hub for foreign exchange trading.

“In fact, last year the Hong Kong stock exchange (HKEX) was the largest in terms if initial public offerings with 138 new listings, raising US$30 billion in fresh funds,” HKEX’s vice president for publc reations Scott Sapp said.

More than 1,885 companies were listed in the Hong Kong exchange as of March.

Philip Yang, honorary chairman of the Hong Kong International Arbitration Centre, elaborated the experience and legal expertise of the thousands of local and international legal firms in Hong Kong that are important for firms intending to do business in mainland China.

“We have deeper understanding of the laws, culture and business practices in China which are key to minimizing the risk of commercial disputes,” Yang said, giving an assurance that the arbitration center was politically independent.

HSBC’s senior executive George Leung agreed that its long international business experience and knowledge about China made Hong Kong the best partner for foreign companies to do business with or in China and for mainland Chinese companies doing business around the world.

The renminbi (RMB) has become an international currency after the IMF’s decision last December to include the RMB in the Special Drawing Rights (SDR), the basket of currencies used by the IMF as its unit of account, joining the US dollar, euro, pound sterling and the yen.

“Hong Kong is the largest center for international RMB transactions and the renminbi liquidity here now amounts to more than 1 trillion [US$154 billion], “ Leung added.

C.C. Tung, Chairman of Orient Overseas Ltd. (OOL), the holding company of one of the world’s largest integrated logistics service providers, cited the role of Hong Kong’s seaport as the world’s fifth-busiest container port, which last year handled 20.1 million twenty-feet equivalent units (TEUs), with 256.6 million tons in total port throughput.

“The efficient port services make us the most popular sea-transportation hub in Asia, which can arrange multi-stage cargo routes,” Tung pointed out.

Orient Overseas Container Line Ltd., one of OOL’s integrated logistics service providers, is also active in Indonesia.

On top of that, the Hong Kong International Airport is also the busiest air cargo hub in the world, claimed Mark Whitehead, the chief executive of Hong Kong Air Cargo Terminal Ltd.

Last year, according to HKTDC, the three Hong Kong air cargo terminals, which operate around the clock, all year long, handled 4.38 million tons of freight.

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Belt and Road Summit to focus on ASEAN infrastructure opportunities

Vincent Lingga, Tue, April 19 2016 | 08:35 am

China’s One Belt One Road (OBOR) development agenda to boost connectivity between mainland China and 65 countries in Asia and Europe by building infrastructure ties fits well with the 2010 Master Plan on ASEAN Connectivity.

The Hong Kong government, which will host the first Belt and Road Summit on May 18, chose infrastructure development opportunities in the Southeast Asian region as the main focus of discussions between business leaders, ministers and investors from around the world.

ASEAN countries will be able to tap the more than US$200 billion in financing resources that China’s policy banks, including the $100 billion Asian Infrastructure Investment Bank (AIIB) and the $50 billion Silk Road Infrastructure Fund, have committed to infrastructure, notably road and rail links and power grids along the corridor covered by the OBOR initiative.

President Xi Jinping launched the OBOR initiative in early 2014 to build a network of overland road and rail routes, oil and natural gas pipelines and other infrastructure that will stretch from central China through Central Asia and ultimately reach as far as Moscow and Venice.

But even though President Xi has asserted from the outset that the OBOR initiative would adhere to the principles of noninterference in other nations, not seeking to increase the sphere of influence, a number of countries are concerned over the geopolitical impact of the agenda.

Analysts, senior government officials and business leaders who talked to journalists from ASEAN countries during a series of presummit briefings in Hong Kong last week have mixed views on the OBOR initiative. The leading thread of views sees the initiative as the Chinese government’s recognition that its own prospects are inextricably linked with those of its trading partners along the OBOR route.

But if the controversies over several infrastructure projects China’s policy banks plan to finance in Indonesia, Thailand and Laos are any guide, the strongest note of caution prevailing now is: China needs to tread very carefully and work hard to gain trust for the Belt and Road agenda to boost connectivity and commerce between China and the 65 other countries involved.

A proposed $5 billion railway line that stretches through to Thailand could support that country’s ambitions to become a regional logistics hub, and China’s need to access key export markets, offering a win-win for both countries. But latest reports from Thailand suggest Thailand might go alone in financing the construction of the first phase of the project instead of seeking financial loans from China, as originally planned, due to what it claimed were unusually high interest rates charged by Chinese lenders.

The 250-kilometer railway is seen as part of an ambitious network linking Bangkok with Kunming in Southwest China’s Yunnan province, through Laos in the north and connecting Thailand, Malaysia and Singapore in the south.

Obviously, upon completion, the countries involved will all benefit from such regional arteries. But the uncertainty shows that different countries may have different expectations when they respond to China’s overtures.

Some prospective projects also could potentially be viewed as primarily benefiting China by building local infrastructure unrelated to the OBOR route, such as the $5 billion Jakarta-Bandung high-speed railway.

Such a suspicion may arise because the OBOR initiative was launched at a time when China’s economic growth fell from a two-digit level to below 7 percent.

Hence, many see the agenda as China’s attempt to export its huge excess manufacturing capacity in steel, cement and various other industrial products.

Such an impression has been strengthened by the fact that China’s policy bank loans extended for infrastructure development have mostly been tied to the involvement of Chinese companies, either as suppliers of machinery and raw materials or in construction and operation.

Hong-Kong based brokerage CLSA and China’s Citic Securities noted in a recent report that China was preparing to counter the accelerating slowdown in its domestic economy through enormous investments in overseas infrastructure that could absorb overcapacity in key industries.

The aggressive lending by China’s policy banks like the China Development Bank and Exim Bank to such developing countries as Indonesia has also been seen as a program to boost exports through Chinese companies that win construction jobs.

Last August, for example, the China Development Bank gave $3 billion in loans to Indonesian state-owned Bank Mandiri, BRI and BNI to finance infrastructure projects that involve Chinese construction companies. So suspicious has the House of Representatives been of these loans that the House’s finance commission summoned the directors of the three banks for explanations on how those loans were spent.

In addition, as Julian Vella, the Asia Pacific head of global infrastructure at KPMG International, cautioned in a recent analysis that Chinese investors must acknowledge that some of the countries on the proposed OBOR route have traditionally strong links to other nations with a vested interest in the region, and may resist China’s overtures.

Certainly, implementing the Belt and Road agenda will require a high level of mutual understanding of the regulatory, political, legal, financial and project risks, such as resource nationalism, transparency and labor unrest associated with potential projects along the OBOR route.

All in all though, seeing it from the positive side of things, the OBOR initiative will help fulfill part of Asia’s huge funding gap for infrastructure financing, which is estimated by the Asian Development Bank (ADB) at $800 billion annually over the next decade.

In fact Japan’s recent decision to commit more than $100 billion in new lending resources to the ADB within the next five years specially for funding high-quality infrastructure should also be seen as another positive impact of China’s OBOR initiative.

Yet more encouraging is the statement made by AIIB president Jin Liqun in Washington last Wednesday that the AIIB, the ADB and the World Bank would cofinance infrastructure projects in Asia.

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Commentary: Jokowi's hardball may mothball Masela gas project until 2022

Vincent Lingga, Wed, March 30 2016 | 09:20 am

President Joko '€˜Jokowi'€™ Widodo'€™s decision to choose an onshore liquefaction process for the giant Masela gas project could be right for domestic political consumption.

But his hardball approach and policy inconsistency, without taking into account the prevailing weak oil-market conditions, could jeopardize the commercial viability of the whole Masela LNG project gas development in southern Maluku.

That was our main reading of the President'€™s decision last Wednesday to select an onshore liquefaction (OLNG) concept for the Masela project, which sits on almost 11 trillion cubic feet of gas reserves in the Arafura Sea.

His decision overrules the recommendations of the SKKMigas upstream oil and gas regulatory body, his energy and mineral resources minister and the oil and gas contractors, Inpex-Shell, which all chose a floating LNG (FLNG) concept.

Ordering Inpex-Shell to go back to the drawing board to prepare an OLNG project will possibly postpone the final investment decision on the project until 2022, almost three years after a new government takes over.

Both Inpex and Shell say they have not received the final documents on the President'€™s decision, so were unable to make any meaningful comment, except confirming that the project would suffer another delay.

But analysts have noted that since this is a huge project, Inpex-Shell will certainly conduct a disciplined approach to see whether the OLNG project will be consistent with their requirements for a development concept that is commercially robust across a range of scenarios.

Wood Mackenzie consulting company observed in its latest report that '€œ the decision to go onshore will not only extend the time to first gas [delivery] but also brings into questions Inpex and partner Shell'€™s commitment to the project'€.

Inpex-Shell had previously looked into both OLNG and FLNG options but had selected a FLNG concept because it would cost over US$7 billion less than the estimated $22 billion for an OLNG, as well as being faster to develop.

They will certainly ask for more incentives to make the project commercially viable and bankable, but these additional incentives could wipe out most of the economic advantages (multiplier impacts) Jokowi had in mind when he chose an OLNG over a FLNG.

Upstream oil and gas analysts here estimate that Inpex-Shell will need at least two years to conduct another environmental impact analysis, another one year for a more detailed feasibility study on the OLNG and one year more for finalizing its final plan of development (POD).

Even if the government speeds up approval of the POD, the oil companies will still need another two years to seek potential buyers and lenders. Hence analysts predict Inpex-Shell will not make a final investment decision until 2022. If the contract for the project'€™s front-end engineering design is awarded within one year later, engineering, procurement and construction will start only in 2023 and the plant will come on-stream in 2029.

The main predicament in this process is that Inpex-Shell will have to negotiate an extension of the Masela block concession, which will end in 2028, because even under the original POD for a FLNG, as proposed by the contractors, the project had been scheduled to start production only in 2024/2025.

Fortunately, though, the extension of an oil and gas production contract can be negotiated 10 years before its end. But negotiations for the contract'€™s extension are unlikely to start in 2018, an election year, when inordinately strong nationalist sentiments heat up campaigns.

The negotiation process will also plunge the project into political and social quagmire, as the Maluku provincial and regency administrations, as well as state-owned Pertamina oil company, may demand a piece of the huge gas-resource pie.

Since this is a gas business and all the risks are to be borne by Inpex-Shell, commercial viability is the key to determining whether the project will advance to the implementation stage or end up mothballed.

The main question then is who will buy the gas and at what prices and for how long. When it comes to the LNG market, many analysts have predicted a market glut within the next 10-15 years, with an estimated additional capacity of 50 million tons a year to come on stream, mainly in Australia, the US, Africa and Malaysia.

The day Jokowi announced his choice of OLNG for Masela, newspapers in Australia reported that Woodside Petroleum and its partners, including Shell, had shelved plans to build the $30 billion Browse floating LNG project off Australia in the face of global oversupply. The decision means there are no longer any major gas export projects under serious consideration in Australia after a $220bn-plus run of investment decisions unprecedented anywhere in the world.

The pace of development of giant gas export schemes has slowed globally, as LNG prices have plummeted with oil prices, prompting many companies to delay funding decisions until business conditions brighten.

In Asia, LNG prices have plunged by 80 percent over the past two years. The basic question then is whether the much larger cost and the more complex development of OLNG justifies spending vast amounts of money at current oil prices below $40/barrel.

Yet more important is whether potential lenders who will put up at least 80 percent of the investment will be convinced that their credit will be returned. After all, most giant oil and gas companies have seen their available funds for development decimated by slumping prices. 

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