IFR Asia Belt & Road Financing Roundtable 2018: Setting the standard

Ken Hu Ken Hu Invesco Ken Hu is chief investment officer, Asia Pacific fixed income, at Invesco, where he is responsible for a variety of strategies including the recently launched Belt and Road Bond Fund. He joined lnvesco in April 2014 from Bank of China Hong Kong (BOCHK) Asset Management, where he was CIO for fixed income, and earlier worked as CIO for Bank of China Group Life Assurance. His 21 years of experience include stints at HSBC Private Bank, First State Investments and Income Partners. Mukhtar Hussain Mukhtar Hussain HSBC Mukhtar Hussain is a Group General Manager and Head of Belt and Road Initiative, Asia-Pacific, at HSBC, responsible for driving the bank’s BRI strategy. He has spent his entire career at HSBC, joining in London in 1982 as a graduate trainee before moving to the Middle East in 1993. He returned to London as Co-Head of Global Banking in 2006 and moved to Kuala Lumpur as Chief Executive Officer of HSBC Malaysia in 2009. He has served on HSBC’s Asia Pacific executive committee since 2010 and recently joined the board of HSBC Singapore. David Lam David Lam King & Wood Mallesons David Lam a partner at law firm King & Wood Mallesons, where he specialises in cross-border financing and is qualified to practise English, Hong Kong and PRC law. He has previously worked in London, Beijing and Shanghai, and has advised lenders, project sponsors and other parties in Belt & Road countries including Vietnam, Sri Lanka, Cambodia, Greece, the Democratic Republic of Congo and Pakistan. Lam is a member of the Professional Advisory Committee of the Hong Kong Trade Development Council and has collaborated with the Hong Kong Monetary Authority’s Infrastructure Financing Facilitation Office, a key body promoting BRI financing in the city. Beibei Li Beibei Li Citigroup Beibei Li is head of Banking and Origination for Belt and Road at Citigroup. She took on the newly created position in September after transferring to Hong Kong from New York, where she was responsible for Chinese institutional clients in North America. Li joined Citi in China in 1999 and previously held various positions in different markets including China and US. Abdul Qadir Memon Abdul Qadir Memon Islamic Republic of Pakistan Abdul Qadir Memon is Consul General of the Islamic Republic of Pakistan in Hong Kong. He has held the post since 2016 and has over 20 years of experience in the Pakistan government, with past assignments in diplomacy, administration and trade including almost five years as Deputy/Joint Secretary (Foreign Trade) in Ministry of Commerce. Abdul Qadir Memon holds a Masters in Public Policy from Graduate Research Institute of Policy Studies in Japan. Steve Garton Steve Garton Editor, IFR Asia (Moderator) To see the digital version of this roundtable, please click here To purchase printed copies or a PDF of this report, please email gloria.balbastro@refinitiv.com

IFR ASIA: Good morning ladies and gentlemen. The Belt & Road Initiative has been a big talking point for the last five years, but most of the financing so far has come from the Chinese policy banks. Mukhtar, what other financing options are available? MUKHTAR HUSSAIN, HSBC: The Belt & Road Initiative has been running since 2013, so we’ve seen five years’ worth of implementation, and the data suggests something like US$60bn worth of actual equity investments have been put in place. About US$740bn of trade has taken place along the Belt & Road, and 200,000 jobs have been created. There are many figures around the financing, but it’s a fairly material number, whichever way you cut it. Looking forward, the scale of financing required to support the Belt & Road is quite substantial. If you just put Belt & Road to one side and look at Asian infrastructure, the ADB estimates we need about US$26trn from 2016 to 2030 to build out Asian infrastructure, that equates to about US$1.7trn every year. Depending on whose numbers you believe, there’s a gap, and that gap simply cannot be met by governments. Even the Chinese government can’t fully fund the Belt & Road. The reality is that we are going to see a migration of funding from the Chinese state-owned institutions, which have been very much to the fore in the first five years, and I think we’ll naturally come to an era where international financial institutions will be more heavily involved. In addition to funding being raised through the international bond markets, we see an opportunity in local currencies as well where capital markets will develop. Asia benefits from having relatively high saving rates. So, the theory is that high savings, against the right projects, against the right structures, could find a home through investing in infrastructure. Clearly, there are some challenges in all of this. The reality is that many Belt & Road financings thus far can be best described as on-balance sheet lending. They have been done, essentially, by the Chinese state-owned institutions, for policy considerations and not entirely for commercial considerations. As we move forward I think it will involve a much wider range of players and that allows everybody in the capital markets, hopefully, to play a constructive role. IFR ASIA: Beibei, you have just taken on this job. The question, I guess, is why now? What opportunities do you see for your global and Chinese clients. BEIBEI LI, CITI: In my previous role I was covering multinational Chinese companies in North America, so right now it’s about covering Chinese companies that are going to be global BRI agents. There is a clear shift of strategy, I think, from Chinese companies to expand on the BRI map. Undoubtedly, Chinese SOEs would play a vital role in terms of going abroad and finding the right projects, through a joint venture or M&A. There are a number of roles that Chinese SOEs can play. But we are also seeing the rise of Chinese POEs in the Belt & Road Initiative. For example, in terms of the e-commerce business, Alibaba has been having phenomenal growth in South-East Asia. If we look across the different industries, I would say there are several waves under the BRI. The first wave we see is infrastructure; it is about energy, construction or logistics. But we will be seeing more waves – for example, the expanded economic cycle in terms of consumption, consumer industries, real estate. There will be new industrial parks in different countries, for example. And then we see a third wave of Belt & Road, which we call the digital Belt & Road. But it’s really not sequential. The digital part is happening at the same time. As I mentioned, for example, the e-commerce company from China going abroad, or telecommunication companies expanding mobile communications or cell phones to the less-developed markets. We see a variety of corporate players that can benefit from the Belt & Road Initiative. And t

IFR ASIA: Abdul Qadir, you said earlier that China is one of the only sources of capital for some of these projects. How do you come to that conclusion? Does Pakistan try to find private sector financing first? ABDUL QADIR MEMON, PAKISTAN: First of all, let me make an observation regarding competition. We are reading that the United States has come forward with a plan to compete with China in the Belt & Road. As a recipient country, we think that investment in infrastructure is essential, but we also believe that investment alone is not sufficient. We also need to look at the regulatory environment, the ease of doing business, the environment. We also need a trade facilitation environment. Instead of the United States competing with China, or Japan, or the UK, we want them not to compete, but to complement each other. If China is investing in infrastructure – road, bridges, ports and so on – the United States, UK and the other development partners can help developing countries like Pakistan in improving governance structures, in improving the ease of doing business. For example, if China built a port in a developing country and the capacity of the public services means it takes 30 days for the customs to clear goods from that port, I think that the objective of that investment would have failed. To your question regarding investment in Pakistan, of course, we have been partners with the United States in the war on terror. Afghanistan is our nextdoor neighbour, and the situation there is still quite uncertain, unfortunately. Situations like this create risk for investors, and we have seen this increasing trend that appetite for such risks is not there. For example, we know that there is around US$100trn of pension funds in the West – in the EU, United States and other countries. We don’t see those pension funds investing in infrastructure in developing countries. They’re more interested in the equity markets and other less risky areas. And our experience has been recently that there has been more talk, more rhetoric than actual resources from that side. On the other hand, China has been quite forthcoming. They have been able to address our concerns. There is a big misconception around the Belt & Road that China has this list of ready-made projects being offered to developing countries. From Pakistan’s point of view, it doesn’t work like that. We have approached the government of the People’s Republic of China with our own projects. If we take 10 projects to People’s Republic of China, we might be successful in getting funding for two. Another important aspect around dealing with the People’s Republic of China has been that they have been very accommodative on Belt & Road projects. We have seen examples of this in Malaysia, where they have accommodated projects, which were politically important for the previous government. Of course, then, there was a change of government and then there was a lot of political noise. But I don’t blame People’s Republic of China for being accommodating: if there is no political ownership or desire, those projects are not needed. China has been able to accommodate those governments, and this has at times backfired. But I don’t see there’s any other option to move forward on it. For us, when we take these projects to other investors, we don’t get a good response. We get a lot of talk. We get a lot of rhetoric. We get a lot of advice. But we don’t see any money. IFR ASIA: David, have you seen examples of how you can mitigate some of these risks – political and otherwise? DAVID LAM, KWM: From our perspective, we have seen that there are all sorts of risk in the Belt & Road contracts and there’s no legal means of eradicating the risks. The right thing to do is to allocate the right risk to the right parties. If it goes to the wrong parties, it just doesn’t work. We understand that in the contracts we have to think about the different parties. For example, if we are talking about politic