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Belt and Road Insights - June 2016

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Summary: Welcome to BLP’s ‘OBOR Insights’ June 2016 issue – a selection of interesting Belt and Road news items, distilled into a monthly ‘speed read’.

Updates from the New Silk Road

China’s development strategy aims to increase economic cooperation across Asia, Africa and Europe. With offices spanning key locations in Europe, the Middle East and Asia and a core focus on the built environment and infrastructure development, at BLP we are excited by OBOR’s promise.

1.Hong Kong’s Belt and Road Summit

"The Belt and Road Summit” was held in Hong Kong on 18 May 2016. The Summit provided a platform for policy makers to interact with key participants in the Belt and Road initiative bringing together a broad range of professionals working in the infrastructure industry.

A key policy address was given by his excellency Mr. Zhang Dejiang, Chairman of the Standing Committee of the National People’s Republic of China who outlined 'Hong Kong's Four Unique Advantages' as a hub for Belt and Road projects including its location as a gateway to China's mainland; its well developed professional services sector; and its position as the world's freest economy maintaining close economic and trade relations with countries across the globe encouraging cultural exchange between the 'East' and the 'West'.  

In an important indication of the Central Government's views on Hong Kong's role in the Belt and Road initiative Mr Zhang explained how the 'Four Unique Advantages' provide 'Four Opportunities' for Hong Kong:  

  1. The provision of professional services to countries along the Belt and Road. In particular, as a Centre for international and legal dispute resolution for Belt and Road projects as well as for logistics, transport services, shipping, design, consultancy and accounting.
  2. Facilitating capital flows and promoting RMB internationalisation which will encourage mainland companies to use Hong Kong for assistance with investment, financing, asset management and other financial services for Belt and Road related infrastructure projects.
  3. Hong Kong should continue to deepen its role as a “gateway” to China by intensifying its cooperation with mainland organisations and facilitating commerce with foreign businesses involved in the development of the Belt and Road.
  4. Promoting greater cultural exchange by acting as a cultural and economic bridge to support cooperation between countries along the Belt and Road. 

Zhang’s speech is an important indication of the role that the PRC sees Hong Kong playing in the Belt and Road initiative and will encourage Hong Kong business, particularly its professional service providers, to carve a role for themselves as the “connectors” and professional service providers facilitating and advising on the efficient and effective roll out of the Belt and Road strategy. 

2. S$30bn funding ready for Singaporean and Chinese companies in Belt and Road projects 

Pursuant to China Construction Bank’s (‘CCB’) first-ever Memorandum of Undertaking signed with International Enterprise Singapore (‘IE’), CCB will give S$30bn of financial support to Singaporean and Chinese companies investing in Belt and Road projects around Singapore.

This partnership will not only provide the necessary funding but also opportunities for Singaporean companies to partner with Chinese enterprises on projects.

IE and CCB have already facilitated a group of more than 30 Singaporean and Chinese companies to explore collaboration in sectors such as infrastructure and connectivity and info-communications and technology.

CCB will also explore the set-up of a centre in Singapore to provide project financing and related services to Belt and Road projects.

As with other recent developments following the announcement of the Belt and Road initiative, this is yet another example of increased regional business cooperation in South East Asia and China’s overseas direct investments in the infrastructure market. 

3. AIIB appoints Asian Development Bank’s China Director to head its Compliance, Effectiveness and Integrity Unit

The Asian Infrastructure Investment Bank (AIIB) has appointed the Country Director for the People’s Republic of China at the Asian Development Bank (ADB), Mr Hamid Sharif, as its first Director General of its Compliance, Effectiveness and Integrity (CEI) Unit.

The CEI Unit monitors and evaluates the AIIB’s portfolio, ensures policy compliance and oversees grievance procedures, reporting directly to the AIIB’s Board of Directors.

AIIB President Jin Liquin is reported to have welcomed Mr Sharif’s appointment, stating that “the CEI Unit plays a fundamental role in the Bank's governance and Mr. Sharif brings with him more than two decades of rich experience in the public and private sectors.”

4.Rail in Iran – supporting a Eurasian trade hub? 

The updating and international expansion of Iran’s 85-year old national railway network has been identified as a strategic priority for President Hassan Rouhani’s government following last year’s landmark nuclear agreement. The Tehran government has signed various cooperation agreements in recent months, perhaps most notably with Italy in February 2016 to develop plans for a high-speed railway and upgrading Iran’s rolling stock.

Chinese President Xi Jinping’s visit to Iran in early 2016 resulted in an accord to increase trade between China and Iran to US$600bn over the next decade. Meanwhile regional rail traffic has been dramatically increasing through Iran in the last year, with the current network extending to Turkmenistan to the east and Turkey to the west, and plans being in place to extend further into Iraq, Afghanistan, Azerbaijan and Pakistan.

However, the re-establishment and modernisation of the rail link with China is the main goal for the Iranian rail authority – freight trains have recently recommenced travelling along the old Silk Road to Tehran from China’s eastern Zhejiang province, making the journey in 14 days (as opposed to 45 days by sea) and the authorities see the principal benefits of the Belt and Road initiative as supporting the increase in Sino-Iran trade as well as regenerating local economies along the route. 

5. CITIC Telecom CPC to acquire Regional Operator

CITIC Telecom International CPC Limited (“CITIC Telecom CPC”), one of the largest commercial organisations in China recently announced its acquisition of Linx Telecommunications B.V. (“Linx”) which is expected to complete in the second half of 2016.

The network services provided by Linx cover a high-growth potential market which includes Russia, Kazakhstan and the "Stan" region, the Baltic Sea and Eastern Europe. Since both companies have a similar customer base, the acquired assets will enable CITIC Telecom CPC to readily strengthen its development and strategy for markets in Central Asia and Eastern Europe. This acquisition will also further reinforce CITIC Telecom CPC's capabilities in managed networking services, cloud computing and other managed value-added data services.

6. CPEC expressway project breaks ground

In a key milestone for the China-Pakistan Economic Corridor, the groundbreaking ceremony for a 392-km-long section of an expressway linking the Pakistani cities of Peshawar and Karachi took place on 6 May 2016.

The expressway travels from the southern city of Karachi, Pakistan’s largest urban centre, to Peshawar a town located on Pakistan’s north west border. Along the way, it passes through Lahore, another key Pakistani city.

The whole project is valued at US$2.9bn.

The section of the works, which runs from Sukkur to Multan is to be performed by China State Construction Engineering Corp. 

7. Hong Kong Infrastructure Financing Facilitation Office (IFFO) to launch in July

The Hong Kong Monetary Authority (HKMA) will establish the Hong Kong Infrastructure Financing Facilitation Office (IFFO) from July this year, providing a platform to help facilitate the financing of infrastructure projects under the Belt and Road initiative.

The platform will bring together key stakeholders, including fund providers, project developers and countries along the Belt and Road and be operated by Hong Kong’s central bank.

The establishment of the IFFO will help promote Hong Kong as a centre for infrastructure deals. Jin Qi, chair of the Silk Road Fund has said that the IFFO will “turn Hong Kong into a main financing and capital management platform. This office will converge a lot of good information, ideas and projects for investment and cooperation”.

Investors said to be considering membership include the Asian Development Bank.

8. Strengthening commercial ties between China, Hong Kong and Russia - HKIAC enters into a MOU with the Russian Arbitration Association

The Hong Kong International Arbitration Centre (HKIAC) has entered into a Memorandum of Understanding with the Russian Arbitration Association (RAA). The signing ceremony took place on 18 May 2016 at the 2016 St Petersburg International Legal Forum.

Due to the growing presence of Russian companies in Asia, as well as Chinese companies in Russia, Vladimir Khvalei, RAA’s Chairman, sees great potential with the agreement to cooperate with each other. Teresa Cheng SC, Chairperson of HKIAC, believes that “the MOU marks an important milestone of strengthening ties between Hong Kong and Russia”.

Russian commercial activities mirror the general shift in the economic balance from West to East. Finance and securities transactions are seeing similar growth, with Russian securities now permitted to list on the Hong Kong Stock Exchange. Moreover, Hong Kong recently signed an agreement for the avoidance of double taxation, which aims at lowering tax rates on cross-border transactions and provides incentives for companies in Russia to do business or invest in Hong Kong or vice-versa.

In addition, HKIAC has also implemented a number of initiatives to appeal to its Russian users, for example, expanding its pool of Russian-qualified arbitrators, translating its 2013 Administered Arbitration Rules into Russian and hiring Russian-speaking staff members.

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