Updates from the New Silk Road
The Belt and Road Initiative is a major development strategy launched by the Chinese government in September 2013 to sponsor and promote economic co-operation among countries along the proposed Belt and Road routes. With our focus on built environment and infrastructure development, we aim to keep you updated on the latest developments.
China confirms over 130 Belt and Road focused transport agreements signed to date
According to the Chinese Ministry of Commerce, over 130 bilateral and regional transport agreements with countries along the Belt and Road routes have been signed by China.
With transportation connectivity being a key principle of the Belt and Road Initiative, the agreements signed over the course of the past three years cover postal services, rail, road, sea and air transportation.
Most recently in a move to improve rail infrastructure and drive economic development and trade cooperation along the Belt and Road, the respective railway authorities of China, Belarus, Germany, Kazakhstan, Mongolia, Poland and Russia have jointly signed an agreement to improve cooperation on China-Europe freight rail services.
Hong Kong – doing its part in the Belt and Road initiative for Aircraft Leasing Activities
Under the impetus of the Belt and Road initiative, the Hong Kong Government has recently announced it plans to introduce legislation to offer tax concessions so as to attract companies to develop its aircraft leasing business in Hong Kong. A Bill was publicly released on 10 March 2017 and is currently being tabled before the Legislative Council of HK for consideration. The proposed changes are aimed to improve the competitiveness of Hong Kong for offshore aircraft leasing activities. A new standalone tax regime specific for Hong Kong’s aircraft financing and leasing industry is being proposed which contemplates that for “qualifying aircraft lessors” and “qualifying aircraft leasing managers”:
- the tax rate on the qualifying profits of qualifying aircraft lessors and qualifying aircraft leasing managers will be 50% of the prevailing profits tax rate for corporations (i.e. 16.5% (being the current CIT rate) x 50% = 8.25%); and
- the taxable amount of lease payments derived from leasing of an aircraft to a non-Hong Kong aircraft operator by a qualifying aircraft lessor will be equal to 20% of the tax base, i.e. gross lease payments less deductible expenses (excluding tax depreciation).
The proposed changes are expected to pave the way for Hong Kong to become a competitive alternative to existing aircraft leasing hubs.
China invests in USD4 billion Nairobi – Mobasa railway
China’s surge of investment into eastern Africa continues apace. A notable project is the 300 mile long railway which is intended to link Nairobi to the port of Mombasa on Kenya’s coast. The line is expected to be operational from June 2017.
The State-owned China Road and Bridge Corporation is constructing the link and will operate the railway for its initial 5 years.
The project is primarily financed by China’s Eximbank in the amount of US$3.6bn, split between a US$2 billion 15-year loan with the remaining US$1.6 billion provided on concessional terms, repayable over 20 years,
The investment is one of China’s most significant in the region, following the opening of a US$4.2 billion rail line linking Djibouti to Addis Ababa, Ethiopia, a distance of 470 miles.
The Nairobi-Mombasa line is to form part of a link which is designed to reach Kampala, Uganda and, later, forming a key infrastructure connection in East Africa.
The investment is indicative of the increasing prominence of China as a trading and investment partner. Chinese imports into Kenya rose to almost US$5 billion in 2016 – more than 5 times that of US imports.
While there are concerns that the project is insufficiently transparent and may not provide the anticipated economic benefits to Kenya or the region, the project remains significant and likely a precursor to the continued growth of Chinese investment and involvement in the country.
Belts and Braces Acquisitions – the Global Growth of Chinese Aviation Companies
There has also been an evident expansion of Chinese corporate entities developing their global network and control of airlines and affiliate companies providing aviation related services. Most obvious is the expansion and recent corporate acquisitions undertaken by the HNA Group. Recent acquisitions by the HNA Group include the Irish aircraft leasing company Avolon, and Avolon’s subsequent acquisition of US aircraft leasing company CIT; a controlling shareholding in SR Technics (an aircraft maintenance and repair organisation (“MRO”)) and material shareholding acquisitions in various international airlines including TAP Air Portugal, Azul Brazilian Airlines and Virgin Australia.
Under the Belt and Road initiative, the global expansion of Chinese aviation enterprises is leading to strategic global cooperation of aviation related companies, reshaping and sometimes “disrupting” traditional methods and techniques applied to the global aviation industry.
Growth in middle class income earners along the Belt and Road corresponds to a growing demand for more Aircraft
The growth figures for aircraft passenger miles used by the major aircraft manufacturers all show an almost never-ending upward curve. And that curve is largely sustained by projections for growth in China, the Asia region and more broadly the regions covered by the Belt and Road initiative. These figures are then used to determined likely aircraft demand over the next 10 to 20 years. Airbus no longer uses GDP figures to project demand for aircraft and the growth in passenger miles – they find that the relative growth in disposable middle-class incomes is a much more accurate base for these projections.
The resulting picture supports the upward curve and indicates massive sustained growth in aircraft movements – internationally and domestically. The consequence of these movements is of course an increased pressure on the physical ground infrastructure, on air traffic control capacity and air space more generally. While it is possible that the more major cities in the region have an ability to absorb much of the additional traffic in the short term – or already have authorised airport expansion (such as in Beijing) – there are many smaller towns and cities that will need to make significant investments in new infrastructure.
Booming holiday traffic will look to more and more adventure destinations and this in turn will require investment in airport structures if regions are to take full advantage. As the digital age moves us increasingly to require our purchases to be delivered to our doors so it increases the demand for air freight. The growth in the numbers of people in the Belt & Road regions with disposable incomes which allow them to fly once or twice a year and to pay for fast air delivery of their purchases will in turn fuel the need for airport infrastructure and access to air space.
Travelling along the Belt and Road - Expansion of International Routes
In addition to the demand for more aircraft, airport related infrastructure and services, and growth of aircraft passenger and cargo capacity, Chinese airlines are further developing their expansion of international air routes. Evidence of such expansion are recent bilateral intergovernmental air transport agreements entered into between the Chinese and Australian Governments (announced in December 2016) whereby the new bilateral arrangements allow Chinese and Australian airlines to have unrestricted international access into each other’s markets under an “open aviation market”.
Another, is the recent modification to the bilateral air transport agreements between the Chinese and the UK Government (announced in October 2016) which increased the number of weekly flights between the two countries from 80 to 200. These developments evidently echo the Belt and Road motto of “connectivity and cooperation” between intergovernmental departments, and the anticipated flow of tourism, transport and trade between these countries.
Homegrown – the COMAC C919
Is that an Airbus? is that a Boeing ? no it's a COMAC!
On the 5th of May 2017, Commercial Aircraft Corporation of China, Ltd. (“COMAC”), a Chinese state-owned aerospace manufacturer successfully completed the first maiden voyage of the COMAC C919 - the first passenger built commercial jet aircraft manufactured in China. The C919 is a twin engine aircraft designed to compete head on with other narrow body aircraft in its market, in particular, respectively Boeing’s 737 and Airbus’ A320 family aircraft.
The steady and consistent growth of China’s middle class, the growing choice of travel destinations along the “Belt and Road” and the increased consumer demand for cost and time efficient travel, creates and opens opportunities for new players like COMAC to enter markets, traditionally dominated by western manufacturer’s.
The forecast for air travel to, from and within China is estimated to supersede the US as the world’s largest aviation market by 2023. Coupled with China’s large domestic consumer base, there is much opportunity for COMAC to take the C919 to become another household consumer brand in the space of Aircraft manufacturing.