Navigator (1st Issue): From prospect to practice—Forging new opportunities for Hong Kong along the Belt and Road

Since the B&R initiative was proposed four years ago, people from different sectors in Hong Kong have gradually deepened their understanding of the initiative. It is an exceptional opportunity for Hong Kong to integrate its advantages – including a sound legal system and financial market, a leading integrated professional services platform, and the convergence of world-class talent – with B&R development and ensure it plays a full role serving as a “Super Engine” connecting with mainland China and countries along the B&R. The 19th National Congress of the CPC emphasized that facilitating the development of China’s real economy is becoming a key consideration for overseas investment1. EY predicts, high technology, advanced manufacturing, high-end consumer goods, environmental protection, life sciences and education will become investment hotspots. In the coming days, Hong Kong is expected to deepen cooperation with the regions along the B&R and foster new growth drivers to further enhance its role as an international financial, trade, shipping and information center. It is moving toward sustainable development against the backdrop of China’s economic transformation and upgrading, driven by the B&R initiative.

To better understand the opportunities and challenges along the B&R, EY launched the Navigator series this time. In our inaugural edition, we offered insights on how Hong Kong can better improve its advantages and excavate more development opportunities along the B&R. EY believes that Hong Kong can leverage its advantages in industry, finance, institutional environment, government support and talent and culture, in line with the five cooperation priorities to create a unique ecosystem that generates synergies with the B&R initiative. In this report, EY provides practical recommendations on how to achieve further development across these five areas in Hong Kong.

Overview of the Belt and Road

In 2013, Chinese President Xi Jinping proposed the building of the Silk Road Economic Belt and the 21st Century Maritime Silk Road. Since then, the B&R initiative has stepped into the international spotlight. Besides China, there are 65 countries or regions along the B&R, most of them are developing countries, with a combined population of 4.6 billion – nearly two-thirds of the world’s population. As both the total GDP and export volumes of these countries represent more than 30% of the global totals, they offer great potential for development2.

The Report on the Work of the Government, announced in March 2017, officially upgraded the Guangdong-Hong Kong-Macau Greater Bay Area from the conceptual planning stage to become a national strategy. The Chinese government also pledged to turn the Greater Bay Area into an important pillar of the B&R initiative. Meanwhile, the Hong Kong Special Administrative Region (HKSAR) government is taking action to improve connectivity with the B&R initiative. In September 2017, Hong Kong hosted the second Belt and Road Summit to discuss how Hong Kong could better integrate with the B&R initiative, with “From Vision to Action” as its theme and infrastructure investment as its focus. In October 2017, the HKSAR Chief Executive’s Policy Address highlighted that in the years ahead, Hong Kong would improve bilateral and multilateral relations with mainland China and overseas countries and participate in the B&R initiative in a comprehensive way, including adding more people to its B&R office and seeking to enter into general agreement on B&R development projects with the National Development and Reform Commission (NDRC) by the end of 2017. At the same time, the HKSAR government plans to develop a green finance program and take the lead in issuing green bonds. EY believes that the B&R initiative and the Guangdong-Hong Kong-Macau Greater Bay Area will generate greater (“1+1 > 2”) synergy effects and present historic opportunities for Hong Kong.

1. Industry

1.1 B&R intelligence industrial park

Setting up overseas economic cooperation zones and industrial parks is an important channel for Chinese companies to establish their global presence. These areas serve as valuable platforms for overseas investment and cooperation. EY suggests Hong Kong establish a B&R intelligence industrial park which plays a platform role to enhance Hong Kong’s connectivity with mainland China and B&R countries in projects matching, investment and cooperation, and talents exchange.

Figure 1: Design of B&R intelligence industrial park

1.2 Insurance services

Hong Kong can leverage its experience in risk and project management to provide insurance and reinsurance services for B&R projects and motivate mainland's companies to establish captive insurers in Hong Kong to manage business risks along the B&R.

Insurance and reinsurance services

Hong Kong is one of the key insurance centers in Asia. However, without fully leveraging its experience and advantages in its financial system, Hong Kong’s reinsurance business has been sluggish in recent years.

EY suggests that Hong Kong seize the opportunities presented by the B&R initiative to develop the reinsurance market and engineering insurance businesses, through a number of measures including:

  • Rolling out RMB-denominated reinsurance services and turning Hong Kong into an offshore RMB reinsurance center
  • Cutting the tax rate for reinsurance businesses for B&R-related projects to 5%, or developing a multi-tiered system based on risk ratings to allow Hong Kong to increase its competitiveness in and share of global reinsurance markets
  • The insurance industry in Hong Kong needs to expand its presence along the B&R by leveraging its extensive experience in engineering insurance and develop engineering insurance services for Chinese infrastructure companies
Policies on captive insurance companies

In recent years, Hong Kong has developed into a captive insurance center in the Asia Pacific region and targets to become a global leader in captive insurance by 202011. EY suggests the insurance industry in Hong Kong leverage its advantages in captive insurance, in the following ways:

  • Maintaining its emphasis on the importance of the policies that allow mainland Chinese companies to manage risks and encouraging more companies to follow the examples of CNOOC and Sinopec in setting up captives in Hong Kong
  • Considering cutting the preferential tax rate further to 5% for authorized captive insurer that provide captive insurance services in B&R countries
  • Allowing authorized captive insurer to qualify for tax deductions in respect of bad debts provisions, so as to encourage mainland Chinese companies to establish captive insurance companies in Hong Kong

1.3 Shipping-related services

EY suggests that Hong Kong make good use of its marine insurance experience and strong network to provide relevant shipping companies with high quality services and establish its pivotal role in the offshore shipping industry to help facilitate B&R projects. Furthermore, as Hong Kong does not have its own shipping exchange, it could consider setting up or acquiring a shipping exchange, and developing an internationally-recognized freight index to gain more bargaining power in shipping pricing.

1.4 Infrastructure business

Public-Private Partnership (PPP)

EY suggests that the HKSAR government transform its experience into benefits by setting up a B&R PPP project team that will be responsible for program negotiation and implementation, and for facilitating cooperation among public and private capital from mainland China and B&R countries.

Project evaluation service for infrastructure construction

EY suggests Hong Kong make good use of its professional advantages in quality monitoring, risk assessment and environmental consulting to encourage, as well as support, professional construction institutions to participate in B&R infrastructure programs. This participation could include areas such as project proposals and feasibility assessment; design, cost and final accounts management; acceptance and evaluation; environmental consultation and assessment; and developing a combined consulting system.

Figure 2: EY Infrastructure Services Framework

2. Finance

2.1 B&R fundraising and financing platform

Establish a special B&R Board for listing and fundraising

EY suggests that Hong Kong could consider setting up a special B&R Board on SEHK to attract more companies from the mainland and B&R countries to seek a listing in Hong Kong. Based on the principle of "less restrictions and stronger regulation", special listing requirements could be formulated, taking into consideration the actual status and income distribution cycle of the B&R projects to promote Hong Kong’s development into an international center for infrastructure project IPOs, such as:

  • Easing the limitation on the registration location of listing applicants for companies related to the initiative (the SEHK now only grants listing approval to companies from a small number of countries and regions – mainly developed countries)
  • Formulating a special set of review standards for infrastructure project companies
  • Creating a special review team or assigning special personnel for infrastructure projects to facilitate approval of listing applications; opening a fasttrack channel for any listing applicants under the initiative that meet the requirements, to reduce the waiting time involved in going public
  • Setting up an independent counseling institution for any companies and projects from B&R countries, to provide special support for companies on the waiting list that are not familiar with the Laws of Hong Kong and listing procedures.
Bond financing platform

Hong Kong has highly dynamic bond market. In the future, the implementation of the B&R initiative will bring about considerable financing opportunities to support the ongoing expansion of the Hong Kong debt market. To seize the opportunity, Hong Kong could issue infrastructure bonds based on its financial services strengths to fund B&R projects, as well as to drive the local bond market. With the establishment of the B&R Board, Hong Kong could further develop into an international center of infrastructure fundraising and financing.

Corporate treasury centers (CTCs)

As more global trading is conducted in RMB, Hong Kong is becoming the ideal destination for the corporate treasury centers (CTCs) of multinationals. For Chinese companies expanding businesses globally or along the B&R, Hong Kong is also one of the best choices for CTCs. EY recommends that Hong Kong attract enterprises to set up CTCs here via tax benefits, and customize CTCs for the B&R initiative.

2.2 Development of green finance in Hong Kong

Formulation of green credit guidelines

EY suggests that the HKSAR government, given Hong Kong’s status as an international financial hub and talent pool, and with its mature testing and authentication system, should work with related parties to formulate green credit guidelines so that B&R projects can receive better financing:

  • Taking the lead in creating a green credit statistics system, in line with international standards, to better monitor and evaluate the implementation of green credit
  • Leveraging Hong Kong’s financial strengths to explore measures to support the development of green credit, such as re-lending and building a professional guarantee mechanism
  • Promoting the asset securitization of green credit, including standardizing the selection of underlying assets for green credit, exploring efficient and low-cost ways to register the change of hypothecation and pledge, increasing the liquidity of the green credit securitization market, and enhancing the management of information disclosure

Development of green bond in Hong Kong

Hong Kong is making an active effort to issue green bonds. The HKSAR government will take the lead in issuing green bonds in the next fiscal year as part of its endeavor to develop green finance, in the hope of attracting investors from the mainland, B&R countries and other foreign regions to Hong Kong’s capital market to raise funds for green projects. EY suggests Hong Kong create a financing platform for green bonds to attract investment from local and overseas funds, including:

  • Establishing an advisory committee on green finance or a similar institution to define long-term focus and provide assistance
  • Designing a "green finance labeling scheme" for green financial programs and securities, and evaluating whether the requirements of green finance have been met, so as to attract new issuers and investors to Hong Kong
  • Providing legal services for Hong Kong-based funds that can invest in the mainland green bonds market to assist foreign investors in accessing investment opportunities in this market
  • Leveraging Hong Kong’s advantages in traditional financial businesses and product development to develop green finance products, such as a green bond index and green funds

2.3 Asset management platform

Hong Kong has recently launched a series of policies to deepen its financial cooperation with the mainland, such as the Shanghai-Hong Kong Stock Connect, the Shenzhen-Hong Kong Stock Connect, the Mainland-Hong Kong Mutual Recognition of Funds (MRF), and the Bond Connect. EY suggests that Hong Kong should seize the opportunity to reinforce its advantage as an international asset management platform by matching projects and capital and promoting the connectivity of stock and commodity markets for B&R countries, in turn consolidating Hong Kong’s position as an international financial hub.

2.4 Biggest global offshore RMB center

The B&R initiative further promotes the use of RMB in international deals and increases the need for RMB products and services. As the central government continues to drive RMB internationalization and open more capital programs, Hong Kong will gain ongoing momentum for offshore RMB business. EY suggests that Hong Kong take full advantage of its position as the offshore RMB center to further facilitate the B&R projects:

  • Enhance cooperation with B&R countries and promote RMB internationalization by improving RMB’s position as the settlement currency for regional trade through industrial cooperation and commercial intercourse. Hong Kong can also provide RMB financing to initiative infrastructure projects through syndicated loan and bond issuance, and facilitate RMB capital cycling and cross-border circulation through its offshore RMB market
  • Streamline the settlement procedure for crossborder RMB business and step up RMB liquidity in the local market by simplifying RMB flows into and out of the market, as well as issuance, sales and settlement procedures for RMB bonds so that initiative project can raise funds in Hong Kong
  • Facilitate RMB financing in Hong Kong for B&R countries by increasing RMB-denominated financial instruments such as equities, bonds, syndicated loans and financial derivatives to strengthen Hong Kong's role as the offshore RMB center
  • Continue to develop derivative instruments and advance its foreign exchange market to safeguard RMB investment. With RMB internationalization, Hong Kong is expected to become the bellwether for offshore RMB deals. At the same time, investors and companies need more effective ways to manage foreign exchange and interest rate risks as various investment products under the initiative are developed, stimulating the development of, and demand for, related derivatives

3. Institutional environment

3.1 Improving the finance and tax environment

In the future, the HKSAR government can create a relaxed business environment by reducing the tax burden for B&R enterprises and improving the local finance and tax environment, thereby attracting more relevant domestic and overseas enterprises to do business in Hong Kong. EY believes the following aspects could be taken into consideration:

  • The HKSAR government could actively conduct negotiations with B&R countries that have not yet signed Comprehensive Double Taxation Agreements (CDTAs) with Hong Kong, to encourage and support the investment and efforts made by Hong Kong’s enterprises and individuals in these areas. Meanwhile, such agreements can also support Hong Kong as an investment platform that attracts domestic and overseas enterprises running businesses along the B&R
  • The IRD should re-examine the existing approval procedures and standards for the application of certificate of tax residence, and simplify the application procedure lodged by Hong Kong tax residents pursuant to CDTAs entered into between Hong Kong and B&R countries, to help these enterprises enjoy benefits under related CDTAs in contracting countries
  • Further enhance the existing tax incentives in relation to professional reinsurers, authorized captive insurers and CTCs, to attract more such enterprises to set up businesses in Hong Kong
  • Consider introducing regional headquarters tax incentives (such as a preferential tax rate or discounted tax loss), thereby attracting more enterprises to set up regional headquarters in Hong Kong and further leveraging Hong Kong’s advantageous role and position as an international financial and trade center
  • The HKSAR government could consider allowing regional headquarters with CTC functions qualify for CTC tax incentives (such benefits are currently limited to Special Purpose Vehicles dedicated solely to carry out specified corporate treasury activities, unless the safe harbor rules are satisfied), as long as they play the role of CTCs. In addition, such regional headquarters companies would be granted the certificate of Hong Kong resident issued by the IRD upon application, which would facilitate them applying for preferential treatment CDTAs in contracting countries that have signed CDTAs with Hong Kong, thereby attracting more enterprises to set up regional headquarters here
  • Expand tax incentives related to the financial sector, including extending the tax benefits of exempting offshore funds from profits tax to onshore funds that invest in specific B&R projects, and exempting the interest and trading profits of bonds issued for specific B&R projects from profits tax, in order to enhance the financing role of Hong Kong for the B&R
  • Provide tax exemption in respect of royalties licensed for use in B&R jurisdictions, if the underlying intellectual property is created or developed by a taxpayer carrying on business in Hong Kong, in order to assist Hong Kong enterprises in expanding into B&R markets
  • Relax the scope of section 39E of the Inland Revenue Ordinance by granting tax depreciation allowances in respect of plant and machinery used in B&R jurisdictions, thereby encouraging and supporting Hong Kong enterprises in the area to invest in infrastructure projects or production, manufacturing and processing, and other industrial activities

3.2 Leveraging Hong Kong’s advantages as a legal hub

The independence and integrity of its judiciary has made Hong Kong a hub for regional dispute resolution services. Hong Kong has a sound court arbitration system. It is familiar with Chinese and Western legal systems, and has maintained close ties with mainland China. This has made it a trustworthy legal services provider for B&R projects, especially when it comes to aligning local laws with international and universal laws. EY suggests Hong Kong build on its advantageous role as an international legal hub in the following areas to maximize its value to B&R projects:

  • Establish a B&R legal services center, taking advantage of the extensive experience that Hong Kong’s legal community has on cross-border investment law and due diligence, as well as the large number of high-quality local and foreign lawyers able to participate in the legal due diligence on national investment affairs in B&R countries
  • Leverage the advantages of Hong Kong’s legal environment and common law, to provide professional legal and dispute resolution services
  • Encourage the legal community in Hong Kong to set up a B&R legal database in the short term, with the goal of integrating the different laws along the B&R to develop a set of international legal standards dedicated to B&R infrastructure development and finance, and even to standardize the format of legal files
  • Set up a “one-stop” HKSAR government building for dispute resolution services, which houses a B&R court to handle disputes arising from B&R infrastructure projects

3.3 Leveraging Hong Kong’s rigorous regulatory framework

In terms of financial regulation, Hong Kong has a rigorous regulatory framework to protect investors and maintain market quality. Taking the SFC as an example, its first priority is to enhance the stability and competitiveness of Hong Kong as a financial market. The key point is that the SFC recognizes that the regulatory system is an important cornerstone of Hong Kong being seen as an outstanding international financial center.

EY suggests Hong Kong improve its finance ordinance, regulations and regulatory framework, not only facilitating enterprises’ financing activities through bond issue but supporting enterprises to enhance risk control and expand businesses and investments along the B&R.

4. Government support

4.1 Government coordination

The HKSAR government is taking comprehensive steps to coordinate and deploy resources to facilitate the B&R initiative and increase Hong Kong’s participation. EY believes it is vital for the HKSAR government to delegate a department to coordinate B&R works overall. Such a move would not only enhance the coordination of B&R promotion, but also increase the scope and strength of policy implementation, making the HKSAR government an initial participant and rule-maker in the B&R development, giving it a stronger voice, and entitling it to greater benefits.

4.2 Hong Kong’s strengths and value proposition

By helping the public understand Hong Kong’s expertise in financial, legal and other areas, and a value proposition that includes freedom, the rule of law and inclusiveness, the city can highlight its key role in promoting connectivity among B&R countries. To promote Hong Kong’s strengths and value proposition, EY suggests the HKSAR government take the following actions:

  • Ensuring financial regulators can focus on promoting the value proposition of Hong Kong as an international financial center and major capital market
  • Promoting the laws of Hong Kong as applicable law and highlight Hong Kong’s strengths as a dispute resolution center for the Asia-Pacific region and B&R countries
  • Promoting Hong Kong's sound legal system, simple tax system, efficient regulatory system, and superior business environment

4.3 Branding and communications

EY has noticed that different groups, including governmental agencies, non-governmental institutions and academic organizations, are currently doing things in their own ways when it comes to participating the B&R initiative. The uniformity and coordination of these actions therefore need to be enhanced. EY suggests that Hong Kong could:

  • Set up a department for promotion and coordination, focused on coordinating major promotional activities and communication strategies in relation to Hong Kong’s role under the B&R initiative
  • Underline its strengths in participating the B&R initiative, focusing on successful cases where Hong Kong benefited from the initiative
  • Organize regular B&R cultural exchange events
  • Strengthen cooperation with the mainland and B&R countries and actively organize international conferences, seminars and forums

5. Talent and culture

5.1 Talent attraction

Hong Kong can further advance its talent mobility and talent pool programs in the future, to further highlight its inclusive and international status, in the following ways:

5.2 Diversified cultural industries

As an interchange for cultural exchanges between China and western countries, for centuries Hong Kong has had an inherent advantage in developing diversified cultural industries. EY suggests Hong Kong grasp the B&R opportunities to actively develop diversified cultural industries and become a place of “cultural integration” along the B&R in the following ways:

  • With an inclusive and diverse cultural background, Hong Kong, where the East meets the West, is an ideal buffer zone between the mainland and other B&R countries. It can reconcile any misunderstandings caused by insufficient communication or cultural differences
  • Hong Kong can serve as a multi-layered cultural exchange platform, promoting inclusive development between different cultures. Hong Kong can look into tourism projects in those countries. It can also diversify the content and form of cultural exchanges with B&R countries by holding cultural exchange activities such as arts festivals, film weeks and tourism weeks.

1 Source: Xinhuanet

2 Source: Big Data Report of Trade Cooperation Under the Belt and Road Initiative 2017, State Information Center of China

3 Source: Belt and Road Portal

4 Source: Ministry of Commerce of China, EY analysis

5 Source: Ministry of Commerce of China

6 Source: National Bureau of Statistics of China, EY analysis

7 Source: AIIB, Silk Road Fund, EY analysis

8 Source: State Administration of Foreign Exchange

9 Source: people.cn

10 Note: Under the PPP (Public-Private Partnership) model, the government, by way of franchise authorization, fair pricing and fiscal subsidies, cooperates with social capital to invest and operate urban infrastructures for the public good. The PPP model is characterized by both benefit- and risk-sharing. It can improve the quality of public goods and services and increase efficiency by taking full advantage of both the public and the private sectors.

11 Source: Hong Kong Financial Services Development Council

12 Source: Hong Kong Trade Development Council

13 Source: Hong Kong Monetary Authority

14 Source: Hong Kong Securities and Futures Commission

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