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FinTech in Belt and Road – the UK FinTech Bridge

In the second round of our interviews at the Belt and Road Summit 2019 in Hong Kong, Blockchain.News gained further insights from European representatives Germany, as well as soon to be European exiters—the UK to learn more about their countries’ latest developments related to the Belt and Road Initiative.

Belt and Road Initiative—UKAs the UK moves slowly toward some kind of exit from the European Union some Brexiteers are looking at China’s Belt and Road Initiative as a way out of threatened isolation

The UK’s Brexit has thrown parts of the region into macro-economic uncertainty. It has also made many observers question what role the UK could have in China’s Belt and Road Initiative. It is with the heartland of industrial Europe that China is intent on connecting, and unless China is interested in Britain’s ports, it’s difficult to see how Beijing can regard the UK as a key link in the Belt and Road.

Frances Moffett-Kouadio is the Director of Trade & Investment at the Department for International Trade (DIT) in the UK and believes opportunities for the UK are abundant within the BRI. She said, “We see a lot of potential for UK companies, primarily because of our expertise in major infrastructure projects globally. In Hong Kong, we’re leveraging the large number of UK companies already headquartered here to mobilize and contribute to projects on the Belt and Road. To do this, we are collaborating with our colleagues in other Belt and Road countries, such as Cambodia or the Philippines, and bringing them into Hong Kong to support and connect with all of the UK companies who are already here doing business on projects like the third-runway or the MTR expansion.”

One relationship of note is between the DIT and the Asia Infrastructure Investment Bank (AIIB). Moffett-Kouadio highlighted, “We have a team of colleagues focused entirely on the BRI based in our embassy in Beijing and they have a very close relationship with the AIIB. The UK was the first western nation to come out in support of the AIIB and through the maintenance of that relationship we can mutually support each other on projects in the Belt and Road.” She added, “Another great mechanism we have to support the Belt and Road infrastructure is UK Export Finance. We have large amounts of government funding available to companies and only 20 percent of their projects must be British to qualify for the export finance.”

Hong Kong to the UK— The FinTech Bridge The City of London is a major financial center and has been very proactive in the development of FinTech—an area in which Hong Kong has been lagging when compared to another developed Asian cities. Moffett-Kouadio said, “We have been very fortunate in the UK, we have our own FinTech awards that we launched in Hong Kong and China and we are also very innovative—if you look at London, many of the big names like Google and BT have bought in and have set up their own hubs to encourage new innovative companies and SMEs to start up.” She concludes, “So our goal is to form a FinTech bridge to make sure we have two-way traffic of UK companies brining innovations to Asia but also Asian companies exporting their own innovations to the UK and Europe.”

On Brexit and the macroeconomic uncertainty of the US-China trade war, Moffett-Kouadio commented, “The results of the Brexit referendum has made countries look beyond Europe into new markets, such as Belt and Road countries and of course, Hong Kong. For example, trade with Hong Kong and China has increased from the UK, a third of all of our trade with China comes from Hong Kong, which demonstrates the importance of Hong Kong as a hub for the region. I think every cloud has a silver lining—companies are pragmatic, and they will move their business where it benefits them, and the DIT will help them do that.”

Image via Shutterstock

Belt and Road Initiative – Hong Kong the Gateway for RMB Internationalization

The Belt and Road Initiative (BRI) is a transcontinental long-term policy and investment program which aims at infrastructure development and acceleration of the economic integration of countries along the route of the historic Silk Road.

BRI was unveiled in 2013 by China’s President Xi Jinping and, according to the Belt and Road Portal, the massive project will encompass 60 countries, that together represent more than a third of the world`s GDP and two-thirds of the world`s population.

According to the official outline, BRI aims to “promote the connectivity of Asian, European and African continents and their adjacent seas, establish and strengthen partnerships among the countries along the Belt and Road, set up all-dimensional, multi-tiered and composite connectivity networks, and realize diversified, independent, balanced and sustainable development in these countries.”

Many analysts have come to view BRI as a diplomatic offensive with geopolitical motives. However, the initiative is primarily driven by China’s pressing need to transform its national economy through further integration with the outside world.

“FinTech, especially blockchain will make a significant impact on the global monetary system. With the recent uncertainties of China-US trade war and the emerging role of FinTech in transforming the global monetary system, the HKSAR government and the Hong Kong Trade Development Council (HKTDC) hosted the 4th Belt and Road Summit in Hong Kong.”Kun Hu, CEO of Blockchain.News

In recent years, much has been said and written about China’s flagship Initiative, and the uncertainties that surround it—What are the implications of BRI projects for local and regional economies, societies and the environment? What are the specific financial risks of BRI projects? How much will the BRI reshape the global trade system and potentially the geopolitical order? In this article, we hope to shed more light on the ever-expanding influence of China’s initiative and the role Hong Kong will play as its major offshore settlement hub.

China’s Expanding Influence

China’s stellar rise to become the world’s 2nd greatest economic power, especially after joining WTO in 2001, demonstrates how it has benefited from globalization and free trade. BRI appears to be China’s continued globalization effort interwoven with its quest for structural reform of the economy.

The BRI combines land-based ‘belt’ projects, such as roads, bridge, rail links and pipelines, in six economic corridors with sea-based ‘road’ projects such as ports. It spreads over China’s nearest neighbors as well as countries in South Asia, the Middle East, Africa and Europe.

Significant boost on China’s economic and political influenceThe BRI supports a diverse array of initiatives that enhance connectivity throughout Eurasia—effectively bolstering development throughout the region and beyond. The initiative also serves to significantly strengthen China’s economic and political interests.

The BRI will expand China’s economic and political influence throughout the region. China has explicitly acknowledged its potential gains in their official outline— such as the expansion of its export markets, the internationalization of the Renminbi (RMB), and the reduction of trade frictions like tariffs and transport costs.

Developing and connecting hard infrastructure with neighboring countries will help reduce transport times and costs. Establishing soft infrastructure with partner countries will allow for a broader range of goods to be traded with fewer regulatory hurdles and a relaxation of protectionisms. Raising capital for these infrastructure projects by issuing bonds in RMB will encourage its use in international financial centers. China will also boost growth in its lower-income western provinces by building overland economic connectivity with Central Asia.According to Chinapower, many of the potential benefits of BRI are less publicly articulated. For instance, some of China’s State Owned Enterprises (SOE) – such as steel, cement and construction companies – have found themselves at overcapacity after racing to expand factories and hire workers to support the once booming domestic economy. SOEs are now struggling to find productive uses for their surplus of resources and has left China with a large reserve of savings that up until now has not been invested properly. Investing the surplus in large-scale infrastructure throughout the Belt and Road projects enables China to export its excess savings and create work for its SOEs.As Chinese manufacturing shifts to low-cost economies it will have a positive effect on their investment inflows and help these nations integrate into the global value chain. Pakistan, Bangladesh, Malaysia and the Philippines are especially likely to make gains with increases in investment, trade, tourism and overall accelerated development. The large-scale physical infrastructure investment should deliver faster overall economic growth and could potentially fast-track BRI countries towards digitization.

Debt Concerns Raised

Since late 2013, Beijing has been pouring Chinese money into Belt & Road countries, much of it in the form of large-scale infrastructure projects and loans to governments that would otherwise struggle to pay for these types of projects.

China’s central bank chief, Yi Gang, revealed that Chinese banks have so far loaned some $440 billion for Belt and Road projects. The total value of all BRI projects worldwide currently stands at $3.67 trillion, according to data from Refinitiv, a financial markets data provider.

Transportation projects are the main player of BRI projects (44%), followed by power and water (23%) and real estate (18%) (see Exhibit 1). Governments support the majority of funding on BRI projects (63%) (see Exhibit 2), whereas Russia and Egypt are the top trading nations on the BRI (see Exhibit 3).

Exhibit 1: BRI Projects by Industry

Source: Refinitiv BRI database

Exhibit 2: BRI Projects by Funding Sector

Source: Refinitiv BRI database

Exhibit 3: BRI – Top Trading Nations

Source: Refinitiv BRI database

The United States and some of its allies have warned that BRI increases China’s global influence over low-income countries by offering them construction project loans they cannot repay. Sri Lanka is the example most pointed to, when the poor island nation was forced to hand over Hambantota port to China on a 99-year lease in 2017 after the nation failed to repay its debts to the Middle Kingdom.

In a report entitled, “The Debt Implications of the Belt and Road Initiative”—John Hurley, Center for Global Development in Washington commented on the almost free-flow of capital from Beijing to these poorer nations, warning that:

“The Belt and Road provides something that most countries desperately want—financing for infrastructure. But when it comes to this kind of lending, there can be too much of a good thing.”

Although China has vowed to “prevent and resolve debt risks” by ensuring long-term financing sustainability in future BRI projects, concerns persist that the new digital Silk Road could lead to indirect authoritarian rule, particularly in terms of internet and information censorship.

Hong Kong—China’s Offshore Settlement Hub

Mainland China’s Thirteenth Five-Year Plan for National Economic and Social Development reiterates its determination to make the renminbi convertible for capital account to push ahead with capital account liberalization and renminbi (RMB) internationalization. The plan further supports Hong Kong to strengthen its status as a global offshore renminbi business hub.

For China, the world’s largest trading nation, the BRI also serves as a platform for the promotion of the Chinese yuan or renminbi (RMB) and to achieve further global integration of its currency. The majority of the work in modernizing trading routes with infrastructure development along the Belt and Road will be settled in RMB and the vast amount of loans issued by China to B&R countries are also in RMB.

Hong Kong has often acted as the Mainland’s gateway to the global market. In 2007, the first offshore bond was issued in Hong Kong. In what has since been coined the dim-sum bond market, the RMB market in Hong Kong has grown to the largest outside of Mainland China with outstanding bonds amounting to RMB367 billion at the end of October 2015.

According to the HKMA, Hong Kong’s experience and solid foundation gives it a clear and unique advantage in its very close economic and business links with Mainland China. Around a quarter of Mainland China’s trade volume is intermediated by Hong Kong in the form of offshore trade or re-exports. Hong Kong is the largest source of foreign direct investment for Mainland China, accounting for about 65% of the total amount as of December 2014. In addition, Hong Kong is the largest recipient of direct investment from Mainland China, being either the beneficiary or intermediary of almost 60% of such investment. These trends highlight Hong Kong’s unique role as both the bridge for foreign companies to access the market in Mainland China and the launching pad for institutions in Mainland China to gain exposure to international markets.

Info updated as of 7 Nov 2019

FinTech Remains as a High Priority Sector, Says Hong Kong Chief Executive Carrie Lam at the Asian Financial Forum 2020

The 13th Asian Financial Forum, taking place as a two-day event starting on Jan. 13, 2020, in Hong Kong, gathering the most influential leaders of the global financial, government, and business sectors, groundbreaking discussions on inclusiveness, innovation, and fintech.

Fintech as one of the high priority sectors in Hong Kong

In the opening session of the forum, the Chief Executive of Hong Kong, Carrie Lam, gave a speech acknowledging that Hong Kong has faced challenges and economic turmoil in the past year due to anti-government protests, as well as the US-China trade war. However, she defends the city’s financial system saying that the city’s financial systems “have not been undermined although we have experienced considerable unrest and challenges in recent months.” She added that financial technology would remain one of the high priority sectors in the city. Having issued eight virtual banking licenses and two virtual insurer licenses, according to Lam, the instant payment system launched in 2018 has reached US$307 million in total transactions every day.

Paul Chan, the Financial Secretary of Hong Kong, gave a short speech at the Keynote Luncheon at the forum. While tackling the challenges for Hong Kong, especially the social unrest affecting the financial market Chan emphasized the importance of “finding the path for a renewed prosperity and to make progress.” Hong Kong has been providing seamless financial connections to Mainland China, the Middle East, North America, and Europe. “Banking systems are still running smoothly, with ample liquidity as well,” he added. Green finance has also been an area of focus going forward, and fintech is an area that the government is striving to accept. He concluded, “Hong Kong is and will remain the business bridge between the Mainland and the rest of the world, count on Hong Kong to help you build your business in the Mainland.”

Refining growth, technology for innovation and inclusiveness

In the plenary session, “Redefining Growth: Innovation ∙ Breakthrough ∙ Inclusiveness,” the Hungarian Minister of Foreign Affairs and Trade spoke about enhancing financial inclusiveness in the nation. According to Péter Szijjártó, in the last ten years, the national economy has changed rapidly, due to the role of policies in the nation. “Ten years ago, Hungary ranked 28 out of 28 in terms of economic growth in the European Union (EU), and at the end of 2019, Hungary ranked number one in economic growth,” said Szijjártó. He explained that the nation carried out an unorthodox strategy on the economy that led to the improvement of its performance.

The minister added that the elimination of the tax system and implementing a flat tax system was the key for the nation on becoming the leader of the economic growth rates in the EU. “Entering the digital era, jobs require higher skills and higher skills require higher salaries. Students will be having the necessary skills to join the labor market’ we have a clear target to become the first 5G hub in Central Europe,” he explained.

Dr. Uttama Savanayana, Thailand’s Minister of Finance, stated that the most important aspect of the national investment strategy is a reform. Thailand launched a reform agenda as a core part of the national investment strategy, to drive for an inclusive financial sector, and innovation. He added, “We can foster innovation in a friendly ecosystem, through our reform strategy.” With its national e-payment system, Promptpay, Savanayana believes that it will provide opportunities for the financial sector, innovation, and will also foster startups. He concluded that Thailand’s infrastructure will bridge all areas in the country, and promote inclusiveness as a first step to sustainable growth.

Fintech lowering the costs in the financial services sector, increasing accessibility

In the policy dialogue session focusing on the global outlook and opportunities in the financial sector in 2020, the moderator of the panel Arthur Yuen, the Deputy Chief Executive of the Hong Kong Monetary Authority (HKMA), suggested that fintech knowledge has the potential to bring down the costs in the financial services sector, hence making the industry more accessible. With the growth of virtual banks in Hong Kong, there have been more suggestions made to the regulator in using stablecoins as a method of cross-border payment, which also brought a lot of risk factors that the authority needs to pay attention to, including cybersecurity, regulation advisory framework, and regulation technology (regtech).

Martin Raiser, the Country Director for China and Mongolia, and Director for Korea and the World Bank Group stated that 50% of citizens from low-income countries do not have bank accounts, and of this cohort, two-thirds are women. With financial inclusion, this cohort is a target group to keep in mind. Most of their payments are for agricultural goods, government transfers, remittances, that are received in the form of cash. According to Raiser, this creates opportunities for fintech companies to cater to this market, to lower access barriers, and the cost of financial transactions. There has also been a surge of mobile-based banking transactions in sub-Saharan Africa.

Disruptive technology could serve to change the landscape for the financial sector, and for regulators in the industry. From a risk perspective, Raiser believes that there is competition among services in the platform-based industry. Other risks include data protection, cybersecurity, managing the credit cycle, as it is not currently part of the financial system. There is a need for stronger international cooperation, as regulation around new disruptive technology should be regulated globally.

“Financial inclusion is a promise that fintech holds, blockchain can bring secure transactions, we see an opportunity here, risks must be managed,” said Raiser. “We are going to see new structural changes, some fintechs need to show that they are sustainable,” as most fintech companies have sought investment in the past.

If Libra succeeds, similar projects would be initiated in the future

Burkhard Balz, Member of the Executive Board of Deutsche Bundesbank, mentioned that it has been observed that there has been an increase in the use of digital payment solutions, especially from the BigTech side. Balz touched on Facebook’s Libra stablecoin, saying, “Facebook’s Libra has led to a flurry of activity around the globe. If Libra was successfully introduced, it could become relevant to central banks, as it is necessary that central banks and regulators have a close eye on this project.” The European Council and the European Commission say that no global stablecoin arrangement should be launched unless the risks have been adequately identified and addressed. Guaranteeing a level-playing field between Libra and other competitors, Balz said, “If Libra gets off the ground, similar initiatives will be started in the future.” He concluded that central banks and supervisors need to review their existing regulatory framework. “If we find that it contains loopholes for fintechs, we need to develop it quickly, and it is important that regulators around the globe work together, as we cannot regulate a global initiative nationally. What is the alternative here – there really is a need for regulators to cooperate on a global basis.”

China’s President Xi Jinping Asks ASEAN Countries to Join Hands in Building A ‘Digital Silk Road’

As China moves to cement its influence in the Asia-Pacific region, Chinese President Xi Jinping has promised to further strengthen cooperation and promote a “digital Silk Road” with ASEAN member states.

On November 27, President Xi assured the Asian leaders that China’s top priority is to develop its relationship with the Asean (Associations of Southeast Asian Nations) – 10 countries in the Southeast Asian region including Vietnam, Thailand, Singapore, Malaysia, Laos, Cambodia, Indonesia, the Philippines, Brunei, and Myanmar.

Xi’s speech comes just two days after President-elect Biden announced that his foreign policy agenda would see the U.S strengthens its relations and initiate a new leadership role in the Asia-Pacific.

While speaking via a video link to partners and participants at the China-ASEAN Expo in the Southwest Chinese city of Nanning, Xi said:

“China regards Asean as a priority in its neighborhood diplomacy and a key area for high-quality joint construction of the Belt and Road Initiative.”

Xi said this while referring to his Belt and Road initiative project to build infrastructure, investment, and trade along both ancient maritime and land Silk Roads (sea and land routes connecting South Asia and East Asia with Persia, South Asia, the Arabian Peninsula, East Africa, and Southern Europe).

Xi mentioned that China aims to collaborate with Asean nations to develop a “China-Asean digital port to promote digital connectivity, and build a ‘digital Silk Road’.”

Xi revealed his plans to lead China towards building close relationships with Asean to address pressure from the prolonged trade war caused by US President Trump in 2018.

China Embracing Blockchain Technology

So far there is no suggestion that the digitalization would involve the use of blockchain technology. However, President XI previously praised and regarded the technology as a breakthrough application, saying that China should seize opportunities presented by blockchain. Xi reiterated the importance of blockchain and the need to accelerate the development of the technology in the country in various sectors. Over 500 blockchain projects have been registered with China’s government.

China is poised to take the lead in blockchain after the country’s leader President Xi gave a strong backing to the technology. The move sets to allow the world’s second-largest economy to control the development of the nascent technology in the absence of competition from the U.S and Europe.

As China seeks to develop closer ties and trade relations in the Asean region, it is possible that the digital yuan, a CBCD project by China’s Central Bank, would be accepted in these countries. China intends to build a payment network autonomous from the U.S dollar, which remains the most popular medium for international business transactions. As the world moves to digital, China authorities remain committed to launching digital yuan so that the CBDC could get dominance by facilitating cross-border transactions in the region.