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Chinese SOE-led infrastructure development will enhance trade

2017-05-23

The Myanmar Times

“The glory of the ancient Silk Road shows that geographical dispersion is not insurmountable,” Chinese President Xi Jinping told the 29 heads of state, among them, State Counsellor Daw Aung San Suu Kyi, who travelled to Beijing for the Belt and Road Forum for International Cooperation on May 14 and 15.

According to Bernard Chan, ASEAN and Myanmar’s geographical proximity to China will create immediate synergy for infrastructure projects to take off more quickly than other participants in the BRI.

The Belt and Road Initiative

Launched in 2013 as “One Belt, One Road”, the scheme involves China underwriting billion-dollar investments, mainly in infrastructure, in countries along the old Silk Road and new routes -- linking Asia, Europe and more remote areas in Africa. The financial commitment illustrates the ambition: China is spending roughly US$150 billion a year in the 68 countries which have signed on to the project. The China Development Bank alone has earmarked $890 billion for some 900 projects.

The summit meeting has attracted the largest number of foreign dignitaries to the Chinese capital since the 2008 Olympic Games, and is President Xi’s second international event this year, following his speech against protectionism at the World Economic Forum in Davos in January.

Amid all the excitement and fanfare for China’s Belt and Road Initiative (BRI), The Myanmar Times sat down with Bernard Charnwut Chan, president of Asia Financial Holdings and grandson of Chin Sophonpanich, the late founder of Bangkok Bank, to talk about the BRI, its relevance to Myanmar and the region and how Hong Kong can facilitate Sino-ASEAN trade and investments.

Mr Chan is a member of the executive council, the top-level cabinet of the Hong Kong government, as well as a deputy to the Chinese National People’s Congress. He is also chair of Hong Kong-Thailand Business Council and co-president of the Maritime Silk Road Society.

Infrastructure leads to trade and tourism

The Economist Intelligence Unit has described the BRI project as “long on rhetoric and short on implementation, with related economic activity showing little sign of a step change”. In spite of the three years since its launch, Myanmar’s private sector has not witnessed significant changes yet. The China-backed Asian Infrastructure Investment Bank (AIIB), for example, has only approved one project in Myanmar so far – the $20 million loan to develop a gas power plant project in Myingyan, Mandalay Region. For Mr Chan, the last three years have been a formation period for China’s state-owned enterprises to prepare for the implementation.

“Clearly, this BRI is a state policy. The fact that it is a state policy has huge implications – not just politically but also economically because many of the Chinese SOEs are very much influenced by state policies,” he said.

After the launch, many SOEs have spent the past three years exploring and investigating how to take advantage of the policy. Because it is a state policy, the Chinese government is offering vast amounts of resources and support for SOEs to develop along the BRI direction.

“For those SOEs that I’m involved in, they all have to look at those BRI opportunities.”

The reach of the BRI is very extensive – more than 60 countries spanning three continents. According to Mr Chan, ASEAN and Myanmar’s geographical proximity to China will create immediate synergy and allow infrastructure projects to take off in the region.

“ASEAN are practically our next-door neighbours. So I suspect ASEAN, for sure, will be a very obvious choice for SOEs to look at. The first wave of these so-called initiatives will be about infrastructure, followed by trade and then other development such as tourism. Infrastructure is the most imminent.

“When SOEs open a map and wonder ‘Well, where do we start? Where do we go?’ I would assume that Myanmar would be a very logical place where these corporations would definitely want to build the connection between China and the area in terms of infrastructure.

“In the last three years, much of BRI has been dealt at the planning stage but now you will start to see more and more Chinese companies locating opportunities in where they can actually find synergy,” he said.

Different countries have their own advantages, or unique selling points (USPs). For countries with rich natural resources, Chinese energy SOEs would be attracted to venture into the market.

The “overarching strategy” of the BRI, for Mr Chan, is a win-win.

“You can arguably say that it’s a win-win; win for China and win for their counterparts. I’m sure Myanmar and other ASEAN countries would want to be in a partnership with China as well,” he said, adding that, at this level, projects would mainly be infrastructure. Trade and services such as finance, engineering, architecture and insurance will follow.

“This is definitely not a one-year or two-year project, this will likely take a good 15-20 years,” he added.

Gateway between ASEAN and greater China

The executive councillor also reiterated his support for Hong Kong to join the proposed Regional Comprehensive Economic Partnership (RCEP), citing the reason that it would enhance the city’s competitive advantage and avoid relying exclusively on the mainland. Tax structure and other factors favour Hong Kong firms to expand into the Southeast Asian region.

“I increasingly find that many Chinese companies will prefer to use their subsidiaries in Hong Kong as a gateway to go abroad. For example, Bank of China has decided to use Bank of China Hong Kong as their flagship to go in.

“Those subsidiaries in Hong Kong have far more flexibility to deal with an urgent expansion. This can be due to a variety of reasons, such as tax or corporate factors. Being in China, sometimes you have the different reporting regime; but with Hong Kong, we play by international rules. It’s much easier.

“Again, when you deal with partnership, you surely need to figure out which law it is based on – Hong Kong law, Myanmar law or mainland Chinese law. Hong Kong tends to be a place where people generally would favour because it is neutral. The legal system and arbitration here give the assurance to both sides,” he explained.

The city’s participation in the Beijing summit has illustrated its eagerness to take part in the BRI. Hong Kong’s Chief Executive Leung Chun-ying led a 30-strong delegation and also delivered a speech about financial connectivity during a panel discussion. In contrast, China’s decision not to invite Singapore’s Prime Minister Lee Hsien Loong reflects the tension between the two countries following a few diplomatic fallouts last year.

“Even though, in theory, the BRI is between China and the rest, in practice Hong Kong will be playing a role,” the Chinese congress deputy emphasised once again.

Tackling the “China factor”

Then, there is the “China factor”. For years, the country was Myanmar’s only ally and chief investor, and the then-military regime opened up partly because they did not like China’s monopoly status. Many commentators have argued that China’s role will be crucial for Myanmar’s peace process. But this factor is not only political; it also has enormous economic implications. Ultimately, China would be a vitally important, if not dominant, partner for Myanmar in terms of regional trade and foreign direct investments (FDIs).

The glaring economic asymmetry is conspicuous enough by looking at Yunnan, one of China’s poorer provinces. Its economy is four times bigger than that of Myanmar, its more populous neighbour.

“For any country, you do not want to rely only on one or two trading partners. You would definitely want to expand that reach beyond to hedge your bets. I can see every reason why Myanmar would not want to count on one partner.

“But the fact is that China is China, and it is a huge market. So, whether you like it or not, China will continue to be a major trading partner for the entire region.

“If I were to be the Myanmar government, I would try as much as I could to expand that scope of regional partners, otherwise you’re stuck – you never know if something happens to the Chinese economy. However, to replace China is impossible; China will continue to be a major trading partner for every country in the region because it is a huge market,” Mr Chan said.

And it is not just limited to the market size. Chinese financing is also pivotal for Myanmar’s infrastructure thirst. The region has long suffered from a chronic deficit of infrastructure.

Despite China’s importance, Bernard Chan is confident that the US dollar will remain the leading currency for trade in ASEAN and Myanmar.

“The renminbi will continue to play a significant role, but it will never replace the US dollar. The US dollar is still a major trading currency.

“The most you can do is for Myanmar to use a basket of currency, including the renminbi. But you certainly would not use that to replace the US dollar; it’s just impossible – I don’t think it is technically feasible,” he added.

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