The Belt and Road Newsletter Edition 3 by Standard Chartered

Edition 3

October 2018

The Belt and Road

Standard Chartered: A Century-Old Shop and the Belt and Road Belt and Road Explained: South Asia The Belt and Road in Bangladesh

Edition 3

Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 04 Standard Chartered: A Century-Old Shop and the Belt and Road

. . . . . . . . . . . . . . . . . . .

Belt and Road Explained: South Asia . . . . . . . . . . . . . . . . . . 09 The Belt and Road in Bangladesh

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The Belt and Road in Pakistan . . . . . . . . . . . . . . . . . . . . . . . . . 14 The Belt and Road in Sri Lanka

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News in Brief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

October 2018

The Belt and Road

Foreword As the initial Belt and Road (B&R) infrastructure projects begin to take shape, there are signs of the longer-term beneficial economic impact that they will make. Nowhere is this truer than in South Asia, a region that needs new infrastructure to fulfil the potential of its young populations and its position on major trade routes.

In this newsletter, we chronicle some of the massive power and transport infrastructure investments underway. In Bangladesh, for example, a road and rail project to bridge the Padma river south of Dhaka will relieve pressure on the capital city. In Pakistan, 21 new power plants are planned, easing the power shortages that have long hindered the economy. And, Sri Lanka’s new Hambantota Port makes the country a key destination on one of the world’s busiest shipping lanes.

Benjamin Hung Regional CEO, Greater China & North Asia, CEO, Retail Banking & Wealth Management, Standard Chartered Bank

There are already signs of longer-term gains, beyond the initial infrastructure investment. Chinese companies are investing in special economic zones and a range of companies such as the stock exchanges in Bangladesh and Pakistan. In fact, in our experience, both Chinese and non-Chinese firms, from a diverse range of sectors, expect the B&R initiative to lead to more business opportunities. The B&R initiative is a key strategic focus of Standard Chartered. We have been collaborating with partners in 45 markets along B&R routes to promote sustainable social and economic development. Most recently, we signed a Memorandum of Understanding (MoU) with China Development Bank, formalising a strategic partnership that aims to facilitate trade and investment relating to the initiative. The MoU enables China Development Bank to make up to RMB10 billion available over the next five years to Standard Chartered to fund B&R projects. This followed our announcement that we would be facilitating additional financing of at least USD20 billion by 2020 to support the B&R initiative. It is evident from the recent amendment of China’s constitution that the B&R initiative has strong commitment from the country’s government. More global and local firms are beginning to play a part in the B&R projects. In this newsletter, we take a closer look at what is happening across B&R’s South Asian countries, as we look forward to continuing to play a strategic role in the B&R development in the years to come.

Edition 3

October 2018

Standard Chartered: A Century-Old Shop and the Belt and Road Xing Dan, reporter at TradeFinance magazine

It has been 160 years since Standard Chartered opened its first branch in China. The century-old shop has witnessed the country’s reforms and opening to the world over the past 40 years, and has played a significant role in the process as both a participant and beneficiary. Ploughing a deep path along the Belt and Road “Countries and territories along the Belt and Road (B&R) comprise 63 per cent of the world’s population, but a mere 29 per cent of the world’s GDP – as a shortage of infrastructure has hindered their development,” Ms Lu Jing, Head of Global Banking for Standard Chartered in China, told Trade Finance magazine. “During a recent trip to Pakistan, I visited a number of large-scale power supply projects engaged with Chinese companies. On completion, they will help to dramatically reduce local power shortages. It is a privilege for Standard Chartered to be involved in such meaningful projects.” Over the past five years, Lu noted, B&R initiatives have been gaining traction, attracting more private and small/ medium-sized companies, in addition to large-scale

state-owned enterprises. The role played by Chinese companies in investment and operations in B&R projects has diversified, expanding beyond fields such as energy and raw materials to high-end manufacturing, agriculture, healthcare and electronic payments.

“Countries and territories along the B&R comprise 63 per cent of the world’s population, but a mere 29 per cent of the world’s GDP – as a shortage of infrastructure has hindered their development” 5

The Belt and Road

Meanwhile, an increasing number of countries along the Belt and Road have recognised the development opportunities. According to Saif Malik, Regional Co-Head of Global Banking, for Standard Chartered in Africa and the Middle East, Africa has a total population of one billion, one that is relatively young on average and possesses huge consumption power. According to conservative estimates, infrastructure shortfalls in areas such as roads, railways and ports cost an estimated USD95 billion a year. B&R projects can help to make up the difference. With the pullback and stabilisation of commodity prices, China-Africa trade in value terms is expected to maintain strong growth, according to Razia Khan, Chief Economist, Africa and the Middle East at Standard Chartered. This regional trade will be further fostered by currency swap agreements between the central banks of China and certain African countries. For the Middle East, North Africa and Pakistan, Sarmad Lone – Regional Co-Head of Global Banking at Standard Chartered for Africa and the Middle East – mentioned that China is

According to conservative estimates, infrastructure shortfalls in areas such as roads, railways and ports cost an estimated USD95 billion a year. B&R projects can help to make up the difference.

currently the biggest trading partner of all the countries in these regions. “In recent years, the economic activities of Chinese companies has spread to the entire financial value chain, including bond and capital markets. With declining liquidity and rising US dollar interest rates, non-oil-producing countries such as Pakistan and Egypt have expressed the need to increase cooperation with China for the renminbi, aiming to substitute part of their US dollar demand for that of the Chinese currency,” he added.

We have seen the increasing use of renminbi for trading activities along the B&R “We have seen the increasing use of renminbi for trading activities along the B&R, and regulatory bodies in China and other countries have introduced new polices and measures and increased policy coordination accordingly,”

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October 2018

A guide for global-looking companies

said Lu. “For instance, the People’s Bank of China (PBOC) issued a circular in January 2018 to improve cross-border renminbi business to facilitate trade and investment along the B&R. Meanwhile, the central bank of Pakistan reciprocally declared permission for the use of renminbi for bilateral trade and investment clearance; great news for the local market, which was suffering a dollar shortage. Standard Chartered is leading the charge in renminbi internationalisation and provides a complete and innovative suite of renminbi products and services.”

Despite the huge potential of development opportunities brought by the B&R initiative, companies that are ‘going global’ and participating in B&R projects are facing a variety of challenges. These can stem from the complicated and volatile situations of countries and territories in terms of policy, culture, laws and regulations, exchange rates and geopolitics. Moreover, infrastructure investment and operation of cross-border projects usually requires years of continuous and substantial capital input, incurring risks in areas such as foreign exchange, interest rates and credit.

Infrastructure investment and operation of cross-border projects usually requires years of continuous and substantial capital input

“Risks such as international oil prices, are always fluctuating. Standard Chartered informs Chinese companies operating overseas of both the controllable and uncontrollable risks. For the latter, we will raise their awareness specifically, while for the former, we can recommend a package of solutions,” Lone explained.

Project construction/ Project operation

Project preparation/ Project expansion

Business operation cycle

04 Invitation to tender/ Investment plan

Project commissioning/ Daily operation

The Belt and Road

In general, B&R infrastructure projects issue invitations to tender as a first step. Chinese companies as contractors are obligated to provide various guarantees according to requirements of the project owners. Standard Chartered can provide relevant services at this key stage. Next is project preparation upon acquisition of the tender document, in which Chinese companies need to understand the local market, regulatory environment, laws and regulations, and open a local bank account for capital management purposes. Standard Chartered can provide professional advice with regards to regulatory and compliance requirements and help to set-up a comprehensive account control mechanism by means of bank account services and electronic platforms, enabling Chinese companies to directly control the use of funds overseas from their domestic headquarters. The third stage is business operations after project commissioning. Infrastructure projects usually need to procure massive quantities of mechanical equipment, either from the Chinese domestic market or from overseas, and thus require multi-currency cross-border liquidity management. In response to the procurement situation and the need for cross-border liquidity management, Standard Chartered can design supply chain finance with risks involved and provide financial solutions in the areas of receivable financing, import invoice financing and FX risk management. Last is the completion stage, in which many Chinese companies, as large-scale project contractors, will also be engaged in project operation and management locally from which arises long-term requirements for fund management and FX risk management. Standard Chartered can help to establish a regional fund management model which makes use of a cross-border fund pool to manage liquidity efficiently.

Strength and humility Standard Chartered’s presence covers nearly 70 per cent of the markets along the B&R, making it the go-to bank in terms of reach and strategy. “We are the first foreign bank to embrace the B&R initiative as a focus of the group strategy, B&R call us ‘the B&R bank’,” said Lu. “We have deep experience and a thorough understanding of political, economic, cultural and financial environments and trade needs of local markets. As such, we are able to provide a comprehensive suite of financial and advisory services which covers cultural, political, economic and other aspects, all of which are highly valued by our clients when looking to further develop their businesses in local markets.” With more financial institutions participating in the B&R, Lu noted that Chinese enterprises playing a guiding role will be key to the B&R financing network. Cooperation beats competition. Standard Chartered has formed strong partnerships with China’s policy banks, commercial banks, export credit insurance corporations and multilateral financial institutions. These include the Silk Road Fund, Asian Infrastructure Investment Bank and BRICS New Development Bank, and internet financial companies such as Ant Financial. In December 2017, Standard Chartered announced that it will provide total financing support of no less than USD20 billion by the end of 2020 for B&R-related projects. The Bank participated in over 50 B&R-related transactions in 2017 alone.

In December 2017, Standard Chartered announced that it will provide total financing support of no less than USD20 billion by the end of 2020 for B&R-related projects

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October 2018

Belt and Road Explained: South Asia Bangladesh, Pakistan and Sri Lanka are already realising the economic benefits of the Belt and Road (B&R) initiative

CHINA

The Belt PAKISTAN BANGLADESH

Pacif ic Ocean

South Asian markets are set to play a crucial role in the B&R. Already, major B&R infrastructure projects are underway. Whether power, transport, oil or SEZs1, they are bridging infrastructure gaps and improving competitiveness.

VIETNAM SRI LANKA

MALAYSIA SINGAPORE

The Road

Indian Ocean

INDONESIA

Bridging infrastructure gaps in three markets China-Pakistan Economic Corridor

Kashgar

Islamabad

AFGHANISTAN IRAN

PAKISTAN Gwadar Karachi

Jessore

SRI LANKA

Sylhet

Kolkata

Colombo

Kunming

Dhaka Mandalay

INDIA BANGLADESH

Hambantota Port

A rabian Sea

Pakistan’s development of power stations will alleviate electricity shortages. New transport infrastructure, as well as new special economic zones, will also boost growth.

CHINA

INDIA

Kohala hydropower project

Lahore Multan

Sukkur

Bangladesh China India Myanmar-Economic Corridor

INDIA

CHINA

Sri Lanka’s new ports will link it to B&R’s key shipping lanes, while real estate projects and special economic zones should boost growth.

MYANMAR

Bangladesh’s new power plants are improving its electricity supply, while new transport links will ease capacity constraints on the crucial garment export sector.

History of burgeoning relationships Relationships between China and these South Asia markets pre-date the official B&R launch. Present in all three markets for more than 100 years, Standard Chartered has long facilitated trade and investment across such investments.

Timeline

1858

1863

1905

1951

1975

1957

Bangladesh

1986–89

1999

China helps build first Bangladesh-China friendship bridge

‘Kunming Initiative’, precursor to BCIM2, first proposed

2001

First joint agreement to develop Gwadar Port

Pakistan Sri Lanka Key BCIM Economic Corridor launched

Standard Chartered establishes presence in market Relations with China established

China launches B&R

First phase of Hambantota Port development complete

2010

Route of CPEC3 agreed

Landmark visit by Xi Jingping leads to USD$21.5bn worth of infrastructure deals Hambantota Port leased to China Merchants Port Holdings in debt-for-equity swap

Elections lead to change of government; some B&R projects reviewed

2013

2015

2016

2017

Sources: Standard Chartered, local press, Nomura, World Bank, UN Comtrade. See accompanying articles for full source information. 1

SEZs: special economic zones

BCIM: Bangladesh-China-India-Myanmar

CPEC: China-Pakistan Economic Corridor

The Belt and Road

The Belt and Road in Bangladesh Bangladesh has the potential to play a prominent role in the flow of goods and capital westwards from China. As in Pakistan and Sri Lanka, businesses there stand to benefit from its deeper integration into regional trade and investment flows as Belt and Road (B&R)-related projects come to fruition. Since Xi Jinping’s landmark visit to Bangladesh in 2016, China’s involvement in Bangladeshi infrastructure projects has accelerated. During Xi’s visit, the two countries signed deals worth USD21.5 billion1 across a range of transport and power-related projects. To date, pledged B&R-related investment in Bangladesh stands at USD38 billion, or 15 per cent of its 2017 GDP2.

To date, pledged B&R-related investment in Bangladesh stands at USD38 billion, or 15 per cent of its 2017 GDP

A power boost The principal benefit to Bangladesh in the short to medium term lies in the upgrading of infrastructure, the benefits of which stand to accrue to the whole country. Power supplies are a big part of this: by 2016, 78 per cent of Bangladesh’s 163 million people had access to electricity, with outages common3. In part under the aegis of the B&R initiative, Bangladesh has embarked on a programme to boost its generating capacity to 24,000MW by 2022, from around 16,000MW currently4. Keystone projects include a USD1.65 billion power plant near the port of Payra, a joint venture between the China National Machinery Import and Export Corporation (CMC)

https://www.dhakatribune.com/opinion/op-ed/2017/10/31/one-belt-one-road-means-bangladesh/

https://www.asiaasset.com/news/NomuraBRI-gte_nim3_final_DM1804.aspx

http://www.worldbank.org/en/results/2016/10/07/bangladesh-ensuring-a-reliable-and-quality-energy-supply

http://www.xinhuanet.com/english/2017-09/13/c_136607232.htm

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and Bangladesh’s North-West Power Generation Co (NWPGC), which is set to be operational by the end of 20195. This follows a NWPGC project for which Sinosure, a Chinese export credit agency teamed up for the first time with its German counterpart Euler Hermes and the World Bank Multilateral Investment Guarantee Agency to back the financing of a power plant in Sirajgang, which is now in commercial operation. Guangdong Power and Hubei Electric Engineering are also building plants in Shahjibazar6 and Chapai Nawabganj respectively7.

Transport transformation Meanwhile, investments in transport infrastructure stand to give much needed relief to Bangladesh’s garment export sector, a backbone of the economy that is targeted to account for 80 per cent of the government’s USD37.5 billion export goal in 2017-188. “Though Bangladesh is one of the most attractive offshore destinations for garment makers, there are infrastructure constraints,” says Saurav Anand,

Standard Chartered Economist for South Asia. “The costs of exports from Bangladesh currently are among the highest in the world owing to infrastructure issues, leading to the high costs of transport logistics.” A number of schemes stand to address these issues. A USD3 billion project to bridge the Padma river south of Dhaka, launched in 2014 and due to open later this year, will help ease pressure on the country’s main seaport at Chittagong by opening the route to the second largest port of Mongla to the south-west of the capital. The core structure is funded by the Bangladesh government9 and being built by China Major Bridge Engineering Company. Meanwhile the accompanying rail link that will go over the Padma bridge and cut the travel time from Dhaka to the southern city of Khulna from nine hours to three, is being financed by a USD3 billion loan from China’s Exim Bank10. Another key B&R rail project, a USD4.4 billion line from Dhaka to Jessore, is being built by China Railway Construction and is expected to open in 202211. “Such projects will definitely improve competitiveness,” Anand says.

http://www.scmp.com/news/china/economy/article/2086362/bangladesh-plugged-chinas-belt-and-road-scheme-hsbc-banker-says

https://www.reuters.com/article/bangladesh-exports/update-1-bangladesh-december-exports-up-8-4-pct-y-y-lifted-by-garment-sales-idUSL4N1OZ39W

http://www.tendersinfo.com/procurement_tendernews/5982

October 2018

http://www.padmabridge.gov.bd/fund.php

http://en.gpec.ceec.net.cn/art/2017/3/20/art_21900_1339627.html

http://www.xinhuanet.com/english/2018-05/09/c_137167483.htm

https://asia.nikkei.com/Spotlight/Cover-Story/Is-China-s-Belt-and-Road-working-A-progress-report-from-eight-countries

The Belt and Road

Ultimately the development of the B&R will open up growth of trade and economic activities, says Enamul Huque, Managing Director and Head of Global Banking for Standard Chartered in Bangladesh. “This initiative is fostering governmentto-governments projects and collaboration, channelling investment into the vital power and infrastructure sectors including ports and road connectivity, and is driving up foreign investment. We also see the trend of rising imports by the Chinese entities of international retailers; that will be a significant growth area for Bangladesh textile exports.” A bilateral Bangladesh-China FTA, for which negotiations are ongoing, could also play a crucial role, Huque says12.

The long-term goal is to make Bangladesh more attractive as a destination for foreign investment A new FDI model The long-term goal is to make Bangladesh more attractive as a destination for foreign investment

both to take advantage of its export-oriented garment sector and serve the large and young domestic population. Part of this will be achieved through Special Economic Zones (SEZs), building on the success the country has seen to date with a limited number of export processing zones. One of the earliest, the Korea Export Processing Zone near Chittagong, was established in 199613. The Korean sponsor, Youngone Corporation, alone exported USD200 million worth of goods in 2017, and having already earned USD100million earned in the first four months of 2018, hopes to close the year at USD220million14. It is a success story the government wants to recreate: it now has ambitious plans to set up 100 SEZs by 2030, each with similar businessfriendly provisions15. So far some 55 government-owned and 11 private SEZ sites have been identified16. Chinese companies are among those developing industrial parks near key infrastructure hubs, to be used by Chinese manufacturing firms. One, a 750-acre site near Chittagong, will be 70 per cent owned by China Harbour Engineering Company in a joint venture being formed for the park with the Bangladesh SEZs Authority17.

While it is still early days, the net effect of better infrastructure and advantageous regulations within the new SEZs should lead to more FDI from South Korea, Japan and India as well as China. “There will be a lot more focus and positivity around SEZs,” says Huque. “As of today it’s at a nascent stage but the government is trying to push Korean, Japanese and Indian SEZs. It’s not just a China story.” As each aspect of the trade corridor gets built out, the benefits of greater inward investment should accrue to domestic firms just as much as Chinese investors. “The ecosystem definitely stands to benefit from subcontracting and local sourcing,” says Abhay Rangnekar, Managing Director and Head, Project & Export Finance, for Standard Chartered. Steve Cranwell, Head of Commercial Real Estate Standard Chartered, points to examples of how B&R investment will impact local economies in South-East Asia being applicable in South Asia too. “As you build out rail networks, the proposition around those extends beyond residential property into commercial and retail at the same time. This opens up opportunities for indigenous companies to capitalise on these opportunities.”

https://www.reuters.com/article/us-china-bangladesh-trade/bangladesh-official-says-no-rush-for-free-trade-pact-with-china-idUSKBN1HV1DT

http://www.aimicrosys.com/KEPZ/about_us.php

https://beltandroad.hktdc.com/en/country-profiles/bangladesh

https://www.reuters.com/article/us-bagnladesh-china/china-to-develop-bangladesh-industrial-zone-as-part-of-south-asia-push-idUSKCN1HB1M2

https://www.thedailystar.net/business/korean-epzs-exports-gain-momentum-1580818 16

http://www.beza.gov.bd/all-zones/

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A working example of the opportunities from B&R rail networks is the China Europe Railway Express which covers more than 60 cities in China, Central Asia, the Middle East and Europe, creating opportunities for the transport and manufacturing companies along the rail line as countries work together to create frictionless trade route from East to West18. Poland has credited the rail link as a providing a crucial contribution to its new economic roadmap19. called the Morawiecki Plan after the country’s Premier.

A stake in Bangladesh’s future “China has traditionally demonstrated a three-stage approach to involvement in foreign investment,” explains Rangnekar, in which they start as Engineering Procurement & Construction (EPC) contractors, thereafter invest small equity stakes and finally seek major equity stakes. In Bangladesh too, the participation of Chinese institutions in B&R ventures commenced principally in an engineering, procurement and construction (EPC) role, or as suppliers of capital machinery.

Having developed a strong familiarity, they are now seeking significant investments in sectors such as power, roads and the like,” Rangnekar says. There are signs this is changing. The examples of Chinese banks and industry players taking a larger role in Bangladesh’s future, from taking equity stakes through JVs for new power plants and industrial parks to broader financing for crucial transport projects, are getting more numerous. And it’s not just infrastructure. Chinese companies are broadening their investment horizons, says Huque.

A recent example of major direct equity investment is the acquisition of a 25% stake in the Dhaka Stock Exchange by the bourses in Shanghai and Shenzhen.

October 2018

“A recent example of major direct equity investment is the acquisition of a 25% stake in the Dhaka Stock Exchange by the bourses in Shanghai and Shenzhen.” Signed in May 2018, the transaction is valued at USD111.65 million and will see the Chinese exchanges help the Bangladesh bourse set up an enterprise board for small and medium-sized companies and launch more derivatives20. There is also more evidence of Chinese private firms being enticed by the prospect of servicing Bangladesh’s consumers in an economy growing at 7 per cent per year. Ant Financial, China’s dominant e-payments group, recently invested in Bangladesh’s bKash mobile payments service21. More such investments may well be forthcoming, particularly if Bangladesh seizes the full potential of its position as a crucial link in the B&R chain.

https://www.forbes.com/sites/wadeshepard/2018/03/22/the-hidden-economic-rationale-of-china-europe-rail/#24b32a2840d1

http://hkmb.hktdc.com/en/1X0AABEP/hktdc-research/Poland-Profiting-from-Increasing-Asia-Europe-Rail-Traffic

http://www.thejakartapost.com/news/2018/05/15/shenzhen-shanghai-bourses-buy-25-stake-in-dhaka-stock-exchange.html

https://www.bkash.com/node/2473

The Belt and Road

The Belt and Road in Pakistan With USD62 billion1 of projects scheduled along the China-Pakistan Economic Corridor (CPEC) – equivalent to 21 per cent of Pakistan’s GDP2 – China’s Belt and Road (B&R) initiative stands to have a dramatic long-term impact on Pakistan’s domestic economy and businesses. CPEC, the principal B&R initiative in Pakistan, stands to be much more than a corridor or transit route for Chinese exports and imports. It includes a range of infrastructure projects and proposed special economic zones along the route from Kashgar, China’s Westernmost city, through central Pakistan to Gwadar port on Pakistan’s south-west coast. Together these could transform Pakistan’s economy.

Powering a stronger economy Trade routes and developing Gwadar Port are focus points of the CPEC, thanks to Pakistan’s geographic position at the epicentre of trade corridors from Western China to the Middle East, Africa and Europe, which in theory could make it the nexus of some USD2.5 trillion of trade flows. But it also encompasses a range of infrastructure investments to bolster the business environment, including power generation.

Shortages of power have long bedevilled business in Pakistan. Around two-thirds of the scheduled CPEC investment will be in 21 power plants3, in a bid to end a supply deficit of around 5,000MW4. Although plans to end load-shedding by 2018 haven’t come to pass, scheduled outages in main cities have halved in recent years5 as new capacity has come online: by the middle of this year an additional 9,000MW is scheduled to have been added, increasing capacity by 50 per cent6. Much more is being financed, built and operated by or with Chinese support. The state-owned Three Gorges Corporation (CTG), for instance, is planning three hydropower projects in north-eastern Pakistan with a combined investment of USD5.7 billion and a planned total capacity of 1,118MW7. The first phase of the Kohala hydropower project will come online in 2020.

https://www.economist.com/news/asia/21728619-china-pakistan-economic-corridor-project-carries-risks-massive-chinese-investment-boon

GDP in current Rs, converted to USD at current exchange rates. Data from State Bank of Pakistan, http://www.sbp.org.pk/departments/stats/NDSP.htm

http://cpec.gov.pk/energy

https://www.reuters.com/article/pakistan-energy/pakistan-sees-end-to-routine-power-outages-by-years-end-idINKBN15S1L2

https://www.economist.com/news/asia/21731185-revealing-other-problems-process-pakistans-government-fixing-power-shortage

http://kohalahydro.com/Location

https://www.dawn.com/news/1405137

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There are various estimates of the impact on GDP but we expect at least a 1.5-2 per cent improvement if the power shortage is addressed The economic boost from additional power capacity is a clear benefit. “There are various estimates of the impact on GDP but we expect at least a 1.5-2 per cent improvement if the power shortage is addressed,” says Arslan Nayeem, Standard Chartered Head of Global Banking in Pakistan. “Three to five years ago, a lack of power was one of corporates’ prime concerns; now that’s being addressed to a great degree with enough projects coming online.”

Heavier commitments Concerns have been raised about the nature of Chinese investment and the debt loads incurred in concessional loans to finance construction. But a shift in the nature of Chinese involvement in such projects suggests the partnership is focused on long-term success.

October 2018

In the past, the role of Chinese firms in overseas infrastructure might have been restricted to engineering, procurement and construction (EPC). B&R, and the CPEC as its flagship initiative, is different: Chinese companies are major equity stakeholders in many projects (as CTG is in the Kohala plants) under a build-own-operate-transfer model, giving them a vested interest in their long-term success. Kohala is due to be transferred to Pakistan after 30 years of operation8. In the short term, Chinese equity commitments also have an impact on financing terms. “When Chinese firms take large equity stakes, the funding becomes altogether different in terms of pricing, appetite, structure, timelines and so on,” says Abbas Hussein, Managing Director and Head of Project and Export finance for the Middle East, North Africa and Pakistan at Standard Chartered. “When you have a Chinese sponsor and when that sponsor is pressurising Chinese relationship banks – because at the end of the day they benefit as well – they get more aggressive financing, there is a higher probability of their being awarded projects, and it has a direct impact on the equity internal rate of return (IRR). So equity does make a massive difference.”

https://www.hydroworld.com/articles/2015/05/chinese-consortium-wins-epc-contract-for-pakistan-s-720-mw-karot-hydroelectric-project.html

The Belt and Road

Creating new in-roads CPEC’s infrastructure phase isn’t just about power: it includes five roadconstruction and three rail-sector projects, upgrading many routes that have received scant investment since Pakistan gained independence. The expansion and reconstruction of the 1,830km-long ML-1 rail line is the largest of these, with an estimated cost of USD8.2 billion9.

CPEC’s infrastructure phase isn’t just about power: it includes five road-construction and three rail-sector projects “These investments have positive externalities far beyond the projects themselves,” explains Standard Chartered Senior Economist Bilal Khan, in particular by improving connectivity within the country. “A lot of domestic cargo, on routes like Karachi to cities in Punjab, is currently transported by road, far less efficiently than by freight car. That infrastructure gap is a supply side constraint that stands to be resolved.”

Though many infrastructure projects are still on the drawing board, those that are in the construction phase have already boosted ancillary business in Pakistan such as cement and steel. Pakistan was the world’s fastestgrowing steel producer in 2017, with crude steel output up nearly 40 per cent from 201610. Cement production has also been rising steadily and was up 14.7 per cent year on year by end-March 201811. “Our clients in the steel and cement industries are contemplating expansion because they see the opportunity for growth,” Nayeem says.

New zones, new hopes From Pakistan’s perspective CPEC is the gateway to far greater integration into the global economy and hopefully a means to break out of a cycle of financial instability that has led to successive balanceof-payments crises. Key to this is making the country a more attractive investment environment and ultimately boosting export earnings. In the longer term, special economic zones (SEZs) along the CPEC route will be instrumental. Currently nine SEZs have been identified, all of which are at the feasibility study stage12. The hope is

that with the improved connectivity and stable power supply, together with tax and investment incentives in the SEZs, Pakistan can attract some of the manufacturing that is becoming increasingly expensive in China, as well as investment to unlock Pakistan’s own natural resources, from minerals to agriculture.

Given its lower labour costs, there is an opportunity for Pakistan to attract some of the investment associated with the mass movement of jobs out of China Given its lower labour costs, there is “an opportunity for Pakistan to attract some of the investment associated with the mass movement of jobs out of China” in the coming years, says Nayeem. Potential investors could also see the benefits in Pakistan’s domestic economy, with a growing base of young consumers: around 55 per cent of the country’s 205 million people are under the age

http://cpec.gov.pk/infrastructure

https://www.worldsteel.org/en/dam/jcr:371e31b5-7866-4c27-bffd-72f25946858c/2017+World+Crude+Steel+Production+Press+Release+Attachment.pdf

http://www.apcma.com/data_monthly1718.html

http://cpec.gov.pk/special-economic-zones-projects

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of 2513. If the economic growth of recent years can be maintained, the consumption potential of a growing middle class could be enticing. Some Chinese firms are already banking on Pakistan as a growth market. China Mobile established its first overseas subsidiary in the country in 2008, buying local mobile network operator Zong. Since CPEC was announced, the M&A flurry has increased: a Chineseled consortium took a stake in the Pakistan Stock Exchange and Shanghai Electric Power acquired one of the country’s biggest energy distributors, K-Electric, for USD1.8 billion14. The deals are not just infrastructure related. Alibaba, the Chinese e-commerce giant, invested in and recently acquired Daraz, a Pakistan online store. Alibaba’s payments affiliate, Ant Financial, also struck a strategic partnership in early 2018 that will see Ant investing over USD180 million in Pakistan’s Telenor Microfinance Bank15.

Climbing over hurdles It is fair to say that the most significant transformational benefits for Pakistan are long-term and a matter of CPEC reaching its full potential. There will be challenges to surmount along the way, such as the fact that the initial infrastructure construction phase

requires importing a large amount of capital equipment, which puts Pakistan’s limited forex reserves under pressure, as does local liquidity project financing. “In the short term, deficits will increase and certain [local] banks will hit sector exposure caps,” warns Hussein, necessitating a greater role for export credit agencies, government-togovernment loans and multilaterals.

The initial infrastructure construction phase requires importing a large amount of capital equipment, which puts Pakistan’s limited forex reserves under pressure, as does local liquidity project financing Aside from the implications of greater levels of foreign debt, there is the issue of servicing the return requirements of Chinese asset owners when the projects are up and running. “In the first 10 years, it will be about servicing debt; beyond that guaranteed ROE [contracts] means operators

October 2018

will also be sending dividends and profits back to China,” Khan says. “Pakistan will have to make foreign exchange available for that, at the rate of between USD1 billion-2.5 billion per year depending on how much capacity comes online.” For the power sector, there is also the question of how problems with distribution and utilisation can be addressed, even as capacity is increased. Nevertheless, CPEC is a tremendous vote of confidence in the future of business in Pakistan, focused both on its domestic economy and for export. “Does Pakistan just become a transit route? No, we want to take advantage of the trade corridor and develop industries that create employment and forex reserves and make the economy sustainable,” says Shazad Dada, Standard Chartered CEO in Pakistan. “We aspire to achieve what China has accomplished in the past four decades: consistently grow the economy at 5 per cent-plus per annum, grow the middle class while taking millions out of poverty, and seize the opportunity to integrate with Belt and Road trade flows worth over USD2.5 trillion.” If China’s B&R initiative is executed properly, because Pakistan is at the forefront it has the opportunity to follow a similar development path.

https://esa.un.org/unpd/wpp/DataQuery/

https://www.reuters.com/article/us-pakistan-china-investment/amid-beijings-silk-road-splurge-chinese-firms-eye-pakistan-idUSKBN15H2ZE

https://www.ft.com/content/e0ead4c2-26c8-11e8-b27e-cc62a39d57a0

The Belt and Road

The Belt and Road in Sri Lanka Chinese investment in Belt and Road (B&R) projects in Sri Lanka has generated some controversy, but stakeholders focused on the long-term potential for Sri Lanka see growing opportunities for business in the country. As well as investments in transport infrastructure and real estate, China’s long-term commitment to the country suggests the positives for local business will outweigh the problems. Navigating the right start When the People’s Republic of China celebrated its 68th anniversary in 2017, the occasion was marked in Sri Lanka with particular fanfare since it also marked the 60th anniversary of diplomatic relations between the two countries1. In recent years, and especially since the launch of the China-led B&R initiative, closer economic ties have become the focus of this longstanding relationship, with successive governments in Colombo seeing the long-term potential and ancillary benefits of the country becoming a vital link in the Maritime Silk Road (the ‘road’ in the B&R initiative). It’s fair to say that such long-term benefits have been overshadowed by concerns about various infrastructure projects that have been emblematic of China’s B&R push in many countries. These include the construction of the USD1.5 billion cargo port at Hambantota, in Sri Lanka’s far south, the first phase of which predated the formal launch of B&R and opened in 2010. Accompanying this was Sri Lanka’s USD253 million second international

airport, at Mattala, some 20km from the port. Both projects were financed for the most part by loans from China’s Export-Import Bank2. These projects, along with a colossal 25-year initiative to develop 269 hectares of reclaimed land in Colombo (known as Port City), the first USD1.4 billion-phase of which is being undertaken by a subsidiary of China Communications & Construction Co3, were initiated by Sri Lanka’s previous government. Elections in early 2015

Elections in early 2015 led to a change of leadership and a temporary rethink of several projects, including Port City, which was restarted in 2017 after an environmental impact review

https://www.news.lk/news/political-current-affairs/item/18163-chinese-national-day-celebrated-in-colombo

https://asia.nikkei.com/Spotlight/Cover-Story/Is-China-s-Belt-and-Road-working-A-progress-report-from-eight-countries

Edition 3

led to a change of leadership and a temporary rethink of several projects, including Port City, which was restarted in 2017 after an environmental impact review4. There had also been concerns about the financing model in the face of the underutilisation of Hambantota Port and Sri Lanka’s rising debt burden. Partly to address this, in 2017 the port was leased to China Merchants Port Holdings for USD1.12 billion as part of a debt-forequity swap in which the Chinese firm holds a 70 per cent stake in a joint venture with the state-run Sri Lanka Ports Authority (SLPA)5. The government is currently considering the future operations of Mattala airport.

Testing the waters These issues have taken the headlines, but stakeholders focused on the long-term potential of the B&R for Sri Lanka have looked beyond short-term problems to the growing opportunities for business in the country. For one thing, Hambantota sits near one of the world’s busiest shipping lanes – through which China currently imports two-thirds of its oil6. Ongoing discussions around further investment in a refinery, which would be Sri Lanka’s largest, and an investment zone of about 6,000 hectares, suggest jobs creation and growth opportunities for ancillary businesses7.

4 5

“Hambantota is a clear positive,” says Saurav Anand, Standard Chartered Economist for South Asia. “We have observed a lot of investor interest in the special economic zone (SEZ) around the port and much related to capacity building in terms of power plants and roads.”

“We have observed a lot of investor interest in the SEZ around the port and much related to capacity building in terms of power plants and roads.” Though Chinese firms will obviously continue to play a large role, “local corporates will have the opportunity to engage with those interested in capital investments and possibly partner, or set up joint ventures,” explains Jim McCabe, Standard Chartered CEO in Sri Lanka. “The fact that Sri Lanka as a relatively small country is on China’s radar, and is deemed to be in a sweet spot from a location perspective, creates a constant reason to continue probing into what else can be done.”

https://www.reuters.com/article/sri-lanka-china-loan/china-approves-1-bln-loan-for-sri-lanka-highway-sri-lanka-pms-office-idUSL3N1SL5ID

https://www.reuters.com/article/sri-lanka-china-ports/sri-lanka-hands-port-formally-to-chinese-firm-receives-292-mln-idUSL3N1O908U

6 7

October 2018

https://asia.nikkei.com/Spotlight/Cover-Story/Is-China-s-Belt-and-Road-working-A-progress-report-from-eight-countries

https://www.reuters.com/article/us-sri-lanka-china-refinery/sri-lanka-in-talks-with-two-chinese-firms-for-3-billion-refinery-idUSKCN1BX2C5

The Belt and Road

McCabe cites one example of a Standard Chartered client that imports and distributes gas. It recently set up a storage facility in the industrial zone around Hambantota Port, from which gas imported from the Middle East will be used both to meet domestic demand and to ship to other countries in the region. The project was financed by Sinosure, even though it was a comparatively small sum for the Chinese export credit and insurance group. Having dipped its toes in the water, Sinosure got excited about the prospect of doing more business in a country to which it previously had very little exposure, McCabe says, but in which it saw bright prospects.

A looming mega-city The impact of the ambitious Colombo Port City project stands to be dramatic. Eventually home to 120 structures including a brand new international financial centre, “Port City will be game-changing for Colombo,” reckons McCabe, with the investment expected to bolster tourism and investment from across Asia. China Harbour Engineering Company, which is building the city, estimates it will bring as much as USD15 billion in foreign direct investment8– which in 2017 for the country as a whole totalled a record USD1.63 billion9.

http://www.bbc.com/news/business-40044113

http://www.lankabusinessonline.com/sri-lanka-achieves-highest-ever-fdi-of-usd1-63bn-in-2017/

9 10

http://exploresrilanka.lk/2017/02/avic-astoria-unveils-first-tower/

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http://www.sltda.lk/sites/default/files/Page3Dec17.pdf

http://www.sltda.lk/sites/default/files/annual-statical-report-2016.pdf

The impact of the ambitious Colombo Port City project stands to be dramatic. Eventually home to 120 structures including a brand new international financial centre

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“Once the land is reclaimed and set up, it will usher in a whole new mindset,” McCabe says. “Already the world’s major real estate brokers are trying to get global architects to come and design signature buildings; Shangri-La has invested USD1 billion in a hotel; there are office towers and condos going up.” Among the first was a project built by the subsidiary of the Aviation Industry Corporation of China, which when complete will have four towers and 608 apartments10. “The larger agenda for this is to create a broader interest that will encompass other companies, such as services, technology and manufacturing that will follow the lead” of the pioneers, says McCabe. One quick impact is likely to be in the tourism sector, a key part of Sri Lanka’s economy. In 2017 China was second only to India as a source of tourists to the country, with nearly 270,000 visitors11– compared to just 12,000 in 201012.

A speedier road ahead Regardless of initial concerns about financing there is no shortage of appetite for China-financed-and-built

projects in Sri Lanka. As recently as mid-May news emerged of a further USD1 billion loan from China to build a highway linking Colombo to the central town of Kandy13. This renewed commitment to the B&R vision suggests the government is focusing on the long-term opportunities it will present for the country. Such support is of course vital for the projects to achieve their maximum potential. “How well the government enables and facilitates investment [around B&R-linked projects] will determine the speed of success,” McCabe says. “There’s no going back: it’s already significantly developed, and the only thing left to determine is how fast the country will drive.”

This renewed commitment to the B&R vision suggests the government is focusing on the longterm opportunities it will present for the country

October 2018

Key to this is the promotion of B&R investment as a partnership, a narrative that is necessary to reinforce given the vastly different size of the two nations’ economies (at USD84 billion Sri Lanka’s GDP ranked above only four Chinese provinces in 201714). “The problem is it’s David and Goliath,” says McCabe. This requires some deft manoeuvring by Colombo: “Now we’re partners [with China], let’s get in place the rules, regulations and policies to make sure it’s a balanced relationship.” This is part of the reason why Sri Lanka’s government has said it wants to take its time in agreeing a freetrade agreement with China15. But it is almost certain that negotiations on this front will bear fruit – as did Sri Lanka’s earlier FTA with Singapore, signed in January16. The long-term vision of being a nexus for trade remains the key to realising the opportunities of the B&R. As McCabe says, “As investment flows in then the economic boost from the projects will be evident, giving Sri Lanka the chance to integrate more heavily into trade flows from China, through ASEAN and the Belt and Road.”

https://www.khl.com/international-construction/china-to-fund-sri-lankan-road/133094.article

http://data.stats.gov.cn/english/easyquery.htm?cn=E0102 and http://erd.cbsl.gov.lk/presentation/htm/english/erd/sdds/rpt_sdds.aspx

https://www.reuters.com/article/us-china-sri-lanka/sri-lanka-eyeing-longer-talks-with-china-on-free-trade-agreement-idUSKBN1FO05A

https://www.channelnewsasia.com/news/asia/singapore-and-sri-lanka-sign-free-trade-agreement-9886990

The Belt and Road

News in brief Standard Chartered appointed by Ant Financial as core partner bank for its new blockchain cross-border remittance service On 25 June 2018, Standard Chartered announced that the Bank has been appointed by Ant Financial to be the core partner bank for its new blockchain cross-border remittance solution. Aimed at enhancing financial inclusion globally, the fast, secure, convenient, transparent and low-cost remittance service will be first available in Hong Kong and the Philippines. This will be the first blockchain-based cross-digital wallet remittance service and is offered through AlipayHK in Hong Kong and GCash in the Philippines. Standard Chartered played an integral role in the development of the solution. As core partner bank, Standard Chartered will act as the settlement bank for AlipayHK and GCash. The Bank will provide instant foreign exchange rates and liquidity to enable real-time fund transfers between the two licensed wallet service providers. Leveraging the blockchain technology developed by Alipay, the service will allow individuals to remit money between Hong Kong and the Philippines within a few seconds and with a competitive exchange rate and minimal transaction fee.

China releases guidelines on expanding imports On 9 July 2018, China publicised guidelines on expanding imports for balanced foreign trade, with policy incentives detailed in several areas. China will optimise the structure of imports to support upgrading production and consumption, with tariff cuts in certain products and clean-up of unreasonable price mark-ups, the guidelines said. Policy incentives will be given to imports of daily consumer goods, medicine, and equipment for rehabilitation and elderly care. China will optimise the layout of its international market, focusing on the expansion of imports from countries related to the Belt and Road initiative. China will also actively explore multiple channels to boost imports, including hosting the China International Import Expo. The countryâ&#x20AC;&#x2122;s investment environment should be improved so that foreign investment could play an important role in boosting imports, the guidelines said. The country will further facilitate trade through cultivating pro-import platforms and strengthening intellectual property rights protection, the guidelines said.

AIIB approves over USD5.3 billion in project investment since operation On 3 July, the Asian Infrastructure Investment Bank (AIIB) announced that it has approved investment for projects worth over USD5.3 billion since it started operations about two and a half years ago, according to AIIB President Jin Liqun. All the projects are in or connected with countries and regions along the Belt and Road initiative, added Jin, who made the remarks at the Forum on the Belt and Road Legal Cooperation hosted by the Ministry of Foreign Affairs and China Law Society. Multilateral institutions have an important role to play in underpinning the Belt and Road initiative by offering support in terms of standards, financing, capacity building, environment and social policies, debt sustainability and dispute settlement, he said.

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October 2018

FDI into Chinese mainland grows steadily in H1 Foreign direct investment (FDI) into the Chinese mainland rose 1.1 per cent year on year to RMB446.29 billion in the first six months of 2018, official data showed. In dollar terms, FDI inflow grew 4.1 per cent to USD68.32 billion in H1, Gao Feng, a spokesman with the Ministry of Commerce, said at a press conference. The number of new overseas-funded companies established in H1 surged 96.6 per cent from a year earlier to 29,591, Gao said. Investment into high-tech industries rose 1.6 per cent and accounted for 20.9 per cent of the total FDI, with the high-tech manufacturing sector attracting RMB43.37 billion in overseas investment, up 25.3 per cent. FDI into the instrument and apparatus sector jumped 179.6 per cent. Investment from countries along the Belt and Road surged 24.9 per cent, while other major FDI sources also witnessed healthy growth, Gao said. China has rolled out a number of measures to significantly broaden market access since the beginning of 2018, a year that marks the 40th anniversary of the country’s reform and opening-up policy.

Asiamoney New Silk Road Finance Awards 2018 Standard Chartered has won the following six categories in the 2018 Asiamoney New Silk Road Finance Awards: • Best Overall International Bank for BRI • Best International Bank in the Region for BRI – Southeast Asia • Best Bank for Infrastructure/Project Finance in the Region –

Southeast Asia • Best International Bank in the Region for BRI – South Asia • Best Bank for BRI-related financing in the Region – South Asia • Regional Bank of the Year for BRI – Middle East & Africa

Global RMB China Capital Markets Awards 2018 The first Global RMB China Capital Markets Awards - in the inaugural awards honouring banks, companies and individual that have made the biggest contribution to bridging the gap between China and the world. For these awards, Standard Chartered won: • Best offshore renminbi bond house • Best bank for ABS • Best bank for securities services

See here for more information GlobalRMB China Capital Market Awards1

https://www.globalcapital.com/article/b19t1w87gkhyfl/the-results-are-in-globalrmb-announces-award-winners

The Belt and Road

This material has been prepared by Standard Chartered Bank (SCB), a firm authorised by the United Kingdomâ&#x20AC;&#x2122;s Prudential Regulation Authority and regulated by the United Kingdomâ&#x20AC;&#x2122;s Financial Conduct Authority and Prudential Regulation Authority. It is not independent research material. This material has been produced for information and discussion purposes only and does not constitute advice or an invitation or recommendation to enter into any transaction. Some of the information appearing herein may have been obtained from public sources and while SCB believes such information to be reliable, it has not been independently verified by SCB. Information contained herein is subject to change without notice. Any opinions or views of third parties expressed in this material are those of the third parties identified, and not of SCB or its affiliates. SCB does not provide accounting, legal, regulatory or tax advice. This material does not provide any investment advice. While all reasonable care has been taken in preparing this material, SCB and its affiliates make no representation or warranty as to its accuracy or completeness, and no responsibility or liability is accepted for any errors of fact, omission or for any opinion expressed herein. You are advised to exercise your own independent judgment (with the advice of your professional advisers as necessary) with respect to the risks and consequences of any matter contained herein. SCB and its affiliates expressly disclaim any liability and responsibility for any damage or losses you may suffer from your use of or reliance on this material. SCB or its affiliates may not have the necessary licenses to provide services or offer products in all countries or such provision of services or offering of products may be subject to the regulatory requirements of each jurisdiction. This material is not for distribution to any person to which, or any jurisdiction in which, its distribution would be prohibited. You may wish to refer to the incorporation details of Standard Chartered PLC, Standard Chartered Bank and their subsidiaries at http://www.sc.com/en/incorporation-details.html ÂŠ Copyright 2018 Standard Chartered Bank. All rights reserved. All copyrights subsisting and arising out of these materials belong to Standard Chartered Bank and may not be reproduced, distributed, amended, modified, adapted, transmitted in any form, or translated in any way without the prior written consent of Standard Chartered Bank.