The second edition of Hong Kong’s Belt and Road Summit spotlighted how the trade and economic development plan has begun to materialise into concrete projects.

Three years since Chinese President Xi Jinping unveiled the Belt and Road Initiative, the game-changing economic and development blueprint has begun taking shape. That was the consensus among participants attending the second Hong Kong Belt and Road Summit, held on 11 September at the Hong Kong Convention and Exhibition Centre.

“Our theme this year is ‘From Vision to Action,’ as we help to bring together tangible projects, serious investors and knowledgeable professionals to package complex developments into commercially viable and bankable projects,” said HKTDC Chairman Vincent HS Lo at the opening session.

Jointly organised by the Government of the Hong Kong Special Administrative Region (HKSAR) and the Hong Kong Trade Development Council (HKTDC), the Summit attracted 3,000 political leaders, policymakers, business leaders and experts in related trades from some 50 countries and regions. Some 40 senior government ministers and business leaders also spoke at the event. 

In her keynote speech, Hong Kong Chief Executive Carrie Lam said that Belt and Road-related infrastructure projects now underway will spark greater demand for services, including in investment and risk assessment, research, financing, insurance, accounting, legal services and arbitration. “Today, these service sectors represent new economic drivers for Hong Kong and are essential to the Belt and Road vision," Mrs Lam said.

Building Foundation

Some 1,700 Belt and Road-related projects are now underway around the world, many of them involving China’s state-owned enterprises (SOEs) undertaking infrastructure projects. One of them, the China Railway Group, plans to team up with Hong Kong’s MTR Corporation Ltd on rail projects along Belt and Road routes. Together, they have already bid for a project to build a 350 kilometre high-speed rail link between Malaysia’s Kuala Lumpur and Singapore.

The second edition of the Belt and Road Summit offered a platform for both high-level idea exchanges and concrete business cooperation

“Southeast Asia is far behind in infrastructure development,” said Jaime Ayala, Chairman and CEO of Philippine conglomerate Ayala Corporation, one of the speakers at a panel examining the region’s infrastructure development needs and related opportunities.

“In order for growth to continue, we need to develop infrastructure. There’s a unique opportunity to create the infrastructure necessary to expand globalisation.” 

Mr Ayala noted that Hong Kong can play a catalyst role by helping to link Southeast Asia’s private sector with China’s state-owned enterprise projects. The sentiment was echoed by Chairul Tanjung, Chairman of Indonesia’s CT Corp, who said that as a key Belt and Road partner, Hong Kong can serve as a communication bridge between China and Southeast Asia.

Fostering Concrete Cooperation

The Summit was also a business-matching platform for more than 200 project owners, investors and services providers. Loxley, a Thai-listed company that received an HKTDC mission in May, signed a Memorandum of Understanding with Hong Kong’s Insight Robotics Ltd at the Summit. The agreement paves the way for the introduction of Hong Kong’s advanced technologies to Thailand under the country’s “Thailand 4.0” development plan, which aims to accelerate Thailand’s economic development through technology. The HKTDC also organised project presentations and business-matching opportunities for Loxley representatives. 

One-on-one business-matching meetings and an exhibition area showcased various professional services on offer at the Belt and Road Summit in Hong Kong

Thai-listed conglomerate Loxley signed a Memorandum of Understanding with Hong Kong’s Insight Robotics Ltd at the Belt and Road Summit

As Belt and Road projects gather steam, the Hong Kong Government is also working with the Central Government on a new agreement to boost Hong Kong’s role “that would give full play to Hong Kong's unique advantages under ‘one country, two systems’ in support of the Belt and Road Initiative,” said Hong Kong Chief Executive Mrs Lam. 

There will be greater emphasis on enlisting more SMEs to take advantage of opportunities, including with the setting up of a Hong Kong-based Belt and Road General Chamber of Commerce, to help prepare businesses with local knowledge about countries along the Belt and Road, with a focus on ASEAN countries. 

Companies that have already taken up the challenge say there’s no time to waste. “The last generation opened the mainland market over 30 years ago,” said hpa’s Mr Ho. “It wasn’t handed to them on a silver platter. With the awareness we have right now of opportunities, projects, success stories that we can hear and see, people should just change their mentality, especially the youth. Have the courage to go out there and get out of your comfort zone.”

SME in Focus

Just as the Belt and Road is not only a China initiative, the global development blueprint also offers countless opportunities for SMEs to grab a slice of the market, making Hong Kong the ideal conduit, said Hong Kong Secretary for Commerce and Economic Development Edward Yau. “Had the Belt and Road been confined to the Global 100s or Fortune 500s, Hong Kong would not have been the market place,” Mr Yau said.

At a panel featuring young entrepreneurs who have ventured outside their local markets, speakers outlined how they have started tapping opportunities from the Belt and Road Initiative. Hong Kong-based architectural and design firm hpa, for instance, is building smart cities across Southeast Asia, including in the Philippines. “At its core, the Belt and Road is about connecting people,” said hpa Deputy Managing Director Ho Nicholas Ho. “The future for companies like us is to identify key markets of what the Initiative can bring together.”

Still he noted: “Risk-mitigation is a huge issue for SMEs, which don’t have Chinese SOE backing.” He said that government agreements for taxation and financing would help boost SME support.

Return on investment for smaller companies won’t be immediate, said Glendy Choi, Executive Director and CEO of infrastructure company D&G Technology Holding Co, Ltd, which is present in 17 Belt and Road countries. Ms Choi said SMEs have to be prepared to sacrifice short-term profit, noting however that the long-term investment allows Hong Kong companies such as hers to diversify to other markets beyond the Chinese mainland.

Apart from physical infrastructure, developing the digital economy along Belt and Road economies is another key focus. Technology-related businesses are upbeat about prospects brought about by the Initiative, which brings together more than 63 per cent of the world’s population. 

Pawoot Pongvitayapanu, CEO of Thai-based online platform TARAD.com, said the Initiative pushes SMEs to think beyond the local market. “With just one click, you can connect a million people. The Initiative helps SMEs think outside the domestic market, to the bigger world.” 

Ivan Teh, CEO and Managing Director of Fusionex, a Malaysian-based data technology company specialising in big data analytics, artificial intelligence, deep learning and the Internet of Things (IoT), agreed, saying these were “exciting times.”

Mr Teh noted that some emerging economies already require that digital processes be put in place to ease transactions. “You will see a gradual shift in in terms of moving away from some of the bureaucracies that hinder a lot of the processes in trade, financing, loan and trade facilitation. There will be a lot of work put in place from government-to-government, government-to-business, and from businesses that are driving these platforms with SMEs. A lot of the permits, trade facilitation and trade agreements will gradually move towards digitisation,” he said.

China's stake in Laos' sustainable-energy sector paves way for closer long-term Belt and Road collaboration.

Hydropower: Alleviating poverty across Laos while driving international co-operation.

China and Laos jointly initiated work on the second phase of the 1,156 MW Nam Ou Cascade Hydropower Project earlier this year. The project, set on Laos' principal river, is seen as one of the country's key contributions to China's Belt and Road Initiative (BRI).

With Laos' GDP for 2016 recorded at just US$15.9 billion, China has shouldered the bulk of the cost of the $2.8 billion initiative in exchange for the concession to operate the hydropower installation for the next 29 years. Once completed, it will comprise seven dams and hydropower stations and have a projected capacity of 1,156 MW, together with an annual energy output of 5,017 GWh.

The lead on the Chinese side has been taken by Sinohydro, a Beijing-headquartered state-owned hydropower engineering and construction company, which entered into an agreement to develop the project on a joint-venture basis with Electricite Du Laos (EDL), the Laos state electricity corporation, which holds a 15% stake in the site. Under the terms of the project, all electricity generated will be sold to EDL. Significantly, Nam Ou is the first project for which a Chinese enterprise has secured the whole basin rights for planning and development.

With work on Phase One completed more than two years ago – comprising construction of the Nam Ou 2, Nam Ou 5 and Nam Ou 6 plants – the site generated its first electricity on 29 November 2015. In total, the capacity of Phase One is estimated at about 540 MW, almost half the total envisaged for the completed project. The groundbreaking ceremony for the second phase was held some five months later and marked the beginning of the work on the remaining plants – Nam Ou 1, Nam Ou 3, Nam Ou 4 and Nam Ou 7. This second phase is scheduled for completion in 2020.

Emphasising the importance of the initiative, Dr Khammany Inthilath, the Lao Minister of Energy and Mines, said: "Once completed, the Nam Ou Cascade Hydropower Project will have a major role to play in the reduction of poverty across Laos. In particular, it will boost the socio-economic development of Luang Prabang and Phongsaly provinces, immeasurably improving the living standards of local residents.

"It will also play an important role in regulating the seasonal drought problems in the Nam Ou river basin. Ultimately, we hope it will ensure downstream irrigation for the region's plantations on a long-term basis, while also reducing soil erosion."

Despite Inthilath's optimism, the project has attracted criticism on a number of fronts. Firstly, there have been concerns over the possible adverse environmental impact of such large-scale hydropower projects, particularly given the scale and number of hydropower developments currently under way along the Mekong River and its tributaries. In addition to the Nam Ou project, China is also involved with several other hydropower installations, including Don Sahong, Pak Beng and Xayaburi.

A second wave of criticism has come from outside Laos, with a number of neighbouring countries expressing concerns that the cumulative effect of the hydropower projects already under way may adversely impact on the flow of the river. To this end, the governments of Thailand, Vietnam and Cambodia have all gone on record as objecting to the expansion of Laos' hydropower programme.

It is the sheer scale of Chinese investment in Laos, together with the country's resultant indebtedness, that has triggered a third wave of criticism. By the end of 2016, with $5.4 billion worth of funding already in place, China was by far the largest overseas investor in Laos.

According the Lao government's own figures, by the end of 2016 Chinese companies had signed up for $6.7 billion worth of construction projects in the country – some 30.1% of the total earmarked for Laos' infrastructure upgrade. The overall scale of the deals already in place makes Laos the third-largest market for China in the ASEAN bloc.

Overall, though, taking an active role in China's Belt and Road Initiative has been seen as a good fit with Laos' long-held ambition to shift from being a land-locked nation to becoming more of a land-linked economy. Furthermore, Laos' ongoing co-operation with China on a series of energy projects has underlined the positive relationship between the two countries.

Highlighting this, while speaking at the launch ceremony for Phase Two of the Nam Ou Cascade Hydropower Project, Li Baoguang, the Chinese Consul-General in Luang Prabang, Laos' ancient capital, said: "This year marks the 55th anniversary of the establishment of diplomatic ties between China and Laos and there could be no better way of commemorating that than with the commencement of work on this joint venture."

Geoff de Freitas, Special Correspondent, Vientiane

Major hydropower and roadway investments chime well with the overall objectives of the Belt and Road Initiative.

Dam good: Will the benefits of the Bakun hydroelectric facility jump-start the local digital economy?

Speculation as to Malaysia's future economic priorities have frequently focused on the country's oil and gas reserves, palm oil production, high-tech manufacturing, real estate and, of course, tourism. While its potential strengths in the hydropower sector have remained largely overlooked, two high-profile dam projects may be about to change all that, with Sarawak's long-mooted Corridor of Renewable Energy now set to become a reality.

Last month, Sarawak Energy Berhad, the power generation company owned and operated by the state government of Sarawak, completed its purchase of the 2,400 mW Bakun Dam from Malaysia's Ministry of Finance. The company paid RM2.5 billion in cash, with a further RM6 billion in loan facilities, to take possession of one of Southeast Asia's most significant – and controversial – power projects. Work on the dam was originally completed in 2010, but the site didn't come fully online until July 2014.

In a further development, in October 2018, work is expected to begin on the construction of the 1,285 mW Baleh Hydroelectric Facility. The project is being jointly undertaken by the China Gezhouba Group, the Wuhan-based construction and engineering giant, and Untang Jaya, a Sarawak-based construction company.

Once completed, Baleh will be the fourth hydroelectric installation to have been co-opted into Sarawak's Corridor of Renewable Energy, an initiative launched in 2008 on Borneo, an island jointly administered by Malaysia, Indonesia and Brunei. This will see it line up alongside the Bakun Dam, the 944 mW Murum Dam and the 100 mW Batang Ai Dam.

Following the completion of the Bakun deal, the Sarawak government, together with its Sarawak Energy subsidiary, now owns all of the state's electricity generation facilities, granting it considerable leverage over the future direction of other local infrastructure projects. This will include the proposed redevelopment of the Bakun Lake region into a prime tourism destination, complete with a range of new hotels and resorts.

Another project with clear links to the Sarawak Corridor of Renewable Energy is a proposed coastal highway. At present, it is anticipated that up to 80% of its construction costs could be covered by Chinese investment in line with the overall objectives of the Belt and Road Initiative. Considered something of a huge undertaking, the project would entail the construction of several bridges, as well as substantial upgrades to roadways in the more rural and forested areas.

Should it get the go-ahead, the coastal highway would only be the latest of the country's array of ambitious transport infrastructure projects. Indeed, work is already under way on the RM16.5 billion, 1,073km Pan-Borneo Highway, a Malaysian government-backed initiative intended to link the country's two Borneo-based states, Sarawak and Sabah. It could also, ultimately, connect to Brunei via the 30km Temburong Bridge. Currently under construction by the China State Construction Engineering Corp, the bridge is scheduled for completion in late 2019.

The first 786km-long phase of the Pan-Borneo Highway is due to be finished a little later – in 2022. Once completed, though, it is hoped that the road will stimulate further investment in infrastructure, public transport, telecoms networks and public-health facilities across the vast tranches of Malaysia's rugged, underdeveloped terrain that the highway extends across.

For its part, the Sarawak government has claimed its bid to take overall control of the state's renewable-energy resources is in line with its long-term ambition to transform the region into a digital-communications hub. To this end, it has already pledged to invest RM2 billion over the next five years in installing fibre-optic cables and satellite connectivity across the state in order to jump-start the local digital economy. The move is part of a wider agenda intended to rebalance the economy and see it shift away from its traditional reliance on the oil and gas, mining, agriculture and forestry sectors.

Outlining the policy, Datuk Amar Abang Johari Tun Openg, Sarawak's Chief Minister, said: "Bakun and the other hydroelectric projects will play a strategic role in powering the digital economy. We believe that the integrated management of the local hydropower facilities will help attract many of the global digital giants to Sarawak."

Geoff de Freitas, Special Correspondent, Kuala Lumpur

The Belt and Road (the Belt and Road Initiative, or B&R) research project was jointly initiated by ACCA and Shanghai Stock Exchange (SSE).

In 2013 Chinese President Xi Jinping started an ambitious initiative to develop the ancient silk routes over land and sea, the Belt and Road initiative (BRI).

Belt and Road initiative: five priorities of cooperation

1. Policy coordination

• Promote intergovernmental cooperation
• Build a multilevel intergovernmental mechanism for macro policy exchange and communication

2. Connecting infrastructure

• Plan and build connected infrastructure
• Align technical standards
• Create an infrastructure network that connects all sub-regions in Asia, and connects the continents of Asia, Europe and Africa

3. Unimpeded trade

• Remove barriers for investment and trade
• Discuss free trade areas with countries and regions along the Belt and Road

4. Financial integration

• Deepen financial cooperation
• Promote systems for monetary stability system, investment and financing, and credit construction across Asia

5. People-to-people bonds

• Inherit and promote the spirit of friendship and cooperation along the Silk Road
• Carry out extensive cultural, academic and talent exchanges

Broad implications of the Belt and Road initiative

• With over 60 countries identified along the route and USD 800 billion invested by the China Development bank the implications of the project are far reaching and significant.
• Already engineering projects are booming, 6,877 new contracts for projects in 61 countries / Consumer demand in China has risen and the country’s outbound investment is up 18.3% year on year.
• Not all smooth sailing
• Other countries have similar initiatives for example; the US New Silk Road strategy, Russian Eurasian Economic Union strategy and Japan’s Silk Road Diplomacy strategy. In addition the diverse countries along the B&R routes bring with them a diverse collection of problems, and this includes national trade protection.

ACCA’s Belt & Road research project was conceived in August 2016. It explores the opportunities and challenges for B&R countries (including China) in politics, economics, society and culture through desk research, roundtable conferences and workshops.

This approach considers local experiences and international vision, historical achievements and future development.

The report is divided into three areas:

• Desk research - an exhaustive review of B&R-related policies
• Case studies - based on interviews with seven enterprises that are deeply engaged with B&R: China Communications Construction, Power China, Bank of China, Sany, Shanghai Electric, Conch Cement and Changjiang Electronics Technology
• The third are explores the integration and innovation of B&R. These findings are based on roundtable and workshop discussion with those who are working close to the B&R Initiative.

The full report can be viewed here

With work beginning on the Bangkok-Nong Khai link, rapid pan-Asian rail connectivity looks set to become a reality.

Thailand on track: Can high-speed rail links deliver a tourism and economic dividend?

A key element of the High Speed Rail (HSR) connectivity plan for Asia, an integral part of China's Belt and Road Initiative (BRI), was given the go-ahead early last month. This saw the Thai government formally authorise work to begin on phase one of the Bangkok-Nong Khai HSR project, an essential link in the overall network.

Back in 2016, work began on the much-delayed Kunming-Laos link, another key component of the wider network. More recently, Indonesia approved the Jakarta-Bandung HSR route. Meanwhile, the tender process for the 90-minute Singapore-Kuala Lumpur railway is set to commence in Singapore and Malaysia, with the project scheduled for completion by 2026.

In the case of the Bangkok-Nong Khai HSR link, this four-year, THB179 billion (US$5.3 billion) project will result in the creation of a 253km rail connection between Bangkok and Nakhon Ratchasima, the Thai city seen as the gateway to neighbouring Laos. In total, six stations will be constructed along the route – Bang Sue, Don Mueang, Ayutthaya, Saraburi, Pak Chong and Nakhon Ratchasima.

The line actually forms the first part of a three-stage project that will ultimately connect with Nong Khai and then Kaeng Khoi (Sara Buri)-Map Ta Phut (Rayong). At present, no schedule has been agreed for the completion of the final two phases.

Although phase one is primarily being financed from within Thailand, the Thai government is reportedly in negotiations with the Export-Import Bank of China with regard to financing the required high-speed rolling stock. The overall plan is for Thai firms to build the track, while China will supply the trains and signal systems, and provide technical support.

The long-term objective is to establish a trans-Asia high-speed rail link capable of delivering a journey time of just four hours between Bangkok and Vientiane, the Lao capital. Beyond Laos, the proposed link would then extend to Kunming in southwest China, feeding into the mainland's rapidly expanding inter-city HSR network, which had about 22,000km of track as of the end of 2016. Heading south from Bangkok, the high-speed link would also significantly reduce journey times to Kuala Lumpur and Singapore.

Although the negotiations and many of the approval processes have proved to be slow and have faced frequent delays, Thailand remains committed to the proposed high-speed link, seeing it as set to play a key role in its own future economic growth. In the first quarter of 2017, boosted by recovering export levels, the Thai economy expanded by 3.3%, its fastest quarterly growth for four years. Despite this recent rally, the country's economic growth has been trailing its regional peers since 2014.

In 2016, the Thai economy grew 3.2%, with the Asian Development Bank predicting a 3.5% increase for 2017, rising to 3.6% in 2018. Although representing something of an uptick, these figures are still below the projected ASEAN average and remain significantly down on the 7.2% growth the country recorded back in 2012.

The advantages offered by the country's geographic location are central to its hopes of a sustained economic upturn. Set at the heart of continental Southeast Asia, Thailand shares borders with Myanmar, Laos, Cambodia and Malaysia, with the latter sharing a land border with Singapore, home to the world's second-busiest port. With a population of about 69 million and highly developed logistics and finance resources, Thailand is also seen as perfectly positioned to capitalise on the benefits of the free movement of people, products and capital guaranteed under the constitution of the ASEAN Economic Community.

It is also hoped that enhanced rail connectivity will boost tourism, which currently accounts for about 11% of Thai GDP. The country has already committed itself to becoming “the tourism hub of Southeast Asia” and has made considerable progress in terms of delivering on that. In 2016, for instance, it welcomed 32.6 million visitors, generating THB1.64 trillion in revenue. It is now looking to attract ever-increasing numbers of high-spending visitors from China, India and from throughout the ASEAN bloc.

At present, the Tourism Authority of Thailand is strongly promoting the country as a holiday destination in many of the mainland's second-tier and third-tier cities, having identified them as China's primary source of next generation tourists. Last year, about 8.8 million Chinese tourists visited Thailand, while the ASEAN bloc accounted for further 8.6 million visitors. Although the total number of tourists was up for the first half of 2017 year-on-year, the level of mainland visitors dropped by 3.83%.

This was largely seen as the consequence of a crackdown on so-called 'zero-dollar' trips – cheap packages offered to Chinese group travellers who are then pressured into spending at high-priced shopping and dining outlets by commission-only tour agents. Despite the disappointing figures, however, China remains – by a considerable margin – Thailand's number-one tourism source, followed by Malaysia, South Korea and Laos.

With the country's commitment to the pan-Asian HSR project now confirmed, its position as the connective hub for Southeast Asia's emerging high-speed rail links brings the transformation of rail transport across the continent one step closer. That promises to be good news for the wider tourist industry, as well as for exporters and importers across the region.

Geoff de Freitas, Special Correspondent, Bangkok

The inclusion of the Guangdong-Hong Kong-Macau Bay Area in China’s national strategies, such as its 13th Five-Year Plan and Vision and Actions on Jointly Building the Silk Road Economic Belt and 21st Century Maritime Silk Road, will bring about new opportunities for the development of Hong Kong in the years to come. In this connection, action should be taken as soon as possible to map out plans taking advantage of Hong Kong’s strengths in financial services, professional services and international ties in order to enhance co-operation with Guangdong as well as to explore new horizons and add new vitality to the sustainable growth and prosperity of Hong Kong.

Hong Kong’s strengths in financial services, professional services and international ties can also contribute to the transformation and upgrading of industries in the Guangdong-Hong Kong-Macau Bay Area, building the Bay Area into a world-class city cluster with international competitiveness as well as a leading economic growth engine for the mainland, driving the development advantages of the Pan-Pearl River Delta (PRD) region encompassing central-south and southwestern China. The Bay Area will also play an important role in building the Belt and Road. With reference to other economically advanced bay areas in the world and analysing the development of Hong Kong and the PRD, the following initial thoughts regarding the future industrial and trade development of the Guangdong-Hong Kong-Macau Bay Area and the roles played by Hong Kong may serve as the reference for further discussion.

Development Advantages of the Guangdong-Hong Kong-Macau Bay Area

1. Transportation and Logistics

As a collective economy, the Guangdong-Hong Kong-Macau Bay Area is home to a number of leading airports and ports in the PRD region, with air and sea cargo throughput ranking first not only in China but also in the world. The PRD, covered by an extensive network of railways and highways with the Bay Area as the core, offers multimodal transport both internally and externally conducive to logistics development.

Compared with other regions in the Chinese mainland and overseas, the Bay Area, as a major passageway for air, land and sea transport linking countries along the Belt and Road, has obvious advantages in terms of geographical location and logistics infrastructure.

2. Upstream and Downstream Industry Supply Chain

Among all provinces and cities in China, Guangdong ranks first in terms of industrial value-added and export, while the PRD accounts for 80% of the industrial value-added and 95% of export for the province. Despite rising production costs in the PRD in recent years, thanks to its strengths in logistics, industrial structure and comprehensive supporting facilities, the majority of enterprises in the region still opt to retain their production lines there while taking action to move towards automation and high value-added production. According to findings of a questionnaire survey conducted by HKTDC Research, 70% of the surveyed manufacturers and traders still see the PRD as the most important production or sourcing base, with 81% sourcing raw materials and semi-manufactures in the PRD for production activities. Among companies which have plans to expand or relocate their factories, 59% said they would still choose the PRD, while the rest mostly opt for other mainland regions close to the PRD or Southeast Asia. In fact, some enterprises which have already relocated to northern Vietnam pointed out that one of the advantages of investing there is its proximity to the supply chain in the PRD which helps to raise production efficiency and lower logistics cost.

3. ICT and High-tech Industry Cluster

Under China’s innovation-driven development strategy, a high-tech industrial belt has gradually taken shape in the PRD. The PRD High-tech Industrial Belt is one of the three national-level belts of its kind approved by the Ministry of Science and Technology (MOST). This belt covers six national high-tech industrial development zones in Guangzhou, Shenzhen, Foshan, Zhongshan, Zhuhai and Huizhou; three provincial high-tech industrial development zones in Dongguan, Zhaoqing and Jiangmen; two national software industrial bases in Guangzhou and Zhuhai; three national high-tech products export bases; 12 national '863' achievement transformation bases; and one national-level university technology park.

In 2015, the shares of advanced manufacturing industry and high-tech manufacturing industry amounted to 53.9% and 31.8% in PRD’s total value-added industrial output respectively; R&D spending as a share of GDP reached 2.7%; the number of applications for invention patents per 1 million people was 1,728; ownership of invention patents per 10,000 people was 23.33; and technology self-sufficiency rate was over 71%.

4. International Financial and Professional Services

Compared with other city clusters in the mainland, the PRD Bay Area has the unique advantage of encompassing Hong Kong, an international financial centre, in its ‘one-hour economic circle’. Hong Kong, with its large pool of professional service providers and international talent, as well as economic and judicial systems different to those of the mainland, is an ideal gateway for multinational companies entering the Asia and China market.

According to a survey conducted by the Hong Kong SAR government, as of June 2016 there were a total of 3,731 regional headquarters and regional offices in Hong Kong which represent their parent companies outside Hong Kong in handling their business in the Chinese mainland, Northeast Asia and Southeast Asia. As such, Hong Kong has been a leading region in the world for many years in attracting foreign direct investment and exporting outbound direct investment. Moreover, Hong Kong accounted for 52% of China’s cumulative utilised foreign investment as at the end of 2016 and about 60% of its cumulative foreign direct investment as at the end of 2015.

Development Prospects for Economic Integration of the Guangdong-Hong Kong-Macau Bay Area

Although the political and legal systems of Guangdong, Hong Kong, and Macau differ greatly, through existing co-operation frameworks between governments of the three places and co-operation platforms such as CEPA and free trade zones, trade between Guangdong and Hong Kong and between Guangdong and Macau is basically liberalised. Hong Kong and Macau already have plans to conduct negotiations on free trade agreement, which, when completed, will turn Guangdong, Hong Kong and Macau into one free trade zone.

In view of the fact that Hong Kong is a service platform for the mainland in its ‘bringing in’ and ‘going out’ strategies, players in the industry clusters in Guangdong and Hong Kong, including production enterprises, service suppliers, capital providers, universities and R&D centres, have already established close ties with one another and the two places have practically formed a collective economy. Connections between Guangdong and Hong Kong in terms of people flow, logistics, transportation, capital flow, commercial existence and corporate investment can well testify to this.

It can be expected that upon completion of the Hong Kong-Zhuhai-Macau Bridge and Shenzhen-Zhongshan Bridge, transport links, customs clearance and trade activities at the Pearl River Estuary will be further enhanced. One of the objectives of the Guangdong-Hong Kong-Macau Bay Area plan is to further deepen co-operation in the Bay Area and co-ordinate the connectivity and construction of infrastructural projects, including ports, airports, railways and highways in Hong Kong, Macau and PRD cities.

Efforts should be made to expand the liberalisation of and co-operation in financial and services sectors; promote the free flow of factors of production, products, technology and services within the Bay Area; create an environment conducive to the transformation and upgrading of existing industry clusters and the growth of new industry clusters. Action should also be taken to attract more domestic and foreign investors, as well as trading and commercial activities to the Bay Area in a bid to create more room for development and business opportunities for cities in the area.

In the US, the San Francisco Bay Area (SFBA) comprises nine counties. While each county has its own characteristics and advantages, the rate of economic and industrial development and urbanisation of the entire SFBA is very high and interaction among the nine counties is extremely strong. Industry clusters in the sub-regions of the SFBA are similar, which mainly include industries taking advantage of local talent, such as professional services, scientific research and technical services, as well as tourism-related industries.

The majority of the industries with outstanding performance in the SFBA also have a presence in almost all the sub-regions. While the three largest and most important industry clusters in the SFBA established their foothold in the San Francisco and San Jose sub-regions, three-quarters of the sub-regions house at least two industry clusters which are developing well in the SFBA. Also, residents in the SFBA commute between different sub-regions every day and ties between all the sub-regions are close. This shows that the economic operation of the SFBA works as a collective whole.

The high degree of interaction between the sub-regions means that any development strategy which takes into consideration just one county or sub-region will miss out on benefits which can only be brought about by taking the entire bay area into account [1].

In a move to meet demands of the market and of their own development, PRD enterprises have started to establish their presence in more than one city. For instance, TCL Communication Technology Holdings Ltd has its production base in Huizhou and China headquarters in Shenzhen, while its Hong Kong office takes charge of overseas business. Another example is Welon (China) Ltd, which set up its base in Huizhou at first, but as business continued to expand the company began to build production lines for different sporting goods in various PRD cities and even set up its China headquarters and production R&D centre in Guangzhou. In order to better co-ordinate its expanding overseas business, Welon may consider setting up an office in Hong Kong.

It can be expected that PRD enterprises will increasingly carry out their business development according to the competitive advantages and economic environment of different cities in the Bay Area. This will in turn bolster the economic and industrial development as well as urbanisation rate of the Guangdong-Hong Kong-Macau Bay Area, while interaction between cities within the Bay Area will also grow stronger.

Hong Kong’s Role in the Future Development of the Bay Area

1. Global Supply Chain Management and Logistics Centre

In recent years, as production cost in China continues to climb, many enterprises have relocated or extended their production lines to emerging countries such as Vietnam and Bangladesh. As a result, a supply chain linking China, East Asia, Southeast Asia and South Asia has gradually been formed to become one of the world’s three largest regional supply chains on a par with the Americas and Europe.

Under the pressure of rising wages and labour shortage, many labour-intensive enterprises in the PRD, such as those engaged in garment and footwear manufacturing, have relocated their production lines to popular spots in Southeast Asia and South Asia. This has caused China’s share in the garment imports into the US and EU to drop from 39% and 42% respectively in 2012 to 36% and 34% respectively in 2016. During the same period, China’s share in the footwear imports into the US and EU also fell from 72% and 51% respectively in 2012 to 58% and 45%.

However, it is interesting to note that the share of Chinese goods in total imports into the US and EU actually rose rather than dropped, while China’s share in global industrial products exports jumped from 16.8% in 2012 to 18.6% in 2015. This shows that China’s manufacturing industry and exports are gradually moving towards high value-added and upstream products.

According to data released by the World Trade Organisation (WTO), the share of China’s semi-manufactures exports in the world rose from 9.6% in 2010 to 12% in 2014. A large part of this was exported to Southeast Asia and South Asia, which reflects the increasingly close supply chain relationships between countries in these regions and China. Currently, the PRD is the ‘world factory’ for a wide range of consumer goods and intermediate products. As Chinese enterprises and other multinational corporations expand their processing and production activities in Southeast Asia and South Asia, they have to import various parts, components, accessories and industrial materials produced in other countries, as well as those produced by their factories in the PRD and their upstream suppliers.

Since the industrial base of emerging markets in Southeast Asia and South Asia is still in its nascent stage, if local and foreign invested enterprises wish to expand their production in these countries, they must import more advanced processes. And in so doing, they have to seek the support of foreign professionals and services, including a wide range of engineering, equipment manufacturing and environmental services.

Hong Kong is an international commercial and logistics centre in Asia, its service suppliers possess rich professional knowledge and have established extensive business networks in many countries and regions, hence, it can help China connect with other regions by providing one-stop services in supply chain management, including the above mentioned production, logistics and environmental services.

In addition to building a supply chain for processing and production activities, the rapid development of logistics supply chain services is not to be overlooked as the booming Chinese economy and other emerging Asian countries has pushed up the income level of the population, which in turn has generated great demand for imported consumer products.

In particular, as e-commerce has grown in leaps and bounds in recent years, the way of doing business has undergone immense changes. And as consumer products are moving faster and faster, the demand for high-efficiency international supply chain services is also bound to expand further. Judging from the structure and growth of Hong Kong’s re-export trade currently, the role played by its logistics sector is becoming increasingly important in Asia’s regional supply chain.

Capitalising on the service networks and efficiency of the airports and ports of Hong Kong, Shenzhen and Guangzhou, as well as the close co-operation between the Guangdong and Hong Kong customs and port authorities (such as the new logistics services offered by the one-stop air-land multimodal super trunk line in Hong Kong Airport and Nansha Bonded Port Area Logistics Park), the Guangdong-Hong Kong-Macau Bay Area can be expected to maintain its position and competitiveness as a logistics hub in the course of its development as a supply chain linking major regions around the world and as a regional supply chain serving China in its move to connect with Asia.

Within the Bay Area there are five airports, namely in Hong Kong, Macau, Guangzhou, Shenzhen and Zhuhai, while Hong Kong, Guangzhou and Shenzhen also have their own international ports. How to co-ordinate these facilities and pursue rational development, complementariness and co-operation in order to strengthen the competitiveness of the Bay Area will have to depend on the communication and collaboration between the participating members.

In the case of Japan’s Tokyo Bay, there are six ports, namely in Tokyo, Yokohama, Yokosuka, Kawasaki, Chiba and Kisarazu. In order to avoid vicious competition, these ports were carefully planned with the aim of promoting co-ordinated division of labour and co-operation. Each port performs different functions according to its strengths and characteristics and all six synergise to form a port cluster.

The planning and development of infrastructural facilities such as ports and airports in the Guangdong-Hong Kong-Macau Bay Area can refer to the Tokyo Bay model in achieving co-ordinated division of labour and complementariness. For instance, Hong Kong, as an international aviation hub, has a strong network of international air routes (for both passenger and cargo flights).

Through strengthening water and land transport links with Shenzhen’s airport and ports as well as customs co-operation, Hong Kong can provide multimodal transport services linking mainland cities with foreign markets. Also, upon completion of the Hong Kong-Zhuhai-Macau Bridge, Zhuhai Airport can forge closer co-operation ties with Hong Kong Airport and further strengthen the competitiveness of the Bay Area as an international logistics hub.

Where promoting logistics resources integration and complementariness in the Bay Area is concerned, Guangdong and Hong Kong can further enhance collaboration in a move to raise the level of advanced and highly efficient services such as online logistics, customs clearance, payment, source tracing and tracking in international trade.

2. Advanced Production and Innovation R&D Centre

Technology and innovation are the main direction for future development. In the course of building the Guangdong-Hong Kong-Macau Bay Area into a city cluster with global influence and competitiveness, technology and innovation are important drivers. Technological development not only aims to enhance the R&D capability of the Bay Area, but also extensively apply technology in different areas, such as smart production, smart cities, Internet of Things, environmental protection and energy saving, in order to raise the level of overall economic efficiency and sustainable development. Industrial development in the PRD region can also attract more input into R&D and propel a benign cycle.

Information on Guangdong’s planning shows that the PRD will, leveraging on its industrial advantages, build five high-tech industry clusters:

(a) Using Guangzhou, Shenzhen and Foshan as the fulcrum to drive development of the information industry in cities including Zhuhai and Zhaoqing, and to expedite the pace of building a national-level information industry base in the PRD.

(b) Using Guangzhou, Shenzhen, Zhuhai, Dongguan and Huizhou as the fulcrum to create a number of new energy industry clusters and establish a new energy car production base; using Shenzhen, Dongguan, Foshan and Zhongshan as the fulcrum to build a national solar photovoltaic high-tech industrial base to support the development of low-carbon economy in Shenzhen, Jiangmen and Zhaoqing, and to accelerate the pace of Guangzhou, Shenzhen, Foshan and Dongguan in creating a national-level new energy, environmental protection and energy saving industrial base.

(c) Using the Torch Plan new materials and niche industry base and the national high-tech industrial base for new materials in Guangzhou and Foshan as the pillar to create a leading national-level new materials industry base.

(d) Using the two national biological industry bases in Guangzhou and Shenzhen as well as Zhongshan as the support to create a national bio-medicine and leading modern innovation industry base.

(e) Using Guangzhou and Shenzhen as the core to develop a world-class LED new light source industry integrating Shenzhen, Dongguan, Huizhou, Guangzhou, Foshan, Zhongshan and Jiangmen, and to form an LED new light source upstream-downstream integration industrial belt in the PRD.

Unlike the San Francisco Bay Area in the US whose industrial structure focuses on professional/scientific and technical services as well as the information industry, the industrial structure of the PRD covers a wide spectrum of industries ranging from high-tech to a diversity of traditional manufacturing.

While technology can be applied in different sectors and smart cities, internet of things, environmental protection and energy saving are major directions. How to promote the integration of advanced technology, modern professional services and traditional industries in order to accelerate industrial transformation and upgrading in the Bay Area is a development direction that warrants attention. For instance, manufacturing industry production lines in the PRD should move towards automation, while industrial associations in various cities in the Bay Area should strengthen exchanges and co-operation, combine different industrial enhancement resources and technological resources, and develop automation equipment suitable for their respective industries.

Today, mainland enterprises boast sound R&D ability and have developed a wide range of popular technologies and products in such areas as ICT applications and solutions as well as mobile device applications (apps). However, not many enterprises manage to extend such technological applications from local level to national level, neither can they tap the international market by using technologies that meet international standards. Meanwhile, although China is still at a nascent stage in certain advanced technologies, it is finding it difficult to import foreign technologies directly into the mainland for application due to different technical specifications and user experiences.

Compared with the mainland, Hong Kong is weaker in terms of scientific research input and overall R&D capability. However, Hong Kong companies are not only well-versed in international technological trends and technical standards, but also have established extensive international market networks. As such, Hong Kong can collaborate with Shenzhen as well as cities within the Bay Area in forging closer ties in personnel exchange, technological application, and technical specifications in relevant technological sectors.

Such joint efforts not only can help advance commercialisation of mainland technological achievements and develop overseas markets, but also effectively bring in the right foreign technologies for mainland industry players for local application, which will in turn boost the overall development of the Bay Area.

In certain high-tech industries, e.g. internet of things applications and development of next generation internet, some mainland enterprises currently still lack the necessary expertise, which has more or less restricted the relevant R&D and technological application. Hong Kong’s technological industry players have good knowledge about advanced foreign technologies, excel in using technologies developed in accordance with international standards/frameworks, and are experienced in importing foreign technologies. Therefore, they can help mainland projects pursue commercialisation to meet market demand.

Hong Kong, as a regional intellectual property trading hub, offers sound protection to intellectual property and provides excellent professional services. Hence, the SAR has attracted a great number of technology, creative, R&D, design and production companies around the world to use it as a platform for trading intellectual property with the Chinese mainland and other Asian markets.

To meet the demands arising from the development of technology and innovation in the Bay Area, Hong Kong can give full play to its advantages as an intellectual property trading hub to bring in intellectual property, such as technology from abroad, as well as assist the Bay Area in launching its R&D achievements onto the market and tap the international market.

Financial technology is another sector where Hong Kong can participate in the technological and innovation development of the Bay Area. In Guangdong’s 13th Five-Year Plan, it was put forward that efforts would be made to encourage Shenzhen and Hong Kong to jointly build a global financial centre.

Hong Kong is already an international financial centre in its own right. As its ties with the mainland financial sector become increasingly close, it provides a sound co-operation base and excellent opportunities for the development of financial technology. For instance, for financial technology companies wishing to develop financial technology for stock investment, Hong Kong offers room for growth because its stock market has connections with both the Shanghai and Shenzhen stock markets.

Any enterprise wishing to engage in financial technology must possess knowledge in financial services and the necessary technical background. Hong Kong is not only home to a large pool of professionals rich in financial experiences and knowledge, but also has in place transparent regulations and a sound supervision system which guarantees information safety. As such, it can join hands with the technical personnel of the Bay Area in developing the right financial technology.

If Guangdong and Hong Kong can coordinate the development and application of financial technology in the Bay Area, including system standards and connection, the application and research of financial technology in the Bay Area is bound to reach an advanced level.

It can be expected that more and more entrepreneurs and investors in the Guangdong-Hong Kong-Macau Bay Area will be encouraged to participate in various technological innovation enterprises. Apart from demand for financial resources, these enterprises are also in dire need of supporting services in technology, market network and corporate development.

Technological innovation enterprises in Shenzhen and in the Bay Area at large can capitalise on Hong Kong’s advantages, such as the free flow of information and capital, extensive international market networks, and sound corporate management, to enhance their development ability. In encouraging Shenzhen and Hong Kong to jointly build an innovation platform, efforts have to be made to strengthen exchanges and connections between the R&D institutions and technological enterprises in the two cities in a bid to create a technological co-operation platform. Steps should also be taken to extend the platform to other related financial and professional services in the hope of combining each other’s advantages.

Pooling talent is an important factor in propelling technology and innovation. In attracting experts, especially experts from overseas, Hong Kong can join hands with Shenzhen and play to their respective strengths.

Foreign experts may find it easier to adapt to living in Hong Kong, an international metropolis, than in mainland cities. So, in order to attract foreign professionals to form R&D teams with mainland and Hong Kong personnel, action can be taken to form teams straddling Hong Kong and neighbouring Shenzhen. In so doing, foreign professionals can live in Hong Kong, where the environment is international, while maintaining close contacts with research team mates in the PRD region, in particular Shenzhen.

Hong Kong, with its foreign ties and international background, can be positioned as a base for foreign technological exchanges and co-operation in the Bay Area. Currently, Hong Kong and Shenzhen are planning to jointly build a Hong Kong/Shenzhen Innovation and Technology Park in the Lok Ma Chau Loop. Upon completion, this park can play a leading and demonstrative role in attracting the entry of mainland and leading foreign enterprises, universities and R&D institutions and help bolster the future development of the Bay Area.

3. Building the Belt and Road

Under the Belt and Road Initiative there are five development priorities: policy coordination, facilities connectivity, unimpeded trade, financial integration, and people-to-people bonds. Among the five, facilities connectivity takes the lead in driving the development of infrastructural projects.

According to the latest estimate released by the Asia Development Bank, from 2016 to 2030, in developing Asia alone, capital required for investing in infrastructural construction amounts to US$1.7 trillion a year. Currently, state-owned enterprises (SOEs) are the major players participating in infrastructural projects along the Belt and Road. However, the diverse range of infrastructural construction projects along the Belt and Road require enormous amounts of investment.

The capital, risks, and management technology involved are far beyond the ability of the government and SOEs. Public-private partnership (PPP), which supplies the above investment essentials and brings in different innovative ideas, is crucial to the successful building of the Belt and Road.

The arrangement of PPP projects can be very complex as they involve investors from different countries and each of the multiple investing parties has its own interests in mind. Hong Kong companies have rich experience in PPP projects and Hong Kong, as an international hub, can play the role of a ‘super-connector’ in effectively matching participants in the projects and providing financing solutions.

Guangdong province has long been a major source of investment in China’s overseas contracted projects. Mainland enterprises, in particular Guangdong enterprises, have an edge in contracted projects, while Hong Kong’s professional and commercial services are highly rated in specific areas. For instance, many architectural, surveying and engineering services companies in Hong Kong have reached the world’s top levels. They can provide Guangdong enterprises participating in Belt and Road infrastructural projects with a wide range of services, such as consultancy, design, planning and supervision.

Also, Hong Kong companies, with their wealth of international experiences and strengths in grasping and analysing information from overseas, can effectively conduct project risk assessment and provide the necessary risk management services for project investment.

Co-operation in investment and trade is another priority in building the Belt and Road. China hopes to collaborate with countries along the route to study ways to advance investment and trade facilitation and remove investment and trade barriers in order to expand the horizon for multilateral investment.

At the same time, efforts should be made to optimise the division of labour and distribution of the industry chain, as well as synergise the upstream and downstream industry chain with related industries with a view to enhancing the region’s industrial support and comprehensive competitiveness. This will include encouraging joint efforts in establishing different types of industrial parks in the hope of collaborating with Belt and Road countries in promoting the development of industry clusters.

The PRD is the first region in China to open up to the outside world. Today, PRD enterprises are highly internationalised and are leading the country in both the ‘bringing in’ and ‘going out’ strategies. As at the end of 2015, Guangdong ranked top in the country in terms of the number of foreign-invested enterprises and amount of outbound direct investment.

Guangdong enterprises have a competitive edge in technology, capital and management. As their ability in participating in international competition continues to increase, they possess the right conditions to ‘go out’.

At present, as China’s economy is undergoing transformation and upgrading, constraints in the domestic resource environment are tightening, labour cost is rising and corporate profit margin is dwindling. If these industry players can leverage on the advantages of Guangdong’s manufacturing industry and capture opportunities generated by the Belt and Road strategy, they should be able to quicken their pace of ‘going out’ and expanding their international business.

HKTDC Research conducted a questionnaire survey of over 200 Guangdong enterprises in the second and third quarters of 2016. According to the survey, 80% of the enterprises indicated that they would consider exploring business opportunities in countries along the Belt and Road in the next 1-3 years.

Among enterprises that would consider exploring Belt and Road opportunities, the majority of them said they hoped to increase product sales to Belt and Road markets. Some of them opted to invest in setting up production factories in the Belt and Road or source various kinds of consumer goods/food products/raw materials there for supplying to the mainland market, while others hoped to build transit warehouses in Belt and Road countries in order to enhance their international logistics efficiency.

With regard to locations along the Belt and Road where the surveyed enterprises showed interest in exploring business opportunities, the vast majority of them (83%) chose Southeast Asia, including ASEAN countries. The Guangdong-Hong Kong-Macau Bay Area is not only an important transport and logistics hub for the Maritime Silk Road, but has also established effective supply chain relationships with Southeast Asian countries.

For many years, Hong Kong service providers have been assisting enterprises in Guangdong and other mainland regions in managing their trading and investment activities in Hong Kong and in foreign markets. As China advances the Belt and Road development strategy and further encourages enterprises to ‘go out’ to invest offshore, Hong Kong service providers should further strengthen co-operation with Guangdong in such areas as finance, law, logistics, taxation, marketing and risk assessment in a move to capture Belt and Road opportunities.

When mainland enterprises go abroad to establish sales networks, make direct investment, and carry out sourcing and various kinds of acquisition, they need to raise funds in US dollar or other foreign currencies to finance their activities. Currently, enterprises raising funds for their offshore investment projects through the banking system or other financing channels in the mainland are still subject to a lot of restrictions.

If action is to be taken to make it easier for mainland enterprises to make use of the Hong Kong platform to raise funds for their offshore business by taking advantage of its free flow of capital and wide range of professional services, it can effectively resolve their investment and financing problem in the course of ‘going out’. Apart from bank financing, Hong Kong’s financial services and investors, such as venture capital and private funds, not only can provide equity fund but also inject international elements into mainland enterprises. For instance, they can set up an international company through Hong Kong to carry out cost-effective equity and debt financing for individual ‘going out’ investment projects and support the operation and development of the projects.

Moreover, as Hong Kong and Macau forge closer ties with the ports and airports in the Bay Area and in other parts of the PRD, such efforts can be further extended to co-operation with ports in foreign countries. Specifically, they can form alliances with ports in Southeast Asian countries along the 21st Century Maritime Silk Road with the aim of promoting goods import and export facilitation, such as customs clearance, integration of ports and free trade zones etc. These developments are bound to raise the competitiveness of the Bay Area in terms of production, sales, supply chain management, international logistics warehousing and distribution.

Cross-border online sales is an example. The developed transportation and logistics networks in the Bay Area have provided great convenience to consumers in shopping online and to small commodity producers in developing e-commerce. Currently, online shopping and e-commerce in the mainland mainly focus on the domestic market, and international business has yet to be developed.

Hong Kong is one of the most popular cross-border online shopping grounds. It has a sound e-commerce platform and offers network security and protection of personal data privacy. Hence, it has won the trust of foreign users who attach importance to network safety.

Hong Kong also has in place different international payment instruments and third-party payment platforms which can facilitate consumers’ cross-border online shopping activities. Moreover, Hong Kong has a highly efficient global logistics network, with service suppliers providing consumers with effective consolidation, purchase, international transhipment and customs clearance services. As such, it can serve as an ideal platform for foreign consumers shopping online for products in the Bay Area and other mainland regions, and for netizens in the Bay Area searching for trendy foreign goods.

If Guangdong and Hong Kong can jointly strengthen goods flow and further implement facilitation measures for the customs clearance and inspection of import and export goods, it can certainly promote the development of online business in the Bay Area.

Conclusions

Outstanding regional economies such as the San Francisco Bay Area, New York Bay Area and Tokyo Bay share a common feature, that is, their entire area is made up of a number of clusters with strong interaction with one another. Enterprises in the clusters develop on a mutually beneficial basis while sharing competitive advantages of the cluster.

The fact that enterprises in the clusters are distributed in different cities in the bay area has raised the degree of urban integration of the entire area. As such, the economic operation of the bay area advances as a whole. For instance, some development strategies must be formulated from the angle of the whole area in order to protect the economic benefits of the bay area. In light of this, the National Development and Reform Commission mapped out the plan of the Guangdong-Hong Kong-Macau Bay Area as a collective economy.

However, unlike foreign bay areas in San Francisco, New York and Tokyo, or bay areas in the mainland, such as Bohai Rim and Yangtze River Delta (YRD), the Guangdong-Hong Kong-Macau Bay Area embodies three places with different political, administrative and economic systems. Hence, it is not surprising that many hurdles exist in the planning of the Bay Area as a whole. The authority should not over-rely on the analysis of a single expert when mapping out such plans and must hold consultation and discussion with all stakeholders concerned.

According to analysis, the ‘single core’ feature is shared by many leading bay areas in the world. For instance, the New York Bay Area has New York City as its core, Tokyo Bay is centred round Tokyo City, while the San Francisco Bay Area has San Francisco as the core and San Jose as a secondary centre.

In the case of the PRD Bay Area, Guangzhou, Shenzhen and Hong Kong are the three major cities with similar population size and economic strength. How to integrate these cities to develop jointly in the Bay Area and collaborate in carrying out overseas promotion is an issue that warrants attention.

In the Guiding Opinions of the State Council on Deepening Pan-Pearl River Delta Regional Co-operation, it was proposed that the Guangdong-Hong Kong-Macau Bay Area is to be positioned as the engine driving the growth of the Pan-PRD region as well as Southeast Asia and South Asia. In strengthening ties with inland regions, such as central-south and southwestern China, connecting with the world and covering Southeast Asia and South Asia, Hong Kong and the PRD can complement each other by way of division of labour and synergy.

In sum, Hong Kong, as an international business platform and financial centre, should continue to maintain foreign ties while taking advantage of the Bay Area’s connection with the hinterland to enhance the strength of the Bay Area in propelling the development of an even wider area. Where specific division of labour is concerned, past experience has shown that not only first-tier cities like Hong Kong, Guangzhou and Shenzhen wish to become regional or international financial, trade and shipping centres capable of attracting the presence of international corporations and business activities, even second- and third-tier cities also hope to join the fray and develop high value-added industries.

With reference to the directions for development of economic industries and urban integration of the San Francisco and other bay areas, the planning of the Guangdong-Hong Kong-Macau Bay Area as a collective economy should follow the macro directions of future developments. It was mentioned in the Guiding Opinions that Pan-PRD has to clean up the various rules and practices impeding the reasonable flow of production factors. By so doing, all kinds of production factors can flow freely and orderly across different regions.

Moreover, in order to create an environment conducive to the transformation and upgrading of existing industry clusters and the healthy growth of new industry clusters, Guangdong and Hong Kong should strengthen co-operation in areas such as increasing market attraction, optimising business environment, and nurturing and attracting talent. This will improve the ability to compete with other regions in the mainland and overseas under the megatrend of globalisation, and in turn attract more domestic and foreign investors and commercial activities to establish a presence in the Bay Area.

In terms of population, size and total economy, the Guangdong-Hong Kong-Macau Bay Area is more or less on a par with most of the advanced bay areas in foreign countries. If the Bay Area can operate as an integrated market where market access and circulation are concerned, it is bound to attract investment, bolster the development of high-tech and innovation industries, and elevate the Bay Area to the level of world-class city cluster.

All in all, Hong Kong can enhance its functions in financing, international operation and risk management. It should also aim to strengthen co-operation with PRD enterprises, enhance its role as an international business platform, drive industries in the Guangdong-Hong Kong-Macau Bay Area to undergo transformation and upgrading, and give full play to the core values of its role as a ‘super connector’ in the building of the Belt and Road.

[1] The Bay Area: A Regional Economic Assessment, Bay Area Council Economic Institute, October 2012

According to Vision and Actions on Jointly Building the Silk Road Economic Belt and the 21st Century Maritime Silk Road, a key strategy document produced by the Chinese government, the “maritime silk road” will consist of two routes, one of which will run from China's coastal ports to Europe via the South China Sea and Indian Ocean. As the key Eurasian shipping route, the Indian Ocean plays a major role in facilitating China’s overseas trade and the transportation of fuel and raw materials. Sri Lanka, an island country in the Indian Ocean, is seen as one of the vital nodes along the maritime Silk Road. In line with this, the Chinese province of Guangdong will ally with Sri Lanka to build the proposed sea-rail multi-modal transportation corridor as part of its participation in the “One Belt, One Road” initiative and the plan of developing the Guangdong-Hong Kong-Macau Big Bay Area into an international logistics hub as part of the Silk Road Economic Belt.

Source: Guangdong Provincial Department of Communications, compiled by HKTDC Research

Sri Lanka’s Logistics Strengths

Situated in the Indian Ocean, along some of the world’s busiest shipping routes and close to India, Sri Lanka has a distinct locational advantage, which should see it develop into a key shipping centre and logistics hub in South Asia (See Sri Lanka: An Emerging Logistics Hub in South Asia). Despite being a small economy, with a total trade amounting to about US$31 billion in 2014 (only 4% of India’s US$778 billion), Sri Lanka is an important transhipment hub in the region. It is a site where many shipping companies consolidate and deconsolidate cargo for transhipping to other destinations. In 2014, the Port of Colombo reported a growth of 12.3% in container traffic to 4.88 million TEUs, of which transhipment cargo accounted for 75% of total container throughput.

World Shipping Council statistics show that the Port of Colombo – Sri Lanka’s major container port on the west coast – was the busiest port in South Asia in 2013, handling 4.31 million TEUs. This puts it ahead of India’s largest container port, Jawaharlal Nehru (4.12 million TEUs in 2013).

Port of Colombo

Increasing traffic in the Port of Colombo.

A reclamation project near the Port of Colombo.

Amid the growing demand for international logistics services, Sri Lanka has launched the Colombo Port Expansion Project (CPEP). Prior to the project, there were three terminals in the Port of Colombo: Jaya Container Terminal, Unity Container Terminal and South Asia Gateway Terminal, with seven main container berths and four feeder berths.

Following the completion of the CPEP, three more terminals will be available. The first of these, the South Container Terminal (developed by Colombo International Container Terminals Limited, a joint venture (JV) between China Merchants Holdings (International) Co Ltd and SLPA) has already commenced operations. This is the first terminal in South Asia that can accommodate a mega-sized vessel. The SLPA-owned East Container Terminal (ECT) will come into operation in late 2015, while the West Container Terminal is still at the planning stage. It is expected that the container handling capacity of Port of Colombo could be increased from slightly more than 4 million TEUs to 12 million TEUs per year, making it one of the world’s largest container ports.

CICT: China Merchants holds an 85% stake.

Fully operational: The South Container Terminal, part of the Colombo Port Expansion Project

Hambantota Port

Hambantota is located in the south of the island.

In order to further expand the country’s logistics sector, the Sri Lankan government is developing a new port and economic zone in Hambantota, a southern coastal district. Significantly, the designated contractor for the whole project is a JV between China Harbour Engineering Co and Sinohydro Corporation Ltd.

Phase one of the projects has already been completed, delivering a port capable of berthing four vessels and a bunkering terminal that started operation in 2014. The current plan will see the second phase of the port’s development add a container terminal with seven berths, while a dockyard will be added in third phase. It is expected that the construction of phase two will be completed by the end of 2015. While a vast proportion of the project is still under construction, the Hambantota port has already made good progress, handling a total of 388 ships in 2014 - more than double its 2013 throughput.

Phase 2 of Hambantota project is under construction.

Automobile transshipment is currently the main business of Hambantota port.

Although Sri Lanka does not manufacture automobiles, Hambantota is now becoming a transshipment hub for finished vehicles. Given its desirable location, augmented by its deep-water port, carmakers from Japan, Korea and India are increasingly using Hambantota as a nexus for transshipping vehicles built in India, Thailand, Japan and China to markets in Africa, the Middle East, Europe and the Americas. According to SLPA, the port handled 254 Ro-Ro vessels (i.e. ships carrying vehicles) in 2014, an 85% increase on the previous year. The total number of motor vehicles handled approached 190,000 in 2014, compared to about 65,000 in 2013. Aside from vehicles, the Hambantota port is also set to become a transshipment hub for a range of other merchandise, similar to the Port of Colombo. In particular, it is looking to service goods manufactured in OEM plants in other Asian production bases.

China Habour Engineering Co Ltd: The lead contractor for the Hambantota project.

A Ro-Ro vessel unloading vehicles in Hambantota.

Foreign Participation

Despite heavy public and private investment in infrastructure – long considered an essential ”tangible factor” for a logistics hub - Sri Lanka is encountering challenges in terms of “intangible factors”, including access to a sufficient number of qualified professionals and international participants in the field. Not surprisingly, the country’s logistics and transport industry still lags behind a number of the region’s other leading hubs, including Hong Kong, Singapore and Dubai.

Sri Lanka was ranked 89th out of 160 countries in the World Bank’s 2014 Logistics Performance Indicator (LPI). Notably, Sri Lanka scored 2.91 on competence and quality of logistics services, compared to India’s 3.03, UAE’s 3.5, Hong Kong’s 3.81 and Singapore’s 3.97. This indicates a need for Sri Lanka to improve the quality of its logistics services, as well as a requirement for greater investment in “hardware” - ports, roads and railways.

The participation of foreign logistics service suppliers, many of whom could bring in the level of services that meet international standards, is important for the future development of Sri Lanka’s logistics industry. Currently, the permitted foreign shareholding of a shipping agency in Sri Lanka can be up to 40%, while requests for a larger share has to be approved by the Board of Investment (BOI) on a case-by-case basis.

Apart from its locational benefits, Sri Lanka has other advantages likely to appeal to foreign logistics companies. Unlike a number of other developing nations, Sri Lanka seldom experiences port congestion or large-scale industrial unrest. In addition, the relevant costs involved in undertaking international trade in Sri Lanka are cheaper than when carrying out comparable activities among its regional peers. According to the World Bank’s Doing Business Report 2015, the per-container cost for exporting and importing to and from Sri Lanka are, respectively, US$560 and US$690 – much lower than the South Asian average (US$1,923 and US$2,118) and in Mumbai (US$1,120 and US$1,250).

During a HKTDC Research field trip to a Hong Kong-based shipping and logistics services provider operating in Sri Lanka in early 2015, it was pointed out that an increasing number of liner and barge transport companies are moving to the country. This is gradually helping Sri Lanka achieve the economies of scale required to succeed in the logistics industry. APL Logistics, one of the world’s largest logistics companies, for example, has announced it will set up a regional consolidation hub for South Asia in Sri Lanka this year. Its company statement said that the logistics service provider will operate container freight stations, warehouses and other logistics-related businesses in the country. In a similar vein, Hong Kong logistics services suppliers who are considering expanding their business further afield can work with their Sri Lankan counterparts to access the opportunities in South Asia.

Useful Contacts

The Hong Kong Law Society has initiated a pact to promote international cooperation among Belt and Road economies.

With more than 60 countries covered under China’s Belt and Road Initiative, the rise of cross-border investment and trading is expected to lead to greater demand for professional legal services. The Law Society of Hong Kong has drafted a related agreement called the Hong Kong Manifesto, and in May, signed the pact with 38 legal organisations from 22 countries and regions along the route. As it sets out to promote a coherent model for businesses and trade to follow, the agreement also promotes Hong Kong position as Asia’s centre for professional legal services.

Thomas So, President of the Law Society of Hong Kong, explains how the manifesto was the culmination of work by the Law Society’s Belt and Road Committee, which also explored the role of Hong Kong’s professional legal services under the global development blueprint. 

What is the idea behind the Hong Kong Manifesto?

The Belt and Road Initiative will spur economic activity and numerous cross-border investments. Given that the 60 participating economies have different legal systems, the Law Society believes it is necessary to push forward a model to allow corporations and investors involved in Belt and Road projects to trade and negotiate using the same legal language and game rules. At the same time, the Society plans to set up a legal information platform for the Belt and Road Initiative to provide information on basic investments and regulations, as well as local legal advisory services for the Belt and Road countries. 

One of the goals of the Hong Kong Manifesto is to harness members’ power to promote legal interaction and strategic cooperation through annual or bi-annual conferences to explore the challenges and opportunities of the Belt and Road Initiative, as well as relevant legal issues for investors. The Society also plans to establish a Belt and Road Lawyers Alliance with the All China Lawyers Association to construct a closer relationship with the lawyers from the Belt and Road countries, and connect with legal professionals around the region through Hong Kong’s platform to grasp opportunities in this development.

How will Hong Kong’s legal sector benefit from the Initiative?

The Belt and Road Initiative involves many large-scale cross-border infrastructure projects and formulation of commercial agreements, which will drive up demand for legal services related to cross-border legal disputes. Many Hong Kong lawyers are experienced in the matter as they have been handling trading and investment-related legal matters in the Chinese mainland and Southeast Asia since the 1980s and 1990s. The only difference is that they were helping overseas investors to handle legal matters in the mainland and Southeast Asia, but this time, the Belt and Road Initiative mainly serves mainland corporations and investors investing in Belt and Road countries. 

Whereas it was overseas companies investing in the mainland in the past, the relevant legal matters were handled by Hong Kong international firms. As many of the senior legal experts that have explored their business in the mainland have now established their own firms, many mainland enterprises looking to explore overseas markets will choose them to handle matters for them. This is a coming trend. 

Investment projects in the Belt and Road are huge in scale, often involving multiple regions. These international investments require the coordination of professional services up to international standards, including international law and dispute resolution mechanism. The quality of Hong Kong legal professionals are beyond doubt, and along with a well-established legal system and a free market, Hong Kong can assume the role of a hub to handle commercial disputes over Belt and Road investments. Hong Kong follows the common law. Our independent judiciaries, reliable and transparent regulatory mechanisms, the rule-of-law, as well as impartial attitudes, are all recognised internationally. 

How can the legal sector best prepare for opportunities arising from the Initiative?

Hong Kong people might not be familiar with the Belt and Road countries and regions. To visit these regions and handle legal matters might not be as comfortable as handling agreements for sale and purchase of property or IPOs. Cultural differences might prove a challenge, but it is truly an experience that is hard to come by. 

To promote Hong Kong’s advantages in the Belt and Road Initiative, the government and professional institutions must work together. The Society has developed a good partnership with the Hong Kong Trade Development Council (HKTDC). Through participating in many HKTDC events – including the Belt and Road Summit and SmartHK held in many Chinese mainland cities, as well as In Style • Hong Kong held in Southeast Asian countries – the Society helps promote the advantages of Hong Kong professional legal services and explore a wider market. 

In order to pass on the experience and guarantee the professional standards of the industry, the Society plans to apply for government subsidy to run training courses to encourage new lawyers, especially those working in small- and medium-sized firms, to equip themselves, take up the challenge, and welcome the opportunities brought about by the Belt and Road Initiative.

The Czech Republic is home to the biggest airport of any of the newer EU member countries and also to one of the densest railway networks in Europe. As a result, many multinational companies have set up regional logistics centres there. It has some of the best, if not the best, passenger flight connections of any Central and Eastern European Country (CEEC) with the Chinese mainland – and the increased belly cargo capacities, plus the new all-cargo flights between Hong Kong and the Czech capital Prague, have further improved the country’s competitive advantage in the eyes of Asian traders and investors.

Following a boom in the manufacturing and IT sector in recent decades, many Czech enterprises are ripe for development, with their owners considering growing the businesses in co-operation with a reliable foreign partner or selling the businesses outright. Meanwhile, relations between the country and China have improved markedly since Czech President Miloš Zeman assumed office in 2013, and reached a high point following the historic three-day state visit by Chinese President Xi Jinping to the Czech Republic in March 2016.

This has helped to create a more business-friendly atmosphere between the two countries. Some investment deals involving Czech companies have actually been done through Hong Kong, while several Czech businesses are now focussing their attention on Asian markets with their own presence in Hong Kong.

A Crucial Logistic Interface in One Way or Another

The Czech Republic has overcome the disadvantage of being a landlocked country by developing one of the best, if not the best, air transport links with Asia of any of the CEECs. These include excellent connections with the Chinese mainland and Hong Kong. Václav Havel Airport Prague (PRG) now has regular direct passenger flights with three Chinese cities – Beijing, Shanghai and Chengdu.

Václav Havel Airport Prague (PRG) is the biggest airport of any of the newer EU member countries.

The belly cargo capacities on these passenger flights, in addition to the all-cargo services between Hong Kong and Prague operated by Slovakia-based Air Cargo Global (ACG) since May 2017 (with a technical stop at Turkmenbashi (KRW) airport in Turkmenistan), have increased the Czech Republic’s ability to handle cargo demand from Chinese and Asian companies on the look-out for ways to take better advantage of the cross-border e-commerce bonanza happening across Europe.

Unlike the other V4 countries, the Czech Republic does not have a common border with the Commonwealth of Independent States (CIS) area, and so cannot profit directly from serving as a major railway junction for the trans-shipment of containers between the broad-gauge (1,520mm) trains used in former Soviet countries, such as Russia, Kazakhstan and Belarus, and the standard-gauge (1,435mm) trains used in China and the EU.

But the country’s well-connected airport, together with its dense rail network (one of the densest in Europe, after only Luxembourg and Belgium), means the country remains highly competitive and attractive for multinationals such as Foxconn and Amazon looking to set up regional logistics centres for the European-wide distribution of high value-added electronics and the fulfillment of online orders.

It’s not just in creating a logistics hub that the Czech Republic’s railways are important to the country. 200 years of Czech rail industry tradition, coupled with the wave of railway privatisation in Europe in recent decades, has helped to make the country a global leader in rail applications and given it another way to contribute to the expanding rail development between Europe and Asia.

Many Czech companies are heavily involved in the rapid expansion of railway systems worldwide. One such company is the wheelset manufacturer GHH-Bonatrans. As the largest European producer of railway wheelsets and a premium supplier of rail-bound transportation worldwide, GHH-Bonatrans won a MTRC contract to supply wheels for passenger trains in 2015 and established its first Asia presence – Bonatrans Asia Limited – in Hong Kong last year.

GHH-Bonatrans is a Czech-based manufacturer of wheelsets for all kinds of rolling stock with a history dating back to 1808. (1) Source: Bonatrans Asia Limited

GHH-Bonatrans is a Czech-based manufacturer of wheelsets for all kinds of rolling stock with a history dating back to 1808. (2) Source: Bonatrans Asia Limited

The company’s tilt towards Asia involves doing business not only with Hong Kong and the Chinese mainland, but with many other Asian countries too, including India and ASEAN. With the Hong Kong office as its sales and service arm for Asia and its manufacturing and servicing facilities in India, GHH-Bonatrans can better promote its new-built and after-sale solutions for clients such as China Railway Rolling Stock Corporation (CRRC) in Asia, which was estimated to account for about 12% of the company’s deliveries in 2015/16.

Czech rail applications suppliers, riding on their price competitiveness, are looking to cash in on Asia’s fast-growing rail network. In China, for example, the amount of high-speed railway mileage reached 22,000km in 2016. While China’s dependency on imported rail applications is actually decreasing with the emergence of domestic versions [1] of high-speed train wheelsets and axles, Czech suppliers which can meet the strictest requirements for train components running at speeds up to 450kph remain a much sought-after partner for Chinese rail operators. Also important is, Czech state-of-the-art technology for noise reduction and rail-wheel contact protection.

The combination of railways which lead the world in terms of safety, reliability, customer service and cost efficiency, and a professional services cluster with extensive global networks and affiliations, has made Hong Kong a natural destination for Czech enterprises hoping to grow with Asian investors under the framework of such regional and/or interregional development initiatives such as China’s Belt and Road Initiative (BRI). Already a conduit for China’s outbound direct investment (ODI), Hong Kong serves as a crucial link in providing not only the important capital flows, but also highly sought-after local knowledge and assurance to new-to-the-market Czech enterprises.

Boom Time for China-led M&As

Another trump card of the Czech economy is its strong and highly competitive industrial base. The Czech Republic is the EU’s most industrialised country, with industry accounting for more than 47% of its total economic activity. Its competitiveness ranks higher than CEEC peers such as Poland and Slovakia (see graph), which gives it a significant advantage in the race to attract foreign investment.

Following a boom in the manufacturing and IT sectors in recent decades, many homegrown Czech enterprises (largely family-owned businesses) are now ripe for scaling up. Some owners are considering development in co-operation with a reliable foreign partner, while others are looking to sell their businesses outright. Such a pool of acquisition targets has made the Czech Republic the region’s most active country in terms of M&A deal volume in 2016, with 288 transactions completed at a total estimated value of US$9.9bn.

To help Czech companies at the negotiation table, the country’s business and investment development agency CzechInvest, has launched the “CzechLink project” to facilitate qualified investor search and enable the pre-audit project stage. From time to time, a list of Czech companies referred to as “Targets” (companies that are actively looking for a partner/investor for joint venture projects or acquisition) will be published on the agency’s website, while further company profiles can be made available to potential investors, including private equity funds and investment consultants, after signing a non-disclosure agreement.

Also oiling the wheels of the M&A frenzy is the significant improvement in business-friendly Sino-Czech relations. These have taken a marked turn for the better since the arrival in office of Czech President Miloš Zeman in 2013 and reached a high point following the historic three-day state visit by Chinese President Xi Jinping in March 2016. As of March 2017, the total number of domestic Czech companies owned by Chinese investors amounted to 2,101, boasting a capitalisation of about CZK5.5bn (US$0.24bn).

By far the largest Chinese investor in the Czech Republic is CEFC China Energy Company Limited (CEFC China), which is considered a key driving force behind many of these China-led investment deals. The Shanghai-based company has established its second headquarters in Prague and has contributed to a number of sizeable, iconic M&A transactions since September 2015, including the biggest Czech airline company Travel Service, the largest Czech online travel agency Invia.cz, the fifth largest Czech brewer Pivovary Lobkowicz Group, five-star hotels such as Mandarin Oriental Prague and Le Palais Art Hotel Prague, Prague’s largest office building Florentinum, media organisations like Médea Group, Empresa Media and Barrandov Television Group, high-end, metallurgy and engineering company ŽĎAS and even the oldest Czech football club SK Slavia Praha.

Aside from promoting its own investment, CEFC China has continuously been building platforms for Chinese enterprises to invest in the Czech Republic. Following its acquisition of J&T Finance Group (JTFG) in March 2016, which made it the first private Chinese enterprise to own a European bank, CEFC China launched the China-CEE Investment Fund together with Industrial and Commercial Bank of China (ICBC) in a bid to better bridge China-CEE investment, especially for potential Belt and Road projects.

Hong Kong’s Roles as a Business Conduit

Hong Kong, as a conduit for China’s investment, handling nearly 60% of China’s ODI, is one of the leading Asian investors [2] in the Czech Republic, actively participating in the country’s China-led M&A spree and overall Sino-Czech investment. Some of the China-led investment deals in the Czech Republic have actually been done through Hong Kong. One such notable deal is the acquisition of one of Czech’s biggest DIY and garden equipment firms Mountfield by the Chinese mainland-background, Hong Kong-based Eurasia Development Group in December 2016.

Since the opening of its first store in 1991 in Mnichovice close to Prague, the 56-strong Mountfield has been one of the major DIY stores on the Czech market. Source: www.mountfield.cz

Some visionary Czech companies are also increasingly tilting using a presence in Hong Kong as a safe and clear-cut gateway to markets in Asia. Examples include famous Czech glass and lighting companies such as Lasvit and Preciosa, which have set up either a regional representative office or holding company in Hong Kong to stay close to both the production base on the Chinese mainland and the rosy residential and commercial property market in Asia. Apart from doing bespoke lighting installations and glass artworks at deluxe hotels, upscale office buildings and premium residences, some of them use Hong Kong as a test bed to ascertain the feasibility of building a bigger foothold in Asia.

Effective since 24 January 2012, the Comprehensive Double Taxation Agreement (CDTA) between Hong Kong and the Czech Republic has afforded Czech companies greater certainty and transparency in planning their investment and expansion activities with the involvement of Hong Kong. Thanks to the tax flexibility, Lasvit, which runs a holding company in Hong Kong to oversee its sales and projects in Asia, has worked with the luxurious department store Lane Crawford to introduce its household retail collections.

As a duty free port with efficient logistics and transparent regulations, Hong Kong’s strong position as a centre of trade and proximity to China’s high-value manufacturing base has made itself a strong choice for Czech companies such as GHH-Bonatrans, Lasvit and Preciosa which are looking to showcase their technology and find prospective investors to turn up-and-coming business ideas into reality. This role goes hand-in-hand with buoyant Sino-Czech investment and is further sharpened by Sino-CEE co-operation through the BRI and 16+1 format.

[1] For instance, Taiyuan Iron and Steel (Group) Co., Ltd. (TISCO) produced its first batch of China’s homemade wheelsets and axles in 2014 and completed the necessary tests in 2016.

[2] Hong Kong, holding an FDI stock of US$23.7 million as of end-2015, ranked 7th on the list of Czech Republic’s inbound foreign investors from Asia, trailing South Korea, Japan, the Chinese mainland, Singapore, India and Thailand.