Thursday 20 August 2015
China plan to expand importance of Singapore
In response to expected flat world trade growth abroad and moderate economic activity at home, China is packaging a series of initiatives to help bolster both. The plans will significantly expand Singapore’s importance to South-east Asia’s financial, trade and logistics services.
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China plan to expand importance of Singapore
PETER WONG
12 August 2015
In response to expected flat world trade growth abroad and moderate economic activity at home, China is packaging a series of initiatives to help bolster both. The plans will significantly expand Singapore’s importance to South-east Asia’s financial, trade and logistics services.
China’s recently announced “One Belt, One Road” plan embraces twin goals to tackle these challenges. “One Belt” refers to the economic belt along China’s traditional Silk Road connecting China with Europe. The “One Road” is the new “Maritime Silk Road” between China, South-east Asia and Africa. The aim is for China to invest in the infrastructure and linkages associated with these “Roads” to help bolster its overseas trade. This in turn will stimulate production and consumption demand at home.
In one policy, China hopes to address challenging internal and external economic headwinds and rebalance its economy. By “rebalancing”, Beijing intends to promote the development of a consumption-led economy, to supplement its traditional success in exports. The policy will also have the planned benefit of spurring economic growth in its laggard western provinces to complement its economic dynamos in the east of the country.
If all goes to plan, China’s President Xi Jinping predicts that “One Belt, One Road” will lift China’s gross domestic product (GDP) this year by 0.25 per cent. In the next decade, he estimates it will comprise annual trade volume, between China and belt and road countries, surpassing US$ 2.5 trillion. The policy is expected to benefit a massive 4.4 billion people in 65 countries.
Strengthening the infrastructure along the belt and the road is a key priority, and South-east Asian countries are a vital part of the initiative. China has been Asean’s biggest trading partner since 2009 while Asean has been China’s third-largest trading partner since 2011. The improved transport infrastructure will encourage trade even further.
One example of the projects in store is that China has pledged to build a high-speed railway network that spans South-east Asia. Travel time between Kunming and Singapore will take a mere 10 hours. The construction of the section of the railway linking Kunming in south-west China’s Yunnan province through neighbouring Laos’ capital Vientiane, then into Thailand, is slated for completion in 2019.
Singapore should make the most of its strength as a global centre of trade, finance and talent as well as its geographical proximity and strong ties to China and South-east Asia. It has great potential to further develop itself as a hub for financial services development throughout Asia, particularly in South-east Asia. Seventy per cent of infrastructure and financial projects in the region are already being conducted by Singapore-based financial entities according to Joseph Cherian from the National University of Singapore. We expect the total investment in planned and ongoing projects could reach 1.5 trillion yuan (S$332 billion) in the coming years.
An example of how this policy is intended to work is in infrastructure development. China has far more steel than it needs. A shrinking construction market at home has meant a surplus is piling up. Meanwhile, South-east Asia is rich in resources but lacking construction funding which is an impediment to its economic growth, causing an infrastructure deficit and low levels of industrial development.
China has the capital, expertise and excess capacity to bridge these gaps. By investing in Asia’s infrastructure needs, China is helping Asian economic development abroad and priming demand for its domestic heavy industry at home. The policy will reinforce China’s centre-stage position in Asian trade and transport. China’s vast transport and shipping sectors would be the biggest beneficiaries of this initiative. Agriculture, textiles, telecommunications, financial and high-tech sectors are also expected to see knock-on benefits.
Beijing has vowed to allocate an initial investment of US$40 billion to set up a Silk Road fund for the construction of major infrastructure such as high-speed railways, bridges and ports in South-east and Central Asia. This figure is above and beyond the US$64 billion of new investments already announced for infrastructure projects. To cope with the huge funding need, Beijing has launched a new supra-national financial body - Asian Infrastructure Investment Bank (AIIB) - to make “One Belt, One Road” happen. AIIB has garnered support from 57 countries as founding members. This will create a large fund that can be sought by countries to develop infrastructure throughout Asia. China is proposing to furnish US$100 billion worth of authorised capital, to give the AIIB the financial firepower needed to turn the plan into reality.
Singapore, as one of the earliest supporters of AIIB, is pledging US$250 million or 0.25 per cent of AIIB’s total authorised capital of US$ 100billion - of which US$50 million will be paid over five years. From Beijing’s perspective, developments under “One Belt, One Road” and via AIIB are part of a bigger picture to encourage further economic integration of participating countries and the formation of a new regional economic trading and investment bloc. Importantly, it will expand the global use of the Chinese currency, increasing the speed of renminbi’s internationalisation.
China will support foreign countries and companies with good credit ratings to issue renminbi-denominated bonds in China. Chinese outward investors will also want to issue both foreign currency and renminbi-denominated bonds abroad so they can match their different types of funding needs in countries along the belt and road.
Singapore has a role to play here. As one of the world’s leading financial centres, Singapore has strong, well regulated and transparent capital markets. It will be an important hub for raising and distributing equity and debt capital to facilitate investment in the South-east Asia, India and elsewhere in the Asia-Pacific region. And the renminbi is an integral part of it.
What’s more, Singapore is already a leading offshore renminbi centre. A total of 6.9 trillion yuan was cleared in Singapore as at the first quarter of 2014. More than 73 banks in Singapore have opened renminbi-clearing accounts to service clients covering 33 countries and regions. Renminbi-denominated deposits in Singapore totalled 257 billion yuan at the end of March, according to the Monetary Authority of Singapore.
Bank of China has turned to the Singapore bond market to raise US$3.55 billion funds via a multi-currency bond to support the “One Belt, One Road” initiative. The lender has issued the international bond in four currencies: US dollars, euros, renminbi and Singapore dollars. Beijing’s “One Belt, One Road” is a small phrase with big ambitions. Seizing the opportunity will be a huge boost for Singapore. The path to success might be long and tough, but China has certainly made an impressive start.
The writer is deputy chairman and chief executive, The Hongkong and Shanghai Banking Corporation
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