SBR Volume 14, Issue 2: July - August 2017

July/August 2017 Volume 14, Issue 2 www.sbrchina.com

Logistics Report

OBOR Hubs

Joseph Stiglitz

The Euro

Montenegro Report

The Balkans Jewel

Hong Kong Handover LKF's Allan Zeman Exclusive on Hong Kong's Future

ISSN: 1813-310X

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CONTENTS HANDOVER COVER STORY

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EDITOR'S LETTER

Time Flies When You're Having Fun

Handover to Balkans Blast and OBOR Hubs

Two decades have flown by on the tail of a monsoon wind that has changed the world’s economic landscape forever.

This summer is capped by a Handover celebration, beach time at a new Silk Road destination and OBOR’s inland drive.

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NEWS IN BRIEF

SBR’s Catherine Musgrave summarizes all the news in brief that you need to know this month in the areas of finance, manufacturing, transport, hospitality, technology, media, trade, property, retail and more.

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INDUSTRY REPORT

Hong Kong Dream Spinner

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Where China’s rugged and mountainous West gives way to the steppes of Mongolia and the peaks of Tajikistan a new frontier in logistics development is flourishing.

Hong Kong success story and entrepreneur par excellence Allan Zeman believes the SAR’s future remains bright – but work is needed.

Dialogue With The Last Governor

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Chris Patten will go down in history as the last gatekeeper of the last major British colony and his work in Hong Kong is a legacy to China’s “One Country, Two System” success.

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The World of OBOR Hubs

Dachser Europe Connection

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Dachser OBOR plans to connect Europe are another watershed in the emerging crosscontinent rail logistics service.

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July/August 2017

CONTENTS

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FEATURE STORY

1997: A Year to Remember

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Chances are you heard of the Handover of Hong Kong to China if you were on this world in the spotlight year of 1997.

Joseph Stiglitz: The Euro and its Threat to the Future of Europe Nobel Prize Winner economist Joseph E. Stiglitz looks at the Euro currency at a time when the EU is in a state of flux.

MONTENEGRO COUNTRY REPORT

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Balkan Silk Road Sparkling Jewel No nation has more potential to become the Silk Road Monaco and attract global capital than Montenegro.

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MARKET INSIGHTS

Moody’s has the China Blues What does Moody’s China downgrade really mean? Is this a political statement or an economic forecast – or both – and does it really matter?

LAKE’S LAMENT

The Man Behind Montenegro 60

Hong Kong's Handover Stands the Test of Time By measure of an historic 20-year period Hong Kong and China have done a solid job in a One Country Two Systems world.

VIEW FROM THE TOP

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Silk Road Gains Traction Four years after China’s unveiling of One Belt One Road McKinsey’s Diaan-Yi Lin looks at the financing opportunities.

July/August 2017

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One of the first foreign investors to enter the Balkan Tiger in 2006, Neil Emilfarb sets his sights on everloftier prizes.

© Copyright 2017 Middle Kingdom Media Ltd. All rights reserved. Shanghai Business Review (ISSN: 1813-310X) is published by Middle Kingdom Media Ltd. No reproduction of any articles or photographs in this publication may be made in whole or in part without the written permission of the copyright holder and/or the publisher. The publisher is not responsible for product claims and representations.

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EDITOR'S LETTER

Handover to Balkans Blast and OBOR Hubs This summer is capped by a Handover celebration, beach time at a new Silk Road destination and OBOR’s inland drive.

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n this issue the SBR editorial teams Tiger economy of Montenegro. With an travelled from Chris Patten’s Loninvestor friendly policy and stable ecodon to the Ottoman power base nomic growth, this decade-old Balkan of Istanbul en route to the emerging nation looks to set its position in the Silk Balkan Tiger of Montenegro with quick Road Maritime arena. pit stops at thriving One Belt One Road Farther to the West, another investhubs in Khorgos ment success story o n t h e we s t e r n is playing out in the fringe of Xinjiang rapidly emerging and Alyat Port on OBOR hubs. With Azerbaijan’s Caspic apit a l f l o w i n g an Sea coast. in from different The London corners, from Kajaunt was a voyage zakhstan to Azerinto the past with baijan, and many the Last Governor points in between, of Hong Kong on t h e i n l a n d Si l k the eve of the 20th Road net work is Anniversary of the beginning to take Handover. Patten better shape. With expressed his inlittle-known names triguing thoughts making a push for on the banks of logistics business, the Thames River the Silk Road world while on the shores marches to its own of Fragrant Hardrum as the OBOR Chinese tea in Shenzhen was a pleasant b or Hong Kong dream continues to distraction on the Long March to billionaire juggermove ahead. complete the SBR Handover Issue. naut Allan Zeman A ll this – plus responded in kind. Though Patten and excerpts from the new book by Nobel Zeman are friends, they do hold differPrize winning economist Joseph Stiglitz ent opinions on Hong Kong at this point titled The Euro and its Threat to the Future in the post-1997 era. of Europe – makes for a well-rounded seThe stop in Istanbul to meet Balkan lection of summer reading. kingpin Orlando Carlo Calumeno of the Enjoy and see you in the Fall! high-flying Merit Group set the stage for a fascinating look at one of the world’s David Lake most active tourist investment destiEditor-in-Chief nations – the Adriatic coast of the new 6

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JULY/AUGUST 2017 Volume 14, Issue 2

Publishing Group Chairman

Sales Manager

Public Relations Administration Editorial Team Editor-in-Chief Managing Editor US Editor Medical Editor

Contributors

Tommy Jiang Ryan Cai Shirley Gui Rong Cissy Gao David Lake Patrick Musgrave Michael Bucher Leon Qiu Yuanliang Douglas Betts Catherine Musgrave

Webmaster

John Denvers

Design

R&R Publishing Ltd.

Printing

RR Donnelly

Cover Photo

Allan Zeman, Chairman of Lan Kwai Fong Group

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NEWS BRIEFS

News in Brief SBR’s Catherine Musgrave summarizes all the news in brief that you need to know this month in the areas of finance, manufacturing, transport, hospitality, technology, media, trade, property, retail and much more Retail & FMCG Online Grocery Shopping Alibaba North American Vice President Lee McCabe expects customers around the world will continue to want to shop in grocery stores and supermarkets for many years to come. Still, he thinks food retailers should “test and run” every available distribution channel. McCabe discussed China’s online shift, “Everyone is being disrupted right now. So is grocery, but I think it is going to be harder to disrupt.” Grocery shopping is “an experience,” as people enjoy browsing the shelves and interacting with others. For this reason, among many others, McCabe thinks it will take longer for online grocery shopping to be fully adopted.

Walmart Opens JD.com Store In China, Walmart is betting big on e-commerce. The US retail giant recently announced plans to open a store on JD.com.

Walmart’s online store will have more than 1,700 of the company’s most-purchased items from its brick-and-mortar stores in China. Those who file their orders before 11:00 am will receive their packages on the same day – the deliveries will be made using JD’s couriers, and drones. Walmart does not often disclose financial details about its China operations but has provided evidence to suggest it is performing well.

bank here, even the counter women are highly qualified. The government has a good hand of cards if it can play them well.”

Li Na Enrolls in Chinese University Li Na, a famous former Chinese tennis player, recently enrolled in the prestigious Cheung Kong Graduate School of Business (CKGSB). “As a retired athlete who has been in the tennis industry for many years, I hope to pursue a wide range of business interests in my second career,” states Li. During her studies, Li looks forward to preparing for future opportunities by “developing on many levels,” meeting new people and studying rigorous course material. CKGSB is ranked as one of China’s top schools – many professors earned their PhDs or previously held tenured positions at top universities such as Harvard, Wharton and Stanford.

Education & Training Average Graduate Wage Falls The average wage of Chinese college graduates is plunging, even though their experience is rising. This is frustrating for the country’s young workers, but may be good news for policymakers as they try to shift China’s economy towards higher technology industries and services. The average monthly salary for Chinese graduates fell 16% last year, marking the second consecutive annual decline. The fact that high-tech industries may benefit from the rise in qualified work seekers is China’s “new competitive advantage,” states Beijing Gao Hua Securities Chief China Economist Song Yu. “When you walk into a 8

Consulting & Law China Promotes EPT Law China’s government is promoting the country’s first Environmental Protection Tax Law (EPT Law), which is set to replace the current Pollutant Discharge Fees (PDF) system. Doing so will hopefully strengthen the enforcement of environmental regula-

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July/August 2017

tions. The EPT law will go into effect on 1 January 2018 and will provide guidelines on how to levy taxes on entities that emit air and water pollutants, solid waste and noise pollution. There are significant changes concerning tax incentives and administrating authorities compared to the current system.

Cybersecurity Law Changes The most recent changes to China’s cyber security law took effect on 1 June. Many experts and business professionals are confused by the law and feel as though not enough information was provided before it was implemented. This is a large issue, as failure to comply can result in fines as high as US$150,000.

The law focuses mainly on protecting personal information and individual privacy and standardizes the collection and usage of personal information. For example, information on Chinese citizens or relating to national security must be stored on domestic servers.

Manufacturing & Auto

Xi Supports Paris Accord Though the US has dropped out of the Paris climate accord, Chinese President Xi Jinping promises to support the agreement. This comment was made during a phone conversation with France President Emmanuel Macron.

Xi’s comments come at a good time, as climate negotiators are currently discussing how to begin drafting a guide on how to continue with the landmark deal without the US. This historic accord aims to limit global temperature rise to 2 degrees Celsius above pre-industrial levels by 2100. Unfortunately, without the US pulling its weight, those who sign the agreement will be at an economic disadvantage. With potentially strict environmental standards imposed on those who sign the deal, businesses may relocate to the US, where climate regulations will likely be more lenient. The US is one of the world’s largest emitters of greenhouse gasses, and many believe the country should play its role in reducing its carbon footprint.

Auto Companies Eye China Expansion Daimler and Volkswagen (VW) are the most recent German auto giants to announce plans to expand in China’s EV industry. China is the world’s biggest carbon emitter, but has been investing billions of dollars to clean up its act. Daimler will purchase a minority stake in Chinese carmaker BAIC’s EV subsidiary and will invest in upgrading its production facilities at its existing JV with BAIC. EV has announced plans to “develop, produce and market electric vehicles as well as mobility services” in a JV with automaker JAC. Jaguar Sales Hit Record High Due to high demand in China and North America, Jaguar Land Rover recorded a record year for sales in the year ending March 2017. Global sales increased more than 16% YoY – growth was strongest in China at 32% YoY. Newer models such as the Jaguar F-Pace SUV were a large driver of this growth, according to Jaguar CEO Ralf Speth. “We are continuing to invest significantly in new models and innovation… reinforcing our commitment to new technologies and providing new and compelling customer experiences,” states Speth.

Mining, Energy & Environment HXMT Near Completion China will soon launch the Hard X-ray Modulation Telescope (HXMT), the country’s first X-ray space telescope that can observe high-energy celestial bodies like black holes and neutron stars that are commonly thought to be hidden in the Milky Way. “We are looking forward to discovering new activities…

These studies are expected to bring new breakthroughs in physics,” states HXMT Lead Scientist Zhang Shuangnan. The telescope will work on 1 to 250 keV, meaning it will be able to complete many tasks that previously required several satellites.

Though other countries have already launched similar telescopes, these products do not have the same advantages and array of features as the HXMT. July/August 2017

Media, Advertising & Entertainment Sony China Licensing Office Sony Pictures Entertainment (SPE) has introduced its first China-based licensing operation. SPE has appointed Sabrina Gu to lead direct deals out of the new Shanghai office. Gu will broaden the company’s China licensing opportunities and establish relationships with business partners in the country. The Chinese government is introducing more favorable policies regarding foreign films, as movie merchandising is increasingly seen as one of the top growth sectors in China’s entertainment industry. “Now, more than ever, there is a world of opportunity in China for consumer products. As SPE broadens the global appeal of its film and television properties in a substantial way, our new China-based licensing office will support that growth,” states SPE Executive Vice President of Worldwide Consumer Products Jamie Stevens.

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NEWS BRIEFS China: “Goldmine” for Sports China Ambassador to the UK Liu Xiaoming notes China has become a “goldmine” for sports businesses. Liu believes the comparison “could not be more accurate,” as the country’s sports sector has a massive market potential to offer. Liu made these comments at the recent Telegraph Business of Sport 2017 conference. While many experts were already aware of China’s booming sports sector, to have these comments made by Liu, a man of such stature, was powerful and highly effective.

firm Millward Brown, Tencent is ranked as China’s top company in terms of brand value, followed by Alibaba and China Mobile Games and Entertainment Group. WeChat made up a significant portion of Tencent’s annual earnings – the popular messaging app takes a percentage of transactions carried out on the platform and generates advertising revenue. A significant portion of the company’s revenue was from its online games business – Tencent pulled in more than US$3.3 billion from online games during the period.

InStyle Modern Lady Launches InStyle, a monthly women’s fashion magazine, will be available in China shortly. “I could not be more excited about the launch of InStyle China. To see InStyle expand into such a massive, modern market is a thrill,” states InStyle Editor in Chief Laura Brown. The company will partner with Modern Lady, a Chinese weekly fashion magazine, to create InStyle Modern Lady. The launch of InStyle Modern Lady, according to Modern Media Group Chair and Chief Content Officer Thomas Shao, “will bring a much more joyful reading experience and international fashion and lifestyle information to readers.”

Tech Companies Think Global Chinese tech companies, including Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Didi Chuxing, became industry leaders at a mind-boggling speed. Chinese investments in overseas technology have increased significantly over recent years. “If you are not the No. 1, you will become obsolete; if you are the No. 1, you can buy the newer technology. It’s a winnner takes-all game,” states Venturecraft Group Founder Isaac Ho. Gobi Partners Founding Partner Thomas Tsao sees this as a simple change of mindset.

“They’re starting to aspire, not just to be the biggest Chinese company, but they are thinking globally.” Microsoft Corp. plans to double its cloud capacity in China, which will enable it to serve about 200,000 corporate cloud customers by 2018. This decision is designed to meet the increasing demand from local clients. As more and more businesses adopt digital services, Microsoft hopes to see triple digit growth in its cloud services this year, just as it did in 2016.

IT & Telecoms Tencent Revenue Rises 55% Tencent’s Q1 2017 revenue beat analyst expectations and increased by more than 55% YoY. According to market research

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Finance & Investment Moody's Discusses China Debt According to Moody’s ratings agency, structural reforms will not be enough to help China’s rising debt issue. China’s financial position will be hurt due to massive corporate and household debt, and the country’s “vast reform agenda” will not be sufficient to prevent borrowing from weighing on economic growth, note officials from Moody’s. “If there are signs that China’s debt will keep rising and the rate of growth is beyond our expectations... then it will continue to weigh on economic growth in the medium term and impact the sovereign rating negatively,” states Moody’s Vice President of Credit Strategy and Standards Li Xiujun.

Student Loans Availability Increases The Bank of China and China Construction Bank have announced plans to launch the privilege loan product for university students. On top of this, Bank of China will provide financially strained students with unique offers including change-free loan contract and online banking account-opening service, annual charge-exemption for debit cards during their study and no service charge for inter-city repayment of loans. China Banking Regulatory Commission recently released a documentation titled “Guidelines on risk prevention and control in banking industry” to ensure there is a clear student loan standard in China.

Adidas China Margins “Stabilize” Adidas AG expects its large operating margin in China to shrink in the long run, while that of North America will grow significantly. During Adidas CEO Kasper Rorsted’s first visit to China in his new role, he mentioned Adidas’s margins in China would likely “stabilize and slightly decline” compared to last year’s 35%. At the same time, North America, which saw a margin of 6.3% last year, will “play catch up.” Though China’s retail market remains challenging, the company is forecasting double-digit growth this year. “Brick-and-mortar traditional and fast-moving consumer goods has dramatically slowed down.

Right now that’s not being offset by anything,” adds Rorsted.

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NEWS BRIEFS Complicated Tax Requirements Rank According to the Asia Pacific Tax Complexity Survey conducted by Deloitte, China is ranked first in the Asia Pacific region for having the most complicated tax requirements. India is ranked second and is followed by Japan, Australia, Indonesia and South Korea. In China and India, more than 50% of respondents feel it has become harder to interpret local tax laws and rules over the past three years. “An overwhelming majority of over 90% respondents said they want to see tax reform in India along with China and Indonesia,” reports Deloitte.

and has not made a profit since opening. The government continues to subsidize its operations heavily, but annual ridership has not hit higher than 31 million passengers. China’s highspeed railway, on the other hand, is hugely popular and sees nearly 1.5 billion passengers per year. The differences between the high-speed train systems in the two countries are enormous. For example, Chinese customers traveling in business class get a reclining seat, tables and a foot rest. On the other hand, US customers traveling in business class only get more spacious legroom and a slightly more comfortable chair.

Li Keqiang Urges Business System Reform Chinese Premier Li Keqiang is encouraging governments at all levels to make greater efforts to cut red tape for companies by integrating separate business licenses. Combining business certifications and licenses into one business license is a major task of business system reform and should be addressed as soon as possible to decrease institutional costs for market entities, notes Li. China will also continue to encourage entrepreneurship and innovation to develop new methods of growth to power sustainable and healthy economic development.

Thailand-China Air Travel Competition Competition in the Thailand-China air travel market has reached the point where it may no longer make sense for newcomers to enter the market. Fare structures have changed dramatically over recent years, and companies are making very low profits. This has slowed Thai AirAsia’s move into the Chinese market, as severe caution and a strong sense of business direction is required. Thailand is one of the most popular destinations for Chinese travelers, and China has been the primary market for Thai tourists since 2012.

Transport & Logistics

Car-Sharing Guidelines China’s Ministry of Transportation has issued guidelines on how to improve the management of the country’s car-sharing industry. The government encourages car-sharing but thinks these vehicles should register with public security bodies, pass

High-Speed Train Popularity Differs Train transportation is not a popular way to get around in the US. Amtrak is the only high-speed intercity rail in the country

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several tests and be insured. Further, greater efforts should be made to have the supply of car-sharing vehicles meet the demand, have sufficient parking spaces and create preferential parking policies. The Ministry’s guidelines will be open to public feedback for the next two weeks.

Hospitality & Leisure Airbnb Appoints China Head Two years after entering the country, Airbnb has finally appointed a head for its China business. Airbnb promoted Ge Hong, who was previously Airbnb China’s Product and Engineering Head, to become the Global Vice President overseeing business development in the mainland. Ge, who graduated from Yale University and holds a Masters degree in Computer Science, joined Airbnb only one year ago. Ge has experience working for reputable companies including Facebook and Google and will report to Airbnb CEO Brian Chesky.

Latin America Attracts China Tourists According to business leaders, Latin America is eager to attract Chinese tourists. “In just eight years, experts say, we are going to see 220 million Chinese outbound travelers, up from the current 135 million. That is an opportunity we cannot pass up,” stated ProColombia Vice President Julian Guerrero at the recent Macro Business Conference. The conference was held in Valparaiso, Chile, and attracted many industry representatives

July/August 2017

from the Pacific Alliance – a trade block that includes Colombia, Chile, Mexico and Peru.

Arabians Enjoy Chinese Books Since the announcement of the Belt and Road initiative, Arabian countries have been increasingly interested in China, notes Wisdom House Cultural Investment Co-Founder and Chair Ahmed Al-Saeed. Wisdom House is based out of Yinchuan, and focuses on works that have been translated from Chinese to Arabic. “Books about the Belt and Road Initiative sell well because many people in Arab countries want to understand more about the initiative and what it could bring to them. They want to learn more about China’s policies, so as to better cooperate with China,” states Al-Saeed.

Zuckerberg Recommends China Book Facebook CEO Mark Zuckerberg selected Dealing with China

by Henry Paulson, the former US Treasury Secretary, as a crucially important book for those hoping to better understand China. “Over the last 35 years, China has experienced one of the greatest economic and social transformations in human history. Hundreds of millions of people have moved out of poverty.

By many measures, China has done more to lift people out of poverty than the whole rest of the world combined,” states Zuckerberg, who has long been interested in Chinese history, culture and language, and suggests the book to anyone interested in the rise of China on the global front.

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COVER STORY

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Hong Kong around the time of the first Handover in the mid-1800s (inset) and Hong Kong on the eve of the 20th 1997 Handover Anniversary.

Time Flies When You're Having Fun Two decades have flown by on the tail of a monsoon wind that has changed the world’s economic landscape forever.

This Report is written by David Lake

T

he principles that govern the Hong Kong Handover and the One Country Two Systems vision have supported the massive expansion of the Mainland economy to proportions that are second to none. Even as the anniversary fireworks explode over Hong Kong, the US-based Conference Board predicts that next year China’s contribution to global GDP will surpass that of the US. Whatever role Hong Kong has played, one cannot deny that it is a part of this impressive result.

Regarding Hong Kong’s contribution to the rise of the Mainland economy in the post-Handover period, the most important developments have taken place are in the area of financial services. The emergence of Hong Kong Exchange as a global tool to raise capital for all levels of enterprise, be they large state owned groups, Internet entrepreneurs or the new round of Silk Road funders is critical. As such, Hong Kong has helped turn the China capital markets experiment into a reality.

To celebrate the 20th Anniversary of the Hong Kong Handover, SBR presents a series of feature articles. In an exclusive interview held in London this summer, SBR met with The Last Governor of Hong Kong Chris Patten. In an exchange of views, Lord Patten spoke of Hong Kong as his finest hour and reminisced about the many points of interest that he still watches when it comes to Hong Kong and China.

To provide another perspective, SBR conducted an interview with Allan Zeman, the entrepreneur and businessman who made his fortune and his life in Hong Kong. Long considered one of Hong Kong and Shanghai’s most renowned foreign businessmen, the Father of Lan Kwai Fong has deep seated feelings about what Hong Kong has achieved over the last 20 years and where it is going over the next two decades.

Finally, in a testimony to the past, SBR heads to its roots where a sister publication by the name of China Capital Markets & Investor Relations Review, the first bilingual financial publication to be distributed in China, published another cover story back in 1997 called “Two Worlds, One China”. In this unique reportage produced to commemorate the Handover, one can read how the financial leaders and pioneers of that time considered the unification of Hong Kong with China.

July/August 2017

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COVER STORY

Integrating Hong Kong’s vision with China’s promise is the next step as illustrated by LKF’s Shanghai Dream Center project on the Bund.

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Hong Kong Dream Spinner Hong Kong success story and entrepreneur par excellence Allan Zeman believes the SAR’s future remains bright – but work is needed.

W

Allan Zeman believes that in the next 20 years the world will see more of a one country than a two systems approach in the China relationship with Hong Kong.

July/August 2017

hen it comes to foreign icons, Western faces that are instantly known across Hong Kong for their entrepreneurial spirit and contribution to the city, no one is more recognized than SAR billionaire Allan Zeman, well regarded as the Father of Lan Kwai Fong. The only problem is Zeman does not believe he fits that profile.

Having turned in his Canadian passport in 2008, at a time when many Hong Kongers picked up theirs, the former Montrealer became a naturalized Chinese citizen with a right of abode that allows him to hold a coveted Home Return Permit for entering the Mainland.

The Chairman of Lan Kwai Fong Group (LKF), the pioneer developer behind the LKF entertainment district that launched the famous California bar and restaurant in Central during the 1980s, feels he is as Chinese as it gets. A second birthright hard-earned over 40 years in the trenches of China business could put Zeman in line to be Chief Executive one day, as farfetched as this may seem to some. After all, how many Mainland businessmen decided back in 1975 to set up their head office in Changsha, Hunan, simply because it was the birthplace of their hero Mao Zedong.

“China was very different in those years and I watched the country change from the inside,” recalls Zeman, who served as advisor and confidante to all of the Hong Kong Chief Executives at one point or another since the Handover. “In those days we used to play ping pong by candlelight until midnight as there was nothing else to do in Changsha. The hotel lights were shut off to save power, food was scarce and so was heat.” www.sbrchina.com

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COVER STORY Zeman’s textile business thrived from its Hunan roots, and the then 26-year old entrepreneur was on the ground f loor of China’s early days. “I saw the changes taking place and the lives of people getting better and better,” he adds. “So I felt very positive in 1997 that China was really going to continue along that path and I thought Hong Kong’s strength is really China. We were blessed with Deng Xiaoping’s one country two systems and though it was an untested theory I thought it would work because China truly wanted to allow Hong Kong to thrive under this plan.”

Perhaps the LKF mastermind may have been a lone in those positive thoughts when he attended an exclusive lunch on board the Britannia Royal Yacht with Prince Charles, Governor Chris Patten and a handful of Hong Kong insiders during that momentous Handover day.

Zeman recalls pulling up in a limousine looking all the part of the fashion and textile kingpin. Walking on to the yacht without a tie and no socks, he remembers feeling somewhat self-conscious when he noticed the honor guard stiff at attention looking through the corner of eye to see whom this lunch guest was.

A lunch fit for a prince was served aboard the Britannia and the conversation naturally turned to Hong Kong.

Prince Charles, providing a tour of the yacht after lunch, including a review of its shining copper engines just prior to what was to be the last sailing. Zeman’s tour highlight was going into a bedroom and seeing a teddy bear said to be that of Queen Victoria. Zeman was overwhelmed by the solemn occasion.

Despite all the camaraderie on the yacht there was doom and gloom in that air as the media coverage was anything but positive those first days of the Handover.

Handover Eve After a fine lunch served with pomp and ceremony, Zeman recalls going to two distinct events on Handover eve. The first was the British ceremony at Tamar outside of city hall in front of stands built for the thousands of spectators.

Zeman remembers arguing with the British that the stands had to be covered in case of rain. The organizers refused, insisting it was not going to rain and they were on a budget.

“The heavens opened up to the heaviest downpour I could imagine,” recalls Zeman, sitting next to the then Chairman of HSBC. “They gave everyone an umbrella and the water was just pouring on to my suit. Poor Prince Charles made his speech with all the world media looking on from under an umbrella held

by a staffer.”

Just before the stroke of midnight all the attendees headed to the drier convention Center built for the ceremony. President Jiang Zemin mingled with the likes of Prince Charles and Prime Minister Tony Blair. “I was feeling very positive,” reiterates Zeman, who remembers dealing with many foreign press interviews that day. “Western media were all doom and gloom. They did not understand China. Fortune published that famous cover with the ‘Death of Hong Kong’. I told them they were crazy. I understood China and told them to go have a look.

Even Patten only did that rarely.”

Two decades of Hong Kong growth has proven that Zeman took the right road. “ While Hong Kong has gone through ups and downs along the way, as every economy has, it has been a good ride on the whole,” states Zeman. “People need one word to understand China and that word is ‘stability’. China will do everything possible to keep the nation stable. Neither China nor the world can afford to see an unstable China.”

When discussing China’s economic achievements Zeman’s view is one of live and let live. “I say respect all systems,” he says. “That is something I learned a long time ago. Every system is different.

The US has its own, so does the UK and Canada. You do what works for you as long as peoples’ lives are improving and in China peoples’ have really improved.

Many Hong Kongers point to the US and UK systems. But that is hard for them to do after Donald Trump was elected with 3 million fewer votes than Hillary Clinton and the results of the UK Brexit vote.”

More China Growth

Hong Kong Chief Executive CY Leung and Allan Zeman share a friendly moment together.

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When looking ahead Zeman believes Hong Kong cannot rest on its past record of services to China. LKF itself is forging ahead with numerous new projects, many of them in the Mainland led

by Zeman’s son Jonathan, who has assumed the post of CEO. LKF has already opened a full-f ledged Lan Kwai Fong entertainment complex in Sichuan’s Chengdu and another complex is slated for launch in Wuxi this year.

Over the years, LKF has been active on the Shanghai entertainment scene, but nothing in the past compares to the bold July/August 2017

The Shanghai Dream Center is considered to be one of the most ambitious projects of its kind in China. (inset) CMC’s Li Ruigang, LKF's Allan Zeman and Dreamwork’s Jeffrey Katzenberg celebrate together the Dream Center development.

new project of Shanghai Dream Center in the West Bund Cultural District.

DreamWorks Animation CEO Jeffrey Katzenberg and Mainland media mogul Li Ruigang of China Media Capital (CMC) first launched this US$2.4 billion, 468,000 sq. m. development project on land that once housed the factory that supplied cement to build Shanghai’s renowned Bund.

Today, Dreamworks, now owned by Comcast, has taken a low profile role in a project that remains strongly supported

by CMC, China Development Bank and the LKF Group. Expected to open its entertainment gates in 2018, this new landmark of modern Shanghai will be a hotbed for entertainment, media and lifestyle industries and is considered one of the most ambitious projects of its type attempted in a country filled with mega-projects.

The Dream Center size, scope and diversity clearly surpass anything LKF has done to date and the Zemans must rise to the challenge. Cultural facilities include a red-carpet IMAX cinema for film premieres, a 900-seat black box theatre, a 1,800-seat theatre for major productions, July/August 2017

a 2 ,50 0 -seat concer t hall, a 3,500-seat dome for even bigger events not to forget numerous ar t ga l leries and the Shanghai version of Lan Kwai Fong. “ Hong Kong mu s t continue to play a major leadership role in China business, just like we have done with the Dream Center,” notes Zeman. “China has changed so dramatically.

Hong Kong has benefited, but the city has fallen behind and become complacent over the last 20 years. Life was good and many did not want to change as the cartels and monopolies grew stronger.

We have to move with the times and catch up to China.”

Change Needed With over HK$1 trillion of reserves in a city of seven million, Hong Kong has the capacity to meet the challenge. Zeman points to the ongoing development of Shenzhen’s Silicon Valley just 45 minutes down the www.sbrchina.com

expressway from Central, an initiative he believes surpasses that of the established US version. With technology powerhouses leading the way, China has created the world’s leading mobile payment system and apps for every convenience.

“Hong Kong is way behind in technology,” says Zeman, who supports the plan to build a technology park on the Shenzhen border at Lok Ma Chau. “With 960 million users wechat has changed the way people work. Hong Kong needs to step up fast. We used to be leaders in everything, but China has surpassed us.

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COVER STORY China still needs Hong Kong as a super zhen and other southern cities. Currentthe size that they can buy in Hong Kong connector to the world. People doing ly, Premier Li Keqiang is strongly supfor a lower price in Zhuhai, and combusiness with China trust Hong Kong’s porting the Greater Bay Area plan, which mute to Central in 25 minutes on a sea legal system and Chinese companies emerged at the State Council last March. bridge why would they decide to live in going abroad use the city as a base, but The concept dates back to the 2011 “AcHong Kong. It may take some time, and Hong Kong needs to reconsider the way tion Plan for the Bay Area of Pearl River there will be opposition, but the barriers it does everything to compete.”

Estuary” initiative that covers nine cities to integration will drop.”

For Hong Kong to regain past glory and nearly 70 million people under an As part of China integration, Zeman local government must take a larger role. integrated economic umbrella. suggests that Hong Kong should play a Zeman feels that the major problem is that “It will be like the Bay Area around greater role in the One Belt One Road the last three administrations decided California’s Silicon Valley and it will initiative, in particular in the area of that market forces should finance. Hong Kong has the dictate and followed a handsability both legally, in terms off policy in the economy. of establishing the corporaThis policy witnessed Hong tions that can serve this mulKong real estate become one ti-trillion dollar program, and of the world’s most expensive financially to raise funds for and caused a social division.

Silk Road infrastructure as While this happened in other the capital markets window, cities, like in New York and a role the city has played well London, due to unprecedentin the past. ed low interest rates it has “I see Beijing as the plane’s caused more polarization in pilot with Hong Kong sitting Hong Kong. in f irst class enjoying the After much public speakf light,” concludes Zeman. ing to young people, Zeman “Some 20 years from now finds that there is a general we will be heading closer to disillusionment in the fu2047, the 50 year mark of the ture. “They are tired of living Handover and the next barin small sub divided f lats,” rier Hong Kong is concerned adds Zeman. “We need to about. My view is China will solve this property market continue to open up as techissue quickly by changing nology surges ahead and the laws and breaking the incountr y becomes a world vested interest of cartels.” leader in artificial intelligence, Zeman points of that under robotics and other areas. the Tsang Administration Twenty years from now the low cost housing schemes one country two systems will New Hong Kong Chief Executive Carrie Lam with Allan Zeman at his were abolished for seven prevail, but it will be more one book launch. years and that created a country than two systems as huge hole in the residential market with totally change the dynamics, China inChina and Hong Kong will be on a similar 100,000 waiting for homes. That comtegration is something coming very rapwave length.” pares to Singapore where 75% of the popidly,” warns Zeman, who points to how One reason for this is the impressive ulation are homeowners. the rapid roll-out of China’s high speed tourist flow in recent years. This past year In addition to cleaning its own house, train network brought people closer to130 million Chinese went abroad and that Zeman calls for Hong Kong to play a gether and changed the way they think is set to rise to 200 million by 2020. “Travel central role in integrating the economies and do things. In the near future Zeman makes you smarter and the more you travof the region. By next year the Hong believes borders will become seamless el the more things you see and more good Kong-Macau-Zhuhai Bridge will allow with the introduction of face recognition ideas you bring back. So by 2047 – or even commuters to move between the three technology, making cross-border travel a sooner – there will be a different China. I cities in just 25 minutes. At the same much simpler affair. am confident that the next generation of time, the trip on the Hong Kong-Guangsocially connected young people will make Integration Coming zhou high-speed train will take just 45 China an even greater superpower than minutes, and high speed travellers will “This integration will bring a new era of it already is and Hong Kong will benefit connect to Shenzhen in just ten minutes. growth to Hong Kong, and change the from that astounding movement. HopeGiven this dynamic Hong Kong must nature of the city,” predicts Zeman. “Affully the city will be able to change along move to a closer integration with Shenter all, if someone can buy a house triple with China.”

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July/August 2017

SPONSORED STATEMENT hina’s serviced residence sector may aphappen.” Wee identifies disrupters in National Bureau of Statistics, the highpear, at first glance, to be rather niche. the form of technology advancement as est proportion in more than two years.

However, shaped as it is by changes in being rather particular for the serviced The return to price rises will have property markets and expansion by apartment industry. Another disrupter come as a boost to many in China’s both international and domestic comto watch is price swings in the property property and construction sector, for panies into new parts of the country, the sector as a whole. whom the price falls in 2015 were rather serviced residential sector can offer an problematic for business. Zoomlion, the Property Turbulence interesting insight into developments in country’s leading construction machinthe wider Chinese economy.

While it is certainly a cliché, it nonetheery and sanitation equipment maker, Furthermore, as serviced resiless remains true that China’s residential announced a 90% net profit drop in 2015, dences look more to the domestic property market has been on something and Wanda cluster.

Commercial properties, part n China’s competitive world of industrial policy, ecoTake the thriving automobile Shanghai VolkswaChinese market for business, the of a rollercoaster ride in recent years. of Wang Jianlin’s Wanda conglomerate, nomic zones seek a special edge to attract a critical gen and Geely Automobile lead the way to perfect the supindustry is a usefuland case study leaders The first of this decade sawfrom steady witnessed sales their bonds downmass of enterprises business withpart a range ply chain R&D recently to manufacturing, and service, that can provide guidance into the price rises, notwithstanding a rapid graded to junk status by Standard and of options and incentives. Ningbo Hangzhou Bay New vehicle detection, training and logistics. This manufacturing habits of consumers.

This is particularly increase in the amount of supply in the Poor’s.

Such developments were particuZone’s (Hangzhou Bay) location at the center of the densest area is further segmented into parts, new energy, technolotrue for the base way ininwhich China’s These price gy rises slowed and services. larly worrying for the Chinese economy population a region thatmiddle boasts themarket. most rapid ecoand production classes book accommodation for both into reverse ofaviation 2014 andcluster as follows a whole.aDespite the much nomic development and highest standardwent of living is one for much The similar trend with vaunted a focus suchand lureshort for local international business partners. development manufacturing, long termand stays.

2015, before turning on round again this of aircraft, economicparts rebalancing, by certainoperameasWithin a two-hour drive of four international tions, prices training and service industries.

Bay took Unsurprisingly perhaps, technology year. airports In March,and for example, were ures roughly 20% Hangzhou of China’s economic two key ports, Hangzhousignificant Bay is at the of theindytheinconstruction aviation park related as an opportunity to is becoming increasingly in epicenter higher than February 62 out of 70 of the activities remain to the property namic economies of Shanghai, Ningbo, Hangzhou and Suintroduce aviation base operations, aircraft leasing and this.

Daniel Wee, Area General Manager major Chinese cities surveyed

by China’s market. zhou. With a development plan trusts, maintenance andthat repair Central West China for Ascott, As such, it is not a shock the that spans over 350 sq. km. of services and related projects. remarks, “Companies must be various economic stimulus measland aware and an equal area dediThe financial cluster is very of the disrupters and ures core pursued by policymakers cated to marine projects, this separated into financial andhave inupcoming trends which change in China since late last year gateway on the fringe of Ningbo surance institutions, commercial the landscape, and be ready to levhad an effect on the residential connects directly with Shanghai offices and services to build a erage on these trends when they property markets. China Vanke, and is fully integrated with the financial service community with for example, one of China’s largest Yangtze River Delta. coastal features. developers, announced that its Zhejiang designates HangRelying on an internationrevenue for the first quarter this zhou Bay as the next “Pudong”, al perspective, standardofand year had jumped 64.3% year-ona platform to upgrade the reelements, Hangzhou Bay has year.

Even in thea context of aliving poor gional economy with largeconstructed modern

NINGBO HANGZHOU BAY NEW ZONE

This new economic zone combines massive industrial potential with an eco-friendly environment for business.

I

scale industry, projects and community with a futuristic vienterprises. This ambitious sion. To assist in development of project commenced under the an international city, Hangzhou Zhejiang Cixi Economic Zone Bay invested over Rmb14 billion banner in 2001, the same year in infrastructure. The zone host The automobile cluster is a major part of the Hangzhou Bay grand plan to support large scale industries. as completion of Hangzhou Bay international schools, hospitals, Cross-sea Bridge. One decade shopping malls, five star hotels later, Hangzhou Bay became one of Zhejiang’s nine marine and a sports park, with new facilities perfected daily. economic clusters, upgrading to a national economic and To enhance the living experience Coastal Holiday Town technological zone in 2014. was introduced as an exclusive Ningbo cultural tourism Hangzhou Bay will build “four zones in one city” and destination. Covering over 4 sq. km., the town includes 16 construct the Ningbo Port Economic Cycle to highlight a diprojects in line with the direction of “large tourism + large versified development strategy. The “6+4” industrial system culture” and a “coastal theme recreation, cultural experiis dominated by advanced manufacturing supported by ence and resort service” to attract Yangtze River Delta visitop-level services. Six advanced manufacturing industries tors to relax and enjoy traditional culture. include automobile, aviation, intelligent electric, new maThe addition of Ningbo Hangzhou Bay Wetland, one terials, life and health as well as high-end equipment. The of Asia’s largest tidal marsh wetlands and an important four modern services are tourism, sports, professional and stopover for migratory birds, provides an ecological angle financial. sponsored by World Bank Global Environment Protection There are nearly 500 industrial projects settling into the Fund. The undersea hot spring is rich in trace elements and zone, of which some 90% are operational, with about 20 plans are afoot to introduce projects related to sightseeing, projects invested by Fortune 500 companies. Names like sports, health recreation and cultural tourism.

Volkswagen, Bosch, Visteon and Unilever are amongst the industry leaders in Hangzhou Bay. Within the 6+4 dynamic For more information and the complete range of Ningbo each category is further broken into segments to reflect Hanghzou Bay Economic Zone services and incentives specialization in multi-billion dollar industries. please see www.hzwxq.com July/August 2017

www.sbrchina.com

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COVER STORY

Lord Patten strongly believes that the economic reemergence of China is one of the most important events of his lifetime.

Photo Caroline Forbes

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Dialogue With The Last Governor Chris Patten will go down in history as the last gatekeeper of the last major British colony and his work in Hong Kong is a legacy to China’s “One Country, Two System” success.

F

or t hose watching the raindrenched Hong Kong Handover ceremony two decades ago on the misty shores of Victoria Harbor, Central’s skyscrapers looming ominously in the background and the Royal Yacht Britannia waiting in the wings to whisk away Prince Charles and his entourage, a few select images remain forever fixed. One is that of the Prince and Lord Patten of Barnes, the Governor of Hong Kong, sitting side by side with hard set faces looking out over the mass of dignitaries and honor guard taking in the full meaning of the last moments of the colony.

Twenty years later, Chris Patten remembers this day well and fondly speaks of his time in Hong Kong. “Those years were the most interesting and happiest of my life, and my family would say the same,” Patten recalls on the eve of publishing his autobiography First Confession: A Sort of Memoir. “I can honestly say since I first saw China in 1979, and have gone on seeing it regularly, I never had any doubt its reemergence was the most important economic event of my lifetime after the fall of the Berlin Wall.

I knew this event would lift hundreds of millions out of poverty. It is in no one’s interest that this economic marvel ends.

It is good for China and for humanity.”

Shanghai Business Review met with Lord Patten on a stormy spring day in London on the banks of River Thames, a stone’s throw from the Parliament

in which he has sat as a member for so many years. In an exclusive interview with SBR, the former Chairman of the Conservative Party who served three Prime Ministers – Edward Heath, Margaret Thatcher and John Major – reflected on the importance of Hong Kong to China and shared his views on the shaping of the world’s economic dynamo.

“There is a reason why I say re-emergence, rather than emergence,” adds Patten. “It really is important for all to have a sense of history. We must understand that until the 1820s China was a third of the world economy and China and India represented over 50% of world GDP. Their collapse in the 19th and early 20th centuries was partly due to depredations of Western imperialism, partly due to the Industrial Revolution and partly due to decisions Chinese and Indians made for themselves. The balance between different economies can shift very significantly.”

For Chris Patten – known in China as Peng Ding-kong – that July 1997 day was the end of a five-year stint that many consider one of the most important in the long diplomatic history of a nation that once ruled the Seven Seas. It was the exclamation point on a saga that began in 1842 when Queen Victoria assumed the helm of a small trading colony on the southern shores of the Middle Kingdom.

It was the end of an era that set the stage for 20 years of growth under the “One Country, Two System” vision forged by

Paramount Leader Deng Xiaoping, architect of China’s Open Door Policy.

“In 1979 I visited Hong Kong Governor Murray Maclehose with three other young Members of Parliament,” remembers Patten, who was 35 years old at the time. “We were taken to the border of Lo Wu to look over the rice paddies that would one day become Shenzhen.”

During that trip Patten stopped in Shanghai. A jazz lover, Patten wanted to hear the band at the Peace Hotel. Of that pilgrimage Patten remembers, “We walked up the Bund from one dim street lamp to another. Things changed, and changed dramatically, just consider the development of Pudong. By the time I left, had a career in British politics and came back to Hong Kong there was an economic explosion, a bit Adam Smith, a bit Wild East or Wild West. What has and is happening is incredible.”

Historical Perspective When Patten took on the challenging assignment to be the Last Governor of Hong Kong in 1992 he was an energetic politician in his 50s that had held some of the most important posts in the Conservative Party. Now in his 70s, Patten is in a more reflective mood as the Chancellor of Oxford University and likes to consider the historic perspective when contemplating the past, present and future of the Middle Kingdom. “China is one of the world’s extraordinary civilization,” notes Patten.

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Photo: Patten Archives

This ref lective mood of the Last Governor, as well as his appreciation of Chinese philosophy, is mirrored in the first lines of the new First Confessions autobiography. “A Chinese anthem, written in 1100 BC, warned against three foolish things: first, deep sleep in an unknown house; second, setting out to sea in a borrowed junk; third, not to lag behind when the elephant approaches a new bridge. To which sound advice, over 3,000 years later, one might add a fourth foolish thing – writing a political autobiography…”

In typical modest fashion, Patten goes on to downplay the contribution of his many years of public service in BritGovernor Chris Patten and Prime Minister Margaret ain and Hong Kong in an offThatcher on the front lines of Handover negotiations. hand manner when speaking discussed key historic events. There was of those who publish autobiographies, the legendary launch of Admiral Zheng “The author poses as the person she or He’s treasure f leet in the 1400s. After he wanted to appear to be: a somebody, touring most of Southeast, South and not too dreary, right about everything West Asia as well as East Africa from or, if not absolutely right, then heroically 1405 to 1433, the fleet returned to China wrong. The more honest examples of to be destroyed by an emperor that dethe genre may concede some surprise cided there was nothing much to gain at the public heights to which the aufrom the outside world. Then there was thor has been lifted by what he or she that 1793 meeting between the Qianlong knows better than anyone else are pretty Emperor and Lord Macartney, the first modest talents.” envoy from Britain to China, which met In a wide-ranging discussion on with protocol difficulties.

China’s international evolution, Patten

Economic Miracle

Photo: Patten Archives

Governor Patten receives the Hong Kong flag to commemorate his service to the city.

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Finally, Patten mused over the first Handover of Hong Kong to Queen Victoria in 1842. When asked what Queen Victoria would have thought of relations between China and the UK today, where Chinese enterprises are building the nation’s nuclear industry, investing in its financial institutions and buying its football teams, Patten responded, “Who knows, she might have had the same views as Napoleon. You recall Napoleon took the view that once China awoke the rest of the world better watch out.”

In terms of his own place in modern Chinese history, Patten had an important role to play in the One Country, Two Systems dynamic. Deng Xiaoping believed there could be only one China, but distinct regions, such as Hong Kong and Macau, could retain their economic, legal and financial systems while the rest of China operated under the “socialist market economy”. It was left to Prime Minister Margaret Thatcher and Foreign Secretary Douglas Hurd, with Governor Patten on the front lines, to deal with what the first iteration of the unique One Country, Two System vision meant in reality.

“There is a question about what China’s current market approach means and it is legitimate for the leadership to tell us what it means for them of course,” comments Patten. “China is certainly entitled to say that, ‘We found a system which suits us.’ The only questions we can ask are rather existential.”

Patten’s wider perspective is that in every country there is an argument between those who think if government gives up its hold over the economy it will sooner or later lose economic control, so you cannot continue to privatize companies whatever the figures tell you. On the other hand, private sector defendants say unless government steps back from managing large parts of the economy it will lose control as the country cannot grow fast enough to create enough jobs.

“We must appreciate China’s position as both propositions are true and plotting a way through is not easy,” he adds.

Two decades on, despite inevitable bumps in the road, the One Country, Two System vision Patten helped cement July/August 2017

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Photo: Patten Archives

over long discussions with Chinese counterparts, repartees he remembers with a certain fondness, was instrumental in making China the economic superpower it is today. After all, without the Hong Kong experiment to steer in the right direction, it is likely China would have faced more issues in forming the market-based economic model now admired worldwide.

When looking at the role of Hong Kong within China, Patten refers to the statistics. “There are 7 million in Hong Kong and over 1.3 billion in China,” he notes. “When I left HK the city was worth about 17% of China’s GDP, today I hear the figure is closer to 3%. It always stood to reason that as China became prosperous the f igures would shift significantly. That is not because HK is doing badly, though the growth rate has slowed a bit, the reason for that change is the same as for China overtaking the US in Purchasing Power Parity terms – the nation’s size.”

Despite this change in economic balance since the Handover, Patten believes Hong Kong provides an economic model that works. “The great thing about being the Hong Kong Governor after being a British politician was the ability to get things done,” explains Patten. “Because of human vanity you like to see things from intellectual creation to completion and normally in politics that does not happen, either because it takes so long in Europe and America to get things done or because you are moved from the post before completion. So you always have to make hard choices.”

In his five years in Hong Kong Patten does not recall having to make a difficult choice. Patten assumed the helm of an economy growing for almost 30 years.

During his governorship public spending rose, borrowing was cut, taxes reduced and the city built its new airport entirely out of revenue. As disability and health services improved people streamed out of private hospitals back to public ones to benefit from higher standards.

“I used to be criticized by Mainland officials for being a socialist, for spending too much, but we could do it because of that impressive economic growth,” remembers Patten. “The efficiency of the Hong Kong economic model is one rea-

Governor Patten was appreciated by Chinese and Western Hong Kongers alike – especially when it was time to hand out lai see packets around Chinese New Year holidays.

son for success. Another is the rule of law and how this law promotes business in a fair and equitable manner.”

Patten recalls when he first went to China for talks with his opposite number Lu Ping, a man whom he appreciates for his intelligence and demeanor. Patten explained to Lu that when he was Britain’s Environment Secretary, in charge of the biggest domestic department responsible for everything from finance to housing, he was faced with many court claims from those against his policies.

Sometimes Patten won and other times not. “I tried to make the point the rule of law applied to me as well everyone else,” Patten adds. “That is the basis of Hong Kong’s success.”

Systemic Approach Patten’s governorship of Hong Kong coincided with a curious time in the capital markets experiment of China.

Those were the days of the Red Chips, China companies incorporated outside the Mainland and listed in Hong Kong, H-Shares, state-owned companies incorporated in China that traded on the Hong Kong Stock Exchange, and window holding companies like Shanghai Industrial and Beijing Enterprises. www.sbrchina.com

In these early days of the capital markets experiment, overseen by the likes of economic czar Zhu Rongji, a man who Patten holds in the highest regard, it was not clear how the world investment community would perceive the commercialization of Chinese enterprise. The subsequent roll call of public listings of enterprises has since driven the HKE to become one of the world’s leading capital markets, and supported the drive for PRC listings in markets such as New York, Singapore, London and Frankfurt, not to mention the rise of the Shanghai and Shenzhen exchanges.

This amazing capital markets story has had its ups and down over the years.

For instance, after a spate of financial and corporate governance scandals around 2010, Chinese enterprises watched in dismay as PE ratios on US and Canadian markets fell to an average of 1 as investors sold positions. This was followed by numerous privatizations where enterprises delisted from global exchanges only to relist in Hong Kong and China at multiples many times the overseas trading value.

On the eve of the Asian Crisis back in 1997, Governor Patten did not see that China could become the world’s 25

COVER STORY

Photo: Caroline Forbes

second largest economy. Patten wrote in in terms of overall growth. the high point for the white middle his bestselling book East and West that “I think to myself that I hope that class. The I Love Lucy middle class was in China’s economic model was unproven, does not happen to China,” notes Patten. their heyday.” as the economies of France, Germany “It would be a disaster for us all. Today, Patten would like to see China publish and the UK were still much bigger at the you can see the rise of the China midits gini coefficient to show figures on sotime. Now that is not the case. China is dle class, but what you need to see is a cial equity, but he notes this issue is well the second largest economy and aims to narrowing in social equity.” Patten comunderstood inside the country. Patten surpass the US in due time. pares the rise of the China middle class points out that former Premier Wen JiToday, Patten is impressed by the deto that of America in the 1950s and 1960s. abao regularly made speeches about the velopment and globalization of Chinese At that time America’s gini coefficient four “uns” (unbalanced, unstable, uncoenterprise, but notes the capital markets (measure of distribution of income level) ordinated and unsustainable) and one of experiment must come back to improvwas the lowest in US modern history. these “uns” was the imbalance in wealth ing the lot of the people. “If you were a “If you were a boss in a big US company and earnings between the best and least Chinese official the thing well off. that would most concern More Thoughts you is the rate of change in per capita income not the Since handing over the total,” adds Patten. “With 1.3 keys to Hong Kong, Patten billion people, if you grow has not sat idle. Moving at the spectacular rates from one hot spot to anChina did for three decades, other, Patten chaired the doubling the economy every Independent Commission eight years, inevitably you on Policing for Northern overtake everyone due to Ireland, better known as population size.” the Patten Commission. In When asked where Hong 1999, Patten was appointed Kong is headed in the next as the UK member to the 20 years, and whether it will EU as Commissioner for be eclipsed by Shanghai, External Relations, where Patten feels the city will he dealt with crises in forthrive due to qualities that eign policy, the most notain his view provide advanble of which was the failure tages that can overcome to come up with a unified the competition with much policy on the 2003 Iraq larger communities. As to War. After a fiery period where China is headed, the as BBC Chairman, today answer is not as forthcomPatten sits as the Chanceling, “I don’t know. In 20 lor of prestigious Oxford years it will pay for a huge University. increase in the number of elI ne v it a b l y, P a t t e n ’s derly,” he says. “By then the thoughts turn to the ecolargest population group in nomic systems that drive the world will be Indian. The world economies. In his The current Chancellor of Oxford has time to reflect on the Patten years second largest will be China. w r it i ng , P at ten s t ates on the eve of the publishing of autobiography First Confessions.

Probably the third largest time and again that the will be Chinese pensioners – Western market approach that is the reality.” then maybe you got 30 times the average is the best economic alternative. Yet, he Due to this demographic quandary, wage,” he adds. “Now bosses get 300, acknowledges Asia has followed a difChina is moving faster than any country 400, 500 times that.” ferent model, one that is centrally led by ever from a labor surplus to a shortage.

For that reason, one of Patten’s most governments. He remembers well the Patten also looks closely at the words of admired US presidents is Dwight Eirunning argument with Lee Kuan Yew, men like Larry Sommers, former Chief senhower (1953-1961), “who baked into the first Prime Minister of Singapore Economist of the World Bank, who speak the economy the best bits of Rousseau, who governed for 30 years, known for of what happens to the fastest growing the highway building program and his opinions on the contribution of Asian economies, the ones that enjoyed real defense industry investment that provalues to economic growth. growth spurts. Sommers argues these duced breakthroughs in academia and The question of how to best achieve economies fall on average by 4% to 4.5% research, including the Internet. It was rapid growth is essential. For instance, 26

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Patten looks at Western developments and acknowledges that systems in that part of the world are far from perfect. “In the UK you see a bizarre decision to vote for taking ourselves out of the EU. Look at America. You see an election where the winner gets three million fewer votes than the loser and a President wins who has limited abilities to do the job or understand the niceties that go along side constitutional arrangements.”

However, Patten does believe the Western system has served other nations to find solutions to deal with the problems they face.

“That just happened in France. Monsieur Macron will have a terribly difficult time ahead, but he is a response to his society’s problems.

Germany, which after a terrible period in the first half of the last century, has turned itself around and emerged from the economic and moral rubble.”

July/August 2017

Photo: Patten Archives

Prosperity for All

Govenor Chris Patten and Prince Charles wave goodbye to the colony as the Royal Yacht Britannia sails off into the night.

Photo: Time Inc.

China has achieved impressive economic growth based on its ability to deliver infrastructure and other projects in a timely manner. Take the highspeed rail initiative. Due to its ability to push through projects, China built an impressive high-speed rail network, one that would have taken other nations much longer to complete. This begs the question as to what is indeed the system that betters the lot of the most people.

“I don’t think there is a better way than to involve people in shaping their own destiny,” Patten concludes. “ What I totally accept philosophically is that life is not a journey, like a wagon train in which you go across the Prairies to find paradise, running streams, leaping salmon and your lucky coin. Life is a series of predicaments and the older I get the more than I believe that. So I am very alive to the argument that trying to find and impose the perfect system is crazy.

To argue against China’s system by constructing one’s own makes no sense. A system that seeks to assert primacy over another system has all the demerits of the first system.”

A m e r i c a' s T i m e M a g a z i n e considers the legacy of the Last Hong Kong Governor.

Patten notes another issue that will arise is the need to satisfy a population used to economic prosperity. This is an issue already identified by today’s Chinese leaders as a challenge. Patten points to China’s current interest in a historic book by Alexis de Toqueville, The Old Regime and the Revolution. Patten is familiar with de Toqueville’s work as he studied it in his first term in university, read it in French and wrote essays on it.

“De Toqueville warns that it is wrong to assume when people get better off they are easier to govern,” adds Patten.

“In the run-up to the French Revolution the rural population and even people in the cities were getting better off. What affect did that have? It made them more aware of how much better off they wanted to be and how much better off others were. What I feel is the management of change in China is incredibly difficult, but it is in all our interest that the leadership gets it right.” www.sbrchina.com

Education is an important part of managing that transition. Over the last two decades, thousands upon thousands of Chinese students have gone abroad to study, and many have taken jobs at the foremost Western corporations and institutes. Some have returned to China to play an important role in shaping the new economy with their gained knowledge.

Patten has closely studied this evolution in education. “The China Education Ministry points out from time to time that many of their post-graduates don’t come back,” noted Patten. “China is not the only country in that position. I am sensitive about the drain of talent from Europe to America, and I run a university so I would be. Fortunately, until now the UK has attracted students and we hope to be able to do so into the future.”

Oxford has over 1000 Chinese studentson its campus, of which about 150 of those students are from Hong Kong.

“I am aware of the incredible amount of talent China has and I will be interested to see how much of that talent remains outside and how much goes back,” concludes Patten. “After all, it is important for the future course of China that the brightest minds are available to lead the way forward.”

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COVER STORY

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www.sbrchina.com

July/August 2017

1997: A Year to Remember Chances are you heard of the Handover of Hong Kong to China if you were on this world in 1997.

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here are certain occasions – some good, some not so good – where people will always remember where they were at that moment. The Handover of Hong Kong to China in 1997 was one such event, especially for those of us who lived and worked in the region, a media celebration that was broadcast worldwide to an audience of billions.

There were many reasons why 1997 Handover caught the attention of the world on a large scale. Perhaps the greatest reason being that this event was something that people waited for in anticipation for many years, if not decades.

After all, the Handover was a topic of everything from adventure movies (Tai-Pan) to books by James Clavell (Noble House) for decades before the moment, not to mention the long debate, the endless analysis and the negotiations.

In other words, this was an event we all knew was coming. What we did not know was what would happen after that event.

Interestingly, when looking back at the comments from those in Hong Kong and China looking ahead at what was to come at that time, it is clear that those in the region were excited by what was to come. In retrospective, their words still ring true 20 years on.

To provide some insight as to what was in fact being said by the movers and shakers on the eve of 1997 Handover, we provide the coverage from the pages of sister publication China Capital Markets and Investor Relation Review published in the summer of that year.

July/August 2017

www.sbrchina.com

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COVER STORY

THE CENTRAL BANKERS Dai Xianglong, Governor People's Bank of China The challenge of enacting the One Country, Two Systems principle is formidable by any measure. The concept has never been applied before, and may never be implemented again. The odds are that sensitivities will arise when the world's most freewheeling economy is joined with the world’s largest centrally controlled market…

This principle was not a compromise solution reached in the Sino British negotiations for political expedience. It was not even an idea f loated by the British side. It was a paramount guiding principle adopted by the Chinese government for advancing the unification of China.

The principle was the outcome of intense research by the Chinese government on what factors contributed to the economic success and stability of Hong Kong and how they could be preserved beyond 1997. We are convinced this principle would serve not only China's longterm national interest but also that of Hong Kong….

There is no lack of skeptics who doubt the Chinese government would abide by the Basic Law and fulfill its commitments after 1997. This brings to mind those skeptics who doubted China's commitment to the Open Door Policy and the economic reform. Such critics thought

James D. Wolfensohn was the President of the World Bank Group back in 1997.

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the problems faced by China in the reform process were so huge that we were doomed to fail. Today, you and I can see that these critics are proven wrong…

Joseph Yam, Chief Executive HK Monetary Authority

China and Hong Kong have close financial links with each other. Since the implementation of financial reforms and the Open Door Policy, such links had been strengthened. It is necessary to enhance such a mutually beneficial relationship.

The Mainland and Hong Kong should work together for the prosperity, stability and smooth transition of Hong Kong.

China's commitment to the implementation of the One Country Two Systems principle is increasingly accepted and appreciated by Hong Kong and the international community.

Worries and doubts about the future of Hong Kong that emerged in the early 1980's have largely subsided now. We are pleased to note the financial situation in Hong Kong is heading towards a smooth transition. We are confident Hong Kong will enjoy financial stability before and after 1997.

Even though there may be some fluctuations in Hong Kong's financial market, we believe the HKMA is fully capable of handling these situations….

One story that has circulated is China will not tolerate two currencies after 1997 and so the HK dollar will be replaced by the RMB. There is a clear requirement in the Joint Declaration and Basic Law for the HK dollar to continue to circulate as legal tender in the SAR, and for it to remain freely convertible for at least 50 years after 1997…

It can be argued that for two close trading partner's, a single currency or a fixed exchange rate between two currencies is preferable to two currencies under the influence of different monetary policy objectives. The situation argues clearly for monetary segregation rather than monetary union. It would be hard to find two economies that are more different than those of China and Hong Kong…

Another myth surrounds the abandonment of the HK dollar link with the US dollar. Having a fixed exchange rate is nothing new in this world. It makes sense for a highly externally oriented economy like Hong Kong to have a stable external value for its currency. The HK dollar link to the US dollar is not vulnerable to speculative attacks...Speculators do not have HK dollars. They have to borrow to cover positions. As a lender of last resort, the HKMA will not lend cheaply, directly or indirectly, for this purpose…

The PBOC's Chen Yuan became Chairman of China Development Bank in 1998.

HKMA's Joseph Yam protected the HK dollar at a time when it was vulnerable.

Chen Yuan, Deputy Governor People's Bank of China

www.sbrchina.com

July/August 2017

STOCK EXCHANGES ket, the entrance of new Chinese companies to our listing rolls, the arrival of more Chinese intermediaries is all part of the grand dream of building the Stock Exchange into one of the world's most formidable markets.

Sure, this dream is ambitious, but we have seen the near impossible achieved in China over the last decade. We look forward to the complementary synergies created by the Shanghai and Hong Kong stock markets.

With Shanghai as the national financial and commercial center and Hong Kong as the offshore international financial center the capital markets for Chinese issuers will be well served…

HKSE's Alec Tsui dreamt of the future rise of the Hong Kong capital market as a global player on the back of China listings.

Alec Tsui Chief Executive Hong Kong Stock Exchange A few years ago, a well-known businessman suggested that in 25 years time Hong Kong could be the biggest stock exchange in the world as a result of its role in servicing the China market.

This may be a dream. However, if we can keep providing high quality services to PRC enterprises and meet the goals of decision-makers across the country we can come a few steps closer to realizing this dream. After all, sometimes our dreams do come through…

Within our century long history, Hong Kong has a tradition of serving the China market. As China develops the potential for expanding these services to our mutual benefit is great.

It suffices to say upon the opening of our stock market a century ago there was a strong interaction with participants in various parts of China…

The ongoing development of the marJuly/August 2017

Liu Bo Executive Vice President Shanghai Stock Exchange It is not up to Shanghai to decided whether it will be the financial center of China. Shanghai's use as a platform for market reform ref lects the determination of the national leadership.

Based on the city's historic background as a financial center, the government believes Shanghai is suited to play a leading role in the capital market reform. In the same vein, it is not up to Hong Kong or its promoters to say that the city will indeed be China's international financial center…

Whether Hong Kong achieves this status depends on the view of the financial industry and the ongoing evolution of the market. People recognize achievement and they will come to a market because they feel it is the place to trade.

Shanghai and Hong Kong are positioned differently and both have to adjust their direction to fit into the financial market restructuring.

The Chinese economy is like an airplane ready to take off. Hong Kong and Shanghai are its wings, and you need a complete set to fly. www.sbrchina.com

SSE's Lui Bo positioned his exchange to play a leading role in capital market reform.

The SSE trading floor prior to moving to the new bvuilding in Pudong District in 1997.

The trading floor of the Hong Kong Stock Exchange was a busy place in 1997.

The streets of Shanghai have changed a lot since this photo was taken in the 1990s.

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COVER STORY

SECURITIES AND BANKING Gary Coull, Chairman and CEO, Credit Lyonnais Securities (Asia) China has made a tremendous amount of progress over a tiny time frame. China has done more in recent history than in the previous thousand years to advance the livelihood of its people… a miracle has been performed in the last 20 years – definitely.

And, there is no doubt the miracle of Hong Kong is leveraged by the miracle of China. Hong Kong is in the privileged position of being a trader with inside information on the biggest market in the world. It is peoples’ desire to get into China and trade with China that has given Hong Kong a boost…

Without China, Hong Kong would be a fraction of the size it is. It has always been my feeling this vanishing border would be a positive for Hong Kong and that economic integration was a clear benefit from a business perspective.

From a social view it is going to take people time to get used to a different system. Interestingly, during this time China has emerged as a safe haven for investment in Asia. This is just incredible…

The July 1 celebration is only symbolic.

The borders have already vanished for the capital markets. They came tumbling down with the B-Share and H-Share programs almost five years ago. Those were monumental changes. There is much excitement to come in the capital markets.

Some 200,000 to 300,000 incorporated companies could be listable. I am not saying they will all list, that is the universe. Now, there are 2000 to 3000 companies that could list, compared to none ten years ago. Perhaps we will see 3000 to 4000 listings from Greater China in the next decade, perhaps more.

Francis Leung, Managing Director and co-Founder Peregrine Investments Holdings In the post-1997 environment one question on the minds of international investors is whether Hong Kong will continue to play its crucial role of channeling foreign capital into China. The answer to this question is an unequivocal “yes”. No other center will replace Hong Kong as the gateway to China. When capital senses opportunity it immediately seeks efficient channels to harness that opportunity. Hong Kong is that efficient channel…

The SAR is China’s most affluent city, with per capita GDP more than 60 times greater than the national average, and 36 times that of the richest province Guangdong. Why has Hong Kong thrived to such an extent?

The reason is partly due to the freedom to do business that has always characterized the place.

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But that is only part of the picture. The other half is China – the source of much of Hong Kong’s human resources and the reason behind its trade in everything from manufactured goods to financial services…

We may say Hong Kong’s dramatic rise in prosperity in the past two decades has been a direct result of its innovative approach in marketing China to the world. When it comes to financial products, constant innovation, this ability to re-invent itself time and again, proves crucial to China’s growth. Flexible and nimble, Hong Kong is China’s natural choice in the constantly changing world of global capital. In terms of China-related financial instruments we have just scratched the surface. I am confident to say China-related equity will eventually dominate the Hong Kong capital market.

www.sbrchina.com

July/August 2017

Stuart Gulliver, Treasurer of Hongkong Bank and Head of HSBC Capital Markets

Jin Jiang Dong, President of China Securities Industry Associations and Chairman of China Goutai Securities The question is what role will the Hong Kong capital market play in the context of the PRC arena? I have been asked many times whether the return of Hong Kong will dramatically alter the dynamic that now exists between Hong Kong, Shanghai, and Shenzhen.

Many people feel that one of these three markets will emerge as a clear leader within the Chinese capital market, and the remaining two will take a back seat in the capital raising process. I do not think that any one market will dominate, nor do I see a dramatic change in the current three market situation any time in the near future…

Hong Kong’s role as the financial center of Asia within the context of China will certainly continue to exist. The Shanghai and Shenzhen financial markets will still serve the rapid growth of the domestic economy. There should be enough business for everyone.

Many world experts have openly stated that with the growth of the Chinese economy and the restructuring of state owned enterprises, there will be many more companies suitable for public offerings in the days ahead. Some even note that in the next ten years there will tens of thousands of companies suitable for listing. If this happens, all three markets will have difficulty in satisfying the listing needs of PRC companies.

July/August 2017

It is unbelievable that as we enter the post-transition phase Hong Kong and China have become safe havens for Asian fixed-income investors. No one would have believed that this would be the case just a couple of years ago.

With economic or political problems in Indonesia, Thailand and Korea, China has become an area of certainty in the mind of the global capital market.

This sentiment is particularly strong for American investors. Overall, the perception is that China has the least political risk due to the clear pattern of what is going to happen…

The reason China finds itself in this solid position is the strong management of its economy. The financial reforms that have taken place in terms of overhauling the banking and payment system are very a much role model for the best practice that the IMF would recommend. This has been helped along by a massive accumulation of foreign reserves. It is equally unbelievable that China is now a major investor in US treasuries, assuming some of the slack of Japanese life companies, and that the PRC will eventually be an influential investor in Asia…

As for reserves, there is a school of thought developing in China that believes the reserves are too large and some should be re-channeled to infrastructure development. Some argue that if you have a certain multiple to import coverage, and reserves are in excess of this multiple there in excess. There is another school that believes that given the size of the country you can never have enough reserves.

From my view, reserves are key in making the Rmb fully convertible. China needs large reserve pools to offset the skepticism of the financial community that is driven by the problems inherent in the banking system and with stateowned enterprise.

Kuang Yong Xiang, General Manager, International China Construction Bank After Hong Kong’s return, the Mainland and Hong Kong will be equal in terms of financial development. They will learn from each, support one another and prosper together. This new historical period has great meaning for financial cooperation.

With the Chinese economic development there will be a great demand for capital.

Hong Kong’s financial center will be put to good use in accessing capital for China.

This new equity capital will improve the Chinese companies capital structure and will greatly support the Mainland’s economic development and restructuring of state owned enterprises.

Chinese international competition continues to increase. But, China’s financial institutions are still far behind. Through the financial cooperation with Hong Kong, financial institutions will learn from Hong Kong’s experience. This will strengthen China’s financial institutions capability in the international market. Hong Kong financial institutions have extensive global network and many experienced financial professionals. Mainland institutions have broader domestic network familiar with local companies and domestic legal framework. The cooperation between the two sides will create a great synergy. www.sbrchina.com

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COUNTRY REPORT

Budva Bay is ready for more expansion.

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Budva's unique Dukley Gardens beach.

www.sbrchina.com

The super yacht set heads to Montenegro.

July/August 2017

Budva's renowned Sveti Stefan is a national treasure and one of the world's most luxurious hotels with a variety of rich and famous guests.

Balkan Silk Road Sparkling Jewel No nation has more potential to become the Silk Road Monaco and attract global capital than Montenegro.

by Dan Spiritus

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here are jewels and there are Silk Road jewels. But these jewels are few and far between on a map that covers so many nations with so many challenges. One of the hidden jewels on this long and winding Silk Road is Montenegro.

In fact, it is hard to find a country in Western, Eastern or Central Europe with the kind of capital inflows of this Balkan nation. Billions of dollars are flooding in from all parts of the world, expanding infrastructure and building a series of luxury Adriatic seaside towns.

For those who watched the Asian Tigers grow from backwater tropical resorts and northern industrial engines to mega-tourist destinations and economic dynamos, Montenegro is déjà vu. Emerging from decades of Cold War cold shoulder and a brutal civil war, this ancient Silk Road crossroads is set to lead the emerging Balkan Tigers into a new era. And, no Balkan market is more friendly towards foreign investment than this 650,000-person sea, lake and mountain paradise which sees a migration of over two million sun worshippers during the summer season.

“Each generation finds its own forgotten place where cultures collide and enjoy the feeling of being different,” remarks Neil Emilfarb, Chairman of Stratex Group, one of the first and still most active foreign investor in the Balkan nation. “There was Marrakech in the 1930s, Mykonos in the 1960s, Miami South Beach in 1990s and now Montenegro.”

July/August 2017

www.sbrchina.com

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COUNTRY REPORT Over the last few years, the biggest names in the investment world have joined the Montenegro beach party.

Egypt, Turkey, Dubai, Qatar, Russia, Azerbaijan, all Silk Road nations in their own right, stepped up with projects destined to bring Montenegro into another league with massive development designed for high net worth crowds. What do they all see? A Silk Road opportunity second to none in a new age Tiger economy set to emerge with a roar in the heart of Europe.

Not one to let a Silk Road opportunity slide, China has taken its stake in a different manner so far, though it may not be long before the world’s largest tourist market finds this enclave. The perennial emperor of Silk Road infrastructure investment entered the market to build and finance an €800 million road project to connect newly developed Montenegro ski resorts. While the rest of the region’s investors chose to go with property development, China sees better value in building the infrastructure that ties developments together and fuels their power needs.

China Road and Bridge Corp. is now building a treacherous 40 km mountain section of Bar-Boljare Highway. Montenegro concluded a Preferential Buyer Credit Loan Agreement with Chinese EXIM Bank in 2014. Of an estimated €809.6 million, €689 million (85% of the funds) will be provided from EXIM Bank to be repaid over 20 years after a grace period of six years and annual interest of 2%, the remaining €120 million coming from the Government of Montenegro.

After contractual preconditions were fulfilled this four-year project kicked off in May 2015.

Perhaps the highest profile Silk Road news for Montenegro came earlier this year when rumors were confirmed that controversial former Prime Thai Minister Thaksin Shinawatra bought Hawaii Islands off Budva’s Old Town. Though the initial size of this investment is small compared to others, the plan to build out this exclusive Adriatic island is expected to produce one the world’s most luxurious resorts, rivaling Sveti Stefan just down the coast, the hob-knobbing point of the likes of Brad Pit, Madonna and Rolling Stones.

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Silk Road Crossroads Montenegro is situated between the Western Mediterranean, favored by upscale Northern and Western Euro tourists, and Turkey and other Black Sea locations favored by Eastern Europeans. Its central Adriatic location close to the Ionian Sea and easy accessibility from Aegean and Mediterranean ports makes it an ideal yachting destination.

Montenegro remains the only European Mediterranean place in which East and West meet on equal visa terms, where EU, Russians and most Gulf citizens do not require entry visas.

Montenegro has been at the Silk Road crossroads for over 2,000 years.

The Greeks, Romans, Venetians, Ottomans, French and Austro-Hungarians have all set their f lags in Montenegro over the ages, some for many centuries.

More rulers, sultans and emperors have laid claim to this sparkling jewel of the Balkans than one can imagine. In more recent times, the nation has suffered the tribulations of the Cold War era and a civil war that captured the concern of the world. Throughout it all, this proud Montenegrin nation has stood tall, absorbed new cultures and different peoples.

Today, Montenegro is open for business and no nation in the region attracts more attention. Supported by a government open to foreign investment and a

tax regime that sets the benchmark at a level of 9%, a flood of interest has been generated in this Dalmation Coast marvel. Watershed developments like Dukley Gardens, Porto Montenegro, Portnovi and Lustica Bay have set the agenda on a multi-billion dollar investment f low that will alter the very nature and demographic composition of this growing Adriatic nation.

Big money has taken the bet that Montenegro will make the grade in a tourist world where competition is tough and opportunities endless. That was the reasoning behind first mover Porto Montenegro. Legend has it that in 2006 Peter Munk, a Canadian billionaire of American Barrack mining fame, circled the country in a helicopter in search of the perfect development destination.

Munk’s co-investors in this €300 million investment included some of the wealthiest businessmen – Russian oligarch Oleg Deripaska, Lord Jacob Rothschild of the banking dynasty, and Bernard Arnault, Chairman and CEO of French luxury group LVMH.

Porto, Porto, Porto Porto Montenegro stands as a testament to the Munk vision, owned as of last year by Investment Corporation of Dubai (ICB). The sale to ICB was a vote of confidence for the Balkan state from a sovereign wealth fund that holds Emir-

Porto Montenegro's Regent Hotel is the centre point of this trendsetting luxury development. www.sbrchina.com

July/August 2017

investor friendly, bureaucracy for property ownership is a factor to overcome with money, time and patience. The fact that Porto Montenegro is 10% owned by the government due to its land contribution makes life easier. “It looks easy, but it is not,” adds Smirnina. “We create a safety bubble for buyers and sellers with a legal and financial team to take care of everything. Prices are higher to reflect this value and a construction quality based in international standards.”

City on the Bay

The Montenegro growth model is based on attracting investment and spending money.

ates NBD, UAE’s largest bank, Burj Khalifa, world’s tallest skyscraper, Emirates Airlines and Emirates National Oil. ICB plans to double investment here with a new round of development and has already arranged direct flights to Montenegro with Fly Dubai.

When Munk spotted the abandoned shipyard, he knew it was the perfect place for a super yacht marina. By 2009 the first residence phase was complete with 85 marina berths. Today, there are six residences, 450 award-winning berths and the five-star Regent Hotel, winner of the annual World Luxury Spa Awards in Switzerland. Plans our now afoot for another 900 berths and 900 residential units, more than doubling size.

The theme of Porto Montenegro is simple: serve the super yacht set and make sure this target market has everything required. This has been possible due to the non-EU standing of Montenegro, which provides yacht owners with all sorts of advantages. Duty free oil at a 45% discount is most attractive to yacht owners where fuel flows like water every time the captain hits the throttle. Yacht-friendly legislation allows multiple changes to passenger and crew manifests season wide with pick-up and drop-off flexibility, not to mention a total VAT exemption.

“So much has changed in the last ten years,” recalls Katie Smirnina of Porto Montengero. “When Porto Montenegro July/August 2017

was conceived few people understood the vision, even the locals were skeptical.

We were the first to make a major luxury development investment, and Montenegro has become the place of choice for those who want to follow. In places like Croatia, EU legislation makes it very hard to compete.”

The Porto Montenegro management team is proud of what is achieved in the national interest and how its vision transformed the country. “Ten years ago no one would take the risk and now this has proven to be most beneficial,” adds Smirnina. “Ten years from now this place will be much different, a super popular destination, more European and less a place where the current adventure seekers set investment trends.”

Smirnina points out Porto Montenegro trendsetters like to buy before the crowds and often have several residences. They prefer a quaint, un-gated community with people that know each other in a relaxed environment and somteimes they buy multiple units. Smirnina believes the current luxury niche is designed to make Montenegro more exclusive and control future crowds.

Meanwhile, property prices rise steadily in Porto Montenegro and most units are sold well before their completion.

As part of its super yacht set service Porto Montenegro manages the real estate component. While the country is www.sbrchina.com

Across from Porto Montenegro on historic Kotor Bay, Egyptian billionaire Samir Sawiris, Chairman and CEO of Orascom Development Holding AG, has doubled the bet with a billion-dollar Lustica Bay extravaganza. This Egyptian development giant operates 35 hotels with over 8,000 rooms and controls a land bank of 100 million sq. m. From the Red Sea to the Swiss Alps, Orascom has set the bar in chosen markets. With Lustic Bay Orascom is developing a small city to cover 40 sq. m. of Lustica Peninsula.

“Scandanivia is currently the direction of our marketing push, but we see the potential for more China business,” says Artem Aref iev, Senior Channel Management Executive of Lustica Bay, which is moving full blast to develop 7 million sq. m. and the country’s first golf course designed by Gary Player. “We plan to develop only 9% of the territory to save green space and look to build a town of major proportions open to locals and foreigners alike, with different phases set aside for different groups.”

Visionary entrepreneur Sawiris came personally to inspect the large tract of land that faces the open sea on Lustica Bay – it was love at first site. “We feel this is the best piece of land in the country,” adds Arefiev, “and when it comes to building new communities like this Orascom is second to none.”

Though it may take more than a decade, when Lustica Bay is finished it will be a point on the map of some size and importance. Orascom plans to construct affordable housing, seven five star hotels, several residential communities, a police station, an international school and a new four lane expressway. The developer provides a tiered pricing struc 37

COUNTRY REPORT ture to attract local year round residents and high-end yacht owners.

Orascom first entered the mega-development space with El Gouna City, built in the desert on the Egyptian Red Sea coast. El Gouna now houses 24,000 and Orascom has finished nearly a dozen similar projects from Qatar to Switzerland. At the same time as building out Lustica Bay, Orascom is transforming Andermatt, a Swiss mountain village, into a year-round mountain resort, doubling the municipality’s size.

Lustica Bay will not be the only town on the Peninsula. Qatari money is coming in with Blue Horizon as a rival set to open in 2018 under the banner of Qatari Diar, owned by sovereign fund Qatar Investment Authority. Qatari Diar will lay down the communication, road and communal infrastucture to support a five-star hotel and mixed-use units spanning 34,000 sq. m.

In yet another location on the peninsula, NorthStar intends to build the €210 million Montrose project with the first of five phases of construction and infrastructure in progress. Backed by capital from Europe and the Middle East, Montrose is a five-star hotel, branded residence with secluded villas, a marina, a yacht club and boasts world-class conference facilities.

Elite Branding Navigate in another direction on magical Kotor Bay, in the sight line of Porto Montenegro, one comes to Portonovi, f lagship of Azmont Investments, the Montenegro based company owned by Azerbaijan Global Investments (AGI).

Azmont plans to develop for the mix-used resort and is sure its €650 million investment will attract the attention of those Silk Road mavericks looking for the peace and quiet of a gated community by the secluded bay.

“We learned from similar projects in Montenegro and worldwide to add the specif ics that can make Portonovi unique,” remarks 38

Rashad Rasullu, Executive Director of Portonovi Resort Management Company. “These types of projects always entail a different concept and approach. It all depends on the market and your strategy. Portonovi is perceived as a new Montenegrin gem. We created a destination to exceed expectations and provide an experience that will be tomorrow’s new benchmark.”

The 26-hectare Portonovi Resort will comprise 275 properties, from spacious town houses and apartments set in a Mediterranean-style village to villas in landscaped gardens, sleek penthouses and sky villas with infinity pools overlooking the marina. At the same time, Portonovi will be home to the first One & Only Resort in Europe. ‘’We all need to acknowledge the work government has done since the country regained its independence in 2006,” concludes Rasullu. “The entire country is busy working on building the economy, focused on tourism and real estate developments which highlight the beautiful Adriatic coastline. As an investor we want to contribute to this work and our ambition is to place Montenegro on the high-end tourism map.’’

Turkish investors will not be left out of the mix, and recently Istanbul’s powerful Doge Group took a stake in Kotor Bay.

At the same time, Merit Group, a publicly-listed Turkish company specialized in entertainment and hotel facilities, is committed to the Balkans and has made Montenegro its regional base. This year it is estimated 200,000 Turks have booked holidays and the direct 1.5 hour Turkish Airlines flights are filling up fast.

Economic Snapshot Above all, Montenegro needs higher economic growth to attain the level of GDP per capita of EU countries. This growth must be sustainable so reform measures do not cause economic problems and the government hopes to avoid changes that increase short-term economic indicators but threaten the long-term stability of the system.

The Montenegro growth model is based on foreign direct investment to expand tourism, energy, agriculture and industry. Despites being a country of natural potential in an important geo-strategic position on the European

Portonovi's Rashad Rasullu wants to create a new community that is the future benchmark for Montenegro. www.sbrchina.com

July/August 2017

continent with a certain degree of political stability and successful Euro-Atlantic integration, prosperity calls for infrastructure to deliver an economic growth rate to erase high deficit levels. Connectivity between different regions is a precondition for international cooperation and strengthens attractiveness as an investment destination.

With foreign tourist consumption composing 20% of GDP, Montenegro cannot realize its development vision as an exclusive destination without modern infrastructure. Undertaking these projects carries risks and Montenegro needs innovative solutions and effective partnerships between the public sector, private companies and donors to exploit the unused potential and provide better living standards.

Important infrastructure projects include: Bar-Boljare Highway, the Adriatic-Ionian corridor, modernization and construction of railways to Serbia and Albania, thermal power plants to connect with grids in Italy and Serbia, Port of Bar development, and improved rural infrastructure. As such, the National Investment Commission adopted a list of 64 priority projects valued at €4.3 billion to be implemented from 2016 to 2025.

The Montenegro model seems to be bearing some results. After anemic growth in 2014, 2015 recorded a real GDP growth of 4.3% as a result of intensive construction activities and record growth rates in tourism. The Government and international financial institutions expect a similar trend in the medium term. Conservative projections of real growth range from 4.1% in 2016, 4% in 2017 to 3% in 2018.

Financial Center Bid With the grand plan to build an upscale country in place, the next step will be to diversify into new value added sectors to serve the changing nature of the Montenegrin community. Dragan Prelevic of Prelevic Law Firm and an investor in Stratex Group with Neil Emilfarb, feels that if the government plays its cards right it can roll-out the Monte Carlo model with little difficulty, bringing a whole new level of opportunity. Austrians, which now dominate the banking and insurance market, along with their Turkish counterparts, are already anticipating this move with new July/August 2017

to the standard. It is like a business club and Montenegro needs to be part of that club.”

The only question mark is where Russian capital is headed with Montenegro’s joining of NATO. The flow of Russian tourists and rubles goes back to the heyday of Yugoslavia. When Italian, German and French tourists exited along with the Club Meds in the 1990s, Montenegro had twice the number of tourists it has today.

When the European crowd left the Russians arrived in force in mid2000s to fill that void and Russian investors Former Prime Minister Milo Dukanovi remains an important of all sorts bought land architect of the Montenegro economic growth strategy. with an eye towards development.

However, government development licenses and branch openings. regulations were not well formed at “Just take trusts, foundations and that time, and most of the investments pensions for a start, where we have almade by Russians never reached fruimost no income at the moment,” explains tion. When the ruble financial crisis hit, Prelevic. “Austrian companies are 80% Russian investment slowed substantially, owned by private trusts. If they agree to though its tourists still represent a 30% become resident we should make them market share, with only Serbia surpassexempt from taxes. Consider British and ing the f low at 35%. Though feelings Nordic pensioners, if they spend half the have cooled after Montenegro entered year here they can benefit from zero inthe NATO alliance, the influence of the heritance tax and relief from other taxes.

Russian tourists and capital remains imIf we are smart we can establish a system portant for the country for the moment. that can only greatly enhance current Montenegro’s NATO membership is income, not harm it.” complementary to the process of inteNATO is expected to be an important grating into the EU. The issue is whether boost for the bid for financial services EU will be a similar benefit. The country business. In 2017, there were positive deis set to become a EU candidate in 2020 velopments on the road to Euro-Atlantic or 2021, but the nation is unclear on the integration with acceptance into NATO. advantage for a tourist destination. Few Membership provides Montenegro longare eager to see more rules and regulaterm stability and security along with tions than necessary. significant economic benefits. The expe“The present government is keen on rience of others point to membership imattracting investment and that makes proving the business environment and people very comfortable here,” concludes attractiveness for investors.

Prelevic. “That is an important advanJoining Albania and Croatia in NATO tage compared to countries laden with is considered by many to be a smart heavy bureaucracy. No one wants to see move. “I look at it as a businessman,” Montenegro lose one of its key advanadds Stratex’s Emilfarb. “NATO is a guartages as it fights hard to fulfill a daring antee of laws and safety of money. To be dream story.” a member you have to improve your laws www.sbrchina.com

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COUNTRY REPORT

The Man Behind Montenegro One of the first foreign investors to enter the Balkan Jewel in 2006, Neil Emilfarb sets his sights on everloftier prizes.

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itting in his 3,000-room Green Village security compound designed to serve the expats in the Afghanistan capital of Kabul in 2006, Neil Emilfarb looked for another challenge. Emilfarb had spent nearly ten years in the war-torn city building the Mother of All Gated Communities and this masterpiece was completed in what is still the premier residential location in the city. It was around the time of his birthday, May 21, which just so happened to coincide with Montenegro’s Independence Day. Emilfarb recalls that life changing moment well. “I wanted to move to Europe as I considered building Green Villages for South Sudan and Libya,” adds the Uzbeki-born Silk Road investor, the Chairman of Swiss developer Stratex Group who moved from Tashkent to the US east coast in 1979. “The referendum to separate Montenegro from Serbia was over and as a former Soviet citizen I remembered Yugoslavia as a paradise. I paid a visit, fell in love and bought a piece of land in my first ten days.”

Ten years later and €140 million of investment in the Dukley Gardens luxury residence, a major stake in Hotel Group Budvanska Rivijera (HGBR), Montenegro’s largest hotel chain, plus plans for Kotor hilltop villas and Kolasin ski resorts, Emilfarb deserves the moniker of The Man Behind Montenegro. While some say this honor should be shared with billionaire Peter Munk of American Barrack mining fame, whose estate recently sold its landmark Porto Montenegro holding to deep-pocketed Dubai investors, Emilfarb endures in fine form with a new slate of projects.

Emilfarb kicked off his Montenegrin dream when he came to the rescue of ill-fated Dukley Gardens, perfectly situated on a hill overlooking Budva’s double bay. Emilfarb had purchased a penthouse in a project destined for disaster due to poor management by Russian investors. In danger of losing a personal investment, he took on the project, now named after Diocletian, a Roman emperor from the fourth century who ruled from the Dalmatian Province of Dukli (Montenegro and north Albania) before retiring to a magnificent palace up the coast in Croatia’s Split.

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Neil Emilfarb, alias Mr. Montenegro, has set the bar high for the future development of Montenegro from Budva to Kotor and Kolasin.

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COUNTRY REPORT “That era brought new investment, growth and expansion along the seaside.

Foreign capital triggered uncontrolled building initiatives that caused extensive environmental devastation,” remembers Emilfarb of those heady days of Wild West expansion. “Many hotels were reconstructed with multiple horizontal and vertical enlargements, regardless of urban plans. Some projects were built without a planning code or permits. Growth in this context strained local resources and problems arose. Even today airlift continues to be a challenge with capacity that has seen only marginal increases in the past five years as connectivity to Western Europe remains limited.”

Dukley Gardens stands testament to a new way of doing things. Located on the Zavala Peninsula in the heart of the Budva Riviera, this lushly landscaped waterfront community set against Budva Old Town houses over 200 suites, including exclusive executive penthouses that span 535 sq. m., and is viewed amongst the Mediterranean’s premier residential developments. Now under construction, Dukley Hotel complements the complex with another 140 rooms, and Dukley Marina, located next to the Old Town, currently caters to 300 vessels with a master plan that calls for 700 berths and a 30,000 sq. m. development of hotels, commercial and retail space.

Budva Bonanza Emilfarb placed his first bet on Budva at the center of Montenegro’s coastline, surrounded by outstanding beauty and boasting a Mediterranean climate with an active social calendar and rocking nightlife. Amongst the oldest Adriatic settlements, Budva is a classic resort village with cobbled streets, a café culture and long-running cultural programs, including Theater City Festival and Jaz Beach, which hosted Madonna and The Rolling Stones concerts. At night, Budva is a party town and home of Top Hill, a 5,000 capacity open-air mega-club that may be the world’s wildest discotheque.

Budva is a lavish enclave where a process of urban regeneration led by a multicultural vision produced a vibrant East and West congregation on the shores of the Adriatic around an ancient town center. Stratex wants to morph Budva, 42

and other highly marketable parts of Montenegro, into something ravishing, wild, inclusive, carefree and slightly forbidden. A promise of change and the optimism of collaboration fires this corporate vision to deliver a New Mediterranean cultural haven that seamlessly fits with the surrounding 3,500 years of history and architecture.

The Stratex strategy is to create destinations deeply routed in Montenegrin culture that offer unique holiday experiences. “Each generation finds its own forgotten place where cultures collide, mix, party and enjoy the feeling of being foreign and different,” notes Emilfarb.

“There was Marrakech in the 1930s, Mykonos in the 1960s, Miami South Beach in 1990s and now it is Montenegro. While some Western Europeans see Budva as an over-crowded, mid-market destination frequented by Russians, I feel this under-populated nation needs another two million of the right people.”

Aware of its limitations and the huge requirement for capital resources in an accelerating Montengrin gold rush of tourists, Stratex wants to provide its experience to co-partners looking to invest and expand in this emerging market destination. With extensive expertise in Russia, the US, United Arab Emirates, and challenging environments like Afghanistan, Emilfarb understands this complex Adriatic nation. “Montenegro is a land of opportunity that is less than a decade old and emerging from a diffi-

cult past,” he adds. “It takes the proper insight and strategic formula to achieve results.”

The move into the UNESCO Heritage Site of Kotor, one of Lonely Planet’s top must see destinations, is proceeding at full speed. If there was a Montenegrin location that epitomizes the Silk Road dynamic it is age old Kotor. Inhabited over the millennia by Greeks and Romans, Venetians and Ottomans, there is a reason why the old Mediterranean port on the Bay of Kotor is surrounded by fortifications. One of the most indented parts of the Adriatic Sea, some call it the southern most fjord in Europe, this submerged river canyon is now on the landing schedule for cruise ships.

Stratex’s Kotor Bay Hotel and Residences is a waterfront development across the Venetian Old Town of Kotor.

In line with planning parameters, a feasibility study was undertaken by a leading UK hospitality consultant, identifying the best development model. On the basis of these findings, the Ministry of Tourism and Sustainable Development held a competition for the master plan and design. The project is envisaged as a luxury hotel to cater to seasonal demand and residential apartments aimed at the foreign holiday or second home market.

Yet, the project that Emilfarb likes the most is the one looking over Kotor from 500 meters. A unique project on the drawing boards is the 11-hectare Vrmac Ridge property designed around an 1860

The attractive Bay of Kotor attracts hundreds of cruise ships during the summer season. www.sbrchina.com

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Stratex plans to pamper the luxury super yacht set with a number of developments across Montenegro's bays and mountains.

Austro-Hungarian fort set above the Adriatic in a pine forest with a microclimate and a natural air spa. Government Planning Permission allows 80,000 sq. m. of residential apartments and villas, hotel, sports and leisure facilities and spectacular vistas over the Bay of Kotor are expected to attract exclusive buyers.

Stratex deviated from the sea and see strategy with its involvement in the national development of Kolasin Ski Resort. Surrounded by spectacular mountain views, Kolasin sits high in elevation amidst pristine nature 1,250 meters above sea level. Convenient access to the main road allows a quick connection to the ski center. The concept encompasses a 4-star hotel with 48 rooms and 20 villas that operate year round. Hoping to see the highway to the ski center completed by 2019, Stratex has purchased a land bank in ten different locations estimated at about 500,000 sq. m.

Private Ownership Stratex is proud of its ability to standalone as a corporate developer that is fully private in nature. Most major developments have accepted government land on a longterm lease basis and associated building rights as an equity injection in their projects, making government a joint venture partner with a major say in the development process. Though the “porto projects” provide a contractual mechanism for a buyer to receive a clear deed on a preagreed fixed price, it is different than freeJuly/August 2017

hold ownership.

“These porto projects are f lagship and amazing for the entire region,” adds Emilfarb, “but they all benefit from government involvement and are tied to the national interest. This is different than fully private Dukley and in all our developments we make sure ownership is clear and strong.”

Stratex likes to bring its private sector vision to all its projects, a diversified portfolio run by a staff of 300 located in attractive tourist locations. However, in this regard its most interesting challenge will be in its future development and renovation of existing properties of the now government-owned HGBR hotel holding. Recognizing the HGBR value and development potential, Stratex became the largest private shareholder in this 4,000-room hotel group with expansion opportunities of 500,000 sq. m.

The government is required to sell its shares in HGBR eventually. Plans are afoot for the government to trade its nearly 60% stake in HGBR for complete control of national treasure Sveti Stefan, the most exclusive resort in the country currently owned by HGBR. If that goes ahead as planned Stratex will emerge as the largest HGBR shareholder, and assume control of a collection of important hotel assets with this privatization.

In April 2016, Stratex prepared the groundwork for its HGBR initiative with a partnership with MK Group, a leading Belgrade-based holding company that www.sbrchina.com

leveraged its agriculture business into a regional investment arm with hospitality activities in Slovenia and Croatia. “The goal is to maximize value through modernization, professional management and development through joint investment,” explains Emilfarb. “We have the experience and capacities to transform HGBR into a hotel company leader.”

Emlfarb sees no reason to look farther afield for Stratex expansion given the opportunities at hand in Montenegro.

Emilfarb feels the next ten years will provide huge investment potential if stability is maintained and all goes as planned with the government’s modernization policy process. This potential can only increase once the new passport and citizenship schemes come into effect. On the doorstep of Europe, one hour from Rome and off the beaten refugee path, Montenegro is looking attractive for Chinese, Turks, Middle Eastern and Russian immigrants.

“The secret to success in developing an emerging market like Montenegro, or Afghanistan, for that matter, is to take the time to monitor your project,” concludes Emlfard. “I spent nearly a decade in Kabul, 10 or 11 months a year to build Green Village. I realized when I tried to do the same in Libya and South Sudan that this was the only way such a project can work. You need to understand the country. The only other way is to come in with huge money and spend three times more than you should.”

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OBOR is composed of logistics hubs that deploy all means of transport.

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LOGISTICS Azerbaijan is diversifying from an economy dominated by oil revenues into a new logistics hub using its strategic position on the Caspian Sea to connect China to Europe and the Middle East.

The World of OBOR Hubs Where China’s rugged and mountainous West gives way to the steppes of Mongolia and the peaks of Tajikistan a new frontier in logistics development is flourishing.

by Patrick Musgrave

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othing stands still in China. Across the Middle Kingdom’s economic landmass of 1.4 billion people, every day marks seven new startups, a new Starbucks opens and the largest human migration in history drives tens of thousands into cities nationwide. With people comes demand for daily necessities and a soaring appetite for luxury goods backed by rapid delivery. When you combine this with the national One Belt, One Road (OBOR) imperative to develop logistics infrastructure and trade routes crisscrossing the Eurasian landmass and beyond, conditions are perfect for a logistics sector boom.

Central Asia is one of the least understood regions of the world. To traverse the vast landlocked Eurasian heartland is to tackle the unforgiving and arid Gobi Desert, jagged snow-tipped Fann and Pamir-Alay Mountains of Tajikistan and Kyrgyzstan, and the abandoned ship graveyards by the Aral Sea. It is a region literally at the crossroads of the great early societies. Intrepid travelers from another age, like Marco Polo, describe in picturesque detail the mingling of ancient Chinese merchants with South Asian, European and Middle Eastern ideas.

“Europe is stumbling over economic potholes, the US is backing off from its traditional position of driving globalization,” remarks OBOR expert Dr. Anil Khurana, a Strategy & Innovation Partner at PricewaterhouseCoopers (PwC), the world’s second largest professional services firm and a Big Four auditor, from offices overlooking the cityscape of Silk Road dynamo Dubai. “A logistics dream guided by OBOR expansion supported by a massive, mobile domestic population growing in wealth promises to create a new development, infrastructure and trade paradigm at a time when global trade and commerce faces notably strong headwinds.”

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INDUSTRY REPORT Khurana’s conclusion is that OBOR is not a project with a strictly defined scope, nor is there any grand cost-benefit analysis or expected return on investment (ROI) that one can point to over the short-term. This is a project of ambition and vision in its purest form. “The sheer scale will disrupt established trade and investment models for decades to come,” Khurana notes. “OBOR spans land and sea routes to over 60 countries, encompasses nearly US$8 trillion of trade (a quarter of the global total) and impacts 4 billion people.”

Another enthusiastic OBOR supporter is Tian Jinchen, Director-General of the Western Development Department of the National Development and Reform Commission and Director of the US$40 billion sovereign Silk Road Fund, who concurs with Khurana’s analysis. Tian hails the OBOR initiative as a “modern equivalent” of the millennia-old trade routes that imperial envoy Zhang Qian helped to establish and believes this current revitalization vision will have an incredible impact for OBOR nations.

In years past, most logistics industry investment was concentrated on the coastal region, in the deltas of the Yangtze and Pearl rivers as well as the Bohai Rim. Today, government has set the stage for inland expansion with massive investments in infrastructure, including a US$20 billion railway upgrade and a US$240 billion National Trunk Highway System and maintenance projects on over 120,000 kilometers of inland waterways, making inland China a cornerstone for the emerging logistics hub of the future.

Across China’s inland provinces, mega-urban centers like Chongqing, Xian, Wuhan, Chengdu, Kunming and Changsha have made unexpected advances in terms of logistic services on the back of this trend. US real estate titan CBRE Group turned its focus to logistics hub development in a report titled Global and Emerging Logistics Hubs. Reinforcing Khurana vision, CBRE noted the astounding pace of development in logistics, with local hubs rapidly scaling up to become regional and even global players.

The success of emerging OBOR domestic logistics hubs is contagious and spreading across Central Asia and the 46

From the heart of Dubai PWC's Khurana sets his sights on connecting ideas with market information and hard cash to bring the OBOR opportunity to the Middle Eastern region.

Middle East like a wildfire, from established players with gigantic logistics operations in Turkey, Dubai, Abu Dhabi and Qatar to fresh contenders like Baku and Khorgos. The strategies, geography and culture of the various logistics hubs that serve this vast demand are often in transition, but understanding the trends that shape this industry now is vital. This is the fast-paced world of OBOR Hubs.

OBOR Reality What a diverse OBOR world it is. In the far western and much less accessible region of Xinjiang, the one-time dusty truck stop of Khorgos is being transformed into the Khorgos Eastern Gate Special Economic Zone. A US$600 million development project with regional Silk Road powerhouse Kazakhstan and the satellite cities of Nurkent and Horgos have produced impressive boomtown skylines which promise to become epicenters of Central Asian development for decades to come.

The Xinjiang outback is entering a new phase of logistics growth on the back of the Khorgos initiative and other similar regional forays. At the start of this millennium, the Xinjiang Customs Office reports that foreign trade was US$1.8 billion. Ten years later that number had jumped more than ten fold to US$22.8 billion. Xinjiang’s statistics www.sbrchina.com

show a massive increase in dry port freight volume, from 20.9 million tons in 2009 to 46.7 million tons in 2014.

Growth would have been even greater had it not been for turbulence in Central Asian trading partners, which had a negative impact on exports. For instance, Kazakhstan’s Tenge currency depreciated from 84 to the US dollar in 2000 to a low 386 in 2016. Such a currency movement in the richest Central Asian nation has an impact on buying power when it comes to Chinese goods. However, Xinjiang has weathered the storm remarkably well with trade values back to high double-digit growth this year.

Travelling farther west from Kazakhstan and Xinjiang, Azerbaijan has steadily poured resources into an US$870 million new Caspian Sea port at Alyat since 2010. In China’s southwest and western provinces, a US$46 billion Economic Corridor is connecting China and Pakistan, with China investing in highway, rail and pipeline infrastructure along the Corridor, linking Kashgar in Western China to the Maritime Silk Road through the Pakistani Port of Gwadar. The OBOR news is non-stop, and often comes from the least expected of locales, but the same underlying forces propel all these diverse developments to 21st century success.

Since President Xi Jinping announced OBOR during a Central Asia summit July/August 2017

LOGISTICS in 2013, the ambitious plan was set to achieve several goals in one fell swoop.

Erecting direct logistics connections with European and wealthy Persian Gulf consumer markets vastly reduces transport time and cost. This logistics efficiency sparks more demand for higher-end technology manufactured goods developed in the Pearl River Delta, East Coast and Inland population centers, which in turn drives employment for higher value-added creators.

At the time, the international appeal of the OBOR project met with skepticism in certain circles. “The OBOR initiative was originally seen by Middle East, Africa and other areas as a China initiative to make investments in infrastructure and transportation as a means to offload its own industrial surplus,” explains Khurana. “The Middle Eastern and Central Asian countries now see OBOR differently. They see it as encompassing investments in all kinds of power, oil and gas and telecom infrastructure.”

After all, grandiose revitalization ideas of this sort are commonplace in a nation that has seen more economic growth and structural change than most nations see in centuries. Breathing new life into Dongbei, China’s Northeastern heavy industry belt, has had limited success, slowed by overcapacity issues.

Given this scenario, taking OBOR’s aspirations with a grain of salt was perhaps warranted for some.

Yet, as of 2017, the OBOR reality has shaped up to be much different than

The move inland is bringing trade opportunity to a new group of workers on the Silk Road.

the skeptics believed. With some US$1 trillion in projects underway under the high-f lying OBOR banner, revamping the prosperous trade routes of centuries past is no longer a whimsical ambition. It is happening – and gaining momentum daily.

Zafer Engin, Head of Value Added Services for DHL Global Forwarding China, a group that has served Western hubs for decades, explains how the OBOR money flows already translate into longterm private sector success. “The Chinese government has been developing this logistics infrastructure for years,” Engin explains, “but with OBOR there is a clear message: China will continue

Azerbaijan is diversifying from an oil-based economy to OBOR logistics on the Caspian Sea. July/August 2017

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to invest heavily in construction. These cross-border freight networks and multimodal transport solutions are needed to connect the countries along this new Silk Road. Logistics is certainly the backbone of all OBOR trade.”

Western Backbone In that past, China’s “West” referred to anything non-coastal. No more. Western development initiatives first shifted focus to the geographic center of the nation. Today, as business heats up, that initiative is pushing further and further West, much closer to the Khazakstan and Kyrgyzstan borders. Xinjiang region, while not yet polished, is the logistics jewel on the tip of everyone’s tongue.

In Q1 2017, data from Urumqi Customs Office shows the value of international trade in the region shot up an incredible 65% year-on-year (YoY).

Urumqi already posts a GDP per capita nearly double China’s average, on par with Shanghai and Beijing. While Chinese Han and Uighur merchants mingle with Russian, Kazakh and Kyrgyz traders on the streets, behind the scenes big money deals are signed in boardrooms to turn the Far West into a boomtown landscape impossible to ignore. Stoked by cross-border trade with Kazakhstan, which more than doubled in Q1 2017 YoY, the region is positioned to become the economic heartland of Central Asia owing to its OBOR prominence.

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INDUSTRY REPORT At the farthest edge of the nation, on the Kazakhstan-China border, Khorgos is starting to draw significant attention.

Khorgos is a diamond in the rough. The name literally means “place of much camel dung” in one local Junggar dialect or “place of good pasture” in another, but the aspirations swirling among the business community are dizzying.

A recent report by United Nations Economic and Social Commission for Asia and the Pacific noted, “Khorgos has attracted billions of dollars through investments in the Kazakhstan Railways (KTZ)-backed dry port that now has a cargo-handling capacity of 200,000 containers. Similarly, the economic and socio-political dividends that can be reaped by reviving the 2,000-year old trade exchanges between China and Central Asia will extend beyond bilateral trade relations that exploit raw materials and source markets for Chinese exports.”

Poised to become the largest dry port in the world, China’s COSCO Shipping and the Port of Lianyungang took a 49% stake during the Belt and Road Summit in Beijing this May for an undisclosed but expected to be very large sum. One of the world’s largest and most robust shipping and logistics providers, COSCO received a US$26.1 billion loan from China Development Bank in 2017 slated

for OBOR investments. With the added support of Dubai-based logistics giant DP World on the books as the dry port’s advisor, Khorgos is set to take off on its flight to prominence.

Asset Seisenbek, Head of the Commercial Department at the Khorgos Gateway, stresses the advantages of the inland dry port lie in cost and time. The Khorgos dry port can deliver goods to their Western destinations faster than sea freight and cheaper than air. After only a year of operations, Khorgos is already moving more than 20% of its 2020 goal of 500,000 TEU/year (a unit measuring cargo equivalents in standard 20-foot-long containers).

“A good example is Shenzhen’s Chung Ying Street,” remarked He Yiming, Xinjiang’s Director and Party Chief of the Department of Commerce when speaking about how he sees regional development unfolding. “Shenzhen has become a high-tech and manufacturing hub, and Chung Ying Street border trade helped to cultivate that. This is an example we look up to.”

Big Leagues Player Much exciting logistic activity in Central Asia is developing around the Caspian Sea, the world’s largest enclosed inland water body. On the eastern shore of the

Caspian seaside sits Aktau, a Kazakh port “attempting to transition from the middle of nowhere to an epicenter of trans-Eurasian transport and trade,” as one Silk Road commentator put it. On the other side sits the small but resource rich nation of Azerbaijan, an economy centered on oil that has moved from epic growth to near ruin and everywhere in between in recent years.

Seeking to diversify into steadier sectors like logistics, Azerbaijan has developed a billion dollar Caspian port project at Alyat to service the promise of a New Silk Road laden with Chinese cargo. The nation’s capital Baku is no stranger to massive logistics infrastructure investments either. Heydar Aliyev International Airport is slated for a boom and air cargo is expected to play a prominent role in this. The Strategic Road Map for logistics development seeks to bolster Baku’s airport with increased investment in 2017 and 2018 along with several other logistics and trade centers.

Resource rich Saudi Arabia, the largest country in the Middle East by both GDP and landmass, is another logistics base positioned to benefit. “Saudi seeks to become a hub. Its industrial progress and domestic and international trade naturally align it with OBOR,” adds Khurana.

“OBOR’s focus on developing bankable

Kazakhstan Railways works with their Chinese counterparts on the border in Khorgos to develop one of the world's largest dry ports.

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LOGISTICS to reinforce commercial links between the two countries. The Emirati cities remain large-scale international logistics hubs that stand to gain prominence in this cooperation. Already, China is Dubai’s largest non-oil trade partner and access to over 2 billion people within four hours flying time makes the location impossible to ignore.

Chinese Consumers

The modern logistics hub of Dubai, home of Emirates Airline, has both the capital and the experience to compete with Qatar and Abu Dhabi for the region's air freight volumes.

infrastructure projects supported by large international agencies is of very real and immediate interest to countries in the region.” The Middle East looks to East Asia as a prime development model, and Saudi Arabia, UAE, Qatar, Kuwait, and Jordan have signed up to be Asian Infrastructure Investment Bank (AIIB) members.

To see how the region’s immense opportunity is magnified by OBOR, we need look no farther than the planned Saudi-Egypt causeway spanning the Gulf of Aqaba to connect with the Arab League’s most populous country and second largest economy. Aside from obvious benefits to cities such as Jeddah and Port Said, two important Red Sea ports in Saudi Arabia and Egypt, Ras Hamid, near Tabuk in Saudi, and Ras Nasrani, near Sharm-el-Sheikh in Egypt, will see significant infrastructural and industrial development.

Smaller players are not bereft of their share of opportunity in this mix.

Jordan’s Port of Aqaba is attracting international attention, with powerful Abu Dhabi-based real estate group Al Maabar winning a bid to manage the port for 30 years. Given the long history of the area – Aqaba Port was referred to by its previous name Eloth in the Bible’s Book of Kings – China’s OBOR initiative is truly bringing back to life the history of the Silk Road.

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Boasting some of the world’s fastest growing and largest air cargo outfits, the Gulf States of UAE and Qatar punch well above their logistics weight class. The UAE, home to world-class cities like Dubai and Abu Dhabi, comprises about 10% of the Middle East’s GDP, over-representing its 2% share of population. Qataris, representing an even smaller population, are some of the richest people in the world per capita and are represented in the highest echelons of finance and development projects the world over.

“The UAE and China already have a large trade volume and strong relationship – more than 4,000 Chinese companies already operate in the UAE,” notes Khurana. “Industrial zones and ports such as Kizad and Jebel Ali offer China significant logistics hub access, as well as a base from which to serve Africa and Europe. State owned enterprises such as DP World aspire to be a key part of OBOR – managing ports along OBOR, streamlining customs processes, improving technology use and removing supply chain inefficiencies.”

There are even logistical city-level arrangements between the two nations.

Dubai and Shanghai have strategic discussions on mutual investments (Invest Shanghai and Dubai FDI), and the Dubai International Financial Centre (DIFC) and Shanghai’s High Court are working on the legal and regulatory foundations www.sbrchina.com

As the OBOR forces move into Silk Road logistics outside of China, and Western China builds launching pads to Central Asia, the Silk Road logistics giants are eying the largest market in OBOR for more business – the consumer market of China. While OBOR nations like the idea of building infrastructure at home, and opening markets to China in that regard, they also look for a logistics role in the mega-cities of the Mainland.

Since China’s foray into manufacturing for export decades ago, which witnessed physical merchandise exports balloon an incredible 23,000% since the early 1980s, the country’s East Coast has been a hotbed of logistics development.

Now, there is a marked shift in logistics focus in recent years with potential to upheave the entire industry toward new and even more profitable ventures: China’s consumption boom.

Since China’s market reforms began in 1978, real consumption expenditure per capita has risen over 900%, according to the World Bank and OECD. With national-level directives to rebalance the economy to innovation and domestic consumption-led economic growth, it is a good bet that the strong role of the Chinese consumer in global logistics is only in its infancy. The same forces that drive Chinese migrants by the hundreds of millions into an array of urban centers – 100 cities boast populations of over a million already – will be a catalyst to push new logistics hubs to fruition.

“We’ve set up key hubs for the China-Europe rail connection in China’s Central West area,” points out DHL’s Engin. “These hubs parallel similar assets in Poland and some European countries.”

In a country like China where national strategy plays such a large role in market planning, Engin believes, “It is vital for the private sector to keep a close eye on 49

INDUSTRY REPORT the government infrastructure development plans to jointly open hubs in inland regions. This led us to launch DHL RAILLINE Westbound and Eastbound Connections, hubs that cover western, southern and northern corridors connecting some 14 key departure and 8 arrival locations.”

Alison Webster, Executive Manager of Qantas Freight and Qantas Catering Group, is a great believer in inland expansion and her carrier has seen volumes grow in recent years at very strong rates. Webster notes Qantas has changed its China strategy to meet inland expansion and now schedules up to “five large freight aircraft weekly from Sydney to Shanghai and Chongqing, the latter connecting to these prominent inland and Western regions.”

The success of the inland logistics strategy is best exemplified by the development of Chengdu in recent years.

Well known for quaint villages, spicy doubanjiang sauce and pandas, Chengdu is becoming a breakaway economic success, ranked as a top performing Mainland city by a recent Milken Institute Report. “Its outstanding performance is unrivalled and it secured top 10 positions in seven of the index’s nine components, more than any other city,” the Milken

ing top-notch operations. The underlying trends that make the inland market so exciting are regularly studied closely by Zheng Zhi, Managing Director of DHL eCommerce for Greater China.

“We’re particularly interested in second, third, fourth and fifth tier cities,” Zheng comments. “The numbers paint a very interesting story. Consider that the existing shopper base in the Tier 3 and 4 cities alone is nearly 260 million.” Zheng notes this consumer segment alone has a greater population than the total population of all but four countries in the world.

New Tier Potential

DHL's Zhi Zheng works to build out a logistics network that covers the Mainland's centers.

Institute noted of this inland emerging logistics leader.

The opportunity to serve a vast and untamed inland Chinese consumer market, largely overlooked by decades of coastal logistics extravagance, is hard to overestimate in the emerging OBOR equation. To meet this shift, global logistic brands pour resources into establish-

China's Singles' Day has turned into a logistics bonanza as consumers generate a shopping frenzy.

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A recent survey by management consultant McKinsey concludes that groups like DHL are headed in the right direction.

“Brands that have historically focused on high-tier cities may benefit from revisiting geographic strategies and make adjustments to take advantage of opportunities in low-tier cities.” AliResearch, owned by influential Internet giant Alibaba, reaches similar conclusions about the opportunities for cross-border logistics development to serve these enormous swaths of neglected consumers.

DHL is heeding the call. “We are already providing many local merchants with e-commerce logistics solutions, ecommerce being a huge component of the newfound demand for logistics in these regions,” explains Zheng. “We expect the market to grow at a CAGR of 13%, as suggested by Euromonitor 20162020. Business is booming as increased disposable incomes leads to more demand for foreign goods, and neighboring countries are the preferred points of origin for shopping rather than domestic products.”

It is hard not to be optimistic as newly moneyed Chinese consumers embark on a buying spree the likes of which the world has never seen, with the national income doubling every decade. In the age where coastal logistics expands inland to align with consumer demand, new transportation links will emerge throughout the country to serve this shift. These new hubs will look inward at first, but outward activity will grow in importance, as connections with the rest of the OBOR network are an essential piece of the puzzle.

July/August 2017

LOGISTICS

Dachser's Europe Connection Dachser's OBOR plans to connect Europe are a watershed in the emerging cross-continent rail logistics service.

C

hina kicked off this year with a than ocean. This internationalizes the bang, waving bon voyage to a supply chain in exciting ways, for instance 200-container block train as it creating new advantages in serving Podeparted from the coastal industrial and land and Russia.” Dachser now ships Chimanufacturing powerhouse of Zhejiang nese components to Poland for assembly Province bound for the far opposite side of before reaching European consumers.

Eurasia: London. The rail link bridges an Rail Rollout astounding amount of ground, connecting London via Kazakhstan, Russia, Belarus, Together with other China developments Poland, Germany, Belgium, France and like a new North China air freight gatethe English Channel. The feat was heraldway, “Dachser LCL railway demonstrates ed by many as a railway marvel. how businesses must respond to constantSoon after, the UK responded in ly changing markets and demands in Asia kind, sending its own freight train loaded with UK-made whiskey, soft drinks and other western products in a show of logistics trends to come. Riding on the media fanfare of these demonstrations of OBOR’s connectivity promise, world-leading logistics companies are scrambling to put the f inishing touches on their own plans to increase end-to-end rail connections between China and European markets.

German-based Dachser is a leadDachser's Edoardo Podesta and Yves Larquemin er in this regard. The family owned driving forward the OBOR European rail connection. company, one of the world’s major logistics providers with a staff of 27,500 at over 400 locations worldwide Pacific,” adds Edoardo Podestá, Managand revenues of €5.7 billion in 2016, has ing Director of Dachser Asia Pacific. “The introduced a new weekly LCL railway positive development of our business in service from China to Europe. This conthe first quarter of this year demonstrates nection promises to extend the novelty of that our efforts have paid off.” these long-distance connections to daily Much of the success can be credited use, normalizing door-to-door logistics to central China’s emerging connections solutions between two continents. with Europe, feels Kevin Chen, Managing “With capacity constraints a limiting Director of Dachser South China: “OBOR factor, the rail route to Europe has become gives Western China a real opportunity to an integral part of the integrated supply develop. Pearl River Delta is the gateway chain in the OBOR equation,” explains of the Maritime Silk Road for thousands Yves Larquemin, Managing Director of of years, but Chengdu, Chongqing and Dachser Air & Sea Logistics (Dachser) Changsha have now launched express rail North China. “Rail transport is up to 80% service to Europe.” cheaper than air and 10 to 20 days faster Further West, Dachser parallels the July/August 2017

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central government’s promotion of the Xinjiang OBOR base. “Before OBOR, we were hardly aware about this province in terms of logistics and trade,” says Chen.

“Now it’s a very hot topic.”

Handling 80.1 million shipments with a volume of 38.2 million metric tons last year, Dachser uses its own consolidation containers for rail transport between Wuhan/China and Hamburg/Germany. Fixed weekly departures and related upstream and downstream activities follow defined standards and schedules. Dedicated operational teams manage the process, from pre-carriage to final destination. Meanwhile, service desks on both sides of OBOR assure processes run smoothly In a wider context, it is clear why China supports such initiatives. The nation’s rail network, especially its modern high-speed network, has become a major source of pride for the country.

The 124,000 km rail network, including the largest high-speed network in the world featuring are over 22,000 km of track as of last year, shuff les passengers about the cities at lightning speed and is a major contributor to new regional commercial activity.

Currently, China’s large east-west rail trunks serve a passenger transport market comprised of time-sensitive travelers moving toward the high-speed bracket.

This puts to good use China’s incredible rail infrastructure by repurposing it for end-to-end logistics links, a natural evolution from a market perspective. Of course, doing this is a challenge. With the likes of Dachser bringing a history of global experience to bear – their slogan being Intelligent Logistics – growth of such end-to-end solutions is sure to be robust.

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FEATURE STORY

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July/August 2017

THE EURO Nobel prize-winning economist Joseph Stiglitz calls for major changes in the structure of the euro currency as a means of repairing the European economic crisis.

The Euro and its Threat to the Future of Europe Nobel Prize Winner economist Joseph E. Stiglitz looks at the Euro currency at a time when the EU is in a state of flux.

by David Lake

F

ew people in the world have a better grasp of the global economic perspective than Joseph Stiglitz. Over the years this winner of the Nobel Memorial Prize in Economic Sciences (2001) has held high economic posts in the US government and with leading international finance bodies. In his new book The Euro and its Threat to the Future of Europe Stiglitz deals with one of the most difficult topics of our day – the economic problems of the Eurozone and how these issues are impacted by the euro.

In dealing with a topic that impacts all the countries of the Eurozone, the 74-year old Stiglitz brings to bear his experience in dealing with the most complex economic issues the world has to offer. After all, Stiglitz won the Nobel for work on the theory of markets with asymmetric information, for which countless applications are used in everything from agricultural markets in developing countries to financial markets in developed economies.

Based on academic citations, Stiglitz is the world’s fourth most inf luential economist and was named one of the world’s 100 most influential people by Time in 2011. Stiglitz has received over 40 honorary degrees, including those from Harvard, Oxford and Cambridge universities and is decorated by several governments, including Korea, Colombia, Ecuador and France, where he recently received the Legion of Honor.

Amongst Stiglitz’s highest profile posts is the Chairmanship of ` the President’s Council of Economic Advisers from 1995 to 1997 under Bill Clinton. Following that prestigious position, Stiglitz became Chief Economist at the World Bank from 1997 to 2000. Stiglitz is now a Professor at Columbia University in the Economics Department, School of International and Public Affairs and Graduate School of Business. He is also Chief Economist of the Roosevelt Institute and a Corresponding Fellow of the Royal Society and British Academy.

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FEATURE STORY Joseph Stiglitz’s intense and complex economic analysis provides an open and interesting discussion point for economic students and laypersons alike interested in the European quandary. As China and Europe move closer and closer on all sorts of commercial levels, understanding the European dynamic is essential for investors and businessmen alike.

In support of such an understanding, SBR is pleased to provide the following excerpts from The Euro and its Threat to the Future of Europe. We have chosen to provide you with a selected digest of short sections of the book from different chapters to provide further insights on the vision of author Stiglitz. In the following report, Stiglitz comments and criticisms on what is happening in the Eurozone, the challenges that European countries face and where this ambitious union is headed.

Euro Experiment In the preface of his book Stiglitz sets the stage for his discussion on the euro and his study of Europe’s single currency concept.

“As an economist, the euro experiment has been fascinating. Economists don’t get to do laboratory experiments.

We have to test our ideas with experiments that nature – or politics – throws up. The euro, I believe, has taught us a lot. It was conceived with a mixture of flawed economics and ideologies. It was

a system that could not work for long – by the time of the Great Recession, its flaws were exposed for all to see. I believe that the underlying deficiencies had been evident from the start for anyone willing to look. These deficiencies had contributed to a buildup of imbalances that played a central role in the unfolding crises and will take years to overcome.”

Stiglitz points out that for most Europeans, the ongoing European unification project is without a doubt the most important event of the last 60 years. “To see it fail, or to suggest that it might fail, or that one aspect of the project – its currency system – might fail, is viewed almost as heresy. But reality sometimes delivers painful messages: the euro system is broken, and the cost of not fixing it very quickly will be enormous.”

Even with its recent reforms, Stiglitz believes that the current system is not viable in the long run without imposing huge costs on large numbers of its citizens. The costs of what has transpired have had a negative impact on the economy and on society as a whole. Stiglitz goes so far as to blame the ills and unrest now evident in some parts of Europe, on the economic toll taken by the implementation of the single currency system, “I believe that the huge economic toll that has been imposed on so many of its citizens is one of the more important causes, if not the most important one.”

The economic ills of the EU are de-

stroying the aspirations of the youth, who are plagued by a dangerously high 30% unemployment rate and “whose future is being put in jeopardy”. Stiglitz feels that the situation is so complex and the problems so deep rooted that the youth may not fully understand what has happened, but they understand that “they were lied to by those who tried to persuade them to support the creation of the euro and to join the Eurozone, who promised that the creation of the euro would bring unprecedented prosperity…

They are now being told…Trust us. We have a recipe, a set of policies, which, while it may inf lict some pain in the short run, will in the long run make all better off.”

Troika Power A Nobel prize-winning economic dynamo, Stiglitz does not hold back on what he feels are the mistakes responsible for the current European economic crisis.

Nor does he hold back his disdain for the policies and role of the so-called “Troika” – the term used to describe the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF).

In his chapter titled Crises Policies: How Troika Policies Compounded the Flawed Eurozone Structure, Ensuring Depression Stiglitz pulls no punches on the policies that “appalled” those outside Europe, and many of those inside Europe with the

Average Real GDP Growth Rates for Some Crisis Countries 6% 4% 2% 0% -2%

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2007-2015 Finland

Greece

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Italy

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THE EURO Real GDP Per Capita Growth (2007-2015) 4 3 2 1 0 -1 -2 -3

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“unfolding drama” in the crisis countries of Greece, Spain, Portugal and Cyprus: “Pictures abound of middle-class individuals suddenly in jeopardy: retirees whose pensions have been cut to the bone; and young people, college graduates, who have looked and looked for a job and can’t find one, living in homeless shelters.”

In this section of The Euro Stiglitz provides an interesting anecdote about the time in 2013 that he and his wife “tried to confront” the prime minister of one of the northern European countries at a private meeting. Stiglitz asked the Prime Minister whether he was aware of how bad things had become. That autumn and winter the media were covering sad stories about once middle-class families in Spain and Greece fighting for survival, unable to afford to warm their homes and eating out of garbage cans.

Stiglitz received a “cold reply, delivered with a gentle smile” from the northern European leader. The Prime Minister felt that those suffering southern EU members should have reformed economies earlier. Stiglitz was not pleased with this response. After all, it was not the middle class individuals scavenging to survive who failed to reform. The reform decisions were in the hands of EU policymakers, many of whom were closely allied with the Troika.

Stiglitz points out that the Prime Minister’s criticisms and lack of empathy for his southern neighbors were characteristic of the lack of European solidarity that has been in evidence throughout the years. “Bad enough was the scolding and flippancy of those like the prime minisJuly/August 2017

Non-Eurozone Europe

ter we spoke to, as the guiltless citizens of the worst hit countries suffered real privatizations. Yet the biggest display of callousness has not been in any politician’s comments, public or private, but in the actual policies that the Troika has foisted on these countries in their moments of desperation. These policies have compounded the crises, weakened the hard-fought bonds of European unity, and magnified the in-built frailties and flaws of the eurozone’s structure.”

Eurozone That Works Stiglitz is not all doom and gloom about the euro. In fact, towards the end of his book, and after a tremendous lambasting of the European forces that be, Stiglitz provides a way forward. After all, an economist of Stiglitz’s ilk, hybrid and background cannot resist when writing a book on the euro to provide some sort of solution to correct the issues facing the continent.

“The euro can and should be saved – but not at any cost,” explains Stiglitz.

“Not at the costs of the recessions and depressions that have afflicted the Eurozone, the high unemployment, the ruined lives, the destroyed aspirations.

It doesn’t have to be this way. One can create a Eurozone that works, that promotes prosperity and advances the cause of European integration.”

In fact, Stiglitz makes the case that for Europe to move ahead with a successful union the integration experiment must run even deeper, and encompass even more economic and political integration.

Stiglitz feels that there either has to be “more Europe” or “less” and if the intewww.sbrchina.com

“

Those who originally promoted the euro realized that in its original stage, it was incomplete, and that more would have to be done. A successful euro required – and would lead to –'more Europe'.

”

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“

The nature of the market economy is that 'stuff happens'.

And the stuff that happens affects different countries differently, and requires large adjustments. The euro makes those difficult at best.

”

gration cannot be deepened in the Eurozone then a complete dissolution of the EU in its current form should be called for and enacted.

“Those who originally promoted the euro realized that in its original stage, it was incomplete, and that more would have to be done,” Stiglitz adds. “A successful euro required – and would lead to – ‘more Europe’. And more has been done. But what has been done so far is not nearly enough. What is required is not beyond the grasp of Europe – most of what is entailed has already been widely recognized. But it requires ‘more Europe’ than the existing arrangement, and certainly ‘more Europe’ than those who say that the Eurozone is not a transfer union are willing to countenance.”

Stiglitz goes on to provide a pointby-point plan to create an integrated economic system for Europe that would make the crises faced by many of the member nations less frequent and less severe. He argues that for a different set of emergency policies that could dig the nations now in crisis out of their hole and that “the depressions that have marked the euro crisis, with their long lasting effects are avoidable.”

The aims of the new structure – or the restructure – of the Eurozone must aim to achieve full employment and strong growth in each member country with “sustainable current account deficits in the absence of f lexible exchange rates and independent monetary policies”.

Stiglitz believes the major secret to success is for the Eurozone to maintain full employment across all member countries, and this can only be achieved with full government support: “Markets do not on their own maintain full employment, and markets on their own are not in general stable.”

say that it is in a pickle,” notes Stiglitz. “It wants to preserve the euro, even though the euro has not been working. It would like to pretend that if only member countries had obeyed the rules, if only there had not been that American-made financial crisis, all would have been well.

But in its heart of hearts, Europe must know that this is not true. Countries that obeyed the rules also went into crisis.”

In this regard Stiglitz cites the case of “virtuous” Finland. Last year, this onetime bastion of stability and the success story of Europe had trouble adjusting to unacceptably high unemployment of -9.3%. “The nature of the market economy is that ‘stuff happens’,” warns Stiglitz when calling for more euro f lexibility.

“And the stuff that happens affects different countries differently, and requires large adjustments. The euro makes those difficult at best.”

Stiglitz believes that the problems in Finland showed that the more austere governments of the north and their more social economic systems were not sheltered from Eurozone policy problems. Here Stiglitz cites and interesting statistical dynamic. Finland’s GDP per capita in 1960 was US$10,500 (adjusted for inf lation), 68% of that of the US at that time. After a series of major investments in education, the country reached a point by 2007 where per capita income

A Flexible Euro When discussing the need for a more integrated European Union, Stiglitz calls for a currency that can adapt and take into consideration the issues of each and every EU member country. In that way, economies around the Eurozone could be better balanced and able to deal with crisis that is specific to the domestic market and its particular circumstances.

“Looking at Europe today, we might 56

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THE EURO could promote prosperity, solidarity and greater political integration.

Portugal

Finland

Ireland

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Brexit Aftermath Belgium

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hit $42,300 or 93% of that of the US. At that point the trouble started for Finland. The once all-powerful Nokia, a high-tech leader that set the benchmark in mobile telephony, could not keep up with the competition. Meanwhile, Russia and its former satellite states, like Estonia, which had strong trade with Finland, fell into recession with the decline in oil and gas prices. This had a further impact on Finland.

In response to this crisis, Finland’s GDP fell by 8.3% in 2009, and in 2015 it was still some 5.5% below its 2008 high point. Stiglitz explains that without the confinement of the euro currency, Finland could have depreciated its currency, thus causing a fall in imports and a rise in exports, a scenario that would have stimulated the economy.

In addition to issues related to a single currency, Stiglitz points out that Finland was further weakened by fiscal constraints imposed by EU membership.

In a non-EU environment, Finland may have borrowed from the capital markets to finance government expenditures to stimulate the economy. Instead, Finland had to comply with the “austerity wave afflicting Europe”. With a touch of irony Stiglitz notes that such factors as cuts in wages of public sector employees were supposed to “mysteriously increase the competitiveness of Finland’s exports.”

Instead, demand was decreased by a series of wage cuts, causing a further downward spiral of the Finnish economy.

Stiglitz points out, “the euro-medicine July/August 2017

Current Euro Crisis, 2007-2015 Great Depression

worked little better in well-behaved Finland than it did in the more recalcitrant patients of the south.”

At the end of the day, Stiglitz believes that the best way forward for Europe is not to dissolve the zone but to create one that works. While at least some of the member countries may not be out to the trials needed for this enhanced structure, Stiglitz believes that is at the critical stage in the European integration process that experiment has not run its course. Stiglitz believes that a euro divorce is “unpalatable” and such an event would set Europe back, however, he also believes that a common currency may not be at the heart of the European project going forward.

When explaining his vision of a “flexible euro”, Stiglitz notes that the first step is to recognize that there is progress in creating euro institutions since the start of the crisis, though this progress is not enough. Stiglitz’s flexible euro builds on the successes to create a system in which different countries or groups of countries could each have their own euro.

Interestingly, Stiglitz would allow the value of different euros – says a Finnish euro as opposed to a Greek euro – to fluctuate within certain bounds set by policy. This would be an interim solution, and, over time, if all worked according to plan a single currency as defined under the Maastrict Treaty of 1992 could be achieved. Stiglitz notes that the next time around the necessary institutions would in place so that a single currency www.sbrchina.com

At the end of The Euro one could just see Stiglitz running for his pen as the results of the June 2016 Brexit referendum shocked both sides of the English Channel. Stiglitz believes that the UK can survive outside the EU. Still, the short-term fall-out is an issue and the first major result was a drop in sterling. The pound fell 11% against the US dollar in the four days following the vote to a 30-year low – but only 8% against the euro.

In the afterword to his book, Stiglitz expressed his displeasure that Europe’s response to the UK’s referendum was similar to the harsh response that Greece received following its 2015 rejection of the EU bailout package. Former EU Council President Herman Van Rompuy expressed a widespread feeling when he said that the decision by Prime Minister Cameron to hold a referendum “was the worst policy decision in decades”.

Stiglitz has harsh words as well for the hard line taken by Jean-Claude Juncker, the head of the EU commission. Juncker’s line is that Europe must be “unrelenting in its punishment, and should offer little more than what the UK is guaranteed under normal global agreements, like the WTO, lest others join the rush to the exit”. Stiglitz feels that Juncker is taking a wrong line by trying to hold Europe together by threats and fear.

At the end of the day, Stiglitz believes that calmer forces will rule at the end of the day and feels that an amicable divorce is possible for all concerned. “Most assume that Europe will not cut off its nose to spite its face,” concludes Stiglitz.

“The benefits of trade and economic integration are mutual, and if the EU takes seriously its belief that the closer the economic integration the better, that implies an attempt to make the closest ties possible under the circumstances.

Anything the EU does to the UK to try to punish it would have an ‘equal and opposite effect’, hurting itself at least as much in the process. The fact that European stock markets were down markedly and European banks were particularly hard hit at least suggests that Brexit was bad for Europe as well.”

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MARKET INSIGHTS

Moody’s has the China Blues What does Moody’s China downgrade really mean? Is this a political statement or an economic forecast – or both – and does it really matter?

T

Douglas Betts

China disagrees with the premise of the Moody's downgrade decision.

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he summer got off to a particularly hot start in late May when Moody’s Investor Service downgraded China one notch. The first such credit rating downgrade for the Mainland since 1989 was based on Moody’s view that the current market reforms will not prevent a rise in debt across the entire economy. To say the least, the capital markets were taken by surprise.

I am not sure what prompted Moody’s timing. While even those managing the Chinese economy agree that there are issues outstanding and much remains to be done to manage the intersection of growth and expectations, has anything really changed to prompt the Moody’s downgrade to A1 from Aa3?

The downgrade begs the question as to why the world’s most successful economic growth story has suddenly turned sour. The economic architects of China have been working hard to keep the economy on an even keel. So why has Moody chosen this time to doubt the capacity of China to maintain its economy?

In fact, the local economy is looking up as of late. My last column dealt with the impact of China’s financial controls, in particular their impact on real estate markets globally and domestically. This is starting to play out as predicted with markets from Toronto to Vancouver, London to Sydney cooling. Others more dependent on China’s cash outflow have faced collapse. Meanwhile, outbound M&A is contracting and local real estate markets are booming as investors seek solutions to a low interest rate environment and a volatile equity market.

More importantly, the central government financial engineers are achieving their objective. China’s foreign exchange reserves are now increasing! This means www.sbrchina.com

that the foreign currency controls have indeed achieved what was intended.

So, what is the reason for this Moody’s downgrade?

Moody’s Meaning Well, let us look at what the Moody’s report actually said.

“The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.

While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government,” stated Moody’s.

“The stable outlook ref lects our assessment that, at the A1 rating level, risks are balanced. The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen. The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account,” the ratings agency said in a statement when changing its outlook for China.

Beijing’s response strongly refuted the need for a downgrade. “Moody’s views that China’s non-financial debt will rise rapidly and the government would continue to maintain growth via stimulus measures are exaggerating difficulties facing the Chinese economy and underestimating the Chinese government’s ability to deepen supply-side structural reform and appropriately expand aggreJuly/August 2017

gate demand,” was a partial response by the central government.

On carefully reading of the downgrade, one is given to ask the “Why now?” question. What action or failure would prompt Moody’s to downgrade, an act that up to now has not been followed by any other rating agency? Moody’s rational seems based on predictive analysis, not reactive.

Others Unchanged Other rating agencies think not much has changed.

Dagong, the Chinese equivalent of Moody’s, has its own sovereign risk rating and its view is quite different from that of Moody’s. Dagong rates China’s debt as AAA, the highest rating. However, Dagong only rates US sovereign debt as A-. Curiously, Canada and Australia, which both receive the highest ratings from other major rating agencies, are ranked AA+, whereas Luxembourg receives AAA. Switzerland, Singapore and

of an economy that converts from an export driven model to a services model – but a downgrade at this point?

HK Downgrade Consistent with the downgrade, but otherwise illogical in my view, Moody’s downgraded Hong Kong’s ability to repay its debt, despite fiscal reserves of nearly HK$1 trillion and budget surplus forecast for 2017 of HK$92 billion.

“The economic and financial linkages between Hong Kong and China are close and broad-based,” said Moody’s. “Combined with political linkages, this means that any erosion in China’s credit profile…will ultimately affect Hong Kong’s credit profile and be ref lected in the SAR’s rating.” Financial Secretary Paul Chan responded, “Hong Kong doesn’t agree with Moody’s decision to ‘mechanically’ downgrade the city,” Bloomberg’s response described Hong Kong’s rating reduction as “Collateral Damage” and its coverage ref lected

The reasons for the Moody's downgrade are hard to understand in the current context of China.

Hong Kong also receive AAA, causing one to believe there may maybe truth to the saying that good things come in small packages.

All agencies, including the big guns of Moody’s, DBRS, Fitch and S&P have their own processes and agendas to follow.

There is no question that there are challenges ahead for the Chinese economy, all economies face those. Debt is escalating at the personal and corporate level and over development remains a question as do the economic perils of regionalization July/August 2017

that. Bloomberg, an inf luential voice in the financial community, noted that Hong Kong has started off 2017 on the upswing, as its economy beat analyst expectations with a 4.3% expansion in first quarter 2017.

All the world’s economies face challenges, and these issues are assessed by the likes of Moody’s. Some, such as Switzerland and Norway, receive the highest rating on virtually any scale due to years of prudent management and administration, sound economic policy and good www.sbrchina.com

governance. Others, such as Singapore and Hong Kong, have sound management, but an inherent risk factor due to their “neighborhood”.

Still, when rating agencies speak the financial markets listen. And, for those facing a downgrade the impact on the cost of borrowing may be dramatic, depending on the scale of the change.

There is also a psychological impact that follows a rating downgrade and that factor usually makes for good press.

More Challenges China does continue to face challenges. To move the economy from one of the world’s poorest performers to the world’s largest in terms of its contribution to global GDP in 2018 (according to US Conference Board) has been an enormous achievement, one never seen before in the history of mankind. To say there are no risks remaining would be naive in the extreme. However, in the face of these successes, and in the face of the current government’s ability to manage its economy, to downgrade at this time seems to me to be strange. On one hand, Moody’s points to an escalation of total systemic debt on the other the agency confirms that “the risks are balanced”.

As mentioned above, China’s ability to manage its economy is demonstrated in the clearest possible way as highlighted by the imposition of currency controls and the restriction on capital outf low.

While I may not believe these measures are the best solution, there can be no denying their effectiveness, and the impact is being felt from London to Johor and, most noticeably, in Beijing.

I must reiterate my opinion that at this time I fail to see a rationale for a downgrade – but perhaps there is something I am missing? Does Moody’s have the China Blues?

Douglas Betts is a Director and Founder of a number of private equity funds and is the Director of Sunwah International Ltd, and Senior Counsel at McMillan LLP. 59

LAKE'S LAMENT

Hong Kong's Handover Stands the Test of Time By measure of an historic 20-year period Hong Kong and China have done a solid job in a One Country Two Systems world.

T

David Lake

wenty years is a long time in any person’s life – never mind that of a nation or of our world. That is especially true at a time when it seems like technology drives everything forward at a quicker and quicker speed.

That is possibly the most relevant thing I can think of saying on the eve of the 20th Anniversary of the Handover of Hong Kong to China.

On that day two decades ago I was a younger man who had finally made the full time move from Canada to Hong Kong and Beijing. I was invited with my Chinese wife-to-be to a Handover party on an amazing yacht lent by a Malaysian tycoon to a British friend in the financial services area. It was a rainy day in Hong Kong harbor and the free flow of champagne made for a warm atmosphere aboard this luxurious vessel.

It was from this drizzly perch that I calmly watched the clouds roll across Fragrant Harbor as proceedings unfolded on this most landmark day. There was a sense of history the air, the dawning of a new era, and no one was quite sure what it would mean, least of all a collection of young Western expats, most of whom were either from the United Kingdom or one of the many colonies of the former British Empire.

Looking Back

The Hong Kong experiment was well designed in Beijing, 60

To celebrate the Handover event, I published a cover story called “Two Worlds, One China” in my China Capital Markets & Investor Relations Review, the premier bilingual financial magazine circulating in China at that time. The magazine was out and it was testament to a historic moment, filled with views from the leading financial voices from China and Hong Kong. www.sbrchina.com

“The steaming weather of South China in the summer of 1997 is nowhere near as hot as the world’s expectations over the return of Hong Kong to Chinese sovereignty,” I wrote in the Editor’s Letter.

“Over the last century, Hong Kong has risen from its status as a small trading post to a renowned economic, financial and trading dynamo. During this same 100 year period, Mainland China has transformed from a weak imperial nation founded on feudalistic principles into a strong nation that is creating the world’s largest economy. Through different experiences and development paths, the Mainland and Hong Kong have thrived in two different worlds.

“In order to smoothly integrate the powerful capitalist machine that Hong Kong has become into the socialist market economy, the Chinese government has designed the One Nation, Two Systems principle. This guiding formula will rule Hong Kong for the next 50 years.

Whether this creative structure is successful will become a focal point of China watchers from now until deep into the 21st century. How the systems of China and Hong Kong will unite under one nation and promote each other’s prosperity and development, and how Hong Kong will serve the development of the Chinese economy, is a story that will take years to unfold.”

Well, 20 of those 50 years have unfolded. Of that watershed, I guess the second most profound thing I can say is that 20 years later I remain in Hong Kong, a testament to the success of the One Country, Two System principle and experiment. The hospitality this city – and China for that matter – has shown me, and continues to show me, is remarkable.

July/August 2017

Sure, many things have changed over this period, but much has remained the same – relatively speaking. That was one of the things running through my mind when I met Lord Patten in London for this SBR issue. For me it was a crowning achievement to meet the man I admired and had watched from afar aboard that Malaysian yacht on that significant day.

Hong Kong h a s cer t a in l y gone through its paces during this period. The city has a more Mainland f lavor with more tourists, more China residents and much more business emanating from north of the border. All in all, prosperity has been maintained, property prices remain at a high (up 100% since 1997), and despite the power of financial centers like Shanghai and Shenzhen, Hong Kong remains China’s window on the world.

This is important at a time when the Chinese nation is globalizing at an incredible rate. The outflow of tourists, globalization of investments and the mark that China’s enterprises have made on the world in this emerging era of One Road, One Belt has increased the importance of Hong Kong. While Chinese have crisscrossed the globe, building infrastructure and finding business opportunities, there is a certain comfort for Mainlanders in the global arena to stage this initiative from Hong Kong.

20 Year Perspective That’s what happened to Hong Kong – more or less – in the last 20 years. And, it all seems particularly tame compared to what we have witnessed in other parts of the world during this same period.

Let’s take a rapid-fire snap shot.

First, there was a series of financial crises to live through. The Asian Financial Crisis started almost immediately after the Handover ceremony and called into question the Asian success story.

This was followed by the dotcom bust at the turn of the millennium and the much more serious events of 2007-2008, a financial meltdown led by the US and considered as the worst since the Great Depression in the 1930s. What first started in American sub-prime mortgage markets led to a banking confidence crisis that came close to collapsing the world’s financial system.

Once the storm of 2008 was weathJuly/August 2017

SBR's David Lake was on the media beat in 1997, an action packed year in a region which witnessed both the Hong Kong Handover ceremony and the Asian financial crisis.

ered it was time for the economic trials and tribulations of the Europe Union to begin. Greek, Spanish, Portuguese and Italian crises have all caused concern for an implosion of the EU financial system framework. Further damage was done at the very tail end of the two decades with Brexit. We are still living with the fallout of these events and there is no end in sight as EU leaders search for solutions.

Life in the geopolitical world has fared little better. The tragic events of 9/11 kicked off a series of major conflicts in key parts of the world, mainly related to, but not limited to, the Middle East, Afghanistan and Pakistan. More than 15 years after the September 9/11 Twin Towers collapse, we are still living in the fall-out, with, once again, no end in sight to terrorist attacks around the world and dangerous global conflicts.

Another Two Decades It was not all doom and gloom over the last 20 years, at least no more than is evident in any slice of history. There were numerous positive highlights for the planet during this period in terms of amazing technological developments, impressive health care advances, exciting global sporting events, positive interchanges of cultures, and last but not least the economic miracle that The Last www.sbrchina.com

Hong Kong Governor Chris Patten calls “one of the two most significant events in his lifetime”.

The good always comes with the bad when taking a two decade historical snap shot, but I guess the point here is that from the eyes of a Canadian expat who has lived in Greater China for all this period, there is a lot more good and very little bad to speak of. And, I would add, in a rough poll of those around me who have spent the last 20 years in Hong Kong the same could be said.

Now, what about the next two decades? Well, with any luck, and betting on the average life expectancy of a man on the global highways and byways in a business filled with stress, I hope to write about this in 2037.

What will Hong Kong look like in 2037 – some 20 years from now? Where will China be at that point in the future?

What will the rest of the world look like then? I have no idea, echoing the words of Lord Patten once again. However, given that all of you will have forgotten this column and not hold it against me, I will make a prediction – Hong Kong will remain prosperous and important to China, the Mainland will continue its economic emergence with the usual speed bumps in the road and the rest of the world will repeat history.

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VIEW FROM THE TOP

Silk Road Gains Traction Four years after China’s unveiling of One Belt One Road McKinsey’s Diaan-Yi Lin looks at the financing opportunities.

Diaan-Yi Lin

O

ne Belt, One Road (OBOR) is an ambitious development initiative, a multi-trillion dollar plan to link Asia to Europe with an unbroken chain of modern infrastructure. It has the potential to kick start economic growth in countries stretching from the South China Sea to the English Channel. Put forward by the Beijing government, funding for the infrastructure proposal has gained some traction with accumulated pledges of about US$240 billion, but private investors will need more persuasion before they commit fully.

The OBOR initiative was proposed

by China in 2013 as a way to modernise trading routes running from East Asia to Europe. The “belt” represents land routes that run through Central Asia and the Middle East before reaching Northern Europe. The “road” sea routes that pass Southeast Asia, South Asia and Africa, before turning northward up the Suez Canal and terminating in the Northern Adriatic Sea. If successful, the initiative represents the world’s largest example of regional economic cooperation.

As with any ambitious initiative, OBOR faces significant obstacles. The first is financing. A crucial factor behind China’s economic miracle in the late 20th 62

century was aggressive infrastructure investment, and to create similar improvements through Asia and Africa annual investment of US$2 trillion to US$3 trillion is needed. Altogether, the initiative could need public and private investments roughly 12 times the size of the Marshall Plan that helped rebuild Europe after World War II. Public funding for the effort has already raised hundreds of billions of dollars in pledges. Asian Infrastructure Investment Bank, funded largely by China, has about US$100 billion available for the program. The Silk Road Fund, also set up

by China, has about US$40 billion, and the New Development Bank, which focuses on projects in Brazil, Russia, India and China, has another US$100 billion. These commitments show the seriousness China and other countries along the route give the initiative.

While this committed US$240 billion is roughly the annual GDP of Finland, it is less than an eighth of what is needed annually to finance the infrastructure needs of the emerging economies along the land and sea routes. Further commitments will be needed, not only from developing markets that would be the direct beneficiaries of the infrastructure improvements, but from European governments that benefit from improved trade connections as well as private investors.

Meanwhile, the world is watching to see whether China’s enthusiasm for the initiative might ebb following a slowdown in the country’s economic growth rates.

With funding sources starting to materialize, the second major challenge for the OBOR initiative is to create transparency in all aspects of administration and investment. Private investors will hesitate to join the effort unless they are persuaded that the funds and assets will be used most effectively.

In particular, how available funds will www.sbrchina.com

be deployed and how the program will be administered remain critical uncertainties that hinder further commitments. This is because infrastructure investment in emerging markets is notoriously risky, and corruption and wasteful bureaucracies remain unfortunate realities for many of the countries along the routes. So investors will want some assurances the funds are not being misused on over-priced projects with no real impact on trade.

China, the primary promoter of the initiative, should take the lead in assuaging concerns. For China, the initiative has an economic and a political dimension, and officials should be crystal clear on their motives and economic rationale. If rhetoric can be matched with action, investor skepticism can be turned around.

Governments outside China have given OBOR mixed receptions. Some, like Indonesia and Malaysia, have welcomed the proposal, focusing primarily on the economic benefits it could deliver. For others, the economics are muddled by geopolitical disputes and other challenges.

Faced with these obstacles, it would be easy for investors to wait on the sidelines until there are more certainties around the initiative. While it might be too early to commit financially unless certain questions are answered, aggressive companies will want to devote resources to stay informed of progress and be ready to commit if the opportunity arises.

On the flipside, for most private and public investors, it is still too early to decide to opt out. Doing so might relegate them to watching as others seize the opportunities presented by the world largest single trade and development initiative.

Diaan-Yi Lin is a Senior Partner in McKinsey & Company and the Managing Partner for Singapore.

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