NEED TO KNOW / July 2019

Measuring Opportunities from China’s Belt and Road Initiative

The initiative seeks to simplify and boost cross-border trade through better connectivity in these countries, which together account for 62.3 percent, 30 percent and 24 percent of the world’s population, gross domestic product and household consumption, respectively. This also means good business for global investment banks such as HSBC. On the sidelines of a forum presented by HSBC and Indonesian news website in late May, GlobeAsia’s Muhamad Al Azhari had a chance to speak with Mukhtar Hussain, group general manager of HSBC, who is responsible for two of the bank’s most important strategic growth initiatives, namely the Belt and Road Initiative and Business Corridors in Asia. The Hong Kong-based executive, who has already been with HSBC for 36 years, talked about the economic impact of the Belt and Road Initiative on Indonesia, as well as the overall business and investment climate in Indonesia, the world’s fourth most populous nation. The forum, themed “The Golden Moment of Indonesia’s Economy,” was attended by senior Indonesian government officials, including Coordinating Economic Affairs Minister Darmin Nasution, Financial Services Authority (OJK) chairman Wimboh Santoso and Coordinating Maritime Affairs Minister Luhut Binsar Pandjaitan. HSBC has announced its ambition to be the leading financial partner for clients engaged in various projects under the initiative. The lender has been named the best overall international bank for the Belt and Road Initiative at the inaugural Asiamoney New Silk Road Finance Awards. China’s Belt and Road Initiative also means projects worth billions of dollars for Indonesia. On April 26, just a few days after the country’s simultaneous presidential and legislative elections, Indonesia, the biggest economy in Southeast Asia, inked 23 memoranda of understanding worth $14.2 billion in total, with China for several major infrastructure projects under the initiative. Even though the Belt and Road Initiative may also be seen as an alternative source of infrastructure financing, there are some social and political concerns in Indonesia about growing dependence on China. Prior to the presidential election, the issue was politicized, with some critics claiming that a growing dependence on Chinese investment may be harmful to the nation, as the country may see an influx of cheap Chinese goods and labor into the market. Furthermore, there are concerns that ownership of the country’s vital infrastructure may pass to China, apart from the risk that Indonesia may fall into a debt trap due to massive infrastructure spending. Minister Luhut, who spoke at the forum, commented on Chinese investment in Indonesia, saying the government and the public want to see a clear parameterization of how investments from the Asian giant may take place. This includes the requirement to use local labor, investments having to add value to Indonesia’s natural resources, a transfer of technology, and investments being environmentally friendly. The following is an excerpt from the interview: What is your opinion on the investment climate in Indonesia overall? My perspective is that Indonesia has been on a positive trend for some time now. If you look at the [World Bank]’s ease of doing business index, Indonesia climbed about 50 places, from 120th to 70th, within a five-year period. The investment case for Indonesia is strong. You have very strong macroeconomic data. You are now an investment-grade country; you have a young population. Indonesia is the most significant part of the Asean economy. All these fundamentals create a place of significant attraction for international investors. So opportunities for growth in Indonesia are significant. What are your thoughts on the Indonesian government’s efforts to attract investment as well as boost trade in the region? I think Indonesia is an integral part of Asean and the ability to cooperate with Asean is very well established. Obviously, the Asean Secretariat is located here in Jakarta. I think the dialogue that has occurred between Asean countries, which is evidence of a willingness to integrate markets; to create free movement of labor; free movement of people; and for barriers to trade within Asean to come down quite significantly. I think in that context, Indonesia is both a beneficiary and contributor to that process. As the largest market in Asean, there is both upside potential and reasons to be cautious. From closer regional economic integration, as a growth area, you want to open your markets in an orderly, regulated fashion. Still, I think this is a quite a positive story. Indonesia itself is about a domestic story; a strong one. Indonesia, as a part of Asean, is also a very powerful story. Its economic fundamentals are very strong. Do you think Indonesia’s economy will also be affected by a global slowdown? What is the sentiment among global investors toward the Indonesian economy? The global economy is obviously impacted by slower growth. Still, there are pockets of opportunity, particularly in Asia, where growth is larger or more significant than the consensus. If you think about China; China will grow about 6.5 percent or 6.7 percent this year; India is also still growing at a very attractive rate. Indonesia has grown steadily at above 5 percent for some time. In relative terms, globally, that’s quite positive; for a country to grow 5 percent represents a very attractive rate of GDP increase. What is the trend of Chinese investment in Indonesia today and in the future, especially related to the Belt and Road Initiative? Minister Luhut Binsar Pandjaitan has said the second Belt and Road summit held in Beijing over the weekend [in April] was a very important event. It brought together a large community of international leaders, with 37 heads of state and 88 countries present. That indicates a willingness for countries to look at what the Belt and Road could do to accelerate development. That’s a positive side. Specifically for Indonesia, the Belt and Road Initiative represents a potential source of capital. Capital to develop infrastructure; capital to develop connectivity – whether the digital community, or people-to-people community. Don’t forget about some of the world’s largest tourism markets. Indonesia today is among the top 20 global tourist destinations. China has probably the largest volume of outbound tourists. So there is enormous opportunity to connect people, to connect capital and to connect opportunities. So the prospects are good. But clearly, as Minister Luhut said, there must be some very clear parameterization of how these investments take place. So the five criteria the minister used – probably those are some of the guiding principles of how Indonesia would wish to see China’s Belt and Road Initiative play a positive role in the country. I think that’s very wise, because we have seen evidence that Indonesia has thought carefully about how to harness that capital and how to make sure that once that capital is harnessed, it’s structured correctly; creates employment; adds value; brings first-generation technology into the country. That makes a lot of sense. What opportunities exist beyond infrastructure development from the Belt and Road Initiative? Many people think the Belt and Road is purely infrastructure. They think of it as infrastructure and acquisition. I think that’s partly true, because a lot of the first phase of the Belt and Road had been infrastructure-related, but I think, as we move on to the next phases of the Belt and Road, there are many other additional areas of cooperation, like cooperation on technology; cooperation in areas such as digital. China of course leads the world in terms of digital technology. The ability to ensure the cooperation is not just economic but also people-related. So developing human talent, developing institutions. There are things that have been talked about in the second Belt and Road conferences. It will include infrastructure; it will include investment, but also include other factors, such as technology; such as learning; such as investment. Simply put, what the Belt and Road Initiative does for Indonesia, is mobilize capital for potential inward investment. When do you think we could see the impact of projects from the Belt and Road Initiative; when will it affect growth in countries that benefit from the initiative? The Belt and Road Initiative is an enabler of growth. How does it enable growth? Remember the impact of the Belt and Road has been seen in several different components, so what the Belt and Road Initiative does, is talk about increased connectivity, that flows through in terms of trade volumes. For example, on trade, the volumes on trade associated with the Belt and Road Initiative in participating countries will increase from $1 trillion today to $2.5 trillion by 2025. So essentially, what we are saying, is the Belt and Road Initiative creates connectivity, which enhances trade. Trade enhances the movement of goods, the movement of people; and that integration creates economic benefit for a country. Because it’s enabling investment to come in and that investment is triggering a positive GDP impact. In that sense, the Belt and Road Initiative is demonstrating really long-term value. I think the other thing to say about the Belt and Road Initiative is that it is not short-term. This is a multi-decade initiative. We just had the first five years. This is still relatively early in terms of its overall evolution and it represents China’s long-term approach to economic development. China doesn’t take a short-term approach to investment and development. It takes a long-term approach and what we have seen in the first phase, is that this is the beginning of that particular journey. The first phase of the Belt and Road 2013 to 2018 – we call it BRI 1.0 – has just been completed. BRI 2.0 has just been launched. It has a certain distinctive feature. It’s open, it’s inclusive, it will be more transparent. It will welcome third-party initiatives. It will be more transparent. This is, in our view, very positive and constructive. How does HSBC see Indonesia as a country for doing business? We’ve been a long-term investor in Indonesia. We remain firmly committed to this market. Daisy and the team can talk to you about the investments we have made in Indonesia. Our acquisition, our integration. That’s a story you know well. That’s a very good example of us committing to the long-term future of the country. You can see what we were talking about, is the long-term future of the country. If you look at the long term, we are committed to growth and investment in Indonesia. We are committed to growth and investment across Asean. That remains a core priority for the group, so the long-term prospect I believe, is that HSBC remains positive. There are of course some challenges, constraints, but if you look back over the past decade, we have made a very significant capital investment here. What are the challenges of doing business in Indonesia? The challenges really are broadly around ensuring what is a very competitive global environment for FDI [foreign direct investment]. Indonesia remains and continues to be competitive. What we probably would like to see; we hope Indonesia migrates even further. Still, if it was in the 70th place in terms of doing business, it should try to get into the top 50, for example, because that would show continued progress. You heard a panel talk about regulation, making sure that the regulatory framework you have here is an enabling framework, so the synthesis between national-level approval and local-level approval on a large project, that’s probably something that can be simplified. That’s something that can be improved. Historical challenges like land reclamation here, land acquisition, infrastructure transaction; again, those are the things that can be improved. And essentially, ensuring Indonesia does what it can to present itself in the most positive way to international investors. Investors have choices; they can go to many countries, but there needs to be a compelling case for coming to Indonesia to make sense. I think what you have, is that you’ve got… is that you’ve got a very positive macroeconomic framework; you’ve got a very good government, good policies; now what you need to do, is to accelerate the execution, so the environment you’ve got is more conducive to more inbound investment and with good control over the type of investment you want and the type of conditions you want. What are the trends of future capital inflows into Indonesia, with the Belt and Road and a stable economy? What the Belt and Road does and what Minister Luhut said; the number that has been coming; the number he mentioned was about $14 billion. What you might want to expect, is how the Belt and Road Initiative continues to move on and how the government explores, on a G-to-G basis, other areas where they would want to promote development. Those flows of capital will continue to increase over time. It’s difficult for me to predict what that would be, but a lot of that would be based around an agreement of what the national priorities are and an agreement, those priority projects. The generic answer for what the Belt and Road means for Indonesia, is it means an opportunity to look at areas for capital investment, in conjunction with the government, or entities from China, public or private sector can continue to be big investors in Indonesia. That’s a positive benefit for the country.