- February 19, 2016
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Interview Transcript: “HKTDC is going to be that super connector between the investors of the world”
Vincent Lo, chairman of the Hong Kong Trade Development Council, says as China transforms, restructures, and rebalances its economy, slowing down has become a necessity. Its Belt and Road is a golden opportunity for Hong Kong to be an investment, financing, and professional services centre for companies wanting to invest in the initiative.
Property developer and Hong Kong Trade Development Council (HKTDC) chairman Vincent Lo is upbeat not just about the Hong Kong property market but also Hong Kong’s position as the centre for China’s Belt and Road Initiative.
“The Belt and Road is not going to be just a China project,” he emphasises. “It’s going to be a world project. It’s 4.4 billion people, 65 countries. If you are just a private enterprise, and HKTDC can help you by identifying projects and coming up with hopefully a standard loan agreement, a standard investment agreement, then it’s going to be a lot easier for the investment and for the countries concerned,” he explained.
The Asian Banker’s Emmanuel Daniel sat down with Lo for a conversation on the prospects for Hong Kong as various regional trading arrangements are created and China slows down.
Emmanuel Daniel (ED): You are a businessman in your own right, a very prominent property developer in Hong Kong and China. The first question I want to ask you is this: We all see the numbers. Global trade is slowing dramatically despite an era where there’s a lot of bilateral and multilateral arrangements taking place all around the world. What do you think is happening?
Vincent Lo (VL): I think we’re seeing a lot of economies slowing down, particularly in Europe. It’s even negative growth. So I think that is going to curb purchase, even in China. Imports have also come down quite dramatically. It’s because China is seeing a 7% growth. It’s more like a recession but also the psychology as well as the actual purchasing power.
ED: You’re a property developer. You understand overcapacity. But the overcapacity we find now is on every front—from raw materials, to property, to infrastructure. How long do you think this will take to work out for a country like China?
VL: Overcapacity should encourage exports and imports because overcapacity will force prices down. The overcapacity in China is quite phenomenal. But with the Belt and Road initiative, hopefully, China can bring some of its capacity to the other 60-odd countries that are in desperate need of machinery to produce for local consumption. I think overcapacity actually can work itself out, particularly in the infrastructure side, which I believe is not actually overcapacity. The reason why China has grown so steadily and at such a high rate over the past 30 years is basically because the infrastructure is there. If you look at India, the growth rate is not the same. It’s because the infrastructure is just not there for support.
ED: The Chinese government revised its outlook for 2016. As the economy slows, how do you think we should be reading that slowdown? As pointed out, China still produces a Germany every four years in terms of GDP growth, even if this goes down to about 5%. So how do you read the slowdown? And how should the rest of the world take that slowdown?
VL: I think slowing down to 7% growth is more than acceptable. A 7% growth relative to the rest of the world is still at the very top. But people have been spoiled looking at China growing at double digits for a long, long time. And that is no longer sustainable, that past model of export and investment. That’s why you mentioned there is so much overcapacity. China is now trying to transform its economy, to restructure and rebalance its economy. Thus it is a necessity to slow down.
ED: How were you at the Hong Kong Trade Development Council reading the trade floor figures in the last few years? A lot of it was actually financing through the trade corridor, i.e., a lot of Chinese corporates were actually borrowing offshore to fund their onshore development. And now, the financing aspect is in turmoil because of the changes in the Renminbi and so on. How were you reading it two years ago? And how are you reading it today?
VL: I think two years ago, everybody was expecting the Renminbi to continue to appreciate. Now, reality has set in. The Renminbi has depreciated quite significantly in the past few months. And so everybody is taking a hit. You mentioned about borrowing money from overseas using it as trade figures to help their own domestic development. The thing is, if you can borrow at a cheap cost, your Renminbi is going to appreciate. It was double win situation before but it’s no longer the case. So I think it’s basically an issue of lower interest rates overseas and also appreciation of the Renminbi.
ED: So how do you think it’s going to play out?
VL: There will be a lot more onshore bonds issues or local financing using Renminbi. Like myself, as a developer, I’m selling in Renminbi. I’m also building in Renminbi. Why should I be borrowing overseas money even at a lower rate? In today’s environment, it’s hard to really see how it’s going to go, whether the Renminbi is going to continue to depreciate, or to stop here, or to appreciate.
ED: On the real estate front, the high end of the investment spectrum, are you still confident in China? Are you still invested? Are you still engaged?
VL: Yes. I’m still very confident in the property sector. But, of course, there’s a lot of overbuild, particularly in the third and fourth tier cities. And also, I think economic development is not consistent throughout the whole country. In a city like Shanghai, there’s still a big demand for properties. I launched one of my projects recently, and it was sold out in one day at record prices. A city like Shanghai is transforming itself to become like a New York or London, an international finance center. So facilities, infrastructure, and housing or offices need to be built.
ED: How do you think the inflation component starts building in? China does have its own quantitative easing. So the system is actually flush with domestic currency. Do you think this will show up in property prices?
VL: Probably not too much. For property prices, I think you cannot generalise to say the whole market is going to behave accordingly. In cities like Shanghai and particularly Shenzhen, prices are shooting through the roof. In Shenzhen, for example, last year, it grew over 30%. But in the third or fourth tier cities, prices are dropping and still there are no buyers.
ED: What do you think is the medium-term impact or other medium-term prospects for the third and fourth tier cities? Is there going to be a reconfiguration of their business model?
VL: The central government recently decided that stocking of the property sector is one of its priorities. I guess they will have to come up with policies and incentives for people in the third and fourth tier cities to buy. For example, tax deductible, deposits, and maybe using the provident fund to help them purchase. I think all of these are in the pipeline. There’s a lot of leverage the Chinese government can still make use of for sure.
ED: Let’s put on your policy-making hat. I’ve heard nothing but One Belt, One Road in this trip to Hong Kong. There’s a policy driver, and the HKTDC has a policy too. You’ve actually identified several industries where the supply chain works in favour of Hong Kong being a player in that regard. How much of that is achievable for Hong Kong?
VL: The Belt and Road is a golden opportunity for Hong Kong to play a very important role in. Why am I saying that? It’s because it’s 65 nations. And it’s all in different areas of the world with different culture, history, even legal system, religion, and ways of doing things. Hong Kong is a hub for financing and professional services. I think in the future, Hong Kong can play a very clear role as investment center, financing center, professional services support center, and then backoffice for companies wanting to invest in the Belt and Road.
That’s on a very high, general level. But I’m speaking as a businessman now. If I want to invest into the Belt and Road projects, how do I go about doing it? If you are just a private enterprise, it’s not easy to consider how and where you’re going to start. So if the HKTDC can help them by identifying the projects and coming up with hopefully a standard loan agreement, a standard investment agreement, then it’s going to be a lot easier for the investment and also for the countries concerned. We’re going to be that super connector between the different nations and the investors and the resources of the world.
ED: Regarding the HKTDC’s role in promoting services, what has it been doing that’s very clearly trying to get the services sector going?
VL: HKTDC has been promoting its professional services for many years now. Unfortunately, the name Trade Development Council I think is giving people that wrong image that we’re only focused on trade. We’re not just focused on trade.
ED: What specific projects can you point to that demonstrates that your Belt and Road involvement or engagement, is working? Do you have specific examples or case studies where you can say, look, this is what we’ve been doing?
VL: Yes. We have signed, for example, a cooperation MOU with an organisation called Yabuli in China. They had a one day workshop with us and were so excited that they wanted to sign a cooperation agreement with us. I think that is a very good indication because, typically, these big companies just go with the Chinese government and go to these places to make their own investment. But they recognize that the council and Hong Kong can help them make their job easier. And that’s why they want to work with us.
In the next few months, we’re going to be lining up all of our strategic partners. And hopefully, by the middle of 2016, we will be able to come and showcase what we’re doing with all our partners.
ED: How about the Asian Infrastructure Investment Bank, are you thinking about how to work with AIIB?
VL: We will be working with everybody because our job, if we want to be that platform, is to work with everybody.
ED: On the Trans-Pacific Partnership (TPP) where China is specifically excluded, and the APEC arrangement, do you see overlapping corridors? As a businessman and policy driver, do you see opportunities missing in Hong Kong as a result of these macro players and alignments?
VL: I don’t worry too much about that. Overlaps are to be expected. Politicians have to work on something. All of these trade agreements will be good. The main thing is we make them happen. That’s the key. Anything that’s promoting free trade will be a big welcome for Hong Kong.
ED: What is your reading of TPP? What do you think of it as a mechanism in itself and its focus?
VL: I think TPP still has a long way to go because all of the countries have to go back to their own legislature to get it approved. I think that’s going to be a long process.
ED: The TPP is very IP-centric and, therefore, all of the industries are IP-centric. Isn’t that an area that Hong Kong would have wanted to latch on to or benefit from?
VL: Yes. Well, if we can join, I’m sure we will consider very seriously. But I think all of these are political considerations.
ED: How developed are IP-based industries in Hong Kong?
VL: We actually have a very good legal system in Hong Kong. I think that’s the best form of protection for IP. And that is why we’re now looking at the possibility of doing a bit more on the technology side. And hopefully, we will gain some momentum.
ED: You’re probably the best person to answer this question because IP players who want to be domiciled in Hong Kong, especially to reach out to China, find that Hong Kong is a very expensive place mainly because of property prices. And property prices, like chemotherapy, does good and does bad as well. Therefore, some industries need a little bit more nurturing in order to find a foothold in Hong Kong.
VL: Unfortunately, I have to agree with you. Hong Kong property prices are way too high. But mainly it’s because of supply and demand. Hopefully, the government will provide more housing for the market, then at least prices will stabilise.
ED: If prices stabilise and prices start to soften, would you as a businessman diversify? And if you did, what would you be looking at?
VL: No, I think property prices in Hong Kong will continue to make good money for investors. Of course, if you go in at the peak of the market, it’s difficult to say. But so far, so good, the Hong Kong market has been very rewarding for property developers.
That Hong Kong is a strategic location for East Asia is very clear. As Lo points out, Hong Kong is “well connected” everywhere. With Hong Kong aiming to be a platform to serve the whole world, HKTDC will have to make good use of its connections.
“Time will tell how effectively we can work with everybody,” Lo admitted. “Chinese money will get the Belt and Road started, but in the future, hopefully, everybody from all corners of the earth who see opportunities they want to invest in can go ahead.”
“Hong Kong has already been trading for a long time with the nations to be spanned by the Belt and Road initiative,” he added. “With the Belt and Road, Hong Kong can become the Asian hub.”
Categories: China, Interview Transcript, The Banking Conversation
Keywords: HKTDC, One Belt One Road, China, Hong Kong, RMB, AIIB, TPP