China: Labuan IBFC To Complement China's Belt And Road Initiative

Last Updated: 14 September 2017
Article by Labuan IBFC Inc.

The midshore centre can play a pivotal role in the realisation of China's BRI

A lot has been said about China's Belt and Road Initiative (BRI), its sheer scale, its vision and last but in no way least, the financial resources which will be needed to fund it.

Spanning over 60 countries, BRI is China's ambitious economic roadmap that will link Asia and Europe as well as Africa. It represents 65% of the world's population with a combined gross domestic product of more than USD20 trillion. It is expected that BRI will become a platform for economic investments especially for infrastructure and trade.

It is clear that BRI is not merely about billions or even hundreds of billions of dollars, it is a continuous commitment to ensuring these infrastructure projects as well as their support ecosystem continues to develop in order to realise the vision of the BRI.

It is hard to estimate, but economists have pegged the cost of this initiative to run into more than USD6 trillion! So where are these funds going to come from?

Towards meeting this demand, China has set up three new financial institutions with a registered capital of USD240 billion – Asian Infrastructure Investment Bank (AIIB), New Development Bank and the Silk Road Fund – aimed at funding its infrastructure plans. However the amount only represents a fraction of what is needed.

This concern has certainly been recognised by the Governor of the People's Bank of China, Zhou Xiaochuan when he was quoted: "The government alone cannot provide all the funding needed for the Belt and Road infrastructure projects," in the China Finance recently.

He also encouraged greater co-operation between the Chinese government and the private companies to create a market-oriented and sustainable financing system.

Private sector funding needed to fill in the investment gap

With many countries along the Belt and Road route being underdeveloped and developing nations, there is a need for foreign investments to fund potential infrastructure projects. Many of these countries are eagerly looking out for partnerships with companies that are financially stable to close these infrastructure finance gaps.

They are looking for Private-Public Partnership (PPP), a framework that is welcomed and well-promoted by the BRI initiative. It is indeed a change from the traditional procurement methods that China has engaged in the past. As a financing mechanism, PPPs could aid nations along the Belt and Road route to attract private sector to fund their infrastructure projects. They can also be a handy tool for ensuring risk-sharing, to identify potential successful projects and establish effective project monitoring systems.

"There is a need to further the public-private partnership framework in China and in many of the countries that are part of the BRI project. There must be open bidding for projects," said Ayumi Konishi, Director-General of the East Asia department at the ADB in Manila.

Even for many ASEAN countries, infrastructure financing has been seen as a challenge. Lack of funding for their own infrastructure projects is a major issue for many ASEAN nations. For instance, Indonesia being the largest economy in Southeast Asia only spends about 2% to 3% of its annual GDP on its infrastructure. This certainly means that there is pressing need for funding to develop better transportation system and other related infrastructure in the country.

Labuan IBFC as an alternative funding hub

As quoted by South China Morning Post recently, Zhou said: "International financial centres along the (Belt and Road) route ... can play an important role in mobilising funds from global institutional investors for infrastructure projects in the region."

For this, international business and financial centres (IFCs), such as Labuan International Business and Financial Centre (Labuan IBFC), could play an effective role as a funding hub, under the BRI initiatives.

As the jurisdiction is very much Asia focused, Labuan IBFC plays an important role as a facilitator of trade and intermediator of investments within the region. For example, investors and business owners are encouraged to use Labuan IBFC as an entry point to access a larger marketplace such as ASEAN and to tap on the opportunities created by the burgeoning markets.

As a substance-enabling jurisdiction, Labuan IBFC offers funding structures in a business-friendly yet well-regulated environment to global companies, including those in China. It is a well-established location for companies in the region seeking to access alternative sources of capital as the midshore jurisdiction allows funds to be raised in several currencies.

With the ready talents and intermediaries available in the centre, Labuan IBFC is can to serve a complementary role to Hong Kong, which is currently the fund-raising hub for most BRI infrastructure projects.

It is worth noting that Labuan IBFC's role as a facilitator of regional funding needs is not a new one. As a case in point, Labuan IBFC has been used by ADB as a domicile to its ASEAN Infrastructure Fund (AIF). Incorporated in 2012 under the Labuan Companies Act 1990, AIF is the largest infrastructure fund in ASEAN and was set up by the ADB and ASEAN member countries.

AIF is a dedicated fund established to address the infrastructure investment needs in the region by mobilising regional savings such as foreign exchange reserves. Around USD300 million worth of loans are provided every year to finance various infrastructure investment projects in the region. To date, AIF has approved seven infrastructure projects with a combined amount of more than USD300 million (co-financing with ADB).

Labuan IBFC supports Shariah-compliant businesses

Malaysia's established Islamic finance ecosystem, coupled with Labuan IBFC's conducive legal and regulatory environment for Shariah-compliant businesses, will allow potential investors that are searching for opportunities in the Islamic finance space to tap on the readily available Shariah-compliant structures, including a full suite of Shariah-compliant financing structures.

Labuan IBFC offers a comprehensive legal framework that supports the creation of Shariah-compliant funding for the region. For example, a joint venture of two Australian solar companies funded their AUD550 million 250 megawatt solar project in Indonesia through an Islamic sukuk in Labuan IBFC. Commenced in July 2015, the first phase of the project was funded through an offer of AUD150 million of sukuk.

Sukuk is a preferred form of financial structure for fund raising of long-term projects, which could be done via public offering or private placement under the laws of Labuan IBFC. The instrument can also be listed and traded on a exchange.

With China having a huge Muslim population, there is a clear opportunity for China to develop and flourish in the Islamic finance space. It is only a matter of time for the country to start using Islamic bonds and other Islamic finance instruments, especially for funding BRI initiatives.

In short, Labuan IBFC located in the centre of Asia and as part of Malaysia – China's oldest trading and investment partner in the region is ready and poised to play its role as a key enabler of the BRI.

Originally published 9 August 2017

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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