CHINA BUSINESS - A Bay Area of Economic Strength

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Founder & Managing Director of Silk Road Associates and renowned China economist Ben Simpfendorfer describes how a cluster of eleven cities in southern China could become an economic powerhouse with a combined GDP comparable to that of Australia or Korea

By Kenny Lau


What is the Guangdong-Hong Kong-Macau Greater Bay Area?

The Greater Bay Area initiative recognizes that commercial opportunities for Hong Kong, Shenzhen, Guangzhou and other major cities of the Pearl River Delta have changed fundamentally. The rise of technology giants such as Huawei and Tencent is a nice illustration of the change. But opportunities are emerging across a range of sectors – from advanced manufacturing to logistics to leisure.

The initiative seeks to nurture these changes. Its inclusion in China’s 13th Five-Year Plan (2016-2020) provides critical central government support. It also gives Hong Kong a bigger role supporting Mainland Chinese companies across the border and helping them internationalize. In short, it lays out a roadmap for a more integrated, internationalized and value-added Pearl River Delta.

What is the Chinese government’s vision for the “Greater Bay Area?”

The Chinese government has plans to deepen Hong Kong’s economic and financial integration with Guangdong. For instance, you hear officials stressing the need for “two-way opening up.” That implies Hong Kong will remain a gateway to China, but also increasingly act as a springboard for Chinese companies to the world. It’s good news for Hong Kong.

It’s also a change that supports the central government’s new priorities – from the internationalization of the Renminbi, to the country’s Belt and Road initiative, to supporting the global expansion of heavy-weight players such as Huawei, Midea, or Tencent. So, it’s likely to remain a long-term driver of Hong Kong’s own commercial opportunities.

How would each of these cities complement one another?

The Greater Bay Area’s nine major cities were in fierce competition with each other during the 2000s, and that wasn’t always healthy. It meant a great deal of duplication. But there are growing signs that each of the region’s cities are starting to specialize either as a result of the challenges in low-cost export manufacturing or the emergence of the digital and technology sectors.

Today, Shenzhen has booming advanced manufacturing and technology sectors; Foshan is home to a number of emerging Chinese multinationals, such as Midea; Jiangmen and Zhongshan, by contrast, are struggling to escape the declining need of low-cost manufacturing; Guangzhou meanwhile benefits from its role as the region’s capital as well as improved rail and road links.

The Greater Bay Area’s geographic concentration is also unique in China. There is no other region in China where you find 11 major cities, including Hong Kong, Shenzhen, and Guangzhou, all within 100 kilometers of each other. It means some of the area’s smaller cities may emerge as dormitory cities, especially for those working in Shenzhen or Guangzhou and faced with rising home prices.

What industry sector will it emphasize?

I would expect a focus on advanced manufacturing, digital and technology, logistics and trade-related services, and leisure & entertainment. These are natural fits for Shenzhen, Hong Kong, and to a lesser extent Guangzhou and Foshan. The leisure & entertainment industry is also key to encouraging consumer spending.

There are also market dynamics in play. Just take a look at the growing number of resort-style hotels catering to middle-class families looking to escape the bigger cities over the weekend. This is a natural outcome of the region’s growing spending power and changing lifestyle preferences. It’s a timely reminder that market forces can be as important as policy initiatives.

What will it take to develop the Greater Bay Area as envisioned?

It’s easy to be impressed by the Greater Bay Area’s existing infrastructure. But there’s more to come. Most impactful, at least for Hong Kong, is the Express Rail Link between Hong Kong, Shenzhen, and Guangzhou. But equally important are a series of Intercity Rail Links under construction and the bridge and tunnel connecting Zhongshan to Shenzhen.

I’m more ambivalent about the Hong Kong-Macau-Zhuhai bridge as a short-term opportunity, especially given prospects for Jiangmen and Zhongshan. That said, it does shorten travel time from 90 to 30 minutes and may prove to be a significant long-term opportunity, especially if the western regions emerge as a logistics, business outsourcing (BPO) or leisure-related opportunity.

The challenge of attracting the right talent is always an issue. But greater integration will help multinationals to better leverage their Hong Kong-based talent for opportunities across the border. While it’s more common for executives to fly to Beijing or Shanghai rather than Shenzhen, that’s likely to change in the near future.

We also shouldn’t forget about Hong Kong’s existing business and family links to southern China. Not only is Hong Kong a major investor in factories across the border, but many in Hong Kong have strong family ties in southern China, and Cantonese is widely spoken in most Greater Bay Area cities.

What role should Hong Kong play as part of the Greater Bay Area?

In my view, Hong Kong should be playing a greater role as southern China’s regional headquarters. There are still significant regulatory and tax obstacles between Hong Kong and Mainland China. But the creation of free trade zones such as Qianhai or Hengqin is a step in the right direction.

Improved infrastructure will also reduce the time it takes for a relationship manager or senior executive to travel between Hong Kong, Shenzhen, and Guangzhou. Many are already considering how Hong Kong-based business development teams or senior managers can drive their southern China opportunities, or whether their Hong Kong office, rather than the office in Beijing or Shanghai, should have responsibility for leading the overall business strategy in southern China.

How is it also tied to the Belt and Road initiative?

The Greater Bay Area will play a key role in China’s engagement with the Belt and Road economies. But it will focus on private companies instead of large state-owned enterprises. For instance, Chinese investors from the Greater Bay Area are already investing in Vietnamese garment factories and industrial parks; Chinese brands, such as Huawei and Oppo, are already capturing market share in Bangladesh.

Sure, these aren’t the large infrastructure or energy projects that many of us typically associate with the Belt and Road initiative. But they are equally important and will result in ongoing international opportunities for the Greater Bay Area. The fact many of these companies have access to international professional services in Hong Kong will already make it much easier to succeed when going global.