In GDP race, the Greater Bay Area could overtake UK and France by 2035

By Kelvin Lau and Ding Shuang | China Daily Updated: Aug 5, 2019

The Canton Tower stands in Guangzhou, Guangdong province, on April 17, 2018. [Photo/VCG]

The Greater Bay Area, or GBA, spans Hong Kong, Macao and nine cities in Guangdong province. A GBA framework agreement was signed by the National Development and Reform Commission and the governments of Guangdong, Hong Kong and Macao in July 2017.

The authorities concerned announced policy directions on the initiative in February, in the form of the Outline Development Plan of the GBA.

The plan, which includes near-term goals until 2022 and longer-term goals until 2035, has specific sections dedicated to turning the GBA into a global technology innovation center, expediting infrastructure connectivity, building advanced manufacturing and modern services industries, and developing a quality living circle, among other objectives.

All of these are important to enhancing the region's leading role in national economic development and opening-up.

The idea is to create a world-class city cluster through collaboration and integration, made possible by the cities' clear division of economic functions, high level of economic vibrancy and internationalization, and a long history of cooperation through Pearl River Delta integration.

The plan aligns one of China's most robust and dynamic regions with the country's long-term economic priorities. This should help the GBA expand strongly and stay relevant, allowing it to spearhead China's economic transformation and reshape how companies operate in the region for decades to come.

High expectations

Standard Chartered Bank's corporate clients appear to share the same view, based on responses to the bank's annual survey conducted after the Lunar New Year holidays.

The 200-plus surveyed companies are headquartered largely in Hong Kong, Taiwan province or the Chinese mainland, with manufacturing operations in the mainland GBA cities.

A majority 64 percent of respondents see the GBA presenting new business opportunities some years down the road, matching expectations for renminbi internationalization. This is up from a mere 49 percent a year prior to the GBA, suggesting that the market talk leading up to and following the announcement of the GBA Outline Development Plan clearly boosted awareness and lifted expectations.

Businesses are expected to benefit in more than one way from the GBA's transformation. About 15 percent of respondents said the GBA would become more an important consumer market for their business, followed by 12 percent saying it could be a sourcing base, with just below 10 percent saying it could be a production base, R&D base or treasury center.

While these numbers do not seem impressive, we highlight that the surveyed companies probably already operate heavily in the GBA.About 65 percent or more respondents see the GBA being at least as important, going forward, across all their business functions.

Interestingly, 63 percent respondents said that an accelerated launch of GBA policies would have a positive impact on their business in 2019.While it is not surprising that clients favor more direct and immediate policy relief, such as "more tax cuts" (72 percent), "more support to SMEs and private enterprises" (72 percent) and "fee reduction" (69 percent). We believe a faster rollout of GBA policies could help China prepare for the worst-case scenario amid rising trade friction with the US.

The skyline of Hong Kong, China pictured by night. [Photo/IC]

Policy support key

Such high expectations for the GBA are well justified. Collectively, the GBA had a GDP of $1.64 trillion in 2018, putting it ahead of South Korea ($1.62 trillion) which ranked 12th in the world.

Even assuming a conservative average nominal annual growth rate of 7 percent, the GBA's GDP could surpass that of the UK and France by around 2035, making it the sixth largest after Germany.

In reality, however, the GBA needs a comprehensive plan and strong policy backing to achieve its full potential, for which it would require freer flow of capital, goods, people and information, better integration of different legal systems, and functional specialization via well-defined roles and priorities, among many other things.

The promotion of innovation, collaboration and the acceleration of infrastructural connectivity are seen as key means to achieving such goals.

Infrastructural connectivity is the key to preventing a mega city cluster from collapsing under its own weight, and takes a long time to build. Such essential infrastructure projects are well underway in the GBA.

Financial services could be among the earlier movers, benefiting from the collective experience of the authorities and industry players in driving renminbi internationalization for the past decade.

In comparison, other aspirations such as modernizing manufacturing, building a shared big data center, establishing education and talent hubs, and developing a cultured metropolitan economy are likely to progress more gradually, but should interest corporates and inventors for years to come. This especially includes policies that favor specific industries, promote cross-border mobility or widen mutual market access.

Superb principle

Unlike other existing bay areas or metropolitan cities, the GBA needs to integrate multiple legal and social systems to become a true city cluster. It is therefore critical that the plan places considerable focus on overcoming physical, social and regulatory boundaries to promote freer cross-border flows of people, goods, services, capital and information, while preserving the "one country, two systems" principle.

Much of the GBA's synergies stem from Hong Kong and Macao's continued ability to be economically open and market-oriented, and the strength of their institutions and rule of law.

We note the following challenges for the GBA to improve connectivity and boost cross-boundary mobility: simplifying immigration and customs clearance, relaxing capital account controls, aligning financial regulations, improving data access and sharing, aligning policies on IP protection and data privacy, mutual recognition of professional qualifications, setting environmental and food safety standards, and the cross-border dovetailing of social-security and public services.

Much progress has been made on regional integration in the past 10-15 years through the Pearl River Delta's development, on the back of China's conscious policy push, which was mainly to facilitate the opening of the mainland's economy and financial markets.

However, much more remains to be done in developing cross-border connectivity across all forms of factors of production, implying that policy coordination and implementation are likely to become more difficult, going forward. As such, the Outline Development Plan of the GBA takes a more long-term rather than short-term view.

The Hong Kong-Zhuhai-Macao Bridge. [Photo/Xinhua]

Reciprocity, not uniformity

"Two systems" allow room for regulatory autonomy and reciprocity rather than complete uniformity of treatment, despite being under "one country". For instance, making border control less cumbersome while preserving the "one country, two systems" principle remains a tough balancing act for China, in our view.

Another point of contention is the social impact of greater integration. The availability and ease of obtaining visas for the Chinese mainland people to visit Hong Kong, for example, has been a source of tensions among Hong Kong residents who have faced the social strain of an influx of mainland visitors in the past decade.

The perception of not acting in line with the "one country, two systems" could erode Hong Kong's competitive advantage and unique contribution to the GBA over time, and also have tangible implications, such as closer scrutiny by the United States under the US-Hong Kong Policy Act, which allows the US to continue treating Hong Kong as a separate entity from the Chinese mainland when it comes to international commerce.

We believe Hong Kong has plenty to offer to the GBA. The benefits from city-cluster development will likely be transformative for Hong Kong in the coming decades, especially given the existence of an official strategy for Hong Kong to participate in the mainland's long-term development.

Kelvin Lau is a senior economist for China at Standard Chartered Bank (HK) Limited, and Ding Shuang is the bank's chief economist for China and North Asia.