Bay watch

The rankings of the world’s top ‘bay area’ economies have long featured three main contenders. San Francisco’s claim to fame is its world-beating tech firms, clustered around Silicon Valley; while New York’s bay is at the centre of the financial markets and hosts more than a third of America’s top 500 companies; outside the US the industrial heartland around Tokyo accounts for more than a third of Japan’s economy.

The newest challenger to the group – the Greater Bay Area, or GBA – is generally lesser known, so much so that many struggle to find it on the map.

But this vibrant region of southern China – combining nine cities of Guangdong province with Hong Kong and Macau – is the biggest of the four in land area and population, and it has already overtaken the San Francisco Bay Area in GDP.

That’s just the start, its backers claim, predicting as much as $5 trillion in economic output by 2030, way ahead of the other three bay economies.

Hence expectations were high this week when the State Council – China’s cabinet – unveiled a plan to speed the region’s transformation into a world-class city cluster.

So the Greater Bay Area is taking more concrete shape?

Closer ties between the economies of Hong Kong, Macau and Guangdong have been discussed for more than a decade but the idea picked up pace two years ago when Chinese Premier Li Keqiang made an official pitch for it at the National People’s Congress.

More detail was expected last year but there was a delay, leading to speculation that getting agreement between the cities was proving a problem. Some also thought Beijing might be getting more hesitant about championing some of its headline policies too – the Belt and Road Initiative has been on the backburner after some of its infrastructure deals ran into political difficulties, while the ‘Made in China 2025’ programme is no longer mentioned at all because of the way it riles the US and the EU in the row over technology transfer.

But the GBA, which is home to about 70 million people and would rank in the world’s top 15 economies if it were a standalone country, should be less contentious.

Not surprisingly this week’s blueprint was lauded in the Chinese press with China Daily saying of the 30,000-word document that itwould create a “world leading” centre. Analysts outside China said detail was lacking.

Proponents say that this is deliberate – policymakers want to set out the principles for how the plan is supposed to proceed rather than take charge of the specifics – and eleven chapters in the plan did set out goals in areas such as industrial development, environmental protection and a better quality of life.

The overarching mission is the creation of an international leader in technology and innovation. To get there, the cities in the region have been divided into two tiers, with Hong Kong, Macau, Shenzhen and Guangzhou taking the lead. Foshan, Zhongshan, Zhuhai, Dongguan, Huizhou, Jiangmen and Zhaoqing go into a second grouping, with targets of building an initial city cluster by 2022, and closely connecting all the markets by 2035.

People on the move

One of the priorities in the plan is making it easier for people to move around the region and there are commitments to speeding up procedures at the borders (or boundaries – the preferred term in official speak) between Guangdong and Hong Kong and Macau.

Elsewhere there are efforts to make it more attractive for people to work away from their home areas, including a promise that residents of Hong Kong and Macau will get the same access to education, medical care and housing as local citizens if they come to the mainland to work.

However, nothing was said about a more pressing issue as far as most Hongkongers are concerned: the requirement to pay local income taxes if they work for more than half the year in Guangdong. That can be punitive: the top rate on earnings in China is 45% versus just 17% in Hong Kong.

One option is rebates for people working in the three special zones in the GBA, which would bring income tax closer to Hong Kong levels. A similar scheme has been applied in Hengqin, the zone adjoining Macau, and it could be extended to people working in the Qianhai district of Shenzhen or the Nansha zone bordering on Guangzhou. That would probably lead to a clustering of investment in these areas rather than its spread across a wider area. But it is harder to see how Hongkongers could get concessions across the GBA in general, simply because local Guangdong residents won’t look favourably on tax breaks reserved for their wealthier neighbours.

In fact tax policy looks like one of the thorniest issues for the GBA planners, which is probably why there was no mention of it in the State Council plan this week.

A role for everyone

One of the features of the other global ‘bay area’ economies is that they are centred on one city. In the GBA there are rival contenders for leadership – especially Hong Kong, Shenzhen and Guangzhou – so policymakers are trying to pre-empt some of the pressures by talking up the portfolio of skills in each location, and how they all bring something different to the region.

Macau, by far the world’s largest gambling hub, will grow its strengths in leisure and entertainment. Hong Kong’s edge is finance, professional services and aviation. Shenzhen is styled as the heartland for tech and innovation, while Guangzhou is the trading and logistics entrepot, as well as the political centre for the region.

Wherever possible an effort has been made to divvy up the spoils between participants. That includes in finance, where Hong Kong gets the main nod for its dominant role in international capital markets, including the cross-border trading programmes that link it to the stock markets of Shanghai and Shenzhen.

However, there is another promise to set up a yuan-denominated securities market in Macau, with hopes that the city will promote the renminbi in the Portuguese-speaking world (a little odd as so few people in Macau speak the language).

Guangzhou doesn’t miss out either, with its designation as a regional trading centre for private equity and commodities, as well as a futures exchange that will trade carbon emissions as its first product.

Collaborate rather than compete

Focusing on the strengths of each city is a sensible strategy but problems will present themselves when two locations are vying for pole position in areas that they both regard as their birthright.

The most obvious clash seems likely to come between Hong Kong and Shenzhen, which are now only a few minutes apart by high-speed train (the long-delayed rail connection – which also extends to Guangzhou – finally opened late last year).

A generation ago there was no comparison between the two cities but Shenzhen’s sensational growth means that they are now neck-and-neck in GDP terms. Buoyed by its rapid rise, Shenzhen also shows a confidence about its future that sometimes seems to be lacking in its southerly neighbour.

However, the hope is that business interests from both cities will find common ground, especially in the special area of Qianhai, which has been tasked with pioneering reforms that free up capital flows between China and the rest of the world.

Another area of overlap is science and technology, especially the combination of Hong Kong’s research capabilities and Shenzhen’s manufacturing expertise. The dizzying ascent of DJI, the world’s top maker of commercial drones, is one of the case studies: its founder put together his business plan as part of his university education in Hong Kong, before starting his company across the border in Shenzhen.

Similar success will come from supply chains that draw on the different skills across the region, says Witman Hung, a lead liaison for Qianhai. “The Greater Bay Area is meant to work as an integrated value chain,” he explained to the South China Morning Post. “In future, research results from a Hong Kong lab will be made into a prototype by a Shenzhen company, and sent back to Hong Kong for design. Factories in Dongguan will then start production, and the products will be shipped overseas.”

A political bridge

Whether this kind of collaboration can trump the combative tone that characterises much of the region is open to question.

The competitive instinct has lit up the transport sector, for instance, including headline projects like the Hong Kong-Zhuhai-Macau Bridge, which have been built to bring the GBA closer together.

We have mentioned the new link – the world’s longest sea crossing – in previous editions, including how it has been stirring protests in parts of Hong Kong for bringing in too many troublesome day-trippers from across the border (see WiC440).

Hong Kong’s airport is more of a beneficiary because the bridge makes it easier to get to Macau’s casinos, which should bring more passenger traffic from cities in China. But infrastructural initiatives like these can also lead to clashes between cities as they clamour for advantage against their rivals.

Earlier this month there was news about longstanding proposals to build another bridge to Zhuhai, this one crossing from Shenzhen’s Qianhai financial district some 45km away. It would slash travel time to just half an hour but the crossing would also be located just a few miles north of the Hong Kong-Zhuhai-Macau link, which offers a similar routing. It would be just a few miles south of another bridge already being built further up the estuary between Shenzhen and Zhongshan, which is scheduled to open in 2024.

Supporters of the latest proposal say that there will be more than enough traffic to share around, citing the wider ambition of bringing all of the main cities in the GBA within a travelling radius of one hour.

Yet reports in the press have claimed that the latest crossing is being promoted by officials from Shenzhen angry that requests for their own connection to the Hong Kong-Zhuhai-Macau bridge were rebuffed.

Shenzhen economist Qu Jian, vice-president of the China Development Institute think tank, hammered home the view that the failure to include a spur to Shenzhen was a massive mistake, saying that Hong Kong’s bridge is already missing out on traffic. Now another crossing is going to be built, he claims, ominously warning that it will take more business away from the newly opened bridge.

Jeremy Tam Man-ho, a legislator from Hong Kong, bemoaned the latest proposal, classifying it as another example of local rivalry. “It’s not the first time that after Hong Kong makes a great investment for connectivity, other cities in the area roll out a separate plan that undermines Hong Kong’s benefits,” he complained.

But that may be overly-pessimistic. A look back at when Robert Moses unleashed his own bay area infrastructure binge in New York in the 1930s is suggestive. When he was trying to secure financing from bankers for his new Henry Hudson Bridge they initially balked. They thought its tolls would not persuade enough drivers to switch from the rival Broadway bridge, writes Robert Caro in his excellent biography of Moses The Power Broker. So when the Henry Hudson Bridge opened in December 1936 bankers had an expectation that 2 million of the 14.25 million cars that annually used the Broadway bridge would switch. That turned out to be far too conservative an estimate. By 1937 there were 10.3 million cars on Moses’ newer bridge and by 1941 there were 14.3 million. And as Caro points out, traffic on the older bridge remained roughly the same too. In other words both capacity and usage doubled.

While not a perfect comparison, it offers an argument that when a bay area is thriving and in growth mode – as the ‘New Deal’-financed New York of the Moses era demonstrated – the provision of more transport infrastructure tends to create additional demand, facilitating more movement around the cluster.

More than the sum of its parts?

Critics of the GBA concept say that super clusters like Silicon Valley weren’t conjured up by state planners, and that too much is being expected of the plan for a new megacity.

Implicit in the rebuke is that Silicon Valley draws on a diverse mix of both people and ideas that the GBA will find difficult to duplicate and that the Chinese government’s interventionist instincts will always make it harder for the private sector to flourish in the same way.

But even in the US the separation between the free market and the state wasn’t always quite so straightforward: some of Silicon Valley’s most famous firms found their way in the wake of government-sponsored research in areas like space exploration and, later, the internet.

There is also an argument that the political and social mix in the GBA makes it more cosmopolitan than anywhere else in China, and that Guangdong has a longer history of reaching out to the wider world than other parts of the country.

The region has also shown the capacity to reinvent itself in its recent past. Whatever happens next isn’t going to be anywhere near as seismic, for instance, as the social and economic transformation of the late 1970s and 1980s, which saw Guangdong lead China’s reintegration into the global economy. Back then privately-owned firms made much of the running, especially in Shenzhen, and there was another throwback to that era this week in the way that political leaders set a general direction but left room for others to experiment.

Who is to say that the region can’t transform itself once again?

What’s ahead for Hong Kong?

Another advantage held by the other more well known bay area economies – such as San Francisco – is that they are anchored in a single jurisdiction. That’s not the case for the GBA, which extends across three governments, three customs zones, three currencies and three legal systems (that of mainland China, Hong Kong and Macau).

As a mundane example: Hong-kongers wanting to cross the new bridge to Macau and Zhuhai in a private car need to register for one of a very limited number of permits to reach each location. They also need insurance and driving licences for each of the jurisdictions.

A photo on Twitter this week of a car loaded down with three licence plates captured the complexity – indeed the image was soon being talked about as a metaphor for the challenges the GBA plan faced.

The longer term issue is how these different jurisdictions are going to be forged into something more singular. For Hong Kong in particular that means resolving a contradiction at the heart of the plan. To grow into something more tangible the GBA is targeting deeper integration but many Hongkongers want to stay ring-fenced from mainland China, with protections for their legal, monetary and political differences.

This sensitivity was apparent in the State Council plan’s emphasis on maintaining the “one country, two systems” approach that is supposed to ensure a high degree of autonomy for the city.

Yet the promise sits rather uneasily with another of its GBA commitments: to create “an international and market-oriented business environment based on rule of law, under the jurisdiction and legal framework of mainland China.”

The conundrum for Hong Kong is how to draw closer to its neighbours without losing too much of what makes it different. That said, Carrie Lam, its leader, defended the blueprint, arguing that the city had played an “active role” in putting it together and rejecting concerns that the territory would be forced to cede more of its autonomy as the proposals take shape.

Besides, if Hong Kong doesn’t seize its chance the boat will sail without it, she added, citing a Cantonese proverb that President Xi Jinping used when he visited the former British colony last year.

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