6 Feb 2018
Bay of Plenty
A Plus Magazine, Hong Kong Institute of Certified Public Accountants
Hong Kong, Macau and Guangdong are working together to form a unified “Greater Bay Area” that could create a global economic powerhouse, reducing duplication and cutting down on red tape. However, as George W. Russell discovers, there are obstacles to achieving a streamlined region despite obvious opportunities.
With a bridge linking Hong Kong to Zhuhai and Macau under construction, high-speed rail putting Guangzhou just 48 minutes away from Hung Hom and a high-tech science park planned for an area that was a no-go borderland just 20 years ago, it seems Guangdong and Hong Kong are on an inexorable path towards greater integration.
Indeed, both China’s central authorities and the Hong Kong government are constantly promoting a more seamless interchange of business, people and ideas in the increasingly dynamic southern region of China.
The conurbation has been given many names in past decades – Pearl River Delta, Zhujiang Delta, Yuegang’ao Greater Bay Area – but China’s National Development and Reform Commission settled on the term GuangdongHong Kong-Macau Greater Bay Area (GBA) in the English-language version of the 13th Five-Year Plan, published in December 2016.
By whichever name it is known, the GBA encompasses almost 40,000 square kilometres and 120 million people, making it the third-largest trading economy in the world, outranked only by the United States and Germany, according to Bank of America Merrill Lynch data.
Earlier estimates put the construction cost of the Hong Kong-Zhuhai-Macau Bridge at 110 billion yuan (US$15.9 billion). However, Hong Kong’s Transport and Housing Bureau said that the project has gone over budget by around 10 billion yuan, according to media reports this month.
Angello Chan, Research Analyst at the U.S. bank in Hong Kong, says the region is already a world leader in trade, logistics and innovation. “The Greater Bay Area is a prime candidate for city cluster development because it already has good integration across the region with concentrations of economically robust industries.”
For Tony Fong, Chief Financial Officer of Hong Kong-listed New Sports Group, the GBA is a potential windfall. In June this year, New Sports’ Mainland subsidiary signed a deal to acquire two property development projects within the area – in what is known as Chaoshan, the agglomeration of the cities of Chaozhou, Jieyang and Shantou in eastern Guangdong.
Fong, a Hong Kong Institute of CPAs member, says his company’s board believes the GBA will function as a positive driver for the attractive prospects of the real estate market in Guangdong. “Considerable income will be generated from the sale and lease of the commercial, residential and retail units after completion of such property development projects.”
New Sports is not the only listed property developer getting in on the GBA action. Sun Hung Kai Properties says in its most recent annual report that the GBA “will be conducive to the demand for residential properties,” while China Electronics Optics Valley Union is upbeat about its industrial parks, and announced in its 2017 interim report that it made a “breakthrough” in the GBA in April by acquiring land for projects in Hengqin.
Itching to audit
The GBA includes several free-trade areas, including pioneers such as the Shantou Special Economic Zone, set up in 1981, and relative newcomers such as the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, established in 2010.
Qianhai, with its focus on financial services, should be the centre of attention for Institute members. “We expect Qianhai to be the linchpin for the GBA as a financial and logistics centre,” says Chan at Bank of America Merrill Lynch. Within Qianhai, Guiwan will focus on finance and trade, while Qianwan is for technology and information services, and Mawan is a logistics, shipping and supply chain management hub.
The area’s development has not been without criticism. In February, Hong Kong Legislative Councillor Christopher Cheung, representing the financial services functional constituency, criticized the area for focusing primarily on big players such as HSBC and Tencent and ignoring small- and medium-sized enterprises.
At an August seminar, Witman Hung, Principal Liaison Officer for Hong Kong at the Shenzhen Qianhai Authority, said the previously implemented capital requirements of HK$5 million have been removed to make it easier for smaller companies. “Many SMEs may not know about the change in the requirements,” he told the seminar.
Hung has said that allowing Hong Kong CPAs to work in Qianhai without requiring Mainland qualifications remains a goal, but unlike architecture and engineering, auditing is a centrally supervised profession and reforms are expected to take some time.
Individual Institute members could seek more challenging management positions looking after the financial operations of new business entities in relation to investment projects within the GBA.”
“One of the hurdles for CPAs in Hong Kong to practise audit or taxation in China is the lack of mutual recognition of professional qualification between the two places,” says Jeremy Choi, Tax Partner at PwC and an Institute member.
Clement Chan, Managing Director of BDO and a past Institute president, earlier this year noted the tight restrictions on Hong Kong CPAs practising in the Mainland. He said allowing Institute members to become partners at Qianhai’s accounting firms would attract more Hong Kong firms to the area.
Fong at New Sports Group says there are opportunities despite the regulatory curbs. “CPA firms will be offered participation into various projects such as audit and financial due diligence in connection with crossborder acquisitions by listed companies in Hong Kong and multinational corporations,” he forecasts.
“Individual Institute members could seek more challenging management positions looking after the financial operations of new business entities in relation to investment projects within the GBA,” he adds.
The Mainland part of the GBA is one of the most cohesive regions in China. “The Yangtze River Delta and BeijingTianjin-Hebei region, the GBA stands out in trade openness, transport and high-tech industries,” Chan at Bank of America Merrill Lynch wrote in a September report.
However, Hong Kong and Macau, with their semi-autonomous statuses, different laws and currencies, and even traffic on the opposite side of the road to the Mainland, present many structural obstacles. “One of the potential challenges for the GBA initiative is how various administrations – Guangdong province, Hong Kong, Macau and the National Development and Reform Commission – work together,” says Dennis Lam, Equity Analyst at UBS Wealth Management Chief Investment Office.
Chinese authorities have long sought closer integration of Hong Kong and Guangdong. Despite the official closing of the Hong Kong border after the 1949 revolution, the mass exodus of Mainland Chinese to Hong Kong at that time, and again after the economic opening-up of China in the late 1970s, meant contacts between the regions have stayed strong, notes Richard Yue-chim Wong, Chair of Economics at the University of Hong Kong and a prolific author on cross-boundary issues.
Since then there have been several initiatives to more closely integrate Guangdong with Hong Kong and Macau.
In January, Hong Kong and Shenzhen announced a plan to jointly construct an international scientific and technical innovation centre on previously disputed land at the Lok Ma Chau Loop area near Yuen Long.
Some accounting firms, such as Deloitte, say they have already taken steps to coordinate their Hong Kong and Guangdong businesses. “We manage our resources from a southern China regional perspective,” says Edward Au, Co-leader of the National Public Offering Group at Deloitte China and an Institute member.
Many administrative obstacles straddle the Hong Kong-China boundary due to the former’s status as a special administrative region since 1997. “The existing immigration and customs clearance arrangements between Guangdong and Hong Kong are not smooth enough,” Legislative Councillor Holden Chow observed during a June session.
Although Hong Kong is a free-trade port, Chow pointed out that individual travellers often wait for more than an hour at the land boundary control points. But the government is keen for change with then Secretary forConstitutional and Mainland Affairs Raymond Tam responding that the government was considering suggestions to facilitate the entry of people and vehicles.
Choi at PwC says there are a number of areas requiring better intergovernmental coordination to make the GBA function properly. “The governments of the Mainland and Hong Kong can improve business and tax policies that could benefit [both] Hong Kong and China companies and individuals running businesses in the GBA,” he says.
His suggestions include allowing Hong Kong companies to set up branches in the Mainland side of GBA to reduce their financing costs and tax burden in the Mainland; reduce individual tax burden of Hong Kong residents who work in the Mainland side of the GBA; and reduce the corporate income tax burden on Hong Kong companies with permanent establishments on the Mainland side of the GBA.
Choi says the Mainland and Hong Kong governments should also enter into a social security agreement so that Hong Kong residents in the GBA who are required to make contributions to Hong Kong’s Mandatory Provident Fund are exempt from social contributions in the Mainland.
Au at Deloitte says the infrastructure developments could change the way Hong Kong and Guangdong businesses deal with each other. “With the high-speed train you could go [from Hong Kong] to Guangzhou in 48 minutes and to Shenzhen in only 20 minutes,” he points out. “The Hong Kong-Zhuhai-Macau Bridge will be a very important connection to mobilize Hong Kong CPAs travelling to Guangzhou. Despite new technology the best approach is face-to-face meetings.”
Moreover, Au adds, authorities have proposed free fund flows between Hong Kong and GBA cities in Guangdong. “More efficient fund flows would open up business to more collaboration and cooperation. This will lead to more openness among city governments.”
Hong Kong can capitalize on the opportunities arising from the GBA to reinforce and enhance its status as a global financial centre, an offshore yuan hub and an international asset management centre. “We can continue to enhance the two-way flow of cross-border yuan funds and deepen the mutual financial market access between Hong Kong and the Mainland,” suggests Choi.
Hong Kong, he adds, should be positioned as the premier financing platform for new businesses and investment in the GBA region. “This will in turn help to source new markets and diversify the investment products for the financial services industry in Hong Kong.”
The GBA has the potential to be game-changing on a national level. “While special zones tend to serve a single purpose on a small scale, we believe the GBA will develop into a world-class metropolis,” says Lam at UBS. “Through greater integration and better resource allocation, the GBA could become a major driver of economic growth for China.”
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