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The Greater Bay Area Initiative: A survey on key drivers for success

By KPMG

We are living in exciting times for Southern China. Nowhere is this seen more clearly than in the ambitious plans being drawn up for the Greater Bay Area initiative, and its goal of building a world-class city cluster across the Guangdong-Hong Kong-Macau region. By 2030, the region is expected to play a leading role in advanced manufacturing, innovation, shipping, trade and finance.

The proposed initiative is a testament to the region’s economic development and significance. Last year, the combined GDP of the 11 cities in the area reached US$1.4 trillion, or 12 percent of the national economy, even though it is home to only 5 percent of the country’s population.

As the area develops, its influence is likely to extend beyond the geographical boundaries of its city cluster to play a key role in China’s Belt and Road Initiative, serving as a key link connecting countries along the 21st century Maritime Silk Road.

The purpose of this report is twofold: to highlight the key issues confronting the Greater Bay Area’s development, and to offer a market view of the Greater Bay Area. This was gathered from a survey of 614 business executives at companies operating in the region that was jointly devised and conducted by KPMG, the Hong Kong General Chamber of Commerce (HKGCC) and YouGov.

In addition to the survey, KPMG and HKGCC conducted several interviews with companies operating in the region for their viewpoints. The interviewees are from diverse backgrounds, including both state-owned and privately-owned enterprises, as well as small and medium-sized companies.

We would like to express our gratitude to all our survey respondents for their input, and to the executives who kindly agreed to be interviewed for this report. We hope that our findings will prove useful to understanding the challenges and opportunities facing the Greater Bay Area and its development in the coming years.

Executive Summary

Businesses overwhelmingly support China’s Greater Bay Area initiative, according to a YouGov survey commissioned jointly by KPMG and the Hong Kong General Chamber of Commerce. The two-month survey was conducted in June and July 2017 and received responses from 614 business executives in Hong Kong (410), Guangzhou (91), Shenzhen (82) and other GBA cities (31). Of the total respondents, close to 65 percent were at a senior management level, while around 35 percent were middle management or below. The companies they represent were from a wide range of industries, including manufacturing (157), distribution (143), e-commerce (73), retail (70), logistics (58), and others. The idea of Hong Kong, Macau and Guangdong working together to create GBA resonated with the survey respondents with 80 percent indicating their support for integrated development across the region.

The strongest backers were those working in Shenzhen, with 85 percent of those polled supporting the project, followed by Macau (83 percent), Hong Kong (80 percent) and Guangzhou (78 percent).

In addition, the respondents highlighted improved corporate synergies, a freer flow of talent and enhanced abilities to penetrate markets as the leading benefits to arise from the initiative. Many respondents (37 percent) believed the GBA will be able to rival the Greater Tokyo Metropolitan Area in terms of economic scale in a decade’s time. Fewer see it rivalling San Francisco Bay (32 percent) or Greater New York (28 percent).

Hong Kong respondents are the most optimistic about the GBA’s competitiveness. More respondents with Hong Kong-based operations – 41 percent of those surveyed – believed that the GBA would be on par with the Greater Tokyo Area in a decade’s time compared to those with operations based in mainland China – 34 percent of the total.

The sectors seen as most likely to benefit from the area’s development are trade and logistics (68 percent), financial services (62 percent) and R&D in innovative technologies (60 percent).

There are, however, challenges to be overcome in order for the GBA to fulfil its ambitions. Those surveyed identified protectionism and other measures that hinder cooperation as the biggest hurdle to the area’s development, followed closely by silos between and within GBA governments.

On the other hand, companies also see government support as the most important factor for the region’s success, followed by the rule of law and infrastructural support. As a result, how governments choose to participate and be involved will be crucial in determining the future of the Greater Bay Area.

Greater Bay Area Overview

The Greater Bay Area (GBA) initiative’s goal is ambitious: combining Hong Kong, Macau and the cities of Guangdong’s Pearl River Delta to create a region with the economic heft that is comparable to the San Francisco Bay Area, Greater New York and the Greater Tokyo Area. To succeed, the relevant infrastructure, policies and regulations will all have to be in place to ensure people, goods and services are able to flow freely within the region.

China’s transformation from an agricultural economy into a manufacturing powerhouse over the past few decades has been nothing short of phenomenal. The country is in the midst of another major shift towards a service driven economy and nowhere is this truer than in the Pearl River Delta, where Shenzhen, for example, is one of the world’s leading high-tech innovation centres.

The region is also at the heart of a network of supply chains that link Guangdong to the rest of the world and is able to draw on a strong manufacturing base. Last but not least, the region is also supported by Hong Kong’s world-class financial and professional services industries.

The further growth of the region, however, calls for greater coordination of financial, material and human resources – hence China’s decision to push for the establishment of GBA.

This landmark initiative aims to bring together the key cities of the Delta region to build a new powerhouse – one that is comparable to other city clusters such as Greater Tokyo Area, San Francisco Bay Area and Greater New York.

The right numbers

The GBA’s eleven cities have a total population of nearly 67 million, which is greater than the Tokyo Metropolitan Area - the world’s largest city cluster with a population of 44 million. The GBA also has a combined GDP of US$1.34 trillion, which is lower than the US$1.61 trillion of Greater New York and US$1.78 trillion of Greater Tokyo.

Hong Kong remains the single biggest economy of the area, but only just. Its GDP, at US$319 billion in 2016, is likely to be overtaken by Guangzhou (US$285 billion) and Shenzhen (US$283 billion) in the foreseeable future.

High-level backing

The concept of GBA dates back to 2011 with a study called “The Action Plan for the Bay Area of the Pearl River Estuary” that was jointly prepared by officials from Hong Kong, Macau, Shenzhen, Dongguan, Guangzhou, Zhuhai and Zhongshan. The idea of a city cluster in Southern China was reinforced when the 13th Five Year Plan (2016-2020) was endorsed in March 2016. Premier Li Keqiang subsequently announced in the annual government report in March 2017 that the authorities were going ahead with the initiative.

This led to a framework agreement in July 2017, which was signed by China’s top policy-making body, the National Development and Reform Commission (NDRC) and the governments of Guangdong, Hong Kong and Macau.

One of the GBA’s key objectives is to improve the level of cooperation within the region. This includes identifying the core competitive advantages of the cities within GBA and exploring ways for them to complement one another. One example of this is to build on the strengths of Hong Kong’s financial and professional services sectors, Shenzhen’s high-tech manufacturing and innovation skills, and the manufacturing strengths of Dongguan and Guangzhou.

Within China, the GBA has the potential to extend its reach beyond the Pearl River Delta to the nearby provinces of Fujian, Jiangxi, Hunan, Guangxi, Hainan, Guizhou and Yunnan. Beyond China, it will be aiming to reach markets in Southeast and South Asia.

The development of the area should also act as a catalyst for China’s Belt and Road Initiative - an ambitious strategy that aims to link the economies along the Silk Road Economic Belt (Central Asia to Europe) and the Maritime Silk Road (South Asia to Africa and the Middle East) together.

The cities of the area offer a wide range of skills and services, and they should develop according to their comparative advantages. One possible approach would be for R&D to be conducted in Shenzhen, Hong Kong or Guangzhou and manufacturing to be carried out in Dongguan and other cities across the Delta.

Companies can take advantage of Hong Kong’s “one country, two systems”, which makes it a part of China but with its own legal and financial regimes. They can also tap into Hong Kong’s status as the gateway between China and the world and as an international financial centre for fundraising, asset and risk management, corporate treasury services, insurance and re-insurance and, more recently, offshore renminbi services.

In addition, the region already possesses some of the most efficient supply chains in the world as well as a well-developed talent pool fluent in English and Chinese.

Next steps

Enhanced cross-border movements of capital, people, goods and services within the GBA are essential for the region’s successful development. As cities in the GBA fall under different customs zones as well as legal and administrative systems, improvements in cross-border movements are highly dependent on cross-institutional cooperation and efforts.

The most pressing issue is for local governments within the region to collaborate on a broad range of topics. This includes economic policies, environmental and transport issues, and regulatory harmonisation.

There is evidence that officials are looking for ways of making progress in all these areas. One example is the Guangdong free-trade zone, which was launched in 2015 across 60 square kilometres of the Nansha New Area in Guangzhou, 28 square kilometres of the Qianhai and Shekou areas in Shenzhen and 28 square kilometres of Hengqin in Zhuhai.

This was followed by the proposed development of the Lok Ma Chau Loop when Hong Kong and Shenzhen signed an agreement in January 2017 to transform a stretch of land on the border between the two cities into an innovation and technology park.

Moreover, the completion of the Zhuhai-Hong Kong Macao Bridge and the Express Rail Link will improve land connectivity and induce more cooperation among GBA cities. These projects, in combination with many other initiatives, will make the GBA a key contributor to the further opening up of the Chinese economy.

Looking Ahead

The development of the GBA is a key priority for Hong Kong. To take full advantage of the opportunities this initiative presents, Hong Kong must focus on three key areas. First, the sectors with the biggest competitive advantages: international finance, shipping and logistics, offshore renminbi transactions and dispute resolution. Second, the unique features offered by the “one country, two systems”, notably Hong Kong’s adherence to the rule of law. Thirdly, the city’s strength in combining its proximity to the GBA’s manufacturing base with its connectivity to the rest of the world.

The key to developing the GBA will be finding ways of cooperation that unify and optimise the region’s city economies. With the cities of the GBA falling under different customs zones and legal and administrative systems, improvements in cross-border movements will depend very much on efforts to strengthen institutional cooperation and collaboration across the region. Success, however, will allow the region to move towards enhanced – preferably seamless – cross-border movements of capital, people, goods and services.

Over the past few decades, the GBA cities have each developed their own unique advantages, economic structures and needs. To help companies become more aware of these, the Hong Kong government should set up a GBA Office to formulate proposals, strategies and policy directions. The GBA Office will be responsible for defining Hong Kong’s potential participatory role in the area’s development and economic growth, coordinating with relevant governments in the region, and disseminating official GBA information to the public.

Hong Kong should develop an overall development strategy with the goal of drawing up a comprehensive region-wide plan aimed at strengthening cooperation with Shenzhen and other cities across the GBA.

To strengthen capital flows within and beyond the GBA, Hong Kong should utilise its established financial infrastructure to facilitate RMB internationalisation, expand the various cross-border share and bond trading schemes to include a “Commodity-Connect”, and bolster its status as the region’s asset management centre.

The government should use the Lok Ma Chau Loop to test a range of pilot schemes, such as providing special work visas for GBA residents and ensuring that research funding sourced from Hong Kong and the mainland can be used by research institutes established there.

With the completion of the Zhuhai-Hong Kong-Macao Bridge and the Express Rail Link in sight, ways to improve the cooperation between the region’s airports for both passengers and cargo should be explored. GBA cooperation can also help Hong Kong achieve breakthroughs in areas where the city has encountered bottlenecks in recent years. This includes waste management, housing, education and opportunities for young people, and elderly care.

As Asia’s most dynamic economic region, the GBA will be an important growth engine for mainland China in the coming years.

Success, however, will depend on mutual collaboration and cooperation.

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