Opinion

Why sentiment in Greater Bay Area is deteriorating, especially in Hong Kong

Lack of concrete plans affects sentiment after brief surge on announcement of Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area

By: , and Date: November 13, 2019 Topic: Global economy and trade

The slowing Chinese economy and US-China trade war are part of the reason Hong Kong’s economy is decelerating rapidly, and the recent social unrest has only aggravated the situation. Among all the uncertainties, an important announcement for Hong Kong and Guangdong province was made in February 2019, namely the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area (GBA).

The key component for the GBA is integration. Hong Kong’s integration with mainland China itself is not a new concept. But the question is whether businesses think there are opportunities in this new initiative. After the release of the Outline Development Plan sentiment in Hong Kong surged, but the market perception has again started to revert even with further details of tax harmonisation and financial opening.

The high volatility in the GBA’s image is primarily due to a shortfall of expectations versus reality stemming from the lack of a solid timeline and government funding. More importantly, the scope of ongoing projects remained narrow as 44% of announcements made by Hong Kong firms on the GBA focus only on real estate and infrastructure. Much less is related to the comparative advantages, namely financial and legal services, tourism, health care, transport, and education.

Free movement of the factors of production, namely labour and capital, are vital to achieve an integrated economic area. However, full mobility of labour is clearly difficult and the case is even more challenging for capital as mainland China does not have a fully open capital account, not even with Hong Kong.

One of the obvious differences in terms of why the image is worse in Hong Kong is that the news in mainland China about the GBA tends to be more positive. But it is also true that the benefits for Hong Kong could be less obvious at first sight. If free labour and capital movement were achieved, convergence of income per capita should benefit the poorer cities in Guangdong more. Hong Kong could still benefit but less so in relative terms. Without perfect labour and especially capital movement, it is hard to see how the cities could truly integrate.

That sentiment on the GBA headed further south for Hong Kong after April 2019 while in mainland China it recovered seems to be related to the lack of concrete plans by the Hong Kong government when compared to Guangdong, which entailed a detailed strategic plan for the next three years. Yet given the unique status of “One Country, Two Systems” and its international recognition, Hong Kong can be a key contributor to sectors related to confidence, finance and mobility, and it needs to fully utilise its comparative advantages in order to fully realise the potential of the GBA integration.

The relatively internationally recognised legal system has served both Chinese and foreign investors well, maintaining the confidence of doing business in Hong Kong at present. This means Hong Kong is best positioned to link opportunities and solve disputes between Chinese and foreign investors through legal services, and increasingly technology-related intellectual property rights.

Finance is another longstanding strong point for Hong Kong. The abundant USD liquidity and financing ability is irreplaceable by any of the other cities in the GBA, meaning Hong Kong’s role in finance is important to attract foreign investments and fund projects in the GBA.

However, while the above components have been the catalyst for previous integration between Hong Kong and mainland China, higher mobility is the unique feature for the GBA. With freer flow of people and capital in the future, opportunities could arise when this increased mobility creates synergy with confidence and finance. Sectors with high growth could include tourism, health care, aviation and education, and laxer restrictions will mean more cross-border insurance policies or financial product sales and bring benefit to the financial services industry overall.

However, in the medium term, the key stumbling block is the free flow of factors of production, and in particular between Hong Kong and Guangdong. Free movement of labour is a lesser problem than capital, which seems impossible as it either requires Guangdong to fully open its capital account or Hong Kong to close it, at least partially. The former seems hard in today’s scenario and the latter could be risky for Hong Kong and the GBA as it would reduce its attractiveness for overseas investors and the role of Hong Kong in intermediating capital.

Therefore, it remains uncertain how the various governments can navigate the many issues without hampering the uniqueness of different systems, and the poor recent sentiment also highlights additional concerns and fundamental challenges Hong Kong faces in integrating with the rest of the GBA, and finding a balancing act on the different expectations will be an essential challenge in the future.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read about event More on this topic
 

Past Event

Past Event

Is China’s private sector advancing or retreating?

A look into the Chinese private sector.

Speakers: Reinhard Bütikofer, Nicolas Véron and Alicia García-Herrero Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 18, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

The cost of China's dynamic zero-COVID policy

What does zero-COVID mean for both China and the global economy?

By: The Sound of Economics Topic: Global economy and trade Date: May 11, 2022
Read about event More on this topic
 

Past Event

Past Event

From viruses to wars: recent disruptions to global trade and value chains

How have events in recent years impacted global trade and value chains and how can we strengthen these against future disruptions?

Speakers: Dalia Marin, Adil Mohommad and André Sapir Topic: Global economy and trade Date: April 27, 2022
Read article More on this topic More by this author
 

Opinion

China’s Covid policy to be year’s largest economic shock

Beijing’s ‘dynamic zero-Covid’ policy could devastate the domestic economy, but the effects will also be felt globally.

By: Alicia García-Herrero Topic: Global economy and trade Date: April 26, 2022
Read article More by this author
 

Podcast

Podcast

What to expect from China's innovation drive?

How much has China progressed technologically?

By: The Sound of Economics Topic: Digital economy and innovation, Global economy and trade Date: April 6, 2022
Read article More on this topic
 

Blog Post

Is the private sector retreating in China? Not among its largest companies

Though private ownership does not free companies from the pervasive influence of the Communist Party, China’s private and state sectors are not equivalent; China’s largest firms are growing faster than their state-owned counterparts.

By: Tianlei Huang and Nicolas Véron Topic: Global economy and trade Date: April 5, 2022
Read article Download PDF More on this topic
 

Working Paper

The private sector advances in China: The evolving ownership structures of the largest companies in the Xi Jinping era

This paper documents recent structural changes in China’s corporate landscape, based on company level data, providing a complementary perspective to that of official Chinese statistics.

By: Tianlei Huang and Nicolas Véron Topic: Global economy and trade Date: April 5, 2022
Read article More on this topic More by this author
 

Opinion

Early Warning Brief: China’s contorted response to Russia sanctions

The spectre of a democratic Russia aligned with the West is probably a more serious concern for Beijing than what it risks losing by supporting Russia, which is exactly why China has arrived at its contorted position on the current military conflict in Ukraine.

By: Alicia García-Herrero Topic: Global economy and trade Date: April 1, 2022
Read article More on this topic More by this author
 

Opinion

Rallying Chinese markets will not be a quick fix for Beijing

Top official makes rare intervention to reassure investors but progress to resolve problems will be difficult.

By: Alicia García-Herrero Topic: Global economy and trade Date: March 25, 2022
Read article More on this topic More by this author
 

Opinion

China can see the limits of bailing out Russia's economy

Beijing will support Moscow as long as it does not fall foul of Western sanctions.

By: Alicia García-Herrero Topic: Global economy and trade Date: March 16, 2022
Read article More on this topic
 

Blog Post

Six reasons why backstopping Russia is an increasingly unattractive option for China

China has too much to lose from aligning with Russia over Ukraine.

By: Nicolas Véron and Alan Wm. Wolff Topic: Global economy and trade Date: March 15, 2022
Read article More on this topic More by this author
 

Opinion

China offers Russia respite but not a solution

Beijing could provide greater assistance to its partner while benefiting from greater energy and military security, but this option is not without risk, nor for Moscow, which would become more dependent on the Asian giant.

By: Alicia García-Herrero Topic: Global economy and trade Date: March 14, 2022
Load more posts