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 article More on this topic
 

Blog Post

Goodbye Glasgow: what’s next for global climate action?

After COP26, and as the debate on whether Glasgow represents a success or a failure dies down, what next for global climate action?

By: Klaas Lenaerts and Simone Tagliapietra Topic: Green economy Date: November 18, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Why is China cracking down on big tech?

A look at China’s recent regulatory efforts in the digital space.

By: The Sound of Economics Topic: Global economy and trade Date: November 10, 2021
Read article
 

Opinion

COP26: why carbon pricing is crucial to China’s climate change pledges

China’s emissions trading scheme is a welcome but to reach its full potential, it needs to cover more of China’s emissions, go beyond the electricity sector and let prices reflect the true cost of carbon.

By: Alicia García-Herrero and Junyu Tan Topic: Global economy and trade, Green economy Date: October 22, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Will ‘common prosperity’ address China’s inequality?

Why is China reviving this old mantra?

By: The Sound of Economics Topic: Global economy and trade Date: October 13, 2021
Read article
 

Opinion

Xi’s pledge on financing coal plants overseas misses point

China’s domestic installation of coal-fired power plants continues at great pace.

By: Alicia García-Herrero and Simone Tagliapietra Topic: Global economy and trade, Green economy Date: October 7, 2021
Read article
 

Opinion

Will China use climate change as a bargaining chip?

Beijing shows signs of changing tactics ahead of the COP26 conference.

By: Alicia García-Herrero and Simone Tagliapietra Topic: Global economy and trade, Green economy Date: October 6, 2021
Read article More on this topic More by this author
 

Opinion

What Evergrande signals about China's economic future

Under Xi Jinping's new economic agenda 'common prosperity', China is cracking down on indebted real estate developers like Evergrande.

By: Alicia García-Herrero Topic: Global economy and trade Date: September 30, 2021
Read article More on this topic More by this author
 

Opinion

Europe doesn’t need a ‘Mega-Fab’

Europe should defend its existing dominance in equipment manufacturing for semiconductors and invest in chip design instead of luring high-end fabrication to its shores.

By: Niclas Poitiers Topic: Global economy and trade Date: September 22, 2021
Read article More on this topic More by this author
 

Blog Post

Opening up digital platforms and reducing anticompetitive risks

The current convergence in measures to open up digital platforms leaves a door open to some form of international coordination.

By: Georgios Petropoulos Topic: Digital economy and innovation Date: September 22, 2021
Read article More on this topic
 

External Publication

Investing in China: myths and realities

Concerns are real, but the country fares as well as peers at similar levels of development. Analysis published in fDi Intelligence.

By: Uri Dadush and Pauline Weil Topic: Global economy and trade Date: September 20, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

A Late Bloomer: where is China’s climate plan?

The world awaits China's concrete plan on carbon reduction, but the country is following its own pace.

By: The Sound of Economics Topic: Global economy and trade Date: September 8, 2021
Read article More on this topic More by this author
 

External Publication

What is behind China's Dual Circulation Strategy?

China's dual circulation strategy should not be dismissed as a buzzword: its implementation will entail major consequences.

By: Alicia García-Herrero Topic: Global economy and trade Date: September 7, 2021
Load more posts