A fine balance required for the success of China’s Greater Bay Area

Tan Chong Huat
We speak with a legal expert about the implications of the Greater Bay Area on China’s capital markets and its economic future
An interview with
Senior Partner at RHTLaw Asia and Chairman of the China ASEAN Business Alliance (CABA)

The Greater Bay Area is China’s ambitious plan to create an economic region like the San Francisco Bay and Tokyo Bay areas, but only much larger – with a population of around 71 million. The mega project entails the integration of the two Special Administrative Regions of Hong Kong and Macau with nine other Chinese cities across the Pearl River Delta, making it a financial, technological and cultural hub of the region. 

Unravel speaks with Tan Chong Huat, Senior Partner at RHTLaw Asia and Chairman of the China ASEAN Business Alliance (CABA), about the intricacies of this grand plan, its objectives, its impact on China’s economic future, and what China needs to set right to achieve its successful implementation.

Unravel: What is the key thinking behind the Greater Bay Area? What are the objectives?

Tan Chong Huat: The Greater Bay Area—a national plan unveiled by China in early 2019—aims to integrate China’s two Special Administrative Regions, Hong Kong and Macau, and the nine cities across the Pearl River Delta, namely Guangzhou, Huizhou, Dongguan, Shenzhen, Jiangmen, Zhuhai, Zhongshan, Foshan and Zhaoqing.

The Greater Bay Area region comprises a total population of about 71 million people and has an estimated GDP of about $1.6 trillion – making it the world’s 13th-largest if it were a standalone economic entity. However, despite being economically significant, integration has been difficult due to the diversity of the region. An illustration is how Hong Kong, Macau and Guangdong provinces are each governed by different administrative systems and use different currencies – the Hong Kong dollar, Macanese pataca and Chinese yuan respectively.

The principal goal of the region is to promote deeper cooperation within the region through easing the flow of goods, people and capital, so as to optimise the allocation of resources and facilitate the growth of emerging industries (especially the fintech, blockchain, artificial intelligence and big data industries – or rather the Internet of Things industry) to boost China’s economy.

The Greater Bay Area, with its significant economic size, certainly has the potential to reshape China’s economic future in terms of fostering a more vibrant domestic market and paving the way towards the internationalisation of the renminbi. But for now, it is a ‘sandbox’ for China’s next steps of market liberalisation.

With the impact of the COVID-19 pandemic forcing countries to be more self-sufficient due to the sharp decline of international tourism among other domestic issues, China’s embracing and implementation of the Greater Bay Area strategy is more timely than ever.

Unravel: What is the importance of the Greater Bay Area to the development of capital markets in China? And how does it change anything in a material manner for foreign capital?

Mr Tan: Historically, China has largely been an isolated market. The experimentation in the Greater Bay Area will unlock some of its domestic capital and drive inflows of foreign capital as restrictions are relaxed gradually.

Access to funding will be facilitated by the freeing of capital movements within the region, which will in turn result in increased movement of capital internationally between China and the rest of the world. Further innovation of the fintech sector will also accelerate global connectivity.

Residents in China will be able to tap into new pools of internationally managed assets in the pursuit of increased economic growth, and the ecosystem of the domestic landscape will be broadened as a result of increased participation of both Chinese and foreign asset managers, banks and other service providers.

China’s asset management industry is growing rapidly. According to the World Economic Forum, the assets under management in China has reached approximately RMB112 trillion ($16 trillion) at the end of last year. Further, as the asset management industry in China is still relatively young, a significant portion of Chinese wealth remains held in bank deposits amounting to approximately RMB200 trillion ($28 trillion).

Therefore, further to the gradual liberalisation of the industry, which will impact not only China’s capital markets ecosystem but its society at large for years to come, the potential access to a market the sheer size of China’s by foreign capital markets and vice versa is in itself material.

A challenge for China in allowing its citizens to partake in international capital markets, however, will be determining how to avoid, or at least limit, exposure to foreign financial sanctions.

Unravel: How do you expect it to impact the status of Hong Kong as a financial hub?

Mr Tan: While the future of Hong Kong is inherently tied to that of China’s, Shenzhen being designated by President Xi as the “important engine” of the Greater Bay Area must be a wake-up call for Hong Kong. Last month, Beijing released a package of reforms giving Shenzhen—a manufacturing and technology hub which houses Huawei Tech City and neighbours Hong Kong—greater autonomy to carry out its own reforms to power growth and innovation in the Greater Bay Area, and President Xi travelled to the city to mark its 40th anniversary since its naming as a special economic zone by Deng Xiaoping. The plan allows Shenzhen more latitude in areas such as land use, technology and innovation, the big data economy and the hiring of foreign professionals.

Shenzhen is often cited by Chinese leaders as an example of Beijing’s effective governance, and this designation of Shenzhen’s role in the Greater Bay Area appears to show how Shenzhen may have taken over the role that Hong Kong used to hold as a model for mainland development, thereby diminishing Hong Kong’s role in the national strategy.

In the same speech designating Shenzhen to be the Greater Bay Area’s engine, rather than highlighting Hong Kong’s role as an international financial centre within the Greater Bay Area project, President Xi called on the young people of the Hong Kong and Macau special administrative regions to contribute to its success and to live and work in the area instead.

The key challenges for Hong Kong will be whether it can retain its international status as a financial hub, while also being a technology and innovation hub. However, I foresee Hong Kong to still play a role, particularly in the financial services sector, in terms of accelerating China’s plans to liberalise its financial markets. Further, being the only city in the Greater Bay Area that adopts common law, Hong Kong is uniquely placed. For example, it also has the potential to be the intellectual property (IP) hub of the Greater Bay Area, as the IP registration system in Hong Kong as compared to that in China will be more familiar to international parties.

Unravel: Do you expect the Greater Bay Area to have a big impact on China’s economic future?

Mr Tan: The sheer size and complexity of China’s capital markets and financial system make liberalisation a challenging task. China has to resort to ‘controlled experiments’ to mitigate potential shocks to its system. The Greater Bay Area, with its significant economic size, certainly has the potential to reshape China’s economic future in terms of fostering a more vibrant domestic market and paving the way towards the internationalisation of the renminbi. But for now, it is a ‘sandbox’ for China’s next steps of market liberalisation.

If social and economic integration can be achieved alongside the physical integration of the cities, the movement of human capital, goods and services will be much smoother, the development of the Greater Bay Area can be accelerated, and the impact on China’s economy will be evident more rapidly.

An example of the impact the Greater Bay Area can have on China’s economic future will be in the asset management industry. The Greater Bay Area region has a deep pool of its residents’ renminbi savings. When capital is able to flow more freely within the Greater Bay Area, these savings of retail investors’ may then be released into the region’s financial markets, especially with the demand for globally diversified investment products and services on the rise. Industry participants in Hong Kong can play a critical role in this as the Greater Bay Area region can tap into Hong Kong’s international experience, as well as its legal framework and best practices, which are already familiar to international counterparties.

The different cities that are a part of the Greater Bay Area present a region of diverse industries, experiences and reputations that taken together, can make for a strong comparative advantage in technology, logistics and transportation.

Touted as China’s Silicon Valley, the Greater Bay Area is already home to some of the largest technology companies, including Tencent Holdings, Huawei Technologies and drone-manufacturer DJI in Shenzhen.

In February 2019, the China’s State Council released the Outline Development Plan for the GBA, a chapter of which highlights the importance of developing the Greater Bay Area into an international IT hub. Specifically, it aims for coordinated innovation in the region, to develop quality IT carriers and platforms, and to enhance the environment for innovation in the region. The plan specifies four cities at the core of its aims – Guangzhou, Shenzhen, Hong Kong and Macau. It is envisioned that Guangzhou will likely take the role of a national city and cultural centre, Shenzhen Special Economic Zone as the innovation and technology hub, Hong Kong Special Administrative Region as the international finance, shipping, trade and aviation hub, and the multicultural Macau Special Administrative Region as a tourism and trade platform.

Other Greater Bay Area cities also have roles to play, for example Zhongshan with its experience in designing and manufacturing medical devices, and Foshan with its edge in industrial manufacturing. Through leveraging and developing each cities’ strengths, the Greater Bay Area has a strong foundation on which to commercialise its IT projects.

However, the development of the Greater Bay Area hinges on how well transport links connecting the cities within the region are capitalised upon. The Hong Kong-Zhuhai-Macau (HKZM) bridge, which opened in October 2018, is a key link for the Greater Bay Area, as it significantly reduces travel time between the cities. For example, the time taken for cargo to travel between Hong Kong to Zhuhai has decreased from approximately three and a half hours to about one hour and fifteen minutes. Yet, the bridge has been underutilised. According to the HKZM Bridge Authority, the average daily traffic flow in 2019 ranged between 2,416 and 4,791 vehicles, far from the 9,200 vehicles projected by the Hong Kong government in 2008.

The HKZM bridge enables those within the Greater Bay Area to move more freely, even to choose to live and work in different cities across the region. If social and economic integration can be achieved alongside the physical integration of the cities, the movement of human capital, goods and services will be much smoother, the development of the Greater Bay Area can be accelerated, and the impact on China’s economy will be evident more rapidly.

Unravel: Some reports suggest the project is too large and progress has been uncoordinated. What are your thoughts?

Mr Tan: China has never shied away from large initiatives. An example from recent history is the Belt and Road Initiative that was launched in 2013, an infrastructure project on a massive scale that sought to link more than 60 countries from Asia, Africa and Europe through rail and maritime trade routes. In 2019, this programme was expanded even further to encompass technology, rather than just its original hard infrastructure projects.

China will have to strike the delicate balance of bringing barriers between the cities down, while still making the most of each city’s individual strengths.

The development of China’s international ambitions is evident from the titles of its national plans over decades. From ‘Made in China 2025’ (the national plan released in 2015) to being set to release a new plan this year named ‘China Standards 2035’, it is clear that China is aiming not only to contribute to the global manufacturing industries, but rather to shape the landscape of technology and define how telecommunications and technologies work, and to ensure its integration and operability around the world. Of course, these global ambitions are rooted in domestic performance and the need to improve domestic efficiency and economy.

In an increasingly interconnected world, perhaps it is time to reconsider the traditional yardsticks we use to measure scope and progress.

With respect to coordination, as touched on in the previous question, due to the huge size and complexity of its capital markets, China turns to ‘pilot programmes’ to mitigate potential shocks to its economy, and also to ensure it has the flexibility to change its course swiftly if needed. This comes at the expense of consistency, and the cities involved in the Greater Bay Area project are inherently diverse. Indeed, one of the objectives of the Greater Bay Area project is the promotion of cooperation within the region. Therefore, it seems natural at this early stage that there will still be competition and a lack of coordination between the cities.

Coupled with the anti-government protests in Hong Kong, the COVID-19 pandemic, the rift between China and the US in particular over technology, and the international reactions to the national security law implemented in Hong Kong, it was predictable that the momentum of the project would slow, just like domestic projects all across the world this year.

The challenges that China could face during the course of this project will likely stem from each city’s distinct rules, qualifications and standards, which will result in difficulties of cooperation and financing, as well as a lack of mutual recognition and, following the Hong Kong protests, perhaps even respect, for the professional qualifications of each city.

China will have to strike the delicate balance of bringing barriers between the cities down, while still making the most of each city’s individual strengths.

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Senior Partner at RHTLaw Asia and Chairman of the China ASEAN Business Alliance (CABA)

Mr Tan Chong Huat is the senior partner and one of the founding members of RHTLaw Asia, the non-executive chairman of RHT Group of Companies and the chairman of China ASEAN Business Alliance (CABA), a regionally focused think tank and business network. He is a leading finance and corporate lawyer, a successful entrepreneur and investor, and a dedicated law professor. Mr Tan is also active in public service and charity work. He sits as a council member in the Singapore Road Safety Council and is chairman of the RHT Rajan Menon Foundation. He has also established a National University of Singapore Grant in favour of the Law Faculty. An award named RHT Tan Chong Huat Corporate Crime Award has also been established by the School of Law, Singapore Management University.

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