By Mark Preen
In 1978, China launched a policy of “reform and opening-up”, which catalyzed the economic development of modern day China. Leading the way in the implementation of this policy was South China’s Pearl River Delta (PRD) region.
Today, the PRD is one of China’s most open and dynamic regions. The PRD is known as “The Factory of the World” and in 2016 the combined GDP of the 11 cities in the region was RMB 9.35 trillion (US$1.38 trillion). This accounted for 12 percent of China’s economy that year, even though the region only accounts for five percent of the country’s population. If the region were a country, it would be the fifth largest economy in Asia.
Despite its success, the Chinese government will not allow the PRD to rest on its laurels. As the region faces increasing competition from countries such as India and Vietnam for low-cost manufacturing, the PRD must become even more open and innovative by taking a leading role in China’s next stage of economic development.
With the signing of a framework agreement in July 2017 between the National Development and Reform Commission (NDRC) and the governments of Guangdong, Hong Kong, and Macau, the PRD has been placed at the center of an ambitious new initiative. The initiative, first introduced in China’s 13th Five Year Plan, aims to transform the PRD into the “Guangdong-Hong Kong-Macau Greater Bay Area (GBA)” by further integrating Hong Kong, Macau, and nine cities in Guangdong so that they become a world class city cluster.
If the initiative develops according to plan, the region will be transformed from “The Factory of the World” to a dynamic hub of innovation and services with a GDP of US$4.62 trillion by 2030. This means that the PRD will overtake rival bay areas in Tokyo, New York, and San Francisco to become the biggest in the world in terms of GDP.
Greater Bay Area integration plans
Valeria Manunza, International Business Advisory Assistant Manager at Dezan Shira & Associates’ Guangzhou office, said, “Alignment of infrastructure development is the key to an integrated and evolving Greater Bay Area”.
To achieve this, the initiative includes three key infrastructure projects. Firstly, there is the Hong Kong-Zhuhai-Macau Bridge, which will likely open in 2018 and significantly reduce travel times from Hong Kong to Zhuhai and Macau. Secondly, there is the Express Rail Link, which is due to open in 2018 and will connect Hong Kong to Shenzhen and Guangdong, and subsequently to China’s vast high-speed rail network. Finally, there is the Shenzhen-Zhongshan Corridor, which is an eight-lane highway that will reduce travel time between Shenzhen and Zhongshan/Jiangmen by approximately 30 minutes after its completion in 2024.
A more physically integrated GBA will also put the region in a stronger position to achieve two other important parts of the initiative: increasing the economy’s value adding capabilities and boosting internationalization, both of which are also important more broadly for China’s next stage of economic development.
To foster a region that adds more value in its economy, the initiative plans for the region to become an important global center for advanced manufacturing and to focus on innovation, finance, shipping, trade, and leisure. These are areas where the GBA is already strong, with different cities having already established their own unique strengths.
Hong Kong is known as a world financial center; Shenzhen is known as China’s “Silicon Valley” because of its innovation and startup culture; Guangzhou is known for its manufacturing industry and as a logistics hub; and Macau and Zhuhai are known for leisure and tourism. A more integrated and open GBA will allow for the further development of these industries. For example, the completion of the three key infrastructure projects will make it easier for middle-class consumers to escape to Macau and Zhuhai for the weekend.
Other projects in the pipeline will also help the region to move up the value chain. The Guangdong Free Trade Zone will make the region more open to international investment in the targeted industries. Further to this, in January 2017 China and Hong Kong agreed to build the Lok Mau Chau Loop Technology Park. Located in Hong Kong right on its border with Shenzhen, the park will allow Hong Kong to tap into Shenzhen’s booming innovation and startup ecosystem whilst also retaining Hong Kong’s strong legal system and business environment.
The initiative will have international impacts beyond the GBA, as the region is located on the maritime section of China’s ambitious Belt & Road Initiative. Manunza noted, “The region is already China’s most international region, with Guangdong province representing 26 percent of China’s trade and 28 percent of China’s exports.” Further to this, Manunza said, “A business that is already established in the Pearl River Delta region will be offered the opportunity to expand its range and use the region as a springboard to shift towards a more international approach.” Companies located in the region that have already made this shift include Chinese tech giants Huawei and Tencent.
As an international city with a highly developed professional services industry and RMB convertibility, Hong Kong can assist Chinese companies to achieve these global ambitions, just as it has traditionally assisted international companies in achieving their ambitions in mainland China.
A more integrated GBA will help make businesses in the region more competitive as they will be more integrated into both local and global supply chains. Businesses will also be able to increase their competitiveness by relocating to new development hotspots, such as Zhongshan, Zhaoqing, and Huizhou, where rents and labor costs are lower than Shenzhen and Guangzhou.
For the initiative to be successful and for the whole region to be more internationally competitive, cities in the GBA must move away from unhealthy duplication and low-value manufacturing. Manunza observed, “The idea is to strengthen the cooperation among the cities within the region by focusing more on their competitive advantages and unique strengths, to create a system in which each city is able to complement one another”. In turn, this will help maximize synergies between the cities.
However, the region will have to overcome silos between cities, especially those between Guangdong province, Macau, and Hong Kong. Currently, the region is less integrated than the European Union (EU). “A successful GBA project,” Manunza said, “will only arise when each single city in the region is able to prioritize the Bay Area’s benefits over individual ones.”
For example, several sectors in the Chinese mainland are still closed to investment from Hong Kong despite the signing of the Closer Economic Partnership Agreement (CEPA) in 2003. According to Manunza, important sticking points between the regions include currency use, immigration rules, and corporate tax rates. Therefore, as well as infrastructure projects, the region will require more harmonized policies and regulations so that goods, services, capital, and people can move more freely within the region.
The region will also need to attract international talent if it is to be more innovative and rival other bay areas, such as San Francisco, which is known for attracting leading talent from all around the world. In its quest to become a world innovation center, Shenzhen already offers incentives such as tax breaks to attract talent and investment. Despite these programs, Manunza cautioned, “The region will need to give more tax relief to make it more attractive, as well as infrastructure investment, which will be important to the development of the GBA and its future success”.
While the GBA initiative faces an array of practical hurdles, it is clearly ambitious, and offers great potential and opportunities. If the ambitions of the initiative are realized, the GBA will rival other great bay areas in the world, and transform the region into a global economic and business hub.
China Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Asia, including ASEAN, India, Indonesia, Russia, the Silk Road, and Vietnam. For editorial matters please contact us here, and for a complimentary subscription to our products, please click here.
Dezan Shira & Associates is a full service practice in China, providing business intelligence, due diligence, legal, tax, IT, HR, payroll, and advisory services throughout the China and Asian region. For assistance with China business issues or investments into China, please contact us at firstname.lastname@example.org or visit us at www.dezshira.com
Dezan Shira & Associates is a pan-Asia, multi-disciplinary professional services firm, providing legal, tax and operational advisory to international corporate investors. Operational throughout China, ASEAN and India, our mission is to guide foreign companies through Asia’s complex regulatory environment and assist them with all aspects of establishing, maintaining and growing their business operations in the region. This brochure provides an overview of the services and expertise Dezan Shira & Associates can provide.
This Dezan Shira & Associates 2017 China guide provides a comprehensive background and details of all aspects of setting up and operating an American business in China, including due diligence and compliance issues, IP protection, corporate establishment options, calculating tax liabilities, as well as discussing on-going operational issues such as managing bookkeeping, accounts, banking, HR, Payroll, annual license renewals, audit, FCPA compliance and consolidation with US standards and Head Office reporting.
In this issue of China Briefing magazine, we analyze macro-level foreign investment trends into China, and how the high-tech sector stands out above others. We then shift our focus to China’s healthcare sector in the context of policy reforms and demographic changes. We also examine how to invest in China’s education industry and how China’s war on pollution introduces new opportunities for foreign investors.