City clusters will power China’s future productivity growth and the most productive will be the Greater Bay Area, which combines the nine cities of the Pearl River Delta with the Special Administrative Regions of Hong Kong and Macao.
The Greater Bay Area comprises 1 per cent of China’s land mass but has a population of 70 million and produces 37 per cent of the country’s exports and 12 per cent of its GDP. The region is already the world’s 15th largest economy but we expect its GDP to reach USD2.8 trillion by 2025, making it 9th largest. Only three countries export more than this new city cluster.
The region has led China’s industrial upgrading and innovation and accounts for most of its international patent applications. Its GDP per head, at USD21,764, exceeds the other 18 new supercities and is more than twice that of the Beijing-Tianjin-Hebei cluster, but we expect its consumer markets to double by 2025 to exceed USD900 billion.
The area’s infrastructure and logistic capabilities are unequalled anywhere in China. Hong Kong’s air and sea port facilities are among the busiest and most efficient in the world. The recently completed Hong Kong-Zhuhai-Macao Bridge crosses the Pearl River estuary while the Express Rail Link connects Hong Kong to Guangdong province and mainland China.
Shenzhen was chosen 40 years ago as the incubator of China’s economic reforms and is now its leading technology innovation hub. The 4.3 per cent of the city’s GDP spent on research and development is already more than double the national average but could reach almost 5 per cent by 2025.
The Guangdong province accounts for 22 per cent of China’s high-tech exports but that could reach 40 per cent by 2025. The province has 20,000 ‘new economy’ companies.
However, there is much still to do to secure the Greater Bay Area’s advantages. Rolling three different systems - Hong Kong, Macao and mainland China - into one region will require significant political will and resources.
China operates a relatively closed capital account with full liberalisation still a distant target but Hong Kong and Macao are already free ports with their own currencies and no capital controls. Their different policies and regulations need to be streamlined, including social benefits, labour, immigration and tax.
But high property prices and living costs deter international talent and expensive operating costs could undermine the cluster’s competitiveness. The Greater Bay Area must compete with the bigger Beijing-Tianjin-Hebei and Yangtze River Delta clusters, as well as globally.
Hong Kong offers high value-added services, including accounting, law, consulting and supply-chain management, and has also long been an international shipping hub and global financial centre. However, its most glaring inadequacy is in technological development and providing early-stage capital.
The arbitrage-trading mentality of its entrepreneurs encourages a short-term approach to investment. The high-risk associated with long-term investment fosters a scepticism towards technology start-ups. Although Hong Kong boasts the highest concentration of the world’s top 100 universities – including leaders in developing technology - they have not commercialised their innovations.
However, collaborating with Shenzhen’s market-savvy entrepreneurs should yield significant synergies.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Qu Hongbin and Kelvin Lam
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