HONG KONG—The economic development of China’s Greater Bay Area (GBA) is being driven by ambitious infrastructure projects, but the less tangible side of integrating the region’s cities offers the greatest challenge.
In February, China released its outline development plan for the GBA, which consists of nine cities in the southern province of Guangdong—Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen, and Zhaoqing—and the special administrative regions of Hong Kong and Macau.
“We are all very committed to building a bay area economy which is open, international, which will consist of an international innovation and technology hub, which has the personal support of President Xi Jinping,” said Carrie Lam, Hong Kong chief executive, introducing the plan to the public.
China’s government wants to integrate these cities, clustered around the Pearl River Delta, into a single bay area, similar to areas encompassing New York City, Tokyo, and San Francisco, as a focus for innovation and economic growth. The plan is also explicitly intended to bring Hong Kong and Macau— which each have tax and legal systems that differ from each other and from that of Mainland China— further into the orbit of the mainland.
The GBA has a population of 70 million (though some estimates claim 120 million) and accounts for 12 per cent of China’s gross domestic product (GDP), so it already makes a significant contribution to the economy even though it accounts for less than 1 per cent of the country’s land mass.
In addition to the mature economy of Hong Kong, Shenzhen and Guangzhou have been drivers of regional growth. Shenzhen has special economic zone status, which has helped it grow to a population of 12 million over the past 30 years. Guangzhou has become the region’s manufacturing hub, and many factories have relocated there from Hong Kong.
However, China needs more from the region as the nation’s overall growth slows. China’s GDP growth, which averaged 8 to 10 per cent in the early 2000s, is forecast by the World Bank to drop to 6.2 per cent this year. Many economists are sceptical about that projection: London-based economic research consultancy Capital Economics, for example, believes China’s GDP will only grow 4 to 4.5 per cent this year. Regardless of the actual number, China is under pressure to deliver growth, and integration of the GBA is intended to deliver a boost.
By integrating the region, the government wants to expand high-value businesses such as technology, finance, and tourism in the four key cities of Shenzhen, Guangzhou, Hong Kong, and Macau and hopes lower-value businesses from those cities will migrate to the less-developed cities of Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen, and Zhaoqing. Beijing’s economic ambitions for the GBA are remarkably specific: the GBA development plan states that the region’s GDP should hit $4.62 billion by 2035, surpassing the projected GDP figures for Tokyo and New York City for that year.
Integration of the GBA will be the main investment theme for real estate in Southern China in the coming years, so it was the centre of discussions at ULI’s first Asia Pacific Leadership Convivium, held in Shenzhen during March.
“We can expect to see [that] there will be a huge inflow of capital—financial capital, human capital—from the rest of China and from the rest of the world into this region,” Marcos Chan, head of research for Southern China and Hong Kong at CBRE, said at the convivium.
Investment in infrastructure is the primary means of generating these flows. China began planning integration of the GBA in 2008 and set about building new roads, bridges, and high-speed rail links. The GBA is currently served by 1,640 kilometres (1,019 mi) of intraregional and intercity trains. Upon completion of the 10 railway projects now under construction, this network will grow to 2,370 kilometres (1,500 mi), bringing most cities in the region within one hour of Hong Kong, Shenzhen, and Guangzhou. For example, the high-speed rail link between Guangzhou and Shenzhen has brought travel times down to 47 minutes from two hours.
The outline development plan predicts an overspill effect from the more prosperous hub cities. Hei Ming Cheng, founder and chief executive of Hong Kong–based China investment manager KaiLong, noted at the convivium that the cost of an apartment in Hong Kong is more than twice per square foot that of one in Shenzhen, and Guangzhou apartments are half again that cost. “So if you cannot afford to live in Hong Kong, you can move to Shenzhen or Guangzhou or from Shenzhen to Guangzhou. You can still get to work in an hour.”
Hei suggested that Hong Kong, Shenzhen, and Guangzhou will be the major beneficiaries of the GBA integration. “In the medium to long term, Shenzhen and Guangzhou have the highest potential,” Hei said. “We have been looking at investing in both cities. I am a big believer in Shenzhen.”
Chan said growth in those two cities will, in turn, spread to other cities. “The brisk growth of Guangzhou and Shenzhen will have a significant spillover effect on neighbouring cities, driving population growth and industrial upgrading,” he said. “This will facilitate economic development and boost property demand. Dongguan and Foshan will likely benefit the most in this regard, along with Huizhou.”
Between July 2017 and January 2018, residential property prices in Foshan rose 35 per cent, the biggest increase among all the cities in the GBA, according to Hong Kong real estate broker Centaline. Measures introduced to cool residential property prices in neighbouring Guangzhou are partly responsible, but prices in Foshan are also little more than half those in Guangzhou. This effect suggests both that the integration of the GBA is starting to work and that real estate investors might look to the secondary cities to find the best value.
The GBA offers Hong Kong’s developers a prime chance to expand their businesses, said Chan. “The Chinese government has set aside plenty of land for future economic development,” he said. “This is particularly important for Hong Kong–based developers because if they just focus on Hong Kong, then they can only compete for less than one square kilometre [0.4 sq mi] of development land, whereas 700 sq kilometres [270 sq mi] has been set aside for development in the rest of the GBA.”
While billions of dollars have been spent on the physical integration of the GBA, the administrative links will be harder to forge. “It is not an easy task,” Hei said. “There are a lot of challenges to get over. There are three different social systems, three different tax and legal jurisdictions, and three currencies.“
The outline development plan indicates that the Chinese government does not envision total freedom of movement in the GBA. A number of measures will make it easier for residents of Hong Kong and Macau to live in Guangdong, but residents of Mainland China will not have the same freedoms in Hong Kong.
Taxation will also be a problem. Hong Kong imposes a flat 15 per cent income tax, whereas Mainland Chinese workers pay a top rate of 45 per cent. Plans have been introduced to allow senior Hong Kong professionals tax rebates if they live and work in Guangdong, but this will not apply to junior workers.
Concerns have been raised in Hong Kong about the status of “one country, two systems”—introduced following the British handover of Hong Kong to the People’s Republic of China in 1997—which maintains the city’s distinct status and its legal system based on British law. It is intended to be maintained until 2047, but widespread concerns exist that it will be eroded before then and the additional freedoms long enjoyed by Hong Kong residents will disappear.
The outline development plan makes repeated references to China’s “opening up” and the need to develop an “open economy,” indicating a desire to continue with China’s moves towards a more market-based economy. However, there are no similar mentions of any intent to make Chinese society more open or to change its legal system to move towards the Hong Kong model.
Concerns were raised at the convivium that Hong Kong real estate prices might fall as people and companies move to take advantage of cheaper property and higher growth in the GBA. Nonetheless, both Chan and Hei insisted that Hong Kong property will be a major beneficiary of the integration. Furthermore, Hong Kong’s plans for a third central business district built on reclaimed land suggest that the city authorities are more concerned about undersupply of real estate than oversupply.
Undoubtedly there will be GBA winners and losers, says Chan. “Individual cities will undergo very different development paths, subject to their own industry base and locality,” he said. “Much of the future economic activity and resources will be concentrated in the central part of the GBA alongside the two coasts of the Pearl River.”
Another criticism of the plan is that it is too abstract, setting out a series of ambitions but not giving much indication about how they will be achieved. However, Hei said, “the outline development plan is not meant to explain every detail, but it shows that the government recognises what needs to be done.”
Doubts also exist about the usefulness of all the infrastructure that has been built. The 55-kilometre (34 mi) Hong Kong–Zhuhai–Macau Bridge, completed last year at a cost of nearly $19 billion, is the most noticeable physical manifestation of GBA integration. However, it is also a symbol of the difficulties, first because it connects two areas where motorists drive on the left side of the road—Hong Kong and Macau—with Zhuhai, where motorists drive on the right-hand side; the bridge is also designed for driving on the right side, thus requiring crossing viaducts.
Furthermore, only 10,000 permits are available for private vehicles to travel from Hong Kong to Mainland China and only 300 permits for vehicles travelling to Macau. The restrictions have environmental justifications—Macau already suffers from traffic congestion—but are contrary to the ambition for an integrated region.
The 63-hectare (155 acre) artificial island that houses the Hong Kong–Zhuhai border crossing has also been criticised for leaving most of the created space empty of development. Even Hong Kong chief executive Lam has criticised the waste of space. “We spent so much effort reclaiming this piece of land, and there is only one thing on this island—the public facility,” she said during a question-and-answer session at the Hong Kong Legislative Council earlier this year. “It does not fit with my idea of using the land to the fullest extent.”
Chan noted that “investing in the GBA is not risk-free. While the planning framework and development blueprint suggest a very promising outlook for the region, uncertainties lie in the way the plan will be implemented and, hence, the effectiveness of government policies,” he said.
“Market transparency and professional standards are also not synchronised in many aspects and require action from authorities and professional bodies. While the region has many world-class infrastructure projects and policy initiatives in the pipeline that will create synergy between its various cities, there is still much for the government and other market stakeholders to do before the GBA can emerge into a truly global bay-area economy.”