Why sentiment in Greater Bay Area is deteriorating, especially in Hong Kong

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.