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China’s Silicon Valley: policy developments in the Greater Bay Area

2 October 2019

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INTRODUCTION TO THE GBA

The Greater Bay Area (GBA) is the Chinese government’s development plan to integrate Hong Kong, Macau and nine cities in the Pearl River Delta (PRD), including Shenzhen and Guangzhou, into a leading economic and innovation hub for business growth.

The PRD in China has always been a dynamic region. It has been a test bed for market reform in China since the 80’s, which has helped it attract the lion’s share of Foreign Direct Investment over the years, while also creating some of China’s most innovative and successful home-grown companies (Tencent, Ping An, Huawei, BYD & DJI). Now with the extra ingredients that come along with the GBA initiative, the true potential of this region will be unleashed, creating exciting opportunities for business growth and investment.

STAGGERING STATISTICS (1)

  • With a combined population of 71 million, the GBA is larger than the UK and France
  • At USD 1.6 trillion, the GBA economy is twice the size of the Netherlands, and makes up 13% of China’s GDP
  • Covering a land area of 57,000 square kilometres, it’s three times the size of the San Francisco Bay area

Despite these staggering statistics, the GBA still only makes up 5% of China’s total population, a fraction of the landmass, and has a nascent services sector. This demonstrates both its current economic efficiency as well as its future growth potential.

SECTOR OPPORTUNITIES

Innovation and technology will underpin the GBA, as it seeks to become China’s “Silicon Valley”. However, each city will be rolling out a range of sector-specific initiatives to enhance their own unique strengths and in turn attract investment. For example:

  • Hong Kong will be the finance and legal arbitration hub
  • Shenzhen will be the centre for innovation and R&D
  • Guangzhou will lead the way for integrated transportation
  • Dongguan will focus on high end manufacturing and services
  • Macau will be the tourism and leisure hub

→ Practical insights: We’re already seeing an uptick in activity and investment through our three GBA offices. From a sector perspective technology is the main focus area, covering advanced manufacturing, smart cities and biotech. Meanwhile, private equity and venture capital funds are increasingly focusing on the region to deploy capital. We’re also seeing a lot of activity around real estate and infrastructure investment as the physical development of the region starts to take shape. Inevitably valuations of assets will rise over time, so smart entrepreneurs are already looking to get an early foothold and tap into the future growth opportunity.

THE ‘EXTRA INGREDIENTS’ OF THE GBA

While the initial blueprint was scant on detail, some of the key initiatives are likely to include:

  • Regulatory harmonisation across cities and regions
  • Continued connectivity of financial markets and physical infrastructure
  • Greater currency convertibility to facilitate cross-border investments and financing activities
  • Simplified IPO exit routes for GBA-domiciled companies
  • Further enhancement of the HK-SZ Stock Connect
  • Launch of R&D centres and innovation communities (e.g. Lok Ma Chau loop)
  • Amended rules to facilitate immigration and customs clearance to allow for freer flow of talent and goods within the region

ECONOMIC AND GEOPOLITICAL RISKS

While there are certainly emerging macroeconomic and geopolitical headwinds companies need to be preparing for, the long-term fundamentals around Chinese investment remain sound. Domestic consumption remains a policy priority, and proactive measures are being taken to support it. In doing so, the 400 million (and growing) middle class in China will help buffer the impact of these headwinds, and continue to create tremendous opportunities for foreign companies and investors in the GBA and beyond.

→ Practical insights: When we speak to our clients on their outlook for China, it’s clear that, despite all the current uncertainty, sentiment remains strong. Many of our clients tell us that they expect their investment activity into China to increase over the next 12 months, while most expect to do more investments specifically into Southern China as a result of GBA.

HONG KONG & SHENZHEN’S ROLE IN THE GBA

Under “One Country, Two Systems”, Hong Kong operates as a Special Administrative Region with a separate legal system, tax framework and currency which has helped position it as a leading International Finance Centre and support the flow of capital into and out of China.

Meanwhile, Shenzhen is positioned to be the ‘hotbed’ for innovation and has the added benefit of being ‘onshore’ with direct access to the domestic consumer base. Because of this, investors will increasingly invest into Shenzhen, but via Hong Kong. Furthermore, Shenzhen has been positioned as China’s onshore city to drive financial market reform and liberalisation. Increasingly, Shenzhen will be given more autonomy to drive such reform and pave the way for a freer and more dynamic economy.

Together, Hong Kong, Shenzhen and the other cities in the GBA can complement each other and add tremendous value across the full lifecycle of investment and growth in the region.

→ Practical insights: In July 2019, Intertrust opened up an office in Shenzhen, our fourth office in Mainland China. Not only do we see the tremendous future potential of GBA, but we are already being driven by existing client demand (both inbound and outbound). We expect this trend to continue, and we want to be well positioned across the GBA with offices in Hong Kong, Guangzhou and now Shenzhen.

This article has been initially written by James Donnan for the Dutch Chamber of Commerce in Hong Kong’s “DutchCham Magazine”

1 Deloitte Research and HKTDC Research, 2019

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