Challenges abound before GBA becomes single market
Three different legal, currency, capital account systems are big barriers to integration
8 Jan 2021 | Janette Chen

Local governments in Guangdong continue to roll out new measures to support the integration of China’s ambitious Greater Bay Area (GBA) scheme, while there are fewer such updates from Hong Kong and Macau and research shows that the area still faces short-term integration challenges.

Since the second half of last year, China has been eyeing an economic recovery based on the  leveraging of increased domestic demand. At the end of last year, more measures and policies were rolled out by local governments of the GBA cities to encourage integration.

Dongguan has recently issued an 18-measure action plan, promoting convenience and efficiency in cross-border trading, investment and fund-raising activities. The measures also aim to boost collaboration and integration of financial services by further opening up Dongguan’s  banking, securities and insurance sectors. In the insurance sector, in particular, the city is targeting to attract more investment from quality long-term insurance assets. And the foreign direct investment channel of certain industries will be expanded with fewer restrictions.

On the offshore fund-raising side, Dongguan has 13 measures to encourage qualified local enterprises to list in Hong Kong, and to support companies eager to develop their business activities in Macau.

However, on the other side of the border, there have not been many substantial measures targeting the increased integration of Hong Kong into the GBA scheme.

There are still concerns that the three different legal systems, currencies and capital account regimes under the “one country, two systems” policies in Hong Kong and Macau will continue to constrain efforts to boost collaboration and integration among GBA cities.

The preservation of Hong Kong and Macau’s separate socio-economic systems under “one country, two systems” until at least 2047-2049, as stipulated in their respective Basic Law texts, is likely, according to a recent Fitch Rating research report, to preclude the introduction of many policies consistent with some of the deepest forms of economic integration, such as a customs union or a fully-fledged common or single market.

These will very hard to achieve, the Fitch Ratings report notes, as a customs union would require Hong Kong, Macau and mainland China to adopt common external tariffs consistent with the rest of the world. But this could hurt Hong Kong’s economic model as, according to Hong Kong’s Basic Law, the city is required to maintain the status of a free port, which adds to the difficulty of adopting common external tariffs among the GBA cities.

The formation of a GBA single market might require even longer than expected, according to the research, as initial steps, such as getting rid of the borders, appear at present hard to achieve. Even other, less dramatic, steps, such as increased capital mobility, are restrained by factors like different capital account regimes.

In the short run, substantial integration among the GBA cities is very challenging to implement. And while some regulations, such as those concerning food safety, according to the research, could be unified or integrated over time with less difficulty, others, especially those in the financial sector, will be much harder to implement. And Fitch Ratings believes that integration could be detrimental to Hong Kong’s role as a global financial centre unless other jurisdictions’ financial regulations are harmonized under its existing regulatory architecture.