HK in GBA: Systemic Complementarity

By Tom WAN

For better or worse, Hong Kong's future role and its success as a partner within the GBA are intertwined with internal developments.

China's initial policy toward Hong Kong in the aftermath of the 1997 British transfer was one of cautious nonintervention, in accordance with the Basic Law. By 2003, however, the Hong Kong economy had been battered by the Asian financial crisis and the SARS virus, and a Legislative Council attempt to adopt a national security law, as provided for in the Basic Law, was withdrawn after widespread public protests. In September 2004, a communiqué from the Fourth Plenum of the 16th Chinese Communist Party (CCP) Central Committee elevated the long-term prosperity and stability of Hong Kong as "a brand new subject."

The 11th Five-Year Plan issued in 2006 broadly supported preserving Hong Kong's status as an international financial, trade, and logistics center. CCP Central Committee statements in 2013 and 2015 referred to a need to "broaden cooperation" among Hong Kong, Macao, and Taiwan, and to prioritizing a greater role for Hong Kong in China's economic development and opening up to the outside world.

Since then, internal tensions in Hong Kong have increased, spurred by demands for greater autonomy in the SAR's governance, as witnessed by the 79-day "Occupy Central" protests, and the subsequent "Umbrella Movement." In 2019, prolonged—and increasingly violent—protests were triggered by a proposed amendment to existing law that would have indirectly allowed Hong Kong to extradite fugitives to the mainland without a formal extradition treaty in place. The proposal was suspended and later withdrawn.

The National Security Law  As social and economic disruption continued, and with an apparent impasse between the protestors and the government, Beijing instituted a series of measures in 2020 that have significantly constrained dissent. At the center is the National Security Law enacted on June 30, 202020 that, among its provisions, gives partial responsibility for enforcement to a new mainland government security office in Hong Kong; allows cases that fall beyond the SAR government's authority to be tried on the mainland; gives Hong Kong's chief executive authority to appoint the judges that hear national security cases; and strengthens oversight of foreign non-governmental organizations and press organizations. The law's enactment and subsequent measures to rein in opposition lawmakers and their supporters have raised concerns regarding freedom of expression and assembly, the potential erosion of judicial independence, risks for foreigners, and, by implication, risks to Hong Kong's reputation as an open global business center.

Hong Kong's business community has been divided in its reaction. An American Chamber of Commerce in Hong Kong (AmCham) member survey in July 2020, after the National Security Law was published, showed 68% of 183 respondents—15% of AmCham's total membership—voicing increased concern over matters such as continued separation of powers and an independent judiciary, data security, the law's broad scope, and foreign government retaliation, although most respondents welcomed greater political and social stability. A third of the survey respondents maintain a headquarters presence in Hong Kong. Of those, nearly two-thirds said they had no plans to move capital, assets, or operations out of the city; two-thirds indicated a wait-and-see attitude about changes in business strategy; a quarter said they had or were preparing contingency plans. Within Hong Kong's business community in general, there has been considerable support for the National Security Law as a step toward restoring stability and business certainty.

The US government responded to the National Security Law with the Hong Kong Autonomy Act (HKAA), which imposed sanctions on foreign entities and individuals who are found to be contributing to China's alleged failure to observe its international obligations regarding Hong Kong and on foreign financial institutions that are found to knowingly conduct "significant" transactions with persons in that group. Separately from the HKAA, the US also announced in late June 2020 that it would no longer treat exports to Hong Kong under the Commerce Department's export control regime more favorably than those to China, ending a longstanding licensing exception.

Some foreign tech firms such as Google, Facebook, and Twitter could face difficult choices. Most have relied on Hong Kong as a safe haven to locate their server networks beyond the reach of Chinese surveillance or censorship. The National Security Law, according to some interpretations, may allow the government to demand user data from internet companies and to require the removal of content related to potential violations, even if it is posted from overseas.

Companies that refuse to cooperate can face fines or imprisonment of their principals in Hong Kong. 25 Reportedly reflecting this concern in July 2020, TikTok, owned by Chinese technology company ByteDance, announced that it was leaving Hong Kong, and Naver, Korea's largest internet portal, moved its overseas data backup center from Hong Kong to Singapore. As of September 2020, Facebook, Google, Twitter, LinkedIn, Microsoft, messaging service Telegram, and other firms had suspended the processing of Hong Kong law enforcement agencies' requests for user data, pending further clarification and assurances regarding the law. There is no indication to date that Hong Kong officials have sought data under its provisions.

The impact of the National Security Law on business activity will ultimately depend on how it is interpreted and enforced. It is likely, however, that for the foreseeable future the changed political environment in Hong Kong won't directly impact the operations of most foreign companies, Hong Kong's financial markets, or the integrity of commercial law or commercial arbitrations.

Hong Kong and Shenzhen

The dynamic between Hong Kong and Shenzhen is another factor that will influence the long-term structure of the region and relationships between its leading centers. At some level, the cities are both collaborative and competitive. One concern in the Hong Kong business community involves competition from Qianhai (Shenzhen) to attract financial, trade, logistics, and business services firms away from Hong Kong as the GBA evolves. Shenzhen surpassed Hong Kong in terms of GDP in 2018 and ended 2019 posting an annual GDP of 2.7 trillion yuan (US$400 billion) versus Hong Kong's HK$2.9 trillion (US$370 billion). The Chinese government's most recent Five-Year Plan, released in October 2020, refers to Shenzhen as a "core engine in the development of the Greater Bay Area" and "a model city that can represent a modernized and vibrant socialist country."

The Port of Shenzhen—the world's third-largest, behind Shanghai and Rotterdam, with 140 berths and annual container throughput of nearly 28 million 20-foot containers—surpassed Hong Kong by volume in the early 2000s with China's entry to the WTO and rapid port development that attracted direct service.

The Shenzhen Stock Exchange (SZSE), with 2,300 listed companies and more than 11,000 listed securities, focuses primarily on small and mid-sized local or Chinese firms and a user base of individual retail investors, versus Hong Kong's global, institutional investor base and global listings. Listings on the ChiNext index, opened in 2009 to serve Shenzhen's growing base of technology companies, have surged due in part to secondary listings by Chinese-held Nasdaq companies fearing de-listing in the US over stricter US Treasury Department accounting scrutiny beginning in 2021. In an effort to compete for secondary listings business with Hong Kong and Shanghai, ChiNext streamlined its rules in August 2020 to simplify bringing initial public offerings to market.

The question facing Hong Kong companies and residents is to what extent the increasing size and sophistication of Shenzhen's financial services, logistics, and technology sectors, along with government incentives to attract business and talent, could ultimately diminish Hong Kong's role within the GBA.

In a November 2020 public opinion survey of Hong Kong residents conducted by the Hong Kong Institute of Asia-Pacific Studies at the Chinese University of Hong Kong, two-thirds of the 703 respondents did not believe that Shenzhen could replace Hong Kong as a global financial center, and 42% disagreed with the idea that Shenzhen has a competitive edge between the two cities. At the same time, however, just over half believed that going forward Hong Kong and Shenzhen are more likely to compete than cooperate, just under half believed cooperation would not be of great value to Hong Kong, and 31% did not favor enhanced cooperation, while 28% did.

To date, the actual integration, relocation, and expansion of Hong Kong firms within the Greater Bay Area have been gradual. Nearly 12,000 Hong Kong-funded firms were registered in Qianhai as of August 2020, representing total registered capital of 1.3 trillion yuan (US$200.4 billion). The just over US$20 billion in Hong Kong funds deployed in the zone composes 89.9% of the total foreign capital used by the free trade area. The registered companies appear to be a mix of smaller, local companies who see opportunities for cheap land/space and early-mover advantage in a larger market, while major, global firms (mainly banks and consultancies) are establishing a toehold to hedge their bets but are hesitant to do more. So far, this has produced healthy company numbers in Qianhai, but less impressive levels of overall investment and only 50% occupancy. Some 200 Hong Kong startups have been incubated at the Qianhai Shenzhen-Hong Kong Youth Innovation and Entrepreneur Hub (eHub),35 but larger and more established Hong Kong and overseas companies have so far only limited presences.

Currently, Hong Kong's position as a global financial and business center, its strong university base, well-developed intellectual property law and enforcement, and common law system provide unique qualities that both contribute to and benefit from the GBA strategy. Much as Hong Kong's manufacturing moved to adjacent Guangdong Province in the past thirty years, creating a dynamic cross-border economy, the GBA's growing market for financial and other services suggests that opportunities from integration will accrue on both sides.

Hong Kong's Role in the GBA

In the communiqué from its Fifth Plenum in October of 2020 the 19th Communist Party Central Committee called for "development of Hong Kong and Macao as international innovation and technology centers," with an emphasis on the term "international,"37 and for "maintaining the long-term prosperity and stability of Hong Kong and Macao."

In early November 2020, Hong Kong chief executive Carrie Lam led a cabinet-level delegation to Beijing, Guangzhou, and Shenzhen to present a set of plans and proposals for future Hong Kong development and integration into China's national development.39 Afterward, in her November 25 policy address to the legislature, she committed to full implementation by year-end of 24 measures agreed to in principle by the central government and GBA regional authorities40 for GBA integration and development relating to Hong Kong, including

■■ support for young entrepreneurs;

■■ allowing use of Hong Kong-registered drugs and common medical devices in GBA healthcare institutions, with an expedited registration/approval process for Hong Kong-registered traditional Chinese medicine products to be sold in the GBA;

■■ facilitation of Hong Kong private cars crossing the Hong Kong-Zhuhai-Macao Bridge (HZMB);

■■ establishing insurance after-sales service centers in GBA cities under the Closer Economic Partnership Arrangement (CEPA);

■■ joint development of the cross-border Shenzhen- Hong Kong Innovation and Technology Co-operation Zone, which comprises the Shenzhen Innovation and Technology Zone and the Hong Kong-Shenzhen Innovation and Technology Park, as "one zone, two parks";

■■ consolidation of land boundary control points between Hong Kong and Shenzhen, extending operating hours and implementing a quota-free scheme for Hong Kong private cars entering Guangdong via the HZMB;

■■ support and assistance for universities in Hong Kong to provide education services in the GBA; and

■■ greater cross-border collaboration among business and trade associations to assist Hong Kong businesses in expanding their domestic sales channels and connecting with mainland e-commerce platforms.

The government's longer-term vision for Hong Kong is connected to the Lantau Tomorrow Vision, a 1,700 hectare (4,200 acre) HK$500 billion (US$64 billion) development project on a series of man-made islands off the eastern edge of Lantau Island, where Hong Kong International Airport and Hong Kong Disneyland are located. The project would create a third business district for the city plus 400,000 housing units—70% of them affordable public housing—to address a shortage. With development scheduled to start in 2025 and expected completion in 2032, Lantau Tomorrow will ultimately accommodate up to 1.1 million residents—a mix of new arrivals and existing residents. The project is considered critical to reducing current and future congestion in the city, while freeing land throughout the SAR for other uses.

Public comment from the central government on Hong Kong's role in the GBA has been limited. In November 2020 remarks to a China Daily conference on the GBA,45 Vice-Chairman of the National Committee of the Chinese People's Political Consultative Conference Leung Chun-ying echoed remarks by President Xi Jinping at an event a month earlier celebrating the 40th anniversary of the Shenzhen Special Economic Zone, calling for, among other things, "efforts to synergize economic rules and mechanisms in the Greater Bay Area, and wider exchanges and deeper integration among young people in Guangdong, Hong Kong and Macao to strengthen their sense of belonging to the motherland."

Leung went on to suggest that an implementation plan for comprehensive reforms in Shenzhen over 2020–2025 provides a roadmap for integration. "Anyone who takes an interest in the future development of Hong Kong and therefore that of Shenzhen and the Greater Bay Area as a whole will be well advised to study in detail this implementation plan of Shenzhen," he said, calling for a three-pronged strategy "to prepare the way forward for Hong Kong in this exciting region," that includes

1. research providing full, current information on "the latest developments and policy promulgations" in all GBA cities and sectors "so that we can cast aside old impressions, outdated information and prejudices";

2. messaging to convey the findings "comprehensively, effectively and objectively" to all Hong Kong people; and

3. community engagement with schools, professional bodies, trades and industries, investment communities, and other stakeholders "to prompt the various sectors in Hong Kong into actions" and "to change mindsets and attitudes." He further tasked Hong Kong, as "the most international city" in the GBA, with engaging the international community in advancing the GBA message.