The potential of GBA integration: City cluster in Guangdong

By Tom WAN

To understand the full economic contribution that an integrated, connected Pearl River Delta region brings to China, it is important to understand the ways in which such a region could as a whole be greater than the current sum of its parts.

First, the GBA brings together "One Country, Two Systems" (the Hong Kong and Macao SARs) and three customs zones (Nansha, Qianhai/Shekou, and Hengqin) within Guangdong Province, providing a more balanced allocation of services, technology, manufacturing, and resources than in the other proposed Chinese "Bay Areas" and broad international connections through its harbors and airports, sophisticated logistics, currency convertibility, and investment and trading capabilities.

In particular, Hong Kong, Shenzhen, and Guangzhou are positioned to leverage and coordinate existing competitive advantages to more precisely allocate and focus resources in manufacturing, technology, research, finance, logistics, and business support services in furtherance of China's long-term strategic and economic initiatives:

■■ Belt and Road Initiative—projecting China's "socialism with Chinese characteristics" model and its industrial, construction engineering, and planning capacity to emerging markets with better targeted, more diversely financed infrastructure, energy, supply chain, and other projects.

■■Made in China 2025—helping domestic industries modernize, commercialize research, and cultivate and attract talent.

■■ Regional Economic Development—serving as an economic multiplier to spread employment, business growth, and procurement opportunities inland, reducing wealth inequality between coastal and inland areas.

■■Opening Up—facilitating two-way flows of technology, business, and investment; leveraging

China's trade and investment promotion, diplomatic, institutional, and academic assets abroad; and building a showcase for Chinese technology, infrastructure, economic development, and urban planning to attract increased talent, investment, and innovation.

At present, the Pearl River Delta cluster of cities together accounts for roughly 9% of China's GDP, versus a 20% share of GDP for the Northeastern US Atlantic Coast city cluster and 72% for the Japan Pacific Coast city cluster, suggesting room for both growth and added value through integration and better coordination. From the standpoint of innovation and technology development, the region's base is already strong. Guangdong-based companies hold more than half of Chinese computing and telecommunications patents and nearly a quarter of patents for electrical machinery and equipment manufacturing. The GBA accounted for 33 of the 218 unicorns (startups valued at US$1 billion or more) listed in Hurun Research Institute's 2019 Greater China Unicorn Index. More than half of the 33 are from Shenzhen, with nine from Guangzhou and five from Hong Kong.

Artificial intelligence industries in Guangdong had a combined value of 26 billion yuan in 2017, a third of the national total. In its 2018 development plan, the Guangdong Science and Technology Department forecasted a continuing expansion, driving-related industries like robotics and smart equipment.3 Among core cities, Guangzhou's municipal government has signed cooperation agreements with Tencent for smart city development; iFLYTECH for smart consultation, diagnostic, appointment, and payment services at Guangdong Second Provincial General Hospital;5 and Huawei for a Baiyun District R&D hub focused on smart vehicles, cloud computing, and Internet of Things.

Shenzhen's economic development has passed through several phases starting with basic manufacturing and processing, moving on to high tech industries, and now to emerging industries. In this latest phase, innovation is being prioritized with emphasis on the digital economy and the digitalization of advanced manufacturing. The city is working with Tencent's AI Lab to develop overall AI capabilities in healthcare, communications, fintech, and robotics. SenseTime and City University of Hong Kong have collaborated on the development of facial recognition technology, while Hong Kong University of Science and Technology has partnered with Tencent to establish the WeChat-HKUST Joint Laboratory on Artificial Intelligence Technology.

Sometimes referred to as the "Silicon Valley of China," Shenzhen was ranked by the Global Innovation Index as the second most technologically innovative economy in the world in 2018. It is also China's leading source of patent production: 228,600 patents were produced in 2018, led by technology companies headquartered in the city such as Tencent, Huawei, BYD Co. Ltd., drone company DJI, and Beijing Genomics. With a frontier mentality—not unlike Silicon Valley's—which traces to its roots as China's first Special Economic Zone (SEZ), Shenzhen has become a magnet for entrepreneurs from across China.

Foshan, with some 9.5 million residents, is the fourth largest Guangdong city, behind Guangzhou, Shenzhen, and Dongguan, and the third to join the province's "trillion GDP club." With a strong manufacturing base and a robust private sector of around 700,000 enterprises according to PwC, Foshan has been given latitude and encouragement to pursue "comprehensive reforms" alongside its basic mission of modernizing and differentiating its manufacturing capability, including "construction of a high-end service demonstration zone" to attract finance, industrial design, and trade services, plus an "intellectual property center" linked with Hong Kong and Singapore to develop a stronger IP regime for the region.

Foshan is a central GBA transportation hub linking Hong Kong, Guangzhou, Shenzhen, and China's interior, prioritizing smart manufacturing in sectors such as vehicles, machinery, and appliances, along with building materials, optoelectronics, energy conservation, environmental protection, biomedicine, and medical devices. Its five districts have considerable overlap in terms of key industries, mainly serving the supplier networks of large companies in the Pearl River Delta and elsewhere in China. Each district is attempting to differentiate itself in new economy verticals, from automotive in Cancheng and Sanshui, to intelligent manufacturing and robotics in Shunde, to hydrogen energy in Nanhai, and tourism in Gaoming with its nearly 60% forest coverage.

Dongguan, slightly larger in population than Foshan, is best known to the outside world as a major manufacturing center. Over time, the city has absorbed much of the manufacturing formerly done in Shenzhen as that city has shifted the focus of its economy toward higher levels of technology. Core industries include electronics, garments and shoes, electronic manufacturing tools, food and beverages, and paper products. Dongguan is currently home to one-fifth of the world's smartphone production. Huawei's decision to locate its R&D activities in the Songshan Lake Industrial Park has in turn attracted companies like Guangdong Oppo Mobile Telecommunications, Vivo Communications Technology, and DJI. The Hong Kong and Macao Youth Innovation and Entrepreneurship Base, located in the Park, offers subsidies and incubator services to attract entrepreneurs. Expecting 20% population growth in the next decade, Dongguan is increasing its focus on sustainable growth and planning.

In furtherance of the GBA, Dongguan's Binhai District will be the site of a Greater Bay Area University. Much of the East Industrial Park District will be dedicated to regional transportation construction and showcasing best practices for integration of industry and urbanization; Shiuxiang New Town District in the northwest will feature financial, professional, exhibition, and creative services. More broadly, Dongguan has identified five emerging industries as priorities over 2018–2025, by which time the city aims to reach its target for R&D spending totaling 3% of GDP. Priority fields include new-generation information technology (AI, big data, 5G); high-end equipment manufacturing (robotics); new materials; new energy (EVs, fuel cells, batteries); and life sciences (biomedicine, medical devices).

Zhuhai is led by heavy industry, which accounts for two-thirds of industrial output, but biomedicine and appliances—and to a lesser extent precision machinery—have seen high growth. The opening of the Hong Kong-Zhuhai-Macao Bridge has expanded opportunities in tourism, trade, and exhibition and support services, mainly linked to ongoing integration with Macao. Zhuhai had 43 million visitors in 2018. A 66-acre Zhuhai International Convention & Exhibition Center, including offices, theaters, and a concert hall, is in Phase 2 development.

Zhuhai is positioning itself as a regional medical and healthcare center with the Traditional Chinese Medicine Science and Technology Industrial Park of Cooperation between Guangdong and Macao and the Zhuhai Western Medicine Center. Its Hengqin Free Trade Zone has placed increasing emphasis on facilitating regional e-commerce. Cross-border finance, in part to support Macao in diversifying its economy, is also a priority. In early 2019, Zhuhai claimed more than 3,000 venture capital firms and 1,600 private equity funds registered with the Asset Management Association of China, with combined assets of around 500 billion yuan (US$76 billion). Zhuhai, like the Qianhai district in Shenzhen, participates in the Qualified Foreign Limited Partner program, enabling investors to pool foreign and renminbi assets.

Zhongshan, located north of Guangzhou with 4.42 million residents, is a city with a strong traditional manufacturing base of more than 3,400 large manufacturers of household appliances, building materials, furniture, food and beverages, and textiles and apparel, and it has both affordable housing and available land for development. Zhongshan has been slow to attract investment and to move its economy into higher value-added activity. In 2019, high value-added business activity slowed, with a number of Hong Kong, Macao, and Taiwan businesses leaving the city, replaced by state-owned or state-held mainland firms.

Zhongshan has since committed 22 billion yuan to investment in new 5G wireless, data center, and industrial internet infrastructure in the run-up to the planned 2024 opening of a Shenzhen-Zhongshan water crossing which is expected to jumpstart growth in new industries such as AI, new materials and energy, smart home solutions, and cloud computing. Planned development going forward includes the Zhongshan Cuiheng Science City project, a new Xiangshan University of Science and Technology in cooperation with the Macao University of Science and Technology, and the Shenzhen-Zhongshan Industry Development Corridor.

To the extent that GBA cities are able to build regional specializations that differentiate them, upgrade transportation and communications infrastructure, and harmonize regulations and processes to streamline the movement of people, goods, services, and capital throughout the region, it could then be possible, for example, for

■■Hong Kong banks, insurers, and asset managers to easily serve and connect international and mainland clients and undertake joint initiatives and service offerings with Shenzhen partners;

■■Hong Kong, Shenzhen, and Guangzhou universities, research laboratories, and incubators to collaborate more easily with each other and with overseas institutions under common framework agreements and standards;

■■ frictionless cross-border movement of people, goods, and services between Macao and Hengqin to facilitate commercial transactions, commuting, and a nseamless visitor experience; and

■■ node cities like Foshan, Dongguan, and Zhongshan to individually or together form global testbeds for electrical equipment and machinery, smart home and lighting products, pharmaceuticals, electric vehicles, and robotics, accessing capital and business support to reach new markets and customers.

Regional integration is gradual but moving forward. At the provincial, prefectural, and town levels, with central government support, policymakers are relaxing foreign and domestic (hukou) immigration and customs controls; harmonizing tax, trade, and investment policies; and standardizing licensing regimes and regulations. At a more granular level, cities are experimenting with cross-border small business permits, personal bank accounts in dual currencies, and driver's licenses. As trade and pandemic uncertainties subside, the process is expected to accelerate.

There are compelling economic growth and urban planning arguments behind China's GBA strategy. Better infrastructure and improved circulation of people, goods, and services further the cross-fertilization of ideas and collaboration. More broadly, cities can be paired to leverage their relative strengths and more efficiently utilize land and allocate resources. At that point, the GBA may potentially become a laboratory and prototype for what China hopes to accomplish in its other Bay Areas. A centerpiece of that effort, with the unique challenges and opportunities it brings to bear, is the principle of "One Country, Two Systems" and, in particular, the Hong Kong Special Administrative Region.