New stimulus for growth

7 November 2011

Hengqin and Qianhai to help neighbouring Macao and Hong Kong to diversify economy

A conglomeration of rapidly expanding cities is emerging in the Pearl River Delta. Indeed, the PRD could be seen as the engine of growth in southern China. Linking these expanding cities are new infrastructures, industries, services, property developments and other large-scale collaborative projects.

In this new era of growth, Hong Kong and Macao are going to be more integrated into the region than ever. Central to achieving this will be the help of three places in particular in Guangdong: Hengqin, Qianhai and Nansha.

These three coastal districts are currently largely undeveloped. They have been officially designated as close partners of the two Special Administrative Regions (SARs) – Hong Kong and Macao.

The draft of China’s 12th Five-Year Plan (2011–2015) has recently been announced. In it, the three Guangdong areas are named as ‘experimental zones’, with preferential policies and tax concessions to help them support the two SARs.

Hengqin in Zhuhai, Qianhai in Shenzhen, and Nansha in Guangzhou are located in the west, east and centre of the Pearl River estuary respectively.

Of the three, Nansha is probably the least significant for Hong Kong and Macao because it is the furthest away from them.

Room to grow

Why has the Chinese government chosen the three localities to support Hong Kong and Macao? It is because both major cities are facing serious constraints in terms of land.

Macao is in urgent need of space, given its tiny area of 29 sq km. With the involvement of Hengqin, Macao will have four times more land for development. This will help the city develop new industries, generate more jobs and diversify its lop-sided economy.

Hong Kong, too, is suffering from a limited land supply. This has led to serious property inflation and rising costs. In recent years, the central government has helped the city with policies such as giving mainlanders greater freedom to travel to Hong Kong. They have also enabled easier market access for Hong Kong professionals and companies operating in China. These measures have boosted local retail sales and created jobs. It has not been enough, however, to revitalise an economy showing signs of stagnation.

With the help of Qianhai, the SAR could expand some of its financial business across the border. In fact, this is what the mainland planners have in mind. The 15-sq-km area is twelve times the size of Hong Kong’s Central district.

Hengqin: the winner

Of the three localities, Hengqin has the best chance of succeeding, with the highest administrative status of a ‘state-level special zone’. It has an area of 106 sq km – seven times larger than that of Qianhai.

Hengqin was incorporated into Zhuhai only recently, in August 2009. At that time, there were no development plans in place that might have conflicted with the incorporation project.

The island is adjacent to Macao, providing easy access to individuals and companies in and out of the SAR. Existing and planned railway links will connect Macao to the centre of Zhuhai, and then to Hengqin. The airports of Macao and Zhuhai are also close to Hengqin – another important consideration in the integration of the two cities.

Most importantly, Hengqin will provide Macao with much-needed space to develop new industries and services. In August 2009, the State Council named three sectors to be developed in Hengqin: commercial services; leisure, tourism and science, education and Research and Development.

Hengqin is also to be a special customs zone. Goods imported for manufacturing and industrial processing within the zone will be exempt from tax. However, taxes will have to be paid if the goods are shipped to other parts of the mainland.

The profit tax for companies investing in Hengqin is favourable at 15 percent against 25 percent elsewhere in China. Hong Kong and Macao residents working on the island will also enjoy a salaries tax rebate from Guangdong. The rebate will cover the tax difference – as high as 30 percent in some cases – between the SARs and Hengqin. These tax incentives aim to attract talented and skilled professionals to Hengqin.

There are high hopes for the planned campus of the University of Macao in Hengqin. With adequate back-up and good management, the university could provide the appropriate setting to nurture high-value services.

Qianhai: Manhattan of Shenzhen

For a decade, Shenzhen has promoted Qianhai as its financial district – like Manhattan in New York or the City in London. But not much has happened, except for some land reclamation.

Qianhai is divided into three zones: the logistics zone close to existing container- port facilities, the financial and commercial zone close to Shenzhen airport, and a mixed zone.

Qianhai is to be connected to the rest of Shenzhen by two subway lines. One is the Hong Kong-Shenzhen high-speed railway, although not much work has been done since the initial announcement.

In August 2010, the State Council designated Qianhai as a ‘Shenzhen-Hong Kong Modern Services Cooperation Zone’. The announcement included bold suggestions not only for the district’s economy but also for its administrative structure. These involved, amongst other things, setting up a Hong Kong-style independent commission, and the appointment of two Hong Kong people to its major administrative body.

On 27 June 2011, the People’s Congress of Shenzhen rejected these ideas. They felt that Qianhai would simply turn into just another low-tax zone in southern China.

The local congress passed regulations to promote service industries such as finance, logistics, technology and information. However, there was no mention of offshore financial activities. The hope had been that Qianhai would develop into a ‘mini Hong Kong’, with freer financial regulations than in the rest of China.

Qianhai’s administrative status within the Chinese government is that of a so-called ‘local special zone’. This means it is much weaker politically than a provincial and ministerial-level zone. It has not been given any powers to pass financial regulations independently. The central government in Beijing continues to control all important matters related to the financial sector.

Without a special mandate on financial matters, Qianhai is not attractive to investors. Why should banks, insurance companies, securities firms and other financial institutions move their businesses to a largely undeveloped new zone? In Shenzhen, there is already a well-established financial district – Futian.

The only area in which Qianhai has made headway is developing its port. The Shenzhen Qianhai Bay Bonded Port was officially established in October 2008. Its main activities are international transits, distribution, procurement, the re-export trade, and export processing.

Shekou: A strong rival

In these areas, Qianhai is competing with another shipping and logistic centre nearby – Shekou. A long-established economic zone, Shekou is located on the same peninsula as Qianhai in Shenzhen.

Shekou has been operating for over three decades and has attracted a large number of local and international companies. Many of these companies have established their China headquarters there. Its subway brings commuters to the centre of Shenzhen. The zone, successfully established by the China Merchants Group, will want to attract financial institutions as well.

Other cities in the Delta are targeting the potentially lucrative financial sector. The most successful one is the Nanhai district of Foshan – a city only recently incorporated into Guangzhou. Nanhai set up a finance and high-tech service zone in 2007. By mid-2011, it had signed contracts for 64 projects worth 22 billion yuan. It has also developed into a major back-office centre for financial institutions, including HSBC.

With so much competition, it is quite unlikely for Qianhai to realise its dream of achieving a GDP of 150 billion yuan by 2020.