Greater Bay Area · cities in the Guangdong Province, and the two Special Administrative Regions of Hong Kong and Macau (“9+2 cities”). The Chinese government aims to create a

Special Feature | 1Q19

Greater BayArea

Source: AFP Photo

Source: AFP Photo

CIO INSIGHTS 1Q19 | 106

Special Feature: China’s Greater Bay Area Chris LeungEconomist

Yeang Cheng LingStrategist

Keys to the blueprint’s success

The Greater Bay Area (GBA) – a key strategic plan in China’s development blueprint – is a geo-economic union of 11 cities with a total population of almost 70m. It includes nine cities in the Guangdong Province, and the two Special Administrative Regions of Hong Kong and Macau (“9+2 cities”).

The Chinese government aims to create a mega-hub leveraging on each city’s competitive advantage. For instance, Shenzhen represents the technological innovation hub, Hong Kong acts as the international financial centre, while Macau serves as the entertainment hub. The physical connectivity within the GBA is exemplified by the Hong Kong-Zhuhai-Macau Bridge and the Express Rail Link (XRL).

In this piece, we examine several factors that will prove pivotal to the GBA’s success. The ambitious development plan will need more than just physical infrastructure to achieve its goals.

Creating the “Silicon Valley of the East”

The GBA shares common success factors with America’s Silicon Valley: (1) Strong presence of leading academic institutions; (2) Development guidance from the state, evident through plans like the China Manufacturing 2025 blueprint; and (3) The availability of an efficient capital market in Hong Kong. However, there are a couple of key differences: (1) Imperfect labour and capital mobility; and (2) The fact that in China, funding comes primarily from the state (vs in the US, where funds are raised from private venture capital).

Building academic alliances

A crucial component to the GBA’s success would be a clear development roadmap for academic alliances. This responsibility should be shouldered by select prestigious universities/higher institutions within the GBA. Currently, most of China’s prestigious universities are located in Beijing and Shanghai. Establishing a “Greater Bay Area Academic Alliance” in Hong Kong, as well as training new talents for the private sector, would prove invaluable. Looking ahead, cross-border economic integration will further deepen via R&D tie-ups and an exchange of talent.

Broadening the sources of venture capital funding

The number of domestic venture capital firms has risen dramatically in 10 years – from 319 in 2005 to almost 1,800 in 2015, marking a more than fivefold increase. The amount of capital invested has also rocketed more than tenfold from CNY63.1b to CNY665.3b.


A breakdown of funding sources confirms the state plays a prominent role: 35.3% came from state-owned enterprises, 14.4% from the private sector, 12% from individuals, and 5.2% from mixed-ownership enterprises. The prevailing phenomenon of early-stage startups backed by state funding is similar to what happened in Silicon Valley in the 1950s. In addition, China’s Small Business Investment Act provides preferential tax treatment for venture capitalists.

Providing an efficient capital market in Hong Kong

The demand for fundraising from successful tech ventures will increase over time, particularly at the stage of product commercialisation. Enterprises in the GBA should take advantage of the depth and openness of Hong Kong’s financial market. Currently, more than 1,000 mainland enterprises are listed in Hong Kong, with a combined market value of USD2t – representing over 60% of Hong Kong’s total market cap. The Hong Kong Stock Exchange’s recent implementation of Weighted Voting Rights allows tech entrepreneurs to gain easier access to the capital market, without weakening their control over their companies. The equity market aside, mainland corporates can also raise funds in Hong Kong by issuing both CNY- and USD-denominated bonds.

Table 1: GBA’s competitiveness against other bay areas

Source: HKTDC, StatisticaNote:*GDP-related figures for Tokyo bay area are from 2015. **TEUs refers to twenty-foot equivalent units.^2016 figure.

Guangdong-Hong Kong-Macau Bay Area (2017)

San Francisco Bay Area

New York Metropolitan Area

Tokyo Bay Area

Land area (sq km) 55,905.5 17,886.4 21,478.5 36,898.3

Population (m) 69.6 7.6 20.2 44.0

GDP (USDb)* 1,513.4 500.7 1,717.7 1,774.2

Average annual growth* (%) (2012-2017) 4.1 6.5 3.6 N/A

Real GDP growth* (%) 7.0 5.3 0.9 1.9

Per-capita GDP* (USD) 21,750 1,022,302 820,502 40,360

"Air passenger traffic (mn passenger-times)" 201.7 81.3 132.2 123.9

"Air freight traffic (m tonnes)" 7.96 1.18 2.16 3.58

Port container throughput (m TEUs)** 66.48 2.42 6.25^ 7.76^

GDP share of tertiary industry (%)* 65.6 71.9 83.3 77


Investment Opportunities in GBA

We have identified the following thematic investment opportunities arising from the GBA initiative, focusing on financial services, technology development, tourism, and logistics.

Table 2: GBA initiative thematic investment opportunities

Source: DBS

Financials Technology Tourism Logistics

Industries • Banking• Wealth management• Trade finance• Insurance• Tax/legal services

• Data centres• Cloud computing• Data security• IT Design• Fintech• Health care• Education

• Integrated resorts• Hotels• Food and beverage

• Infrastructure• Construction• Transportation• Warehouses

Geographic focus

Hong KongShenzhen

ShenzhenZhongshanGuangzhouDongguan

MacauZhuhaiFoshanGuangzhou

GuangzhouHong KongShenzhenHuizhou

Themes UrbanisationIncome growth

Health care servicesTechnology innovation

Domestic retail consumptionHuman resource developmentTransport systems development

Hong Kong – The financial gateway. We expect Hong Kong to retain its central role as the financial gateway, thanks to its well-established financial system and legal framework.

Since the handover of Hong Kong to China in July 1997, net FDI inflows have consistently expanded and reached a peak in 2015. FDI in the four years from 2014 to 2017 was equal to that of the preceding eight years (Figure 1). A significant portion of the inflow came from mainland China companies, as they acquired commercial and industrial buildings as well as development landbanks to expand their regional footprint.

CNY deposits among financial institutions in Hong Kong surged over the years, thanks to its reliable banking system (Figure 2). Similarly, its status of being the exclusive global CNY settlement hub has also boosted the financial services sector, whereby the Real-Time Gross Settlement (RTGS) system for CNY payments across global financial institutions is directly linked to China’s National Advanced Payment System (CNAPS).


Source: Bloomberg, DBS

Figure 1: Hong Kong inbound FDI growing by leaps and bounds

Figure 2: Surging CNY deposits and cross-border CNY remittance in Hong Kong


Shenzhen – The Silicon Valley of the East. Geographical advantages, talent pool, IT research capabilities, supply-chain capacities, and infrastructure connectivity have placed Shenzhen at the forefront of China’s ambition in technological development.

Correspondingly, Shenzhen will also retain its prime position as the preferred city for some high-profile corporate headquarters, and this will be instrumental for the long-term growth of the GBA. Examples of such companies are Tencent, Huawei/HiSilicon, ZTE, BYD Group, DJI, Ping An Insurance, China Merchants Bank, Everbright Water, Shenzhen Development Bank, Vanke, Vivo, and China South City, to name a few.

China will continue to keep a firm grip as a leading developer and exporter of smart devices and technology products (Figure 3). Evidently, the global market share among top three mainland smartphone brands – Huawei, Oppo, and Xiaomi – has seen consistent expansion in the past two years (Figure 4).


Figure 3: China’s solid technology exports Figure 4: China smartphones are gaining global market share

Source: Counterpoint, IDC, DBS

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SamsungHuawei

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XiaomiTop-three China brands


In recent years, the Chinese government has shown unrelenting commitment in developing electric vehicles, nurturing the EV value chain, and spurring domestic demand (Figure 5).

Among the success factors in China’s technological quest is R&D spending which, as a percentage of GDP, has steadily risen to above the 2% mark, narrowing the gap with the US (Figure 6). In September, the National Development and Reform Commission (NDRC) announced plans to invest USD15b in the development of big data, cloud computing, and smart cities over the next five years.

The access to human capital, deep-pocket funding, supportive government policies, and big data collection are among the essential aspects that would enhance China’s quest for technological progress.


Figure 5: Surging EV sales in China Figure 6: China’s R&D spending as a percentage of GDP is rising

Source: OECD, DBS

Tourism – The shining pearl. Macau has some of the most popular integrated resorts and will continue to attract tourists from around the region, if not the world. Visitor arrivals have recovered (Figure 7) while integrated resorts continued to expand capacity between 2010 and 2018 (Figure 8). The sector has passed the heavy capex cycle and is primed to reap financial benefits and expansion in shareholder returns.

The recent opening of the Hong Kong-Zhuhai-Macau bridge further improves Macau’s connectivity, in addition to the current list of frequent direct-ferry services from surrounding areas in Hong Kong, Kowloon, and Shenzhen.

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China R&D to GDP (%) US R&D to GDP (%)



Figure 7: Tourist arrivals are back on an uptrend Figure 8: Macau integrated resorts have been expanding room and table capacity


Logistics – the next frontier. The construction of an integrated transport network will further strengthen collaboration within the GBA, leading to smoother cargo flows and customs clearance. For example, logistics companies in Hong Kong could deploy their extensive global network and IT management systems to Guangdong while utilising the latter’s cost competency and warehouse capacity. The build-up in e-Commerce transactions will be another secular tailwind for the logistics industry in the GBA. Transport and logistics sectors as new growth drivers. The adjacent areas to the GBA are filled with seaport and airport facilities, providing gateways for huge volumes of trade and visitors. Joint data from NDRC and the China Federation of Logistics and Purchasing show that the value of the logistics industry has risen steadily, while logistic costs as percentage of GDP have stayed relatively stable at 15% (Figure 9). The rising freight volume and increased container throughput in Guangdong (Figure 10) were driven by organic trade growth as well as relocation of capacity from Hong Kong ports. These will continue to serve as new growth drivers.

Source: NDRC, China Federation of Logistics and Purchasing, DBS

Figure 9: Logistics is an important component of China’s economy

Figure 10: Guangdong, the gateway to China’s imports and exports

Source: Statistics Bureau of Guangdong Province, DBS

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Macau total hotel guest rooms (LHS)Macau total gaming tables (RHS)


Further, not only does the newly-completed Guangzhou-Shenzhen-Hong Kong Express Rail Link (XRL) shorten the time taken for border crossings significantly, it also connects the GBA regions with mainland rail networks to other large cities, like Shanghai and Beijing.

The seaports and airports surrounding GBA are ranked highly among global peers. This is especially so for the Pearl River Delta region (Figure 11) which has been boosted by China’s expanding position in world trade and also enjoys increasing popularity among overseas visitors (Figure 12).

Source: Hong Kong Marine Department, DBS

Figure 11: China container ports are among the busiest globally

Figure 12: Airports to drive growth in air traffic and visitor arrivals

Source: Airport Council International, DBS

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More bridges, better accessibility. Two new bridges – the 13-km Second Humen Bridge which will begin operating in 2019 and the 24-km Shenzhen-Zhongshan Bridge in 2024 – together with the newly-completed Hong Kong-Zhuhai-Macau bridge, will improve the physical connectivity across the Pearl River Delta and effectively reduce the travelling time between these populated areas.

Figure 13: Existing and future bridges in the GBA

Source: Hong Kong Trade Development Council (HKTDC)

Guangzhou

Zhongshan

Second Humen Bridge

Humen Bridge

Shenzhen-ZhongshanBridge

Hong Kong-Zhuhai-MacauBridge

Shenzhen

Hong Kong

Zhuhai

Macau

Dongguan

Future BridgesExisting Bridges

LEGEND:

CIO INSIGHTS 1Q19

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Glossary of Terms: Acronym Definition Acronym Definition

ADAS advance driver assistance system GDP gross domestic product

AI artificial intelligence GFC global financial crisis

ASEAN Association of Southeast Asian Nations GMV gross merchandise volume

ASP average selling price GRE government-related entity

AxJ Asia ex-Japan HDB Housing and Development Board

bbl per barrel HY high yield

BI Bank Indonesia IG investment-grade

BOJ Bank of Japan IMF International Monetary Fund

bpd barrels ber day IOT Internet of Things

CAGR compound annual growth rate IPO initial public offering

capex capital expenditure ISM Institute for Supply Management

CAR capital adequacy ratio IT information technology

CASA current account saving account JGB Japanese Government Bond

CDS credit default swap LNG liquefied natural gas

CEO chief executive officer LTV loan-to-value

CET1 common equity tier 1 M&A merger & acquisition

CAA CIO Asset Allocation MAS Monetary Authority of Singapore

COC change of control mmbbl million barrels

CPI conusmer price index mmbpd million barrels per day

DM Developed Markets MRO maintenance, repair, and operations

DPS dividend per share NAV net asset value

DPU distribution per unit NIM net interest margins

DXY US Dollar Index NPL non-performing loan

EBITDA earnings before interest, tax, depreciation and amortisation

OECD Organisation for Economic Co-oporation and Development

EC European Commission OEM original equipment manufacturer

ECB European Central Bank OPEC Organization of the Petroleum Exporting Countries

EM Emerging Markets OPM operating profit margin

EMEA Europe, the Middle East, and Africa P/B price-to-book

EPFR Emerging Portfolio Fund Research P/E price-to-earnings

EPS earnings per share P/TB price-to-tangible book

ETF exchange-traded fund P2F passenger-to-freighter

EU European Union PBOC People's Bank of China

EV electric vehicles PCE personal consumption expenditure

FCF free cash flow PET polyehtylene terephthalate

FDI foreign direct investment PLM product lifecycle management

FFO funds from operations PM portfolio manager

FX foreign exchange PMI purchasing managers' index

FYP first-year premium POE privately-owned enterprise

CIO INSIGHTS 1Q19

Acronym Definition Acronym Definition

PONV point of non-viability SD standard deviation

QE quantitative easing SEC Securities and Exchange Commission

QSR quick-service restaurants SKU stock keeping unit

R&D reseach & development SOE state-owned enterprise

RBI Reserve Bank of India SST Swiss Solvency Test

REIT real estate investment trust TAA Tactical Asset Allocation

RevPAR revenue per available room TEU twenty-foot equivalent unit

RM relationship manager TLAC total loss-absorbing capacity

ROA return on asset TP target price

ROE return on equity TSR total shareholder return

ROI return on investment UCITS Undertakings for Collective Investment in Transferable Securities

ROTE return on tangible equity UST US Treasury

RRR reserve requirement ratio VNB value of new business

SAA Strategic Asset Allocation WTI West Texas Intermediate

SASAC State-owned Assets Supervision and Administration Commission of the State Council

YTD year-to-date

Documents

Greater Bay Area · cities in the Guangdong Province, and the two Special Administrative Regions of Hong Kong and Macau (“9+2 cities”). The Chinese government aims to create a