Why sentiment about Greater Bay is worsening, especially in Hong Kong

September 10, 2019

HONG KONG - The Hong Kong's economy is decelerating rapidly, partly because of the US-China trade war and a slowing Chinese economy, aggravated by recent social unrest. But among the uncertainties is the announcement for Hong Kong and Guangdong province in February of the "Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area (GBA).

In a research report from big data sources, global financial group Natixis says the project should have been perceived positively, given the planned integration of highly-omplementary cities.

The Natixis analysis points to an improved image for the concept of GBA from 2017 that has retreated since

April 2019.

"More generally, sentiment has been volatile, with improvements after announcements and immediate worsening afterwards. In addition, the image of GBA in Hong Kong is trailing behind mainland China," it says.

Natixis in the report addresses three questions: i) why is the GBA's image volatile; ii) why is its image worse in Hong Kong; and iii) why it is worsening since April 2019.

"On the high volatility in the GBA's image, there is a shortfall of expectations versus reality stemming from the lack of a solid timeline and Government funding," Natixis says.

"More importantly, the scope of ongoing projects remains narrow, as 44% of GBA announcements made by Hong Kong firms focus only on real estate and infrastructure.

"Much less is related to the comparative advantages, namely financial and legal services, tourism, health care, transport, and education.

"In terms of why the image is worse in Hong Kong, the obvious difference is that news in mainland China tends to be more positive. But it is also true that the benefits for Hong Kong could be less obvious at first sight.

"If free labour and capital movement were achieved, convergence of income per capita should benefit the poorer cities in Guangdong more.

"Hong Kong could still benefit, but less so in relative terms.

"Without perfect labour and especially capital movement, it is hard to see how the cities could really integrate.

"As to why sentiment on the GBA headed further south for Hong Kong after April 2019 while that of mainland China recovered, it seems to be related to the lack of concrete plans by the Hong Kong Government when compared to Guangdong, which entailed a detailed strategic plan for the next three years.

"In the medium run, the key stumbling block is the free flow of factors of production, in particular between Hong Kong and Guangdong.

"Free movement of labour is a lesser problem than capital, which seems impossible, as it either requires Guangdong to fully open its capital account or Hong Kong to close it, at least partially.

"The former seems hard in today's scenario and the latter could be risky for Hong Kong and the GBA as it would reduce its attractiveness for overseas investors and the role of Hong Kong in intermediating capital.

"To realise the full potential of the GBA, Hong Kong needs to utilise its comparative advantages in investors' confidence, finance and mobility.

"The abundant USD liquidity and financing ability (in Hong Kong) is irreplaceable and can create synergies with other cities in the GBA." www.natixis.com (ATI).