Category Archives: Cities

GBA’s three big zones keep reform flame flickering

The provincial government has released a Five-Year Plan for the development of its three main special economic zones of Nansha (Guangzhou), Qianhai (Shenzhen) and Hengqin (Macau). It reads like a plan for a bygone age, but nevertheless makes clear that the GBA’s masterminds still see prospects for further “reform and opening” ahead.

The document is full of jargon, talking about the three zones being carefully aligned in their planning. In fact, they have missions that appear to be largely indistinguishable. The plan is for Nansha to be some kind of central point for the GBA, while Qianhai seems to be focused on working with Hong Kong, and Hengqin with Macau. Yet all three places already have major projects well under way that obviously overlap with each other in their objectives. For example, all three have so-called international arbitration centers; special incentives for Hong Kong people and companies; and a desire to be both “financial centers” and “talent magnets”. Nansha and Qianhai are major shipping hubs. All three love their tech plans.

Among the three, Hengqin seems to have the most realistic chance of success in the foreseeable future. Macau will pursue its “diversification” mission there with zeal for the next few years. Having lots of cheap land, plus a 15% personal and corporate income tax, should make it fairly easy to attract some big SOEs to set up subsidiaries in Hengqin. Adding another 600,000 residents should also be a cinch. Its office towers, now standing empty, should fill up quickly once Macau starts pulling in Chinese companies for smart manufacturing, medicine, and financial services (with a little help from Hong Kong). Its MICE industry, meanwhile, is sure to boom, as the casinos will be keen to sponsor events that enable attendees to receive special visas for Macau. And in the longer term, the casinos will likely be invited in to build more large-scale non-gaming resorts.

(GBI has a special 60-page report on Hengqin, which is distributed to consulting clients. Please get in touch if you are interested.)

Qianhai looks more like quicksand for Hong Kong investors. It is hard to see what the zone offers that cannot be done more efficiently in Hong Kong. The land is not that cheap, the arbitration center is still a work in progress that no serious international firm would use when they can rely on Hong Kong’s courts, and most financial firms are little more than admin offices. And there is no bullet train running there yet. Cross-border currency trading is already a thriving business in Hong Kong; why would banks and insurers need to set up in Qianhai as well?

Nansha, likewise, fancies itself as a future international financial center, with its Hengli “financial island”. But what is that besides a naked attempt to hollow out highly priced commercial real estate in Central? It might be in the geographic center of the GBA, but that also means that it is in the middle of nowhere. It is a long trip by MTR from downtown Guangzhou, and getting there by bullet train from Hong Kong is not yet easy. Nansha is a better bet as a hub for scientists, but even in this respect, it is hard to see it becoming international in a way that might draw resources from Hong Kong. Its real strength remains as a cutting-edge manufacturing hub, notably for electric vehicles, and as a port, for cargo running up to Guangzhou. In both areas it will compete hard with the expanded Qianhai, which now bleeds into Shenzhen’s hi-tech district next door.

In reality, China probably is long past the need for special economic zones. It should be conducting any experiments it deems necessary directly in the two Special Administrative Regions. Still, at least the provincial government is keeping the faith with the Reform and Opening agenda. It will be interesting to see how long its ambitions last under the country’s new twin drives of Dual Circulation Theory and Common Prosperity.

Macau’s casinos face up to common Prosperity

It would appear that the lights are about to be turned up on Macau’s casinos. With 20-year concessions expiring next year, the government has released a list of changes it would like to implement, several of which appear similar to those launched recently under Beijing’s “Common Prosperity” drive. The way these were unveiled and the perceived lack of detailed explanation by the government has sent stocks tumbling.

Are investors over-reacting? It might depend on ROI time horizons. A big shift is under way, but it has been years in the making and will take decades to play out. Now is a good time to be considering the long-term opportunity, remembering what makes Macau special. This is especially when looking more closely at the development of neighboring Hengqin, a special zone on an island next door to Macau’s Cotai district, which is more than three times the size of the whole of Macau.

With this in mind, GBI has prepared a report looking ahead to beyond the awarding of new gaming concessions, which should happen sometime before the old ones expire in June next year (2022). Under this 10-year outlook, it is likely that strong growth will resume as the Hengqin Port becomes the main entry point to Macau and Beijing works with Macau to make the pioneering integration project a success. It is envisaged that GGR could double from pre-pandemic levels by 2031 as Macau’s merger with Hengqin drives mass visitation.

The main risks are macro: Disease containment and socio-economic stability in the hinterland.

Please get in touch for a copy of the report, which is only available to clients of GBI’s consulting service.

Hengqin plan is game-changer for Macau

Hengqin, the special economic zone opposite Macau’s Cotai casino district, has been turned into a bold new experiment. Macau will essentially take over the daily management of the zone from Zhuhai, but will have to consult the provincial government on major policies.

The zone will be jointly managed by a committee, but Macau will be in the driver’s seat: This is clear from the fact that Macau will appoint the Executive Deputy Director of the zone’s management committee. Although Macau’s CE and Guangdong’s governor will be co-heads, the EDD will run the show on a daily basis. The language of the announcement makes it seem like this is a JV, but really this is Macau’s project. 

There is much talk about diversification, with hi-tech industries, including manufacturing, and financial services being given lots of ink. But tourism is still the key. The plan makes no mention of the gaming concessionaires, and the tourism section calls it “cultural tourism”. But make no mistake, what this means in practice is that SMEs will get subsidies to pursue tech ideas, most of which will flop, and the banks will be able to build up some wealth management products in Hengqin, but the only projects that will actually make money will be in tourism, and so they will get the lion’s share of attention and resources.

This will take time, however: No one should expect a press release on the casinos being given a role in Hengqin before the concessions are renewed next year. The deadline for getting the management committee fully functional is only 2024. The goal for integration to be fully realised is only 2035.

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Qianhai to grow 8X, boosting property developers

Shenzhen has decided to widen the administrative boundary of its Shekou Qianhai special economic zone, promising to speed up long-promised reforms in financial services and use the zone as a test bed for further opening the country to international capital flows. Yet what this really is, is a property play.

Here is the SCMP story on the initial announcement, which is full of commentary about how this announcement is a massive win for Hong Kong and should be seized upon by Hong Kong businesses, which currently only account for around 10% of all investment in the zone.

This follow-up story gushes further, adding assurances that lots of experimental stuff will be happening in Qianhai, and that one-third of the newly-vacated land will be set aside for Hong Kong investment.

However, a few days later, another SCMP report hit the nail on the head: the biggest beneficiaries of the new plan are the state-owned property developers with the largest land banks in the area: China Merchants, Grand Joy, and Shenzhen Metro.

It also notes that property prices now have to deal with cooling measures being implemented across the country, which has resulted in a “cap” being placed on the Qianhai market that is 7% beneath the level reached at the most recent land auctions.

That is just for residential. Office vacancy rates in Qianhai have been climbing steadily since 2014, and now stand at around 23%. This is nearly three times higher than in Hong Kong, which has been hammered in recent years by a combination of protests and Covid-19. And yet officials say the reason they are expanding Qianhai is because it lacks room to grow?

Shenzhen eyes duty-free zone

Hong Kong has woken up to the fact that the Greater Bay Area isn’t a concept designed exclusively for its benefit, after analysts pointed out Shenzhen’s plans for a duty-free shopping zone in its downtown area. The same is happening in Macau, where massive shopping centers are being built in neighboring Hengqin.

Unlike Macau, which appears ready to annex Hengqin, Hong Kong cannot get ahead of this trend. The easy days as an “offshore” shopping destination that fueled its tourism industry since the recovery from the last pandemic (SARS in 2003) are unlikely to return after Covid-19 is brought to an end. Hainan is already providing a snapshot of what happens when onshore duty-free shopping is embraced: it, er, migrates back across the border.

This is good. Hong Kong’s duty-free status is a drug that has long needed to be kicked. It has brought in mostly low-end jobs, enriched landlords more than workers, and taken Hong Kong’s focus away from being “Asia’s World City.” Forces pushing for innovation and globalisation of Hong Kong’s economy might stand a better chance again.

However, in many other respects, it would seem that Hong Kong is moving in the other direction, becoming more of a mainland-like city. Shenzhen’s duty-free plan is just a reminder that it is a competitive market that awaits Hong Kong, with or without a GBA masterplan.

Could Macau be ‘gifted’ Hengqin?

Macau Chief Executive Ho Iat Seng has set tongues wagging with comments to local media concerning Henqin, the island in neighboring Zhuhai, suggesting the central government could be preparing to transfer control over all or part of it to the Macau Special Administrative Region.

Ho said in an interview at an event in Macau today that “there is good news” for the specific progress of the so-called Guangdong-Macau Intensive Cooperation Zone, the parameters of which have not yet been clearly defined. “It will be announced within this month or next month”, Ho said, when asked about the details, adding that “it’s not convenient to disclose the relevant information now, as this is a central government policy.”

The Guangdong-Macau Intensive Cooperation Zone concept was first announced around the time of Macau’s 20th anniversary celebrations in December 2019, presided over by President Xi Jinping. One idea floated by political observers since then is that Macau would use this framework to expand the administration of its University of Macau campus on Hengqin. The campus currently has a fence running around it and is accessed only via a tunnel from the Macau side. But other analysts see a joint administration of the entire island being more likely, as its border controls could easily be moved back from the current Hengqin crossing to two bridges connecting Hengqin to the rest of Zhuhai. These already have customs checkpoints, because Hengqin is a New Area, a kind of special economic zone.

Ho went a bit further in today’s press conference, again hinting at what lay in store for Macau in Hengqin. The whole country hopes that Macau will be stable, develop at an appropriate pace, and diversify its economy, he said. When a reporter asked if this meant Hengqin could help in this mission of diversification, he said: “That is the road the country has paved for us.”

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Foshan: Where legends are born

The municipality of Foshan looks like a suburb of Guangzhou on a map. The two are divided only by a small river and if their boundary were removed they would look like what is expected of a major megalopolis. Which is why it makes sense that they are intertwining more by the day, with a common Metro system and joint planning commissions. But go back in time, not that far, and Foshan’s status as a dynamic and brilliant city in its own right becomes clearer. 

Continue reading Foshan: Where legends are born