Constructing a modern economic system in the Greater Bay Area

The construction of the Guangdong–Hong Kong–Macao Greater Bay Area (the Bay Area Development) must conform to the new requirements of the 19th National Congress of the Communist Party of China on the construction of a modern economic system. This modern economic system that China will build will be an industrial system comprising the real economy, technological innovation and the co-ordinated development of modern financial and human resources. 

The greatest difference between the current round of development and those of the past three decades is that, in the past, China has emphasised rapid growth but is now focusing more on high-quality development. Thus, the Bay Area Development needs to establish an industrial system that is tied to the real economy, technological innovation, and modern financial and human resources, and will promote the transition from high-speed growth to high-quality development in the Greater Bay Area. 

A core indicator of high-quality development is the growth of total factor productivity in the Greater Bay Area through changes in quality, efficiency and motivation. Therefore, to develop such a strategic emerging market, the construction of the Bay Area Development must move towards a new era of high-quality progress.

The seven strategic emerging industries identified by the Chinese government comprise IT, biotechnology, new energy, new-energy automotive, high-end equipment manufacturing, new materials and energy savings. To integrate these strategic emerging industries into the Bay Area Development, technological innovation is the priority. The indicator of progress in science and technology innovation should be investment in research and development (R&D) – it should be the whole year’s expenditure of social research and experimental funding as a share of GDP. In 2016, the intensity of R&D investment in Guangdong Province reached 2.56%, surpassing the Organisation for Economic Co-operation and Development average of 2.4%. From the perspective of R&D and innovation input, the Bay Area Development already possesses the foundation and conditions for developing strategic emerging industries driven by innovation.

However, this index only indicates that the input flow has reached its goal. To achieve the stock of R&D and innovation inputs, Guangdong will need 10 or even 20 years of hard work. In the Greater Bay Area, Hong Kong’s R&D intensity is 0.73%, which is relatively low. The Hong Kong Special Administrative Region Government has explicitly proposed that R&D investment intensity in Hong Kong should reach 1.5% by 2022. By then the total funds invested in R&D in the Bay Area Development will exceed RMB220 billion annually. Currently, the R&D input intensity in Shenzhen is 4.1%. 

Despite the low intensity of R&D and innovation in Hong Kong, it still possesses some of the advantages that Guangdong lacks. First, it has four world-class universities, while neither Shenzhen nor Guangdong is home to any of the world’s top 100 universities. Second, establishing modern and world-class direct financing systems is of crucial importance to the construction of the modernised economic system in the Greater Bay Area.

There are perceived shortcomings in the direct financing systems in Guangzhou and Shenzhen, and Hong Kong has a global advantage in providing multi-level and diversified modern direct financing tools for technological innovation. Third, with a high degree of internationalisation, a sound economic environment and complete legal conditions, Hong Kong is capable of forming a complementary joint mechanism with Guangdong.

In China, several areas are able to compete with the city cluster in the Greater Bay Area. For example, the investment in innovation in the Yangtze River Delta (YRD) metropolitan region in 2016 reached RMB420 billion – about twice that of Bay Area Development. In the YRD metropolitan region’s major cities, R&D intensity reached 3.82% in Shanghai, 2.43% in Zhejiang and 2.66% in Jiangsu – meaning both Shanghai and Jiangsu’s R&D intensity ratios were higher than that of Guangdong. Another example is the Beijing–Tianjin–Hebei region – known as the Jingjinji metropolitan region. Its investment in innovation reached RMB240 billion, slightly more than that of the Bay Area Development. In this region, the R&D intensity of Beijing in 2016 and 2015 was 5.96% and 6.01%, respectively. This is the highest in all of China, reflecting Beijing’s position as the location of China’s best universities, research institutes and enterprise innovation platforms, and some of the most outstanding scientific and technological innovation talent in the country. 

Xiong’an New Area further strengthened the innovative advantages and potential of the Jingjinji metropolitan region, Beijing–Tianjin–Hebei. The key to future development lies in the region’s leadership-building strategically emerging industrial bases and world-class city clusters. In this regard, the Bay Area Development and the YRD metropolitan region, along with the Jingjinji metropolitan region, will surely enter into fierce competition with each other.

Globally, the benchmarks for the progress of the Bay Area Development will be the bay areas of New York, a hub for global finance; San Francisco, a global tech innovation hub; and Tokyo, a global hub of modern manufacturing. There are three metropolitan areas in the Greater Bay Area. First, the Guangzhou–Foshan–Zhaoqing metropolitan area, which is on a mission to connect with Hong Kong and Macao, to identify its function in the Bay Area Development. Second, the Shenzhen–Dongguan–Huizhou metropolitan area, which will give full rein to mutually beneficial advantages compared with Hong Kong and Macao, advancing diverse development. Third, the Zhuhai–Zhongshan–Jiangmen metropolitan area, which has the task of strengthening co-operation with Hong Kong and Macao to exert their own advantages. The disparities in the three metropolitan areas determine the approaches adopted to building a regional and even a global financial network centre, an innovation network centre and a modern service network centre that can participate in international competition in the Greater Bay Area. 

Construction of the Bay Area Development must rely on a high standard of investment, business and market environment. Over the past 30 years, Guangdong has accumulated rich experience in co-
operation with Hong Kong and Macao. Most important has been the combination of the ‘invisible hand’ of the market with the tangible hand of the government, as well as the strengths of a harmonious society, and ‘opening‑up’ to form a systematic co-operation mechanism to promote economic and social reform and development. 

Over the past 30 years, the proportion of private-owned enterprises in China’s manufacturing industry has reached 61.2%, that of foreign investment has reached 11% and state-owned enterprises (SOEs) has reached 27.8%. It is not difficult to see that China’s manufacturing industry has formed a mixed-ownership structure. 

However, not all industries are the same. For example, in the financial industry, the share of SOEs is 90.7%. In the medical and healthcare industry, this number is 89.9%. In the fields of culture, education, scientific research, retail and wholesale, the proportion of SOEs is above 60% in all instances. Therefore, for an improved construction of the Bay Area Development, it is necessary to create a fully open market, and an investment and business environment that leads to a rational distribution system for private enterprises, SOEs and foreign investment in different fields.

This article is part of The IFF China Report 2018, which draws mainly on content provided by China-headquartered think tank, the International Finance Forum, and is published in association with Central Banking.