The strategic impact of the Hengqin-Guangdong Free Trade Zone on China’s and the global economy

The development of a pilot free trade zone (FTZ) in Guangdong Province, covering Hengqin of Zhuhai, Nansha of Guangzhou, and Qianhai of Shenzhen is of great strategic importance for China, and potentially will impact on the world economy. The region neighbouring Hong Kong and Macao, possesses unique conditions, features, and advantages compared to other parts of China which require similarly specific policies.

These policies flow from the unique interaction of one of China’s most economically advanced areas, Guangdong, with two of the most economically developed regions not only of China but of the world – Macao and Hong Kong. These macro-economic features determine that, with correct policies, the high prosperity of Hong Kong and Macao will increasingly spread into rapid growth in Hengqin and other parts of Guangdong. This will allow integrated development of the Pearl River area – a process which will aid all parts of the region.

The importance the Chinese leadership attaches to this development was shown in the recent visits of the most senior leaders to the region. In December of 2014 President Xi Jinping made a major visit to Macao. At the beginning of January 2015, Premier Li Keqiang visited Guangdong to stress the importance of this FTZ.

These high profile visits built on earlier policies prioritizing development in the region. In August 2009 the State Council approved the Overall Development Plan for Hengqin New Area. In late July 2011, the State Council gave official permission allowing Hengqin to enjoy more preferential policies in terms of taxation and customs clearance. In the executive meeting of the State Council in December 2014 Li Keqiang announced the expansion of China’s overall FTZ policy to include Guangdong FTZ. As previously announced, Hengqin was incorporated into the FTZ, meaning Hengqin will become an area with extra tax preference policies.

Macro-economic fundamentals clearly determine the development of the FTZ. Hong Kong and Macao are two of the most economically developed regions in the world. In a similar fashion to the way that proximity of Hong Kong drove the dramatic economic growth of Shenzhen after its establishment as a Special Economic Zone in 1979, the economic dynamic will allow the rapid development of Hengqin and other parts of Guangdong, under the impact of the new FTZ. A major difference to the earlier process, however, is that this development will take place in different economic sectors to the earlier development of Hong Kong and Shenzhen. This is due to the much higher level of economic development in Hong Kong, Macao and Hengqin compared to the original Hong Kong-Shenzhen process.

In order to appreciate just how developed Macao and Hong Kong are in global terms it is merely necessary to note that in 2013, in Parity Purchasing Powers (PPPs), Macao ranked first in the world in terms of per capita GDP in the world and Hong Kong ranked ninth – the United States ranked tenth. Macao’s per capita GDP is 172 per cent of the United States, even in current dollar terms, and in terms of PPP, Macao’s per capita GDP is 268 per cent of the United States. Hong Kong has the same per capita GDP as the U.S. in PPP terms and almost three quarters of the U.S. level in current dollars.

Guangdong is developed by Chinese standards with a per capita GDP 40 per cent higher than the average for China in 2013. But, of course, Hengqin is less developed, and therefore has far lower costs, than either Macao or Hong Kong.

The economic dynamics that flow from this are clear and determine their importance in China. They are the well-established “geographical catch up” – i.e. the process whereby areas surrounding regions of very high per capita GDP will grow even more rapidly than the most developed areas themselves.

The reasons for these economic dynamics are well understood. Such regions as Hengqin, adjacent to areas of very high economic development, gain from the easy access to the highly developed areas but have the great advantage of far lower costs as the development process proceeds. Therefore companies gain strong advantages from locating directly adjacent to, but not actually within, very highly developed economic regions. This well-known economic phenomenon manifests itself in numerous forms ranging in scale from the relatively small to the extremely large. Taking examples in ascending order of scale:

        • Within developed cities, for example, New York, London, Paris, the “fringe” of areas of very high development, such as Manhattan or the City of London, grew spectacularly, moving rapidly up-market.

        • This process at the scale of an entire city, Shenzhen’s development adjacent to Hong Kong, has already been noted.

        • An even larger example, taking in entire countries, has taken place in Europe where countries surrounding the developed core of Germany-France-Britain have shown spectacular growth over several decades – classic examples being the extremely rapid development of Ireland and Poland.

Hengqin, in particular with its unique connection of the Chinese mainland to Hong Kong and Macao, is a core of this FTZ. The whole island is designated a special economic district, with the ultimate policy aim being to make Hengqin gradually become the outstanding hub for close cooperation between the Pearl River delta, Hong Kong and Macao.

Given the very high per capita GDP of the surrounding areas, the core developments in the Hengqin region will necessarily, however, not be lower and middle technology manufacturing, as at the beginning of the older Hong Kong-Shenzhen development. The core will be high-end service sectors such as business services, finance, tourism, leisure, and cultural creativity together with high-tech manufacturing.

While the macro-economic fundamentals for this development are highly favourable for the reasons already noted, to be successful will require attention to be paid to the three main sources of growth in an economy – capital investment, labour and productivity. It is clear that government policies are intended to meet these requirements.

First, very large scale fixed investment, not only in direct production but in infrastructure, is being poured into the region. The most eye-catching is the Hong Kong-Zhuhai-Macao bridge and tunnel which will connect the three major cities in the Pearl River Delta. With a length of some 50 kilometres, this is one of the world’s largest infrastructure projects. But it is only the most spectacular feature of infrastructure development. Hengqin has also for several years been constructing five networks – railways, pipelines, a water grid, power grid, and an IT network. The aim is to have a unified management for development of this underlying infrastructure.

Second, such a high value added region evidently requires highly skilled labor. This can draw on the entire Pearl River delta region, and other parts of China, but specific initiatives are being taken in Hengqin itself. In particular the University of Macao has established its own campus in east Hengqin.

Finally, the aim of developing the region as an FTZ is to support productivity growth. The key aim of the FTZ, alongside specific tax advantages, is liberalization of development in the service sectors which will form the core of the region’s economy.

Situated in the most highly developed part of China, which is the world’s most rapidly growing major economy, the Hengqin New Area and the Guangdong FTZ at large is a major initiative with an impact likely to be felt not only on China but in the world economy

John Ross is currently Visiting Professor at Antai College of Economics and Management,Shanghai Jiao Tong University, where he leads research on globalisation and on China and the international financial crisis.
Check out his blog: http://ablog.typepad.com/keytrendsinglobalisation/ , or follow him on twitter @JohnRoss43