On February 18, 2019, the Chinese Government released its much-anticipated blueprint for the Greater Bay Area — a thriving and dynamic economic zone that includes major cities such as Hong Kong, Shenzhen, Guangzhou and Macau and a combined GDP of over USD 1.5 trillion. The Greater Bay Area presents significant business opportunities across a broad spectrum of sectors and industries. In this article, we focus on the key takeaways from the Greater Bay Area blueprint for financial institutions and the business opportunities they present.
What is the Greater Bay Area?
The Greater Bay Area is made up of Hong Kong and Macao as well as nine cities in China’s Guangdong Province, namely: Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing. The 56,000 Greater Bay Area has a combined population of about 70 million and a GDP that would make it the world’s 12th largest economy if it were its own country. The area includes some of the most dynamic, innovative, technologically advanced and economically open regions in China.
The development of the Greater Bay Area is a major national strategy for China. The blueprint document — entitled Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area 《粤港澳大湾区发展规划纲要》— aims to turn the Greater Bay Area into a world-class city cluster that houses an international innovation, science and technology hub, a series of interconnected financial markets, trade centers and smart cities, some of the world’s leading academic and research institutions, an advanced manufacturing and IT powerhouse as well as an important pillar for the Belt and Road Initiative.
Since the blueprint is only an outline of China’s development plan for the Greater Bay Area, it addresses most topics – including finance-related matters – only at a very high level. We expect that relevant authorities and regulators will issue detailed policies and measures designed to implement the broad objectives stated in the Greater Bay Area blueprint. We are closely following developments relating to the Greater Bay Area and will publish our analysis of the detailed implementing measures as they become available.
Finance – at the core of the Greater Bay Area
The Greater Bay Area includes Hong Kong (an established international financial center) and Shenzhen (an emerging global financial powerhouse that is home to the Shenzhen Stock Exchange and some of the world’s leading fintech and technology companies).
Financing (whether it be through traditional loans, bonds, securitization, green finance or other innovative financing techniques) and financial markets (including enhancements to the stock connect and bond connect regimes and the trading of investment funds, currencies, commodities, derivatives and carbon/emissions credits) will play a vital role in the development and ongoing success of the Greater Bay Area. All of this is consistent with the role of the financial sector as a key supporting pillar for the real economy.
Business opportunities for financial institutions
The Greater Bay Area presents significant business opportunities. For some financial institutions, the Greater Bay Area could be a game changer for their China business strategy.
Following are just some of the potential business opportunities for financial institutions. As detailed implementing measures are introduced over time, we would be pleased to work with you to explore more specific business opportunities for your organization.
Coordinated development, regulation and supervision in the Greater Bay Area
- Currently, one of the key challenges faced by financial institutions operating in Mainland China, Hong Kong and Macau is that they will have to follow different rules and regulatory regimes in each jurisdiction, which significantly increases their compliance costs and reduces their efficiency.
- Going forward, financial institutions operating in the Greater Bay Area will likely benefit from further financial regulatory and supervisory coordination among key regulators in Mainland China, Hong Kong and Macau, subject to the “one country, two systems” principle.
- There will also be greater coordination amongst cities in the Greater Bay Area (primarily Hong Kong, Guangzhou, Shenzhen and Macau) across all areas of development, including developments in banking, finance, insurance, electronic payment systems, RMB internationalization, fintech, capital markets, financial market infrastructure, asset management and capital management. A coordinated, top-down development plan for financial services will reduce the risk that measures issued by different regulators are at odds with one another.
- Further financial sector opening-up and reforms
- Financial institutions will benefit from further financial sector opening-up, reforms and innovation in the Greater Bay Area. Measures providing for greater market access and other more accommodative policies will allow financial institutions to establish new operations or expand their existing operations in the Greater Bay Area and gain access to over 70 million potential customers in an area that currently represents 12% of China’s overall GDP.
- Below are examples of business opportunities resulting from further opening-up and reforms in the following specific areas:
- ① Greater capital account convertibility:
- China’s plan to expand the role of offshore accounts (OSAs) and leverage the experience gained from operating free trade accounts (FTAs) in the Shanghai Free Trade Zone should ultimately lead to greater capital account convertibility, which will facilitate cross-border investments and financing activities in the Greater Bay Area and beyond.
- ② Specialty areas of finance:
- Financial institutions with expertise in aircraft and ship leasing and financing, shipping insurance, cross-border insurance, reinsurance and related areas will see an increase in business activity as the Greater Bay Area consolidates its position as a leading global center for these specialty areas of finance.
- ③ New regional financial centers for Hong Kong and Macau banks and insurance companies:
- Hong Kong and Macao banks and insurance companies will be allowed to set up operations in the Qianhai area in Shenzhen, the Nansha area in Guangzhou and the Hengqin area in Zhuhai, which are emerging as important regional financial centers. The rising middle class population in those areas will have a strong demand for financial products.
- ④ Commodities and derivatives:
- Financial institutions with extensive commodities and derivatives experience can help design innovative financial instruments that help businesses in the Greater Bay Area hedge their currency, commodities and other risks.
- ⑤ Green finance:
- Financial institutions and other service providers can play an important role in turning the Greater Bay Area into a leading green finance hub. For example, they can start by helping establish an internationally recognized green bond accreditation organization in Hong Kong.
- ⑥ Insurance:
- Insurance companies in Mainland China, Hong Kong and Macao will benefit from newly established cross-border motor vehicle, medical and RMB reinsurance businesses as well as the planned insurance pilot program in Shenzhen.
- ⑦ “Go Global” strategy:
- Financial institutions can play an important role in assisting Chinese companies in the Greater Bay Area look beyond the bay area and pursue a coordinated “Go Global” strategy.
- ⑧ Macau’s role as a bridge between China and Portuguese-speaking countries:
- Financial institutions in Macau and Portuguese-speaking countries will benefit as Macau is transformed into a hub for the provision of financial services between China and Portuguese-speaking countries.
- Based on our past experience, China will likely take a gradual and cautious approach to these opening-up and reform measures in order to secure the bottom-line of ensuring financial stability. For example, China may establish pilot programs with limited scope of application in terms of eligible participants, product types and geographical reach before expanding successful pilot programs to cover the entire Greater Bay Area.
- We would be pleased to share our insights regarding the development and evolution of previous financial sector pilot programs in China, which may be useful as you navigate similar programs in the Greater Bay Area.
- Belt and Road Initiative
- China will further consolidate Hong Kong’s position as a financing and coordination hub for projects relating to the Belt and Road Initiative. The Greater Bay Area therefore presents financial institutions with a unique opportunity to finance Belt and Road projects.
- The blueprint is full of references to ambitious infrastructure-related projects that are designed to make cities and people in the Greater Bay Area more interconnected – both physically and digitally.
- Financial markets interconnectivity
- Financial institutions can take advantage of enhancements to the stock connect and bond connect programs as well as new and emerging interconnections, mutual access and mutual recognition regimes between the financial markets in Mainland China and Hong Kong to help bring international investors to China and Chinese investors to the world.
- Over time, we can expect China to gradually expand the channels for Mainland China, Hong Kong and Macau residents to invest in financial products (e.g., stocks, bonds, currencies, investment funds, commodities and derivatives) in each other’s markets, which will lead to further integration of financial markets in the Greater Bay Area and beyond.
- Financing hub for innovation and technology
- As the Greater Bay Area (especially Shenzhen and Hong Kong) emerges as a global fintech hub and international center for innovation, science and technology, financial institutions will have the unique opportunity to provide financing to technologies and companies that will shape the 21st century and redefine the human condition.
- For example, financial institutions can help Chinese innovation and technology companies in the Greater Bay Area raise capital through a public listing in Hong Kong or attract investments from Hong Kong private equity funds.
- RMB internationalization
- As China encourages greater use of the RMB within the Greater Bay Area and beyond, financial institutions can benefit from further internationalization of the Chinese currency.
- For example:
- ① Subject to applicable regulations,banks in the Greater Bay Area will be able to engage in cross-border RMB interbank lending, RMB FX spot and forward transactions, RMB-related derivative transactions and the distribution of RMB-related wealth management products.
- ② Financial institutions with capital markets experience can assist companies in the Greater Bay Area issue offshore RMB bonds and engage in other cross-border capital markets activities.
- The Greater Bay Area presents different business opportunities to different financial institutions, depending on their unique competitive advantages and business strategies in the region. KWM’s cross-border team of lawyers. We would be very pleased to discuss with you what the Greater Bay Area means for your business and how you can take advantage of this once-in-a-generation opportunity.