New trade pact about much more than just Hong Kong

Australia’s new free trade agreement with Hong Kong will help open up a new world that stretches beyond the territory itself to the Greater Bay Area, a region that is the epicentre of China’s transformation from an industrial nation to a multi-faceted economy.

The Greater Bay Area sits where the Pearl River flows into the South China Sea and includes nine of China’s mainland cities in Guangdong Province, as well as Hong Kong and Macau. China in February announced a long-awaited plan to accelerate the economic integration of this region to create a globally competitive, world-class metropolis that draws on the respective strengths of each city. This includes, for example, high-tech industries in Shenzhen and the financial, logistics and professional services capabilities at which Hong Kong excels.

The new free trade agreement will help Australian companies tap the opportunities proffered by this transformation, not just by exporting goods, such as wine and food, to the Greater Bay Area’s increasingly affluent residents but also by providing services that fuel a dynamic economy, including education, engineering, legal services, transport and construction.

Hong Kong already has a significant comparative advantage in a range of modern industries from healthcare, family and household services, to intellectual property rights, logistics, tourism and entertainment that benefit from China’s rapid growing demand for services. Its central position in the Greater Bay Area should drive home those advantages further to Australian companies, and complement the economic benefits generated by both the new trade pact and the existing China-Australia Free Trade Agreement.

The Greater Bay Area has been at the forefront of China's economic development for decades. It was in Shenzhen, at the time little more than a fishing village, that the “reform and opening up” of China was piloted in the late 1970s. China’s more recent rebalancing from low-value manufacturing to innovation and high-tech industry has again centred on the region, within Shenzhen alone spending 4.3% of its GDP on research and development (more than double the national average).

The enormous potential of the Greater Bay Area is well recognised by numerous foreign companies, including Apple, which in October 2016 announced it would set up an R&D centre in Shenzhen. Chemical company BASF in July last year also signed a memorandum of understanding for a US$10 billion production site in Guangdong.

With a population of 70 million, the Greater Bay Area today produces 37 per cent and 12 per cent of China’s total exports and GDP, respectively. If were ranked as an individual economy, it would be equivalent to the 13th largest economy in the world and ahead of Australia.

The full integration of the Greater Bay Area will take some time as the different policies and regulations that operate within mainland China, Hong Kong and Macau will need to be streamlined. But much of the necessary infrastructure and logistics capabilities necessary for the area’s transformation are already in place. In particular, Hong Kong’s port facilities (both sea and air) are consistently ranked among the busiest and most efficient in the world. The recent completion of the Hong Kong-Zhuhai-Macau Bridge as well as the Express Rail Link connecting Hong Kong to Guangdong and beyond are further evidence of China’s commitment to the region’s future.

Experience also shows that selling into a vast, complex and rapidly-evolving market like China is not without challenges. Incomes aren’t rising as fast as previously and today’s trade tensions have an inevitable impact on business and consumer confidence.

Foreign companies also need to be able to react to constantly-shifting tastes and to brace for intensifying competition from nimble and increasingly high-tech local companies. Tesla, for example, faces a host of local electric car players competing to become the “Tesla of China”, while Beijing-based Luckin wants to overtake Starbucks as the largest coffee chain by number of stores in 2019.

Nonetheless, these obstacles shouldn’t obscure the long-term business opportunities available in the Greater Bay Area. HSBC expects the size of the region’s consumer markets to double to nearly US$900 billion by 2025, which would make it larger than those of South Korea and Vietnam put together. By that time, its GDP should reach US$2.8 trillion, or the equivalent of the ninth largest economy in the world.

Hong Kong has a long history as a centre of global commerce and is Australia’s largest business base in Asia. The Australia-Hong Kong Free Trade Agreement will ensure that our relationship with it can evolve at the same quick speed that is transforming not just the territory itself, but also China as a whole.