A global megapolis and Macao’s role in the Greater Bay Area

Macao’s Role in the Greater Bay Area Plan and the Belt and Road Initiative


During President Xi Jinping’s official visit to Hong Kong for the celebration of the 20th anniversary of its return to the People’s Republic of China (PRC), Xi presided over the signing of the Greater Bay Area (GBA) Framework Agreement between the National Development and Reform Commission (NDRC) and the governments of Guangdong, Hong Kong and Macao.


This agreement is aimed to improve cooperation and coordination among the aforementioned parties to further integrate those three regions in the Pearl River Delta region into a global megapolis, according to their respective competitive advantages.


The agreement will also implement the principle of one country, two systems, fully and accurately. The ultimate goal of the project is to turn the GBA into a highly competitive world region by the year 2030, making it a high-quality area for living, working and traveling, and a showcase for in-depth cooperation between the mainland, Hong Kong and Macao, and a first-class bay area city cluster.


GBA includes nine cities of Guangdong Province: Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen, and Zhaoqing and the Hong Kong Special Administrative Region (HKSAR) and Macao Special Administrative Region (MSAR), a cluster of cities and regions also known as the Greater Pearl River Delta.


The inclusion of Hong-Kong and Macao into China’s 11th (2006-2010), 12th (2011-2015) and 13th Five-Year Plans (2016-2020) was a major step in the institutional effort to reinforce the idea of “one country,” while retaining the autonomy of “two systems.”


In the last two plans, China’s two Special Administrative Regions (SARs) were given roles in the Belt and Road Initiative, the great Chinese strategy first announced by Xi in 2013. The project became official national policy in 2015 and was enshrined in the Party Constitution at the 19th National Party Congress of the Communist Party of China on 24 October 2017.


This ambitious Initiative, whose internal and external dimensions are like two faces of the same coin, “aims to promote the connectivity of the Asian, European and African continents and their adjacent seas” and to “realise diversified, independent, balanced and sustainable development in these countries,” according to the State Council action plan on the Belt and Road Initiative, which was promulgated on 30 March 2015.


The plan is a bold initiative presenting China’s vision of globalisation for the 21st century; it is inclusive, participatory and generates inclusive development to all partners along its several corridors of connectivity, in a win-win paradigm of multinational cooperation.


The Five-Year Development Plan of the MSAR (2016-2020) includes a chapter on Macao’s participation in the Belt and Road Initiative as well as the merger of the platform between China and Portuguese-speaking countries and the Belt and Road Initiative.


Moreover, the GBA development plan is also linked to the role of Macao, as it establishes the connections between the platform and the Belt and Road Initiative.


Development of the Pearl River Delta as an Economic Region


The pillars of this new megapolis in the making, Guangdong, Hong Kong and Macao, were also at the forefront of China’s historic opening to capitalism and the modern industrial revolution that began in 1979. These important changes were marked by the pragmatic policies set out by paramount leader Deng Xiaoping, which transformed a backwater economy into a powerful economic giant over the course of just 40 years.


It all started in southern China in the marshes, wetlands, small villages and emerging town and village enterprises of Guangdong province. These small towns and villages took advantage of the proximity of Hong Kong and Macao. The former was the champion of freewheeling capitalism and an established light manufacturing and international trade powerhouse, while the small economic enclave of Macao thrived on gambling, tourism and low-tech manufacturing along with significant amounts of accumulated capital ready to be invested in new ventures across the border.


It was Hong Kong, Macao and Taiwan that introduced the ways of capitalism and early Foreign Direct Investment (FDI) into places such as Guangzhou, Foshan, Shenzhen, and Zhuhai, through networks of kinship and guanxi, or relationships. Shenzhen and Zhuhai were two of the first Special Economic Zones authorised by Beijing in 1984. Hong Kong and Macao were the early windows and doors of the growing industrial export model China was introducing to the world, simple in its principles but complex in its making.


The initial process of economic cooperation in these regions was market-driven induced by China’s reform and opening up; the policies and measures taken by different levels of government expedited these processes, including offering many kinds of incentives to attract foreign investment as well as to push forward rapid urbanisation and infrastructure-building. This trend was driven by exponential growth of world demand for China-made goods. The PRD was the foremost processing and trade-oriented manufacturing cluster in the world.


In 2001, with accession to the World Trade Organization (WTO), a new impetus was given to China’s integration into the world economy. At the regional level, a sub-state process of regional integration and coordination of the Pearl River Delta region started taking place after the return of Hong Kong and Macao to China. The historic connections of those territories at the Asian and international level added value and diversity to a region already standing out for its entrepreneurship, connectivity, rich cultural tapestry, openness to the world and economic experimentation.


Evolution of the Pearl River Delta and Birth of the Greater Bay Area


The Greater Pearl River Delta Region, including Hong Kong and Macao, benefited greatly from China’s opening up and reform processes, while keeping its cultural particularities as well as economic and legal systems.


Before the return of Hong Kong and Macao to the PRC, the integration process was fundamentally market-driven. Cooperation across the Pearl River Delta was bilateral in nature, with Guangdong-Hong Kong and Guangdong-Macao focusing on improving communications, transportation and coordination in trans-border issues of mutual interest.


While highly successful, this tripartite regional cooperation was also sensitive to external shocks, whether caused by the world at large or by the region. Two major shocks in the previous 15 years exposed the structural challenges the region faced due to the strong integration of its economies, on the one hand, and their openness to the world, on the other.


The SARS (Severe Acute Respiratory Syndrome) crisis in 2003 triggered intervention by Beijing, which looked for solutions to help speed up the economic recovery of Hong Kong and Macao. The remedy came in the shape of the Closer Economic Partnership Arrangement, a preferential trade agreement that gradually opened the door of the Mainland market to free trade in goods and services from the Special Administrative Regions and encouraged Chinese tourists to visit the two destinations through the Individual Visit Scheme. These measures have had an enduring impact; the individual visas stimulated exponential growth of incoming tourists from China and played a crucial role in the gaming liberalisation process in Macao, which kicked off in 2002.


Subsequent to the 2008 world financial crisis, Guangdong’s export-oriented industries suffered a hard landing, provoked by reduced demand from some of China’s main export markets, namely the US and across Europe. In the meantime, first-generation export industries established in and around the coastal areas of the province were encouraged to move to the hinterland as the central government issued stricter environmental policies and standards to reduce industrial pollution.


The spatial integration of the Pearl River Delta aims to achieve multiple goals, including increasing mobility and accessibility of resources across the region and building multiple infrastructures connecting within and across the three vertices of the triangle: Guangdong-Foshan; Hong Kong- Shenzhen; and, Macao-Zhuhai. The Hong Kong–Zhuhai–Macao Bridge, set for completion in 2018, is the highest-profile project among dozens of other bridges, highways, high speed train lines and metro lines built in the last five years.


The GBA had a combined GDP of US$1.3 trillion in 2015 (Fung Business Intelligence, May 2017), which makes it the 12th largest economy in the world, on a par with Russia. It had a total population of 68 million people as of 2015, the same as Thailand, and more than the UK, making it the most populous major metropolitan area in the world vis-à-vis the Greater Tokyo Bay Area (43.84 million), the New York City Area (8 million) and the San Francisco Bay Area (7.6 million). Three of the major container ports in the world are located in the GBA – Shenzhen (3rd) Hong Kong (5th) and Guangzhou (7th) — a perfect mirror image of its combined export capacity, second only to the US and Germany, according to InvestHK Annual Report 2016. The GBA is improving its international competitiveness from a processing trade-oriented manufacturing cluster into a high- technology-oriented export region. In the meantime, its economic orientation is shifting to a modern and internationally competitive service economy through the process of regional integration with Hong Kong and Macao.


Along with the two Special Administrative Regions, the GBA is the most globally integrated mega-region in China surpassing the Yangtze River Delta Region and the Bohai Rim.


Transformation of the GBA into a Dynamic Economic Region


The Framework Agreement on Deepening Guangdong-Hong Kong-Macao Cooperation for the development of the Greater Bay Area, signed on 1 July 2017, is a comprehensive document dedicated to the objective, goals and principles of multi-party cooperation. It combines the central authority of the NDRC with the provincial government of Guangdong and the regional governments of Hong Kong and Macao.


These four parties agreed to improve coordination and to convene annual meetings to coordinate and resolve major problems and issues of cooperation arising from the GBA development process. The goals of cooperation are tailored to each region’s characteristics and competitive advantages. The goals set for Macao are in conformity with previous documents of the Central Government, namely its 12th and 13th Five- Year Plans, as well as MSAR’s cultural and historical background. Those goals are: to take forward its development as a global tourism and leisure centre; to establish an economic and trade cooperation platform between China and PSC; to establish an exchange and cooperation base with Chinese culture as its mainstream and ensure the co-existence of different cultures and to foster the appropriately diversified and sustainable development of the economy.


This new enhanced mechanism for cooperation aims to develop the GBA into a more dynamic economic region, a high-quality living circle, which is an ideal place for living, working and travelling, and a showcase for in-depth cooperation between the Mainland, Hong Kong and Macao. It aims to build together a first-class bay area and world class city cluster. (A translation of the Agreement is available at gia.info.gov.hk).


The principles of cooperation established in the Agreement are dominated by a catchy phrase: to be led by the market and driven by the government. This means that markets will determine the allocation of resources according to the rules of supply and demand.


However, the government will not be a passive onlooker. On the contrary, it will facilitate the flow and optimum distribution of the factors of production and essential elements for living within the region. In other words, the governments of these regions together with the NDRC will supply the hardware and software needed for the market to move toward the optimum distribution of production factors. These facilitations will face challenges, namely harmonising cross-border control mechanisms, customs clearance, transportation networks, capital circulation, people-to-people connections and a smooth circulation of human capital.


The Belt and Road Initiative does not only mobilise outward Chinese investment. It is also the centrepiece of economic priority within the provinces and main cities in the Chinese mainland as well as the Special Administrative Regions. Hundreds of infrastructure projects, as well as public and private investments in China’s domestic economic environment, are realised as pertaining to the Initiative or because of that.


The two Special Administrative Regions have been given roles appropriate to their features. Hong Kong as a world level financial hub is actively promoting business opportunities along the six economic corridors that are a part of the Initiative, as well as being a prime market for the internationalisation of the Chinese yuan.


On the other hand, Macao has centred its efforts on the PSC. In the meantime, public and private academic institutions and think tanks are developing efforts to contribute to a clear strategy for Macao’s involvement in the initiative.


Interconnectivity of Belt-Road Initiative and GBA


By developing the GBA the central authorities in Beijing and local authorities are integrating simultaneously the development of this regional space constituted by Guangdong-Hong Kong-Macao into the national development strategy of the Initiative. They are also working towards a systemic long-term integration of the two Special Administrative Regions of China into a national space. The GBA is upgrading the quality of living standards in the whole area, building the required infrastructure for efficient circulation of economic resources and maximising its internal and external potential. The goal is to be one of the most important mega-regions in the world by 2030.


In the process of constructing this new regional pole and fulfilling the internal and external roles attributed to each one of them, Guangdong, Hong Kong and Macao are effectively participating in the Belt and Road Initiative. And at the same time, they are also restructuring their own economies in a way that will guarantee sustainable development and convergence with national goals.


Macao’s challenge is to address its internal and external needs in terms of infrastructure development, educational prominence, cultural attractiveness and diversity, and the provision of human capital, economic diversification and entrepreneurship.


Macao must pool together public and private resources and know-how and mobilise all sectors of society in order to serve as a centre for tourism and leisure, including training and education in this area. Furthermore, it must upgrade its role as a platform for the relations between China and PSC, and act effectively as a base for multi-cultural dialogue based on Chinese culture, while diversifying its economy and building the foundation for sustainable development.

Macao must pool together public and private resources and know-how and mobilise all sectors of society.

How prepared is Macao to contribute to the GBA and Belt and Road Initiative?


Macao must build upon its experience and knowledge of how to interact in a context much wider than the limited horizons offered by its 30 sq km of land area and the additional 85 sq km of maritime jurisdiction offered by the Central Government, in order to grasp the multiple opportunities presented by China’s grand initiatives.


It has to do so to secure a better future for its population, and overcome the vicious circle of a rent-seeking economy, typical of jurisdictions over-dependent on gaming. Much has been written and said about Macao’s participation in the construction of the Grand Bay Area and the Belt and Road Initiative, and how important these initiatives are as opportunities for economic diversification and sustainable development of the region.


However, not much has been said of the systematic aspects of the economy and society at large that require restructuring, re-orientation and upgrading in order to confidently face the tremendous challenges of the present and future.


Macao’s economic over-dependence on the gaming sector has led to the declaratory goal of economic diversification as a top priority of the government’s economic agenda. It is not only about how much of Macao’s GDP and fiscal revenues have been generated by the industry, or how sensitive the sector is to external shocks. It is about the social and economic consequences derived by high growth rates since 2001.


With great rapid economic expansion, they have created tensions between the gaming industry and related economic activities with traditional sectors of the economy, particularly the small to medium-sized enterprises, in terms of uneven competition for labour, capital, access to political contacts, and competition for land.


In spite of the positive impact on the employment rate and the new opportunities and diversified demand for qualified workers, improved income, fiscal revenues and a more cosmopolitan way of life, this over-dependence on the gaming industry has also had a negative impact. This includes rising inflation for all consumer products and services, overpricing, speculation in the land market and income inequalities, all ingredients for social instability.


Many questions were also raised about how easy money from the mainland would gain access to Macao, leading the central authorities to cooperate with local law enforcement to tighten control of several mechanisms of illegal transfer of funds to the MSAR.


Moreover, the goal of economic diversification has been given high visibility in the political discourse of national and local political leaders. It is also enshrined in several national documents, including national five-year plans dating back a decade ago as well as the most recent GBA agreement.


However, economic diversification is not a walk along the waterfront. It is a high hill to climb, requiring cooperation between the government and the private sector, balanced policies and a long-term plan. Whatever measures are designed to fulfill those goals, Macao will still have to maintain a stable development of the gaming sector and, ironically, build upon its strengths as a market where there is a wide range of products and services required for its daily operations.


Therefore, the strategic question is how to link the sustainable development of Macao’s economy, with diversification as a component of sustainability, and the MSAR participation in GBA and the Belt and Road Initiative. As a first step, it is important to identify MSAR’s current strengths and weaknesses in engaging in those large projects that are both regional and international by nature.


In dealing with participation in the GBA and the Belt and Road Initiative, some business sectors are more relevant than others. At the same time, Macao’s comparative advantages are not limited to business; non-business sectors such as education and culture must also be taken into consideration.


In addition, public finances, the fiscal reserve fund of the MSAR and the resulting Macao “sovereign fund” (in the making) are of great relevance. Therefore, the following paragraphs will be dedicated to a review of the state of Macao’s economy and the process of economic diversification.


With gross gaming revenue (GGR) totalling US$33.2 billion for 2017, a 19.1 per cent year-to-year increase over 2016, Macao’s economy seems firmly set on the road to recovery. This figure is, however, far from the astronomic levels of 2013-14, when GDP recorded its highest level ever, rising to US$55.55 billion. Some readjustments in the sector, namely reducing the structural weight of VIP gaming in relation to mass-market gaming, were triggered by political and economic developments in Macao’s main gaming market – the Chinese mainland.


On the one hand, the anti-corruption campaign played a role in keeping out high-rollers. On the other hand, restrictive anti-capital flow policies and measures forced certain well-known practices of illegal channels of money transfers out of the PRC to Macao and elsewhere to be more restrained. As a very open economy  sensitive  to external factors, Macao can do little in terms of policy to avoid those impacts. Nevertheless, after two consecutive years of economic downturn, the first signs of recovery started to appear by the end of 2016 and were sustained throughout 2017, with GDP expected to exceed US$45 billion.


As a result of the aforementioned adjustment process, as well as internal pro-diversification economic policies, the contribution of gaming to Gross Value Added (GAV) of Macao’s economic structure fell from 63.10 per cent in 2013 to 47.15 per cent in 2016. The relative weight of other sectors increased significantly, namely, real estate (7.13 per cent to 10.60 per cent), construction (2.86 per cent to 5.33 per cent), commerce (5.28 per cent to 5.30 per cent), financial activities (3.94 per cent to 6.90 per cent), rentals and commercial services (3.32 per cent to 4.12 per cent), and hotels and restaurants (4.61 per cent to 5.93 per cent).


Altogether, they only contributed 38.18 per cent to GAV in 2016, compared to 47.15 per cent for the gaming sector. It is, however, still too soon to determine how the quota gains of those sectors will stand up against the recovery of the gaming sector from the dramatic slump of 2014-16.


The GBA and the Belt and Road Initiative are national development plans that are connected primarily through Guangdong, Hong Kong and Macao. Those plans will generate spillover effects that will induce growth and functional integration. They will also make the GBA an international economic and urban multipolar region, and one of the most important ones in the world. These two projects will be extremely relevant to the process of globalisation with Chinese characteristics that President Xi Jinping has put into motion since 2013.


There is no other way for Macao to proceed on its path of sustainable development than to ride that wave and make the most of it. In this way, it will guarantee the well-being and growing opportunities for its population in a modern and inclusive way as well as the development of Macao’s own cultural and political features, under the principle of “one country, two systems.”

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