Bay Area 2.0: Hong Kong and China’s New Innovation Economy

Victoria Harbour, Hong Kong. (Photo: Thinkstock)

 

I was in Hong Kong for the Wharton Global Forum a few days before President Xi Jinping commemorated the 20th anniversary of the “handover” of Hong Kong to China from Britain—and hence 20 years of “one country, two systems.”

Because Hong Kong has long been more than a city but less than a country, there was real uncertainty then about how the handover would work.

Twenty years later, I think the assessment has to be that the handover has worked somewhere between “pretty well” and “surprisingly well.” More has stayed the same than has changed. Hong Kong remains one of the world’s great global cities. Its people continue to enjoy freedoms and protections they grew accustomed to under British rule. Its economy has flourished as the gateway to and from China.

What about 20 years from now? I think “one country, two systems” is more sustainable than many people suggest, because it is a win-win economically for the island and the mainland, and because this win-win will only increase with the greater economic integration between Hong Kong and China—and Hong Kong-Shenzhen linkages in particular.

This economic trajectory often gets lost in the political noise about Hong Kong’s future, never more so than surrounding Xi’s visit.

Emphasizing “one country” more than “two systems,” Xi talked in Hong Kong more about Chinese sovereignty and national security than about Hong Kong’s autonomy. To underline the point, less than a week later China’s sole aircraft carrier, the Liaoning, sailed into Hong Kong harbor—with striking visuals despite the rainy season’s gloomy skies.

Overall, Xi’s visit and the installation of Hong Kong’s new CEO (Carrie Lam, who opened the Wharton Global Forum) went off relatively smoothly. Some protests to be sure. But nothing like the scale of hundreds of thousands of protesters clogging the narrow streets of Hong Kong following SARS more than a decade ago, or last year’s umbrella movement.

Despite this relative high-politics calm, there is widespread and deep-seated disgruntlement in Hong Kong about daily life. The biggest gripe is outrageously high housing prices for far too few apartments that even Manhattanites would consider cramped—at least in part driven by well-off mainlanders wanting Hong Kong residences. But the local government seems incapable or unwilling to do anything about it—like opening up to residential development some of the (relatively) plentiful green space in Hong Kong.

This is where very real quotidian disquiet intersects with more principled democratic activism—quickly redirected from Hong Kong to Beijing (and ultimately to ending one country, two systems). Hong Kong has elections, but within significant Chinese guardrails. Changing policies in Hong Kong, certainly on politically sensitive topics, requires Beijing’s approval. The more Hong Kongers seem to push for more independence, the more Beijing seems to push back in asserting more authority.

People in Hong Kong want their chief executive to be responsive to their needs and demands. This could result in greater frictions with Beijing.

But I think the push for a better daily life in Hong Kong is more likely, paradoxically, to strengthen current arrangements. Here’s why:

“One country, two systems” was a political bargain. But it has triggered a win-win economic cycle that is only likely to intensify in the years ahead.

Hong Kong benefits from its privileged access to China—not only for production and investment in the adjoining Guangdong province, but increasingly also for selling into the whole Chinese middle class market.

In turn, China needs Hong Kong’s rule of law and openness to and integration into the global financial and economic system to attract global capital into and move Chinese money out from the mainland.

The path forward seems only likely to heighten this win-win dynamic. Looming largest is the remarkable story of  Shenzhen—just 20 miles from the center of Hong Kong—and sharing a land border with the larger “Kowloon side” of Hong Kong (actually, the New Territories of Hong Kong on the Chinese mainland land mass).

 

Chief Economist of the World Bank, Paul Romer, made a clever joke about Shenzhen at the China Development Forum in Beijing I attended earlier this year. He said something like “I want to recognize a President of a great country who was also great real estate developer … Deng Xiaoping.” He went on to name what he considers the biggest urban development project in human history: the transformation of Shenzhen under Deng from a fishing town of around 200,000 people in 1986 to today’s 10 million-plus megacity and still growing (in fact, the second fastest growing city in the world).

This pair of “then and now” photos from the Guardian tells the extraordinary story in pictures:

 

Shenzhen is not only very big and still growing fast, it’s also at the leading edge of the Chinese economy—already the third most important city in China (after only Beijing and Shanghai). It is China’s second financial center (after Shanghai) and probably China’s top technology and innovation city (home to Huawei and Tencent), ahead of Hangzhou (headquarters of Alibaba.)

But the Chinese authorities understand Shenzhen would benefit from becoming even more like Hong Kong—i.e. more entrepreneurial and more open—by increasing the economic openness between them. That is why they are pushing two big initiatives.

First, the creation of Qianhai on reclaimed land near the border with Hong Kong. This is a “special zone inside a special zone.” Deng earmarked Shenzhen as a special economic zone (freer than the rest of the Chinese economy) from the outset. Qianhai is designed to double down on openness, but with a twist—it is officially called the Shenzhen-Hong Kong Modern Service Industry Cooperation district.

Within five years, total construction in Qianhai is estimated at more than 25 million square meters, or about 250 million square feet. To put that in context, the remarkable Hudson Yards development transforming the west side of midtown Manhattan entails about 12.5 million square feet of construction; Qianhai is about 20 Hudson Yards.

Second, the Chinese government is building a direct fast train link between central Hong Kong and central Shenzhen, which will more than halve commute times to 15-20 minutes. At least as importantly, border formalities will be completed in the stations themselves, with the potential dramatically to cut down the current time cost of crossing the border.

On top of this, China wants to expand this new regional economy to include both the semi-independent Macau and its neighboring city Zhuhai in what it has come to call the “Greater Bay Area,” with the world’s longest bridge being built to connect the Hong Kong airport with Macau-Zhuhai 30 miles away.

The notion of a Greater Bay Area is no coincidence; it signifies the Chinese government’s ambitions to create an innovation economy that is “greater” than that around San Francisco Bay.

What does all this mean for Hong Kong? Some view the development trajectory of Shenzhen as an implicit threat to Hong Kong from Beijing. Toe the line politically, and you will benefit economically. Push for more independence, and we will turn Shenzhen into the gateway to southern China.

The political sensitivities here are real. But I think they are overwhelmed by the economic logic. Hong Kong-Shenzhen economic integration benefits Hong Kong because it will turbocharge its access to the most developed part of the Chinese economy—the Shenzhen-Guangzhou corridor in Guangdong province. Integration benefits Shenzhen because more business-to-business and people-to-people interactions with Hong Kong will push Shenzhen further and faster down the path to becoming a global quality innovation economy.

The politics of Xi Jinping’s visit to Hong Kong dominated the media headlines. The win-win economic benefits of “one country, two systems” garner less attention. But in the long run, the economics are likely to be at least as important. That is why the apparently-surprising stability of one country, two systems seems likely to continue through the end date of the handover agreement, in 2047.

 

Editor’s note: This post was originally published on Dean Geoffrey Garrett’s LinkedIn page, where he was named an “influencer” for his insights in the business world. Geoffrey Garrett is Dean, Reliance Professor of Management and Private Enterprise, and Professor of Management at the Wharton School of the University of Pennsylvania. Follow Geoff on Twitter. View the original post here.

 

 

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