Why is sentiment about the Greater Bay Area worsening especially in Hong Kong

• Hong Kong’s economy is decelerating rapidly. Part of the reason is the US-China trade war and a slowing Chinese economy, aggravated by the recent social unrest. Among the uncertainties, an important announcement for Hong Kong and Guangdong province was made in February 2019, namely the “Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area (GBA).
• In this report, we look into the image of the GBA using news from big data sources. This project should have been perceived positively with the integration of highly complementary cities in principle. However, our analysis points to an improved image since 2017 but retreated in April 2019. More generally, sentiment has been volatile with improvements after announcements and immediate worsening afterwards. In addition, the image of GBA in Hong Kong is trailing behind mainland China. We aim to address three questions: i) why is the GBA’s image volatile; ii) why is its image worse in Hong Kong; and iii) why it is worsening since April 2019.
• On the high volatility in the GBA’s image, there is a shortfall of expectations versus reality stemming from the lack of a solid timeline and government funding. More importantly, the scope of ongoing projects remained narrow as 44% of announcements made by Hong Kong firms on the GBA focus only on real estate and infrastructure. Much less is related to the comparative advantages, namely financial and legal services, tourism, health care, transport, and education.
• In terms of why the image is worse in Hong Kong, the obvious difference is news in mainland China tends to be more positive. But it is also true that the benefits for Hong Kong could be less obvious at first sight. If free labor and capital movement were achieved, convergence of income per capita should benefit the poorer cities in Guangdong more. Hong Kong could still benefit but less so in relative terms. Without perfect labor and especially capital movement, it is hard to see how the cities could really integrate.
• As to why the sentiment on the GBA headed further south for Hong Kong after April 2019 while that of mainland China recovered, it seems to be related to the lack of concrete plans by the Hong Kong government when compared to Guangdong, which entailed a detailed strategic plan for the next three years.
• In the medium run, the key stumbling block is the free flow of factors of production, and in particular between Hong Kong and Guangdong. Free movement of labor is a lesser problem than capital, which seems impossible as it either requires Guangdong to fully open its capital account or Hong Kong to close it, at least partially. The former seems hard in today’s scenario and the latter could be risky for Hong Kong and the GBA as it would reduce its attractiveness for overseas investors and the role of Hong Kong in intermediating capital.

Full report available for NATIXIS clients.