China in Focus
Is GBA Investment Worth the Risk?
Is GBA Investment Worth the Risk?<br/>大灣區投資是否值得冒險?

Is GBA Investment Worth the Risk?<br/>大灣區投資是否值得冒險?

The Greater Bay Area (GBA) – encompassing the Guangdong, Hong Kong, and Macao regions – has a population of more than 86 million people in 11 megacities. Despite the pandemic, the GBA enjoyed growth in 2020, with its GDP exceeding US$1.66 trillion. 

Still, investors are asking: Is the area worth the risks?


Pressure from the U.S.

Manufacturing in the GBA has been hard hit during the pandemic. Although the Chinese government has taken some action to cool prices, the cost of steel input has risen substantially. In addition, the global disruption of trade due to Covid-19 has led to a shortfall of available containers and ships, leading to the highest shipping rates in more than a decade. This comes on top of the Trump-era tariffs and price increases in other key raw materials, such as copper and aluminum.

The net result is that "free-on-board" shipping prices have gone up by 30 to 40% for a wide range of manufactured goods exported from the GBA. These price increases are now working their way through the global economy.

Since 2018, the GBA has faced several significant events in addition to the pandemic. In addition to increasing tariffs on Chinese imports and restricting exports of technology, the U.S. has regulated the public listing of Chinese firms on U.S. stock exchanges. Meanwhile, China has increased oversight of technology firms and tightened control over Hong Kong. 


From washing machines to semiconductors

The U.S.-China trade war initiated by the Trump administration started unassumingly, with a disagreement over solar panels and washing machines. In 2018, frictions moved to steel and aluminum and began to involve a host of other nations, from Mexico to Turkey.

The GBA was most seriously affected by what has been termed by policy observers as Trade War Battle 3, which covers intellectual property rights, innovation and technology. By the end of 2020, the trade deficit with China had dropped to US$310.8 billion, the lowest since 2011.

The impact of Trade War Battle 6, which focused on semiconductors, took effect in 2019 and 2020. The GBA is a tech hub and home to four of the country's top five technology companies by revenue: Huawei, ByteDance, DJI and Tencent. And not only was the technology industry targeted, but specific companies such as ZTE and Huawei had their access to U.S. technology severely curtailed. 

Standards are another arena of contention. The most recent battleground is the extension of the 5G hardware restrictions on Huawei to restrictions on Chinese companies' participation in the O-RAN Alliance, a 200-company industry group that is working on open telecommunication standards. This may lead to a forking or balkanization of 5G.


Internal headwinds

Headwinds have also come from within China. The last-minute cancellation of the Ant Financial IPO in November 2020 by the Central Government was followed by a record fine for Alibaba in April 2021. 

In the background, a series of regulatory measures were brewing, aimed at reducing the economic power of the largest tech firms. These include antitrust regulations that cover areas such as restricting user traffic, blocking competitors' products and discriminatory pricing. New laws on data security and to protect personal information also came into force this year. 

A lot of these laws appear to overlap, but the net effect is to dampen the economic power of the tech giants. 

What are the implications of all these pressures for FDI and the GBA? Will the GBA and its technology sector maintain its growth?


Strategies for resilience

Let's consider Shenzhen, the largest of the GBA cities. In October 2020, there were more than 2,600 newly registered companies in high-tech areas, representing a year-on-year growth of 11.3 %. As of December 2020, while much of the world remained in lockdown, some 90,000 new foreign-invested companies started up, in all sectors. 

Historically, the confluence of challenges facing the GBA is not new. In the 1980s, a higher valued U.S. dollar enabled American consumers to buy Japanese and European cars and other imported goods at very competitive prices. This fuelled trade deficits and provoked tariffs and restrictions with limited effect. Then the 1985 Plaza Accord depreciated the value of the dollar against the yen and major European currencies. Exports to the U.S. dropped.

The immediate impact on Japan's export-oriented economy was devastating and led to the "lost decade" of the 1990s. Japan fought back, however, with more research and development, resulting in better quality products and diversified export markets.

Not wanting to experience the same loss, China is pursuing a similar course. As Nietzsche observed: "That which does not kill us makes us stronger." That is exactly what is happening in the GBA.


Accelerated diversification

Above all, the new laws are forcing GBA companies to align with global standards and regulations, especially on data security and privacy. Trade and other restrictions have also accelerated diversification, both geographically for production and in business sectors that avoid restrictions.

For example, sales of Huawei's 5G base station equipment have been severely restricted and the ban prohibiting the use of Google's Android operating system has affected Huawei's handset business. Huawei has taken positive steps to address this with its own open source operating system, Harmony. However, this will have a forking effect. It is only a matter of time before other Chinese smartphone manufacturers use it, once it has its own app ecosystem developed.

Huawei has been more successful on the PC front, with licenses being allowed once again from Microsoft, Intel and AMD for Huawei notebooks. And it is rapidly expanding three other sectors: cloud computing, AI, and automotive technology.

The automotive sector is promising. China is the world's biggest car and light truck market, and the vehicles increasingly employ more and more technology. As automotive solutions are not considered a security issue, the U.S. approved the export of specific chips to Huawei for its components business in August 2021.


Going forward

The ratification of the Regional Comprehensive Economic Partnership (RCEP), expected by the end of 2022, will also benefit the GBA by lowering trade barriers in the East Asia and Pacific region.

The net result? The GBA will likely continue to be the jewel in the crown for China as the country adapts to new realities. According to this view, shared by some of the world's largest investment houses and most prestigious consultancies, the answer is clear. Investors remain drawn to the GBA's potential continued growth.


This is an abridged version: you can read the full article on


Michael Mudd, Managing Partner, Asia Policy Partners


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