Economic integration

The economic integration of the Grande Baie region could be incompatible with “One country, two systems” – Fitch

Differences between separate legal systems, currencies and capital account regimes could make full economic integration within the Great Bay Area (GBA) initiative incompatible with the “One country, two systems” principle. “Said the rating agency Fitch Ratings.

“This constitutional foundation will limit the ability of policy makers to harmonize regulations and introduce unhindered movement on factors of production. In this regard, the GBA will fall short of an integration project like the European Union, which explicitly aspires to a “single market,” Fitch says in a note.

At the same time, the GBA’s shared sovereignty under China, combined with the clear economic and trade benefits for Hong Kong and Macao from integrating into mainland China’s much larger and more dynamic markets, should offer policymakers policies more leeway in the long run to enact members – binding structural reforms ”.

Fitch has called the ACS for now a free trade agreement with some elements of a common market, with the region benefiting from the Closer Economic Partnership Agreement (CEPA) with Macau and Hong Kong.

However, he pointed out that the preservation of the separate territories of Hong Kong and Macao
socio-economic systems under ‘one country, two systems’ until at least 2047-2049 is likely to prevent the introduction of many policies compatible with some of the deeper forms of economic integration, such as a customs union or a common or single system in its own right. Marlet.

“A customs union would force Hong Kong, Macao and mainland China to adopt common external tariffs with the rest of the world. This would be detrimental to the economic models of the two SARs and also violate their basic laws, which oblige them to retain their status as free ports and largely refrain from imposing external tariffs. adds the agency.

“A fully-fledged common market – which benefits from unhindered mobility of factors of production (i.e. capital and labor) – would require the removal of the internal borders of the ACS, and could also be incompatible with “One country, two systems”.

Still, Fitch noted that more tangible progress on the initiative is expected to come, as the Chinese central government will give its full support to the full implementation of previously agreed measures by the end of 2020.

As part of the central government initiative, Macau’s main development goals are to become a world-class tourism and leisure center, leveraging its unique history to
strengthen economic and commercial ties between China and Portuguese-speaking countries.

In addition, the GBA outline also directs the territory to achieve a greater degree of economic diversification by 2035. Macau is also aiming to diversify its financial sector, which will include the development of offshore bond issues and of a trading platform for continental issuers, ”notes Fitcth. .

“Issue volume remains low, but has included early issues from China’s Ministry of Finance and some local state-owned companies. The territory was also tasked with establishing a renminbi denominated stock exchange, ”the rating agency said in a note.

In recent years, Chinese authorities have indicated that they will help Macao SAR develop its local financial sector as part of plans to help diversify the local economy.

This included several bond issues by related Chinese banks, including RMB 3 billion (MOP 3.5 billion / US $ 443.13 million) “blue bonds” issued by the Bank of China branch. in Macau, and 2.1 billion MOP (US $ 262.9 million) in the urban area of ​​Macau. development finance bonds issued by ICBC Macau branch.

At the end of June, the People’s Bank of China, the Macao Monetary Authority and the Hong Kong Monetary Authority also jointly announced the pilot activity “Wealth Management Connect”, which allows individual investors in Guangdong, Hong Kong and Macao to invest in the financial sector bank products in the region.

However, some financial experts consulted by the Macao SAR government’s Talent Development Committee (CDT) also warned that the first steps towards developing the local financial sector have been “slow” and conditioned by the size of the market and the pandemic.

Fitch pointed out that the existence of very different capital account regimes in the three ACS jurisdictions is another factor hampering capital mobility, while
the socio-economic systems under “One country, two systems” will complicate the implementation of many common market style policies across ACS, such as the elimination of internal borders and the harmonization of regulations.

As an example, the agency mentions efforts to gradually liberalize northward labor mobility, while southward labor mobility is expected to continue to face challenges.
administrative barriers, such as work visas, travel permits in light of the significant differences in population, land endowments and salary levels between mainland China, Hong Kong and Macau.

However, he still noted that the common sovereignty and the clear hierarchy of power
central government may ultimately give ACS more leeway to adopt structural reforms that are binding on members in the long run.

“A final point to note is that there are clear economic and business benefits for the two SARs to integrate into the larger and more dynamic mainland Chinese market,” Fitch noted.

“Macau faces similar challenges, but is also hampered by a severe lack of economic diversification. If successfully implemented, the integration of ACS will create a larger market to spur employment and growth opportunities for businesses and residents of both SARs.