China’s Greater Bay Area – looking to the future

16 Sep 2020

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While investment, sales, orders and hiring will suffer this year, manufacturers have a positive long-term outlook: 58 per cent see the GBA presenting new business opportunities in the next three to five years.

What else did the survey reveal? Here are the top five findings:

1. COVID-19 is the biggest concern for 2020

The virus negatively impacted business for almost 75 per cent of manufacturers. Looking ahead, 83 per cent said the ‘global impact of COVID-19’ is one of their biggest concerns for 2020. Businesses expect both orders and sales to be hit hard, with more than 61 per cent predicting a reduction in orders by an average of 12.4 per cent and a similar 12.7 per cent decline in sales. ‘Further China slowdown’ and the ‘US-China trade war’ were the other top concerns, (60 per cent and 57 per cent respectively). Despite China being a common denominator, manufacturers remain upbeat on the market. A likely persistent global recession and looming risks of a second-wave outbreak are also key concerns.

Our view: while extensive shutdowns and weak sentiment imply a long and difficult recovery for the global economy, China is recovering the quickest given its earlier emergence from lockdown.

2. Hiring is at its weakest in a decade

Almost half of manufacturers reported less difficulty in hiring workers compared to a year ago. Almost 40 per cent no longer find it hard to find staff – in fact 18 per cent reported an excess labour supply. This suggests growing labour-market slack, which probably underpins the authorities’ decision to commit to creating nine million new urban jobs and lowering the urban unemployment rate to around 6 per cent. They have also refrained from setting a GDP growth target this year.

Our view: As long as issues in the labour-market persist, we expect the authorities to continue policies to support growth and ensure economic and social stability.

3. Manufacturers will ramp up diversification, with little appetite to invest in 2020

In a setback to the GBA’s long-term upgrading plan, more manufacturers see a ‘deceleration’ than an acceleration in key forms of industrial upgrading in 2020, including artificial intelligence, robotics, big data and internet-related investment. However, beyond 2020, a solid 53 per cent have a long-term target for industrial upgrading – a key driver of the GBA’s ongoing transformation.

While appetite to invest in industrial upgrades is low, respondents see compelling reasons to move capacity overseas. For instance, 43 per cent said they would more actively consider relocating due to US-China trade tensions and/or COVID-19. These developments may have unnerved companies facing high concentration risks in China due to operational or national security concerns. However, rather than replacing their China-based production, we see a trend of manufacturers diversifying capacity, with 56 per cent choosing ‘diversification of production capability’ as the main reason for relocation.

4. The spotlight is on Vietnam and Hong Kong

Manufacturers in the GBA are increasingly eyeing ASEAN as an area to diversify, with Vietnam the top choice, followed by Cambodia and Myanmar. However, businesses did highlight issues in ASEAN, including a lack of local financing, poor productivity, rapidly rising labour costs and the need for more active promotion and facilitation of the region’s free trade agreements. Diversification of production capacity is now listed as the top driver of relocation overseas, as wage savings have become a less compelling reason due to labour-market slack in the GBA.

In May, financial regulators jointly issued a new set of guidelines to support the financial reform and opening up of the GBA. It offered much needed reassurance to investors that, despite increased social tensions in Hong Kong over the past nine months, China remains committed to supporting Hong Kong and collaborating with other GBA cities.

Our view: we agree with the sentiment that Asia is likely to lead the recovery from COVID-19. In the long run, we expect ASEAN to remain an attractive destination for Foreign Direct Investment; however, we think the region needs to raise productivity levels to continue to benefit from the trend of relocation from China.

5. Policy support must continue

Our survey revealed a clear preference for measures that offer more immediate relief from COVID 19, reflecting the current challenging business environment. 80 per cent see ‘more tax cuts’ helping their business in 2020, closely followed by ‘fee reduction’ (76 per cent). At 70 per cent each, there was also a clamour for ‘more support to SMEs and private enterprises’ and ‘interest rate cuts and other monetary easing’, reflecting the key stress points in the economy.

Liquidity continues to pose a challenge: almost half of companies (49.2 per cent) expecting it be more to borrow than a year ago, up from 24.4 per cent. This is despite multiple rounds of interest rate cuts, suggesting room for further monetary easing.

Looking ahead

The GBA’s unique advantages that have made it China’s largest manufacturing hub, attracting a high population of migrant workers, has likely also exacerbated the impact of COVID-19 on the region, materially weighing on GBA manufacturers’ business performance and expectations. Meanwhile, as an export-oriented region, it is prone to headwinds from a global recession.

However, we believe the GBA will become increasingly important to China in the post-pandemic world given the region’s leadership in driving China’s innovation, ability to attract highly skilled talent and high infrastructure investment needs. The risk of persistent US-China tensions may push China to become more self-reliant and to establish a smarter, more complete manufacturing ecosystem.

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