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A quarter century after its return to China, Hong Kong eyes further economic integration with the Chinese mainland for its future development

By Yu Xiaodong , Chen Weishan Updated Sept.1

The 28-kilometer-long, meandering Shenzhen River serves as the boundary between Hong Kong and Shenzhen, with Hong Kong’s rural New Territories on the left and Shenzhen’s Yantian district on the right, August 26, 2019

Hong Kong marked the 25th anniversary of its return to China on July 1. In a ceremony commemorating the event held in the former British colony, Chinese President Xi Jinping gave a keynote speech. In reference to the political unrest the city had experienced in the past a few years, Xi said the development of Hong Kong “allows no delay.”  

“The next five years are important for Hong Kong to break new ground and achieve another leap forward,” Xi stressed.  

Xi also oversaw the inauguration of Hong Kong’s new Chief Executive John Lee. In his inauguration speech, Lee vowed that the Hong Kong government will adopt a “result-oriented” approach to social issues and will start “a new chapter” for Hong Kong’s development by embracing the opportunities of the Guangdong-Hong Kong-Macao Greater Bay Area initiative launched by the central government to develop Hong Kong into an international hub of innovation and technology.  

On October 6, 2021, Hong Kong’s former chief executive Carrie Lam unveiled the Northern Metropolis plan.  

The ambitious blueprint aims to develop 300 square kilometers in the city’s New Territories near the border with Guangdong Province into an “international innovation and technology” hub that will accommodate 2.5 million people within 20 years.  

The Northern Metropolis plan will be among the new government’s top priorities. In June, Lee said the Hong Kong government will set up a department to manage the planning and development of the project, signaling its imminent implementation, and that the new metropolis would be an important engine for the city’s future development. 

Room to Expand 
The largest integrated urban development project in the city’s history, the Northern Metropolis scheme marks a revolutionary change in Hong Kong’s development strategy.  

Hong Kong is composed of three parts. Hong Kong Island and Kowloon Peninsula were ceded to Britain in 1842 and 1860 after China was defeated in the two Opium Wars. The New Territories was leased to Britain in 1898 after China lost the war with Japan in 1895 and was forced to cede or lease its territories to Japan and Western powers.  

Hong Kong’s economy has always centered on the financial hub at Victoria Harbor between Hong Kong Island and Kowloon Peninsula. By comparison, northern Hong Kong’s New Territories, which accounts for 86 percent of Hong Kong’s land area, are largely rural.  

Shifting the development focus away from Victoria Harbor to the border with the Chinese mainland indicates the city is making serious efforts to synchronize its development plan with the Greater Bay Area initiative and integrate its economy into China’s overall development. 
According to Guo Wanda, executive vice-president of the China Development Institute and vice-chairman of the Chinese Association of Hong Kong and Macao Studies, the Northern Metropolis scheme offers a comprehensive solution to Hong Kong’s three major economic and social problems: soaring housing prices, low social mobility and the growing wealth gap, all results of the city’s unbalanced economic structure.  

As a global financial hub, Hong Kong has a vibrant finance industry, which offers high-paid jobs that attract financial professionals from around the globe. However, it only absorbs a small portion of the city’s labor force. In the meantime, given the strong economic ties between Hong Kong, the Chinese mainland and global markets, the city has robust commerce and logistics sectors that account for the bulk of Hong Kong’s labor force, though it only offers meager wages.  

“There’s no strong manufacturing sector, especially in high-tech and innovation industries,” Guo said. “Even though many of Hong Kong’s graduates have solid backgrounds in a lot of subjects, they have little choice other than finance, commerce or logistics.”  

Manufacturing once played an important role in Hong Kong’s economy. But as land and labor costs rose, the city saw an exodus of manufacturers, mainly to the Chinese mainland following the reform and opening-up policy in the late 1970s. As a result, the manufacturing sector fell from about 30 percent of Hong Kong’s economy in the 1970s to just 1 percent in 2020.  

Supporters of the scheme argue that by integrating Hong Kong’s economy with the Greater Bay Area, the Northern Metropolis will help Hong Kong bring back high-tech manufacturing jobs and achieve its “re-industrialization.” Under the plan, 650,000 jobs will be created with at least 150,000 jobs coming from innovation and technology firms. 

Innovation vs Real Estate 
But for many experts, the plan is easier said than done. The Northern Metropolis scheme is not the first initiative the Hong Kong government launched to develop northern Hong Kong. In a plan released in 2007 titled “Hong Kong 2030: Planning Vision and Strategy,” Hong Kong authorities considered transforming New Territories localities including Fanling North, Kwu Tung North and Hung Shui Kiu into new development areas (NDAs).  

Although the report included plans to move some high-tech firms to the New Territories, it ended up focusing on developing residential projects aimed at decentralizing the population from central Hong Kong.  

In a commentary published by the Hong Kong Economic Journal on November 21, 2021, Hongbin Cai, dean of Hong Kong University Business School, warned that the Hong Kong government must have clear goals for its Northern Metropolis scheme to prevent it from becoming yet another residential project.  

“The main purpose of the Northern Metropolis plan must be made very clear. Is it to promote rural development of the New Territories, to decentralize the population in central Hong Kong, to solve housing problems, or to build Hong Kong into an international innovation hub?” Cai said. He stressed that while the plan will help solve many other problems, the government must prioritize promoting innovation and technology industries in its development plan.  

The Hong Kong government has also previously launched several initiatives focused on high-tech industries. Just one year after Hong Kong returned to China in 1997, the Hong Kong government announced a plan to develop a “cyberport” project aimed at attracting global tech companies. But as developers handled the project, it ended up more focused on real estate.  

In 2001, Hong Kong launched the Hong Kong Science Park project in Tai Po, an eastern New Territories district. Although the project nurtured several impressive unicorns, its impact is relatively limited given the project’s small scale of 15 buildings.  

According to Professor Cai, given the size of Hong Kong’s market, the city cannot build a strong and competitive high-tech industry unless it goes beyond Hong Kong to integrate with the highly-developed innovation sectors in neighboring Shenzhen. By further integrating with Shenzhen, Hong Kong could attract more professionals and have access to the massive Chinese mainland market to commercialize its innovative technologies.  

Home to some of China’s biggest tech companies such as Tencent, Huawei, DJI, and Insta360, Shenzhen is dubbed China’s Silicon Valley. Its economy grew from just one-tenth of that of Hong Kong in 1997 to 2.42 trillion yuan (US$362b) in 2018, surpassing Hong Kong for the first time. 

In 2017, the Hong Kong-Shenzhen Innovation and Technology Park was launched, which was planned to occupy 87 hectares for the research and development of biomedicine, chemistry, physics, engineering and AI, in Lok Ma Chau Loop, a border area between Hong Kong and Shenzhen. Its first batch of eight buildings is expected to be completed by the end of 2024.  

As the central government’s Greater Bay Area plan takes shape, which aims to link Hong Kong, Macao and nine cities in the Pearl River Delta region into an integrated economic and business hub, it paves the way for the Hong Kong government’s ambitious Northern Metropolis plan. 

A child looks at wooden fish toys at Sha Tau Kok Pier, Hong Kong, June 3, 2022. Sha Tau Kok Pier, within the Frontier Closed Area which had been closed to non-residents since 1951, opened to group tours on June 3, 2022

Overcoming Obstacles 
Hong Kong is very competitive in scientific research. According to a the QS World University Rankings 2021, Hong Kong has five universities ranked among the world’s top 100, whereas the entire Chinese mainland has six and Singapore, a major competitor of Hong Kong, has two.  

In 2018, the Hong Kong government announced a HK$10 billion (US$1.27b) investment in two research clusters at the Hong Kong Science Park, one for healthcare technology and the other for AI. During his recent two-day visit to Hong Kong, Chinese President Xi Jinping met with scientists and entrepreneurs at the park, where he was shown some of Hong Kong’s most recent technological advances, including AI drone technologies, high-strength steel and an award-winning prenatal test for Down’s syndrome.  

A major obstacle for Hong Kong to develop a robust high-tech industry is capitalizing on its research because of the city’s relatively small market. “If an investor has to choose between two similar projects based in Hong Kong and Shenzhen, they would almost certainly choose Shenzhen, as it provides access to a market of 1.4 billion people, compared to a market of 7 million in Hong Kong,” said an AI researcher at a major Hong Kong university who declined to be named.  

Another obstacle is Hong Kong’s limited space for manufacturing. According to a reindustrialization study conducted by Hong Kong Productivity Council and Hong Kong University Business School in 2021, more than half of 184 manufacturing companies surveyed had plans to expand their production lines but lack access to additional space.  

To address these problems, the Chinese government set up several cooperation zones on Hengqin Island in Zhuhai City, and in Qianhai New District in western Shenzhen. In June, the State Council, China’s cabinet, released the “Master Plan for Deepening Soft Cooperation Between Guangdong, Hong Kong and Macao in Nansha,” designating Guangzhou’s Nansha District, an area of 803 square kilometers, as a cooperation zone. All three cooperation zones offer a 15 percent reduction in corporate income tax for innovation industries. 

‘Soft Connectivity’ 
According to Guo, a more serious challenge for cooperation between Hong Kong and Shenzhen and other cities in the Greater Bay Area is what he calls “soft connectivity.” Their different political and legal systems, as well as market regulations, create many technical and institutional barriers for cross-border cooperation.  

One example is the transfer of research funds. In the 2017 Policy Address, the Hong Kong government pledged to double funding for research and development as a percentage of its GDP from 0.73 percent to 1.5 percent in five years. But in 2021, that percentage was only 0.99 percent. Hong Kong not only fell short of its target, but also lagged far behind Shenzhen’s 5.46 percent.  

According to a development plan on the Greater Bay Area released by the State Council in February 2019, the central government said it would support the establishment of joint grants to support innovative research and allow cross-border transfers and use of scientific research funds. With the establishment of the Qianhai, Hengqin and Nansha cooperation zones, local authorities in the nine cities in the Pearl River Delta have shown strong interest in funding research at universities and research institutes in Hong Kong.  

But moving research funds across borders remains difficult. “Financial authorities and technological authorities are two separate sets of institutions that follow different regulations, and it is technically not viable for financial authorities to just open the door for scientific research funds given the current restrictions on cross-border fund transfers,” the Hong Kong researcher said.  

According to professor Zheng Yongnian of the Chinese University of Hong Kong (Shenzhen), the key to the success for the Greater Bay Area scheme is the free movement of talent, capital and goods, which he said requires a unified set of rules. As there are three currencies, three customs agencies and two political systems between Hong Kong, Macao and Guangdong Province, this is a daunting task. Zheng, a vocal supporter of the Greater Bay Area plan, has repeatedly called to learn from the experience of the European Union.  

“If some 20 different countries in Europe can establish a unified market, there is no reason that the Greater Bay Area, which belongs to the same country, can’t,” Zheng told the Guangming Daily in May 2021.  

For Professor Guo, the Greater Bay Area’s success hinges on the synergistic efforts of city governments to further institutionalize reforms to open up to Hong Kong and Macao, and make it easier for Hong Kong and Macao professionals and business to provide services in the mainland.  

In his article for the Hong Kong Economic Journal, Professor Cai warned that given Hong Kong’s complex decision-making mechanisms and regulations, especially those regarding land appropriation and usage, major progress could take a long time. “If the Hong Kong government can’t take swift action, the project could lose momentum, which would undermine the significance of the project and credibility of the government,” Wang warned.  

“For too long, the Hong Kong government has adopted an economic policy of non-intervention, which poses a significant challenge to the establishment of the Northern Metropolis,” Cai said.  
To implement the plan successfully, the Hong Kong government needs to change its overall governance style and adopt a more proactive approach in the coming years, Cai added.

Chung Ying Street in Sha Tau Kok Pier in Hong Kong’s New Territories which is next to Shenzhen’s Yantian District, January 1985. The town of Sha Tau Kok was designated as the boundary between Hong Kong and the Chinese mainland in 1951