Author: Man Nga Ching, Vice Director, Department of Hong Kong, Macao and Regional Development

Editor’s note: February 18, 2021 marks the two-year anniversary of the announcement of the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area. The Guangdong-Hong Kong-Macao Greater Bay Area (GBA) cities have been exploring inter-city comprehensive regulatory and systematic integration within the framework of the existing legal system. While fruitful progress has been made, at the same time there is room for optimization.

Top-level design: build an innovative policy system under the “one country two systems” principle

Key projects such as Qianhai (of Shenzhen city), Nansha (of Guangzhou city), and Hengqing (of Zhuhai city) have made significant progress towards GBA cooperation. However, some aspects require improvement, namely the extent of inter-city cooperation, policy making and GBA’s systematic integration. A comprehensive policy system that addresses and legally facilitates regulatory and systematic integration, the exchange of resources, and the integration of livelihoods should be built to deepen GBA cooperation under the “one country two systems” principle. The varying features and development strengths of the different GBA projects should also be considered. For instance, in the Luohu Pilot Area, Shenzhen, integration of livelihoods can be enhanced via the exploration and implementation of citizen treatment policy for Hong Kong and Macao residents.

Making Breakthroughs: Promoting the establishment of a well-connected civil and commercial judicial system in the Greater Bay Area

Over the past 40 years of reform and opening-up, and especially since the return of Hong Kong and Macao, the judicial assistance system in civil and commercial matters across Hong Kong, Macao and the Chinese mainland has been gradually improved, however, witha number of outstanding issues, such as time-consuming and difficulty with coordination and implementation.

The effective economic operation of the GBA depends on the creation of an efficient and comprehensive civil and commercial dispute resolution mechanism across the region. With the GBA’s growing market interconnectedness, the number of cross-regional legal disputes will also inevitably grow. Promoting the establishment of a well-connected civil and commercial judicial assistance system across the area is thus critical for the development of the GBA. This will also be a cost-effective approach towards regulatory and systematic integration without unifying superordinate laws or national rules. By deepening mutual legal assistance and law enforcement cooperation, the judgments in civil and commercial matters between the different legal systems in Guangdong, Hong Kong and Macao can be better coordinated, communicated and circulated. This will provide a good judicial environment for the efficient economic operation of the GBA.

Under the principle of “one country, two systems”, the GBA should strengthen the mechanism and arrangement of civil and commercial judicial assistance, facilitate the mutual recognition and enforcement of arbitration awards, and establish a convenient enforcement procedure for arbitration awards as well as civil and commercial judgments. These works should be conducted on the basis of seeking common ground while shelving differences within GBA cities, tackling easier issues first and focusing on key issues, so as to promote the establishment of a closer and more integrated civil and commercial judicial assistance system.

Starting point: Give full play to the comprehensive pilot reform authorization in Shenzhen

This reform is characterised by its openness, flexibility and adaptability. The first issue of forty authorized matters and the Implementation Plan (2020-2025) for Comprehensive Pilot Reform in Shenzhen to Build the City into a Pilot Demonstration Zone for Socialism with Chinese Characteristics have been issued. The authorized list delegated greater legislative power to the Shenzhen special economic zone and granted Shenzhen the right to take precedence in the fields of artificial intelligence, self-driving cars, unmanned aircraft, big data, biomedicine, medical health, information services, personal bankruptcy act. Some of these areas are industries closely related to those that Hong Kong has an advantage in (e.g., unmanned aircraft).

Furthermore, the authorized list leaves us with the question of whether the legislative power of Shenzhen special economic zone could be used to better connect Shenzhen and Hong Kong with the development of specific industries while breaking through the regulatory barriers in the construction of the Shenzhen-Hong Kong cooperation parks. It is suggested that the comprehensive authorized pilot reform in Shenzhen could become a critical starting point to promote the comprehensive connection between Shenzhen and Hong Kong regulations. Shenzhen’s experience can be taken as an example to be replicated and promoted. In the future, the existing policy practices and convergence regulations shall be summarized and upgraded into legislation, increasing the effectiveness while balancing the flexibility of the comprehensive authorization with the stability of local legislation.

Author: Cao Yuanzheng, Member of the Board at CDI and Chairman of BOCI Research Limited

Creating new demand is a pressing task for China

Labor productivity has been declining since the turn of the century around the world, especially in developed countries. As major technological breakthroughs are hard to achieve, the global economy has entered a new phase that requires the creation of new demand from the new round of technological revolution.

In China, considering demand-supply management from the perspective of the dual-circulation development paradigm, the focus should be on promoting the growth of people's income, especially the income of the low and lower-middle income groups. In the medium term, the focus should be increasing both government and private investment on social infrastructure, such as education and healthcare, laying a solid foundation for the domestic circulation of the new development paradigm. In the long run, the focus should be constantly creating new demand in low-carbon technology field to achieve green development, so as to let domestic circulation be the engine of the dual-circulation development paradigm.

As the tide of globalization grew in strength, China grabbed the opportunities it presented and became the world's largest export-oriented economy. However, as the Chinese economy further expands and industrial upgrading advances, the country is confronted with the same challenge as the global economy.

The long-term downturn of the global economy entails an absolute surplus in Chinese production capacity. Creating new demand is a pressing task for China as well as a global issue. Without new demand, the world might witness prevailing protectionism that benefits one at the expense of others. A salient example is the Sino-US economic and trade conflict which was just an outcome of US protectionist policies. Even the adoption of extremely loose fiscal policy and monetary policy has done little to stimulate demand, while sending asset prices skyrocketing.

In this context, the only way out is to create new demand. Green development can create enormous market demand not only in investment but also in consumption. According to estimates by the International Renewable Energy Agency, every dollar of investment in renewable energy will get eight dollars in return. The transformation of the global energy structure will increase global GDP by $100 trillion and double the number of employment positions in relevant industries by 2050.

China formally joined the Paris Agreement in 2016 and announced in 2020 that it will strive to peak its carbon dioxide emissions before 2030 and achieve carbon neutrality before 2060. To achieve the goal of keeping the global temperature rise well below 2 C above pre-industrial levels, a total of 100 trillion yuan ($15.5 trillion) of investment is needed for China's energy mix transformation by 2050, and the amount will reach 138 trillion yuan if the goal is well below 1.5 C above pre-industrial levels.

It's worth noting that compared with high-tech products such as chips, China has no technological generation gap with the developed nations in technological support for green development, therefore it can play a leading role. Green development requires revolutionary changes both in production patterns and people's lifestyles. Green development therefore should become the new direction and focus of demand-side management.

Domestically, China has just completed the building of a moderately prosperous society in all respects. Although China has eradicated absolute poverty, the low and lower-middle income groups－with a combined population of nearly 1 billion－still account for the bulk of the country's total population, a big difference from that in developed nations. Therefore, increasing the incomes of the low and lower-middle income groups should be put on top of the agenda in demand-side management before 2035.

To this end, accelerating urbanization by giving rural residents more job opportunities in cities is one of the most effective means, which has been proven by the experience of more than 40 years of reform and opening-up. The service sector has become China's largest industry alongside rapid urbanization over the past decade, which has led to the rapid growth of new job opportunities in cities. In 2010, an additional 1 percentage point of GDP growth could result in a net gain of up to 1.2 million jobs in China while now it could result in 2 million new jobs. The ever-increasing demand for labor force promoted a continuous increase in minimum wage in all provinces. Therefore, over the past 10 years, the growth rate of per capita disposable income in China's rural areas－reaching as high as 10 percent in some years－has been higher than the GDP growth rate during the same period.

During the 14th Five-Year Plan period (2021-25), on the one hand, China should quicken the process of urbanization to create more job opportunities to increase migrant workers' disposable incomes and reform rural land-use and ownership policies to increase their property incomes. On the other hand, the new focus on demand-side management will mean greater efforts to address difficult structural issues, such as fairer income distribution and improving the social safety net, to tap their spending power.

In the meantime, compared with the low and lower-middle income groups, China's higher-middle to high income groups, whose combined population has surpassed 400 million, has strong consumption power. What these groups need are high-quality services, such as children's education, medical and healthcare and elderly care services. Given that the population of this group has exceeded the US population and is expected to double within the upcoming 15 years to reach 800 to 900 million, exceeding the combined population of Europe, the US and Japan, China will become the country with the largest middle-income group by then.

Last but not least, demand-side management should also include measures aimed at stabilizing foreign trade and foreign investment. The Chinese economy has been deeply integrated into the world economy, with more intertwined interests than ever before. The Chinese market cannot be separated from the international market and external circulation could boost domestic circulation. This should be an important aspect of demand-side management.

Industrial output rose 7% y/y in November, reaching its fastest growth rate since April. Investment rose 2.6% y/y, and was up 0.8 pps from October.

Consumption was the worst-hit macro variable of the pandemic. But retail sales of consumer goods recovered further, rising 5% y/y, up 0.7 pps from October. Its real growth rate was 6.2% y/y, and was even higher than in November 2019.

CPI fell -0.5% y/y in November, turning negative for the first time, hit by a fall in pork prices. The ex-factory price index of industrial output fell -1.5% y/y, and PPI fell -1.6% y/y, up 0.6 and 0.8 pps respectively from October.

Most financial and monetary indicators halted their rising trends, except for M1. As of the end of November, M1 was up 10% y/y, and up 0.9 pps from October, reaching its highest growth rate since February 2018.

Exports are surging, and rose 14.9% y/y, and 4.7 pps from Q3. Exports to the United States and Canada were particularly strong, rising 38.6% and 52.4% y/y, up 19.4 pps and 23.2 pps from Q3. Imports fell -0.8% y/y, turning negative again, although by a small magnitude.

China’s exports in November experienced their strongest surge since early 2018: China shipped $268 billion in goods, more than 21% more than in the same month last year, pushing its trade surplus to a monthly record high of $75.4 billion. China’s global export share increased to over 13% in the second and third quarters from 11% last year, the highest for any quarter. All this happened despite a strong RMB. This can be mostly attributed to China’s good pandemic control, which allowed production to proceed uninterrupted, in comparison to other major economies.

Author: Guo Wanda, Executive Vice President of China Development Institute

What is Sustainable Financing

Sustainable financing refers to financing activities taking account of sustainable development criteria. It forms a financial development model that considers the coordination of humanity, society, economy and environment, and guides financial resources’ flow to more inclusive and sustainable areas.

The UN Environment first published a report in October 2015, entitled ‘Building a sustainable financial system’, which extends the field of sustainable financing to public debt, society and governance. This was further explored in November 2017, when the UN Environment and the World Bank jointly published the ’Roadmap for a Sustainable Financial System', which demonstrated how financial industries can play a different role in contemporary society by practicing sustainable financing, and engaging in social responsibilities. This report also suggests that financial technology has the potential to protect environment, and support sustainable development finance.

In February 2018, the G20 convened its Sustainable Finance Study Group (SFSG) in London. The SFSG focused on green finance as the core of their study, and also included sustainable development factors such as financial supports for disadvantaged groups, innovation and entrepreneurship, income distribution and SME development to the scope of study.

Why ‘Belt and Road Initiative’ needs sustainable financing?

Financing is essential for the Belt and Road Initiative (BRI). Based on the capital and financial needs of the BRI, a diversified, inclusive and sustainable BRI financing system has been initially established.

To enable this, the construction of diversified financing network has taken shape. The sizeable BRI financing network covers development finance, financial policy, multilateral development institutions and capital markets.

In addition, the sustainable financing policy has formed an initial framework, which has allowed a series of sustainable financing policies to take shape, and has been introduced by China and BRI countries. Some of these policies include ‘Guiding Principles on Financing the Development of BRI’, ‘A Framework to Assess Sustainability and Financial Risks under the BRI’, ‘Regulatory Commission Guidance Opinions on the Standardization of the Banking Sector’s Provision of Service to Enterprises Expanding abroad and the Strengthening of Risk Prevention and Control’ and ‘Environmental Risk Management Initiative for China's Overseas Investment’.

Moreover, sustainable financing activities are increasingly enriching, and innovative financial products and services are widely applied in the BRI countries by issuing different types of bonds; such as green ‘Belt and Road’ interbank normalization cooperative bond, green financial bond and non-sovereign secured debts.

How to promote sustainable financing for ‘Belt and Road Initiative’?

It is recommended establishing a BRI multilateral financial institution, from which lessons can be drawn within international organisations like the World Bank, the International Monetary Fund and the International Finance Corporation. The multilateral financial institution will be led by the BRI countries and will be dedicated for their financing.

More specifically, the organisations within BRI institutions will focus on some key factors; they will create and improve the sustainable financing regulation based on the BRI countries’ general agreement, they will facilitate the mandatory use of relevant sustainable financing regulations for BRI’s bilateral or multilateral financing, and will formulate the BRI sovereign debt relief mechanism, so as to cope the debt default problems involved in the BRI investment and financing. Furthermore, incorporating these mandatory sustainable financial regulations will strengthen the policy coordination among BRI countries, in areas of law, taxation, trade, investment, financial supervision and accounting standard. Thus, a transparent and non-discriminatory financing environment as well as a fair, efficient and stable financial infrastructure can be created.