China has big plans for its Greater Bay Area

By Christopher Fix Source:Global Times Published: 2019/8/4 19:08:39

Illustration: Xia Qing/GT

The Chinese government plans to transform the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) into an economic powerhouse that will drive innovation and GDP growth in the region. Taking its inspiration from Japan's Tokyo Greater Bay Area, the San Francisco Bay Area and the New York metropolitan area in the US, the initiative aims to improve connectivity and cooperation between nine key cities in South China's Guangdong Province, Hong Kong and Macao. 

Detailed plans for the project were unveiled in February 2019, when the government published its Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area, setting out its ambitions to create a high-end manufacturing and innovation hub, while also using the project as a test bed for further opening up the economy.

The development plan has implications for a range of sectors, including financial services, logistics and technology companies. The project is also set to impact China's oil reserve bases and aid the internationalization of the yuan.

China is currently the world's largest crude oil consumer and importer. In 2018, imports of crude oil rose by 10.1 percent year-on-year to a record 461.9 million tons. With China's domestic oil industry unable to meet its consumption needs, the country is dependent on imports, leaving it vulnerable to supply disruption and price fluctuations. As a result, since 2008 the government has focused on creating oil reserve bases with the aim of improving domestic energy security.

The need to improve energy security was mentioned in the GBA blueprint, with the government setting out plans to develop what it terms as an "energy security protection system." This system involves the construction of large petroleum reserve bases in the Pearl River Delta and new liquefied natural gas terminals, as well as expanding the coverage of oil and gas pipelines and storage capacities across the region, according to the GBA plan. 

Creating oil reserve bases in the Pearl River Delta addresses two needs: The reserves will be in the proximity of the Pearl River Mouth Basin, where China National Offshore Oil Corp, the country's largest offshore oil and gas producer, is currently exploring two areas for oil and gas; and their location in the GBA will also enable them to supply the oil and gas needs of industries in the area, making supply to the region more secure and reducing short-term reliance on foreign imports. 

Alongside plans to increase economic growth, the GBA blueprint also contains measures to continue with yuan internationalization, through expanding the scale and scope of cross-border use of the currency. 

Hong Kong will act as the financial center of the GBA, building on its strength as an international asset management and risk management hub, while Macao will also be developed into a yuan clearing center for Portuguese-speaking countries. The feasibility of establishing a securities market in Macao denominated and cleared in the yuan is also being explored. 

The blueprint also states that financial institutions within the GBA will be allowed to launch yuan-denominated interbank lending, as well as offer a yuan-denominated foreign exchange spot and forward business, yuan-denominated derivative products and cross-distributional wealth management products. 

The reforms do not end there, with enterprises located within the GBA set to be able to issue yuan-denominated cross-boundary bonds. Hong Kong will also be supported in developing more offshore yuan, commodity and other risk management tools. In addition, there will be greater scope for cross-boundary investment by Hong Kong and Chinese mainland residents and institutions.

The changes, when they come into force, are likely to significantly increase the level of yuan trading. The blueprint also mentions using Guangdong as the "pioneer of reform and opening up," suggesting measures that are successfully piloted in the GBA region could be rolled out across the rest of the mainland in time.

Having greater oil storage facilities in the GBA will enable purchasing to be better managed to take advantage of troughs in prices and ride out any price spikes. As the world's largest crude oil importer, any changes in China's demand patterns could impact global prices. Companies can use oil derivatives to hedge against this price volatility. It is worth noting, however, that any impact remains far off, with oil exploration in the Pearl River Mouth Basin still at a preliminary stage, while the planned storage facilities and pipelines are yet to be built.

Derivatives are also likely to play an important role for investors as the yuan continues to be internationalized. Expanding the scale and scope of cross-boundary use of the yuan within the GBA, and possibly beyond it, could lead to greater volatility, as the currency's exposure to market forces is increased. 

It is perhaps for this reason that the GBA blueprint is also increasing the scope for financial institutions to issue yuan derivative products. Currency derivatives enable investors to manage the risk of future exchange rate volatility by purchasing futures contracts at set exchange rates. As cross-border use of the yuan increases, demand for yuan derivatives is likely to grow.

The author is managing director and head of Asia Pacific at CME Group.


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