Greater Bay Area integration a boon for Hong Kong's maritime cluster
Hong Kong has embarked on a new journey as part of the major Southern China port cluster—a key component of the GBA economic powerhouse. Contributing to the national development strategy, the Hong Kong SAR Government—with the support of the Central People’s Government as outlined in the 14th Five-Year Plan for National Economic and Social Development and Vision—is committed to upholding the city’s position as a competitive international maritime centre and securing its long-term prosperity and stability. Though the SAR’s sights are set high, on the current trajectory, its goal is achievable, say industry participants.
By 2035, the plan is for the GBA to have formed a highly integrated bay area, more powerful economically and financially than the bay areas in San Francisco, Tokyo and New York. GBA container throughput has already surpassed 70 million TEU, as of 2020, with the value of cross-border trade reaching RMB15 trillion ($2.4 trillion), topping the three other leading bay areas.
“On the one hand, Hong Kong is connecting with one of the world’s biggest markets, and on the other, it’s a gateway to the rest of the world for Chinese enterprises,” says Edward Liu, principal representative of the International Chamber of Shipping (ICS) (China) Liaison Office in Hong Kong.
Stronger together
Envisioned in 2017, the GBA comprises the two special administrative regions of Hong Kong and Macau, plus nine cities in Guangdong—Dongguan, Foshan, Guangzhou, Huizhou, Jiangmen, Shenzhen, Zhaoqing, Zhongshan and Zhuhai. Together, they cover some 56,000 square kilometres and have a population of over 86 million. The GBA’s GDP topped $1.6 trillion in 2020—compared with San Francisco Bay’s GDP of $525 billion in the same period—and HSBC research forecasts that its GDP will rise to $4.6 trillion by 2030.
Each constituent of this cluster has a specialised role to play, with innovation and technology in Shenzhen and Guangzhou, and trade, finance, maritime, and legal and dispute resolution services in Hong Kong. In June 2021, China’s Ministry of Transport assigned the GBA the function of developing high-quality maritime services and piloting maritime reform.
This followed the signing of the Framework Agreement on Deepening Guangdong-Hong Kong-Macao Cooperation in the Development of the Greater Bay Area in July 2017 in Hong Kong, which outlines the degree of integration required of each constituent. The integration of specialisations has created synergies in areas such as ship technology and greener shipping.
The process accelerated in 2019, when Hong Kong’s position in the GBA was cemented further in the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area, which sets the path for the SAR’s deeper integration into China’s national development strategy.
“Hong Kong is a gateway to China. That is something [that] no other maritime hub can compete with,” says Michael Fitzgerald, deputy chief financial officer, Orient Overseas Container Line (OOCL).
“The GBA initiative is the culmination of mainland China’s modernisation programme. It is built on established special economic zones in southern China, and Hong Kong’s development as a leading port and international maritime centre. Both Hong Kong and the Guangdong constituents of the GBA are mature, and by working together, they’ll ensure the initiative succeeds,” says Rosita Lau, a partner at international shipping and commercial law firm Ince’s Hong Kong office, and a member of the Hong Kong Maritime and Port Board.
Integration with its GBA neighbours better positions Hong Kong to tap into the Mainland’s thriving maritime market. China is one of the world’s biggest ship-building economies—94% of global shipbuilding, in terms of tonnage, was located in China, Japan and South Korea in 2020—and it’s a prominent ship-owning economy.
Hong Kong’s deepening connection with the GBA comes against the backdrop of China’s economic policy of dual circulation. The development model seeks to achieve sustainable growth and boost self-sufficiency through stoking domestic demand and vertically integrating domestic production, whilst simultaneously boosting external demand.
“One of the SAR’s advantages is its integration in the GBA, and thus mainland China, for the domestic circulation component,” says Liu.
Cooperation and competition
Though some observers point to competition between Hong Kong and its GBA peers that have ports, terminals and free trade zones, “the ability to cooperate between those ports is going to be very valuable,” says Fitzgerald, who sees the practical advantages of cooperation and competition. “We already saw some of that over the last year when cargo moved between ports to manage supply chain disruption during the COVID-19 pandemic.”
Indeed, a 2021 UNCTAD Review of Maritime Transport report found that collaboration and coordination between nearby ports and public authorities are key determinants of a port’s resilience during times of crisis.
There’s precedence for cooperation between domestic maritime centres trumping competition. London’s relationships with the UK’s regional maritime clusters, such as Liverpool, Southampton and Aberdeen, are based on diversified services. Likewise, the GBA’s clusters feature a division of functions, with Hong Kong focused on high-end maritime services, while the others specialise in shipbuilding, bulk and liquid cargo, and transshipment.
Favourable policies
The policy of top-down support and incentives is part of a concerted effort to sustainably and continuously develop Hong Kong’s maritime sector and economy. For example,the Ship Leasing Tax Concessions Bill, which came into effect in June 2020, set taxes for qualifying ship lessors’ profits at 0% and taxes qualifying ship leasing managers at 0% or 8.25% profits tax—50% lower than the then already low profit tax rate. This enhanced Hong Kong’s competitiveness in a sector where mainland Chinese capital is partly taking the place of traditional global bank lenders who have retreated from ship financing.
“It was a really good idea to help leasing capital base itself in Hong Kong. China has become one of the major global sources of shipping finance. [This] wasn’t true 10 to 20 years ago. So it’s very fitting that China, through Hong Kong, has a place which is the right home for that sort of international capital investment,” says Fitzgerald.
According to Petrofin Global Bank Research, the top 40 banks’ shipping portfolios had shrunk to $286.9 billion by the end of 2020 from $454.89 billion in 2011. The year saw traditional shipping capital providers DVB and Nord LB withdraw from ship financing completely. Meanwhile, Chinese finance of leasing grew to $66.5 billion in 2020 from $59.2 billion in 2019. Notable providers of capital in Hong Kong included the Bank of Communications, the Export-Import Bank of China, and the Industrial and Commercial Bank of China.
In January 2021, Hong Kong enacted a highly anticipated tax exemption law covering profit tax for marine-related insurance business, enabling qualifying firms to pay corporate tax at 8.25%—also a 50% reduction. It covers all general reinsurance business of direct insurers, selected general insurance business of direct insurers, and selected insurance brokerage business. The intent is to attract marine insurers and specialty risk insurance business to the SAR, setting up another spoke in Hong Kong’s strategy.
A working group was set up in 2017 to review Hong Kong’s insurance industry. Subsequently, the government adopted a more pragmatic approach for Protection and Indemnity (P&I) clubs to apply for authorisation in Hong Kong.
“This is different from before, when some of the P&I clubs only operated a manager’s office in Hong Kong. Nowadays, 12 of the 13 members of the international group of P&I clubs have a presence here. Many are authorised and licensed to conduct business in and from Hong Kong. No other maritime centre has such a substantial marine insurance presence,” says Lau.
As well as tax concessions, Hong Kong had entered into double taxation treaties with 45 jurisdictions as of 2021. “Some countries may have had tax treaties for longer, but not all are up to date. Hong Kong’s are very modern and sit very well with its favourable tax system,” says Fitzgerald.
The best of both worlds
Another component of Hong Kong’s maritime service offering is its rise as a leading centre for shipping and commercial contract formation, dispute resolution and arbitration. It’s the only part of China and East Asia that operates a common law system, the prevalent legal model in shipping.
Hong Kong is home to the Hong Kong International Arbitration Centre (HKIAC), the Asia office of the International Chamber of Commerce (ICC), the Hong Kong branch of the China Maritime Arbitration Commission (CMAC) and China International Economic and Trading Arbitration Commission (CIETAC).
“China conducts a huge number of transactions with other countries, and inevitably there are contractual disputes. They are invariably referred to court litigation or arbitration. One counterparty may prefer London or New York as an arbitration venue, while the Chinese counterparty would prefer China. Hong Kong serves the purpose of breaking deadlocks like these because of its common law system, and legal and dispute resolution services,” says Lau.
The Baltic & International Maritime Council (BIMCO)—the international shipping association that represents the owners of some 60% of the world’s merchant fleet—included Hong Kong as one of its four designated arbitration venues in its standard agreements, alongside London, New York and Singapore, when it adopted the BIMCO Law & Arbitration Clause 2020. “The move signals not only BIMCO’s, but also the global shipping industry’s recognition of the strength of Hong Kong’s arbitration services,” says Lau.
Since October 2020, pursuant to an agreement between Hong Kong and mainland China, parties to Hong Kong arbitration can apply to mainland Chinese courts for interim measures pertaining to institution alarbitration. This enables shipping firms engaged in Hong Kong with mainland Chinese parties to obtain injunctions from Mainland courts in a time-efficient and cost-effective process.
“A counterparty can apply to Mainland courts from Hong Kong for the interim preservation of evidence and interim preservation of assets, as well as interim protective measures, which are similar to injunctions under common law. If you come to Hong Kong, you can enjoy that. If you go elsewhere and arbitrate with Chinese counterparties, you don’t have that,” says Lau.
Further reinforcing Hong Kong’s status as Asia’s preferred maritime arbitration centre, the Hong Kong Maritime Arbitration Group (HKMAG)—which was set up in 2000 as an informal body of arbitrators and mediators under the Hong Kong International Arbitration Centre and established as a formally independent arbitral organisation in 2019—is tasked with maintaining a framework for arbitration terms and procedures for applying to Mainland courts for interim measures.
China and Hong Kong are also parties to the New York Convention, so awards in either location are enforceable in more than 150 jurisdictions.
Growing ecosystem
In another vote of confidence in Hong Kong as a maritime hub, the ICS opened its first overseas office in 100 years in the SAR. The ICS is the world’s principal shipping organisation, representing the ship-owners of 80% of the world’s merchant tonnage. “It chose Hong Kong because of China, and because Hong Kong is home to national ship owners,” says Liu.
Favourable policies and Hong Kong’s status as a finance centre and arbitration hub further bolster its position as the world’s fourth largest ship registry by tonnage of vessels registered.
“Unlike flag of convenience registries that do not disclose a high degree of information on their ships, in Hong Kong, you have to make full and frank disclosure of the crucial details of the ship owners. It’s open, transparent, and it gives your commercial partners certainty and confidence,” says Lau.
Looking ahead, tax concessions for ship managers, ship brokers and ship agents are under discussion, and the government is considering creating a standalone transport and logistics bureau—a government function that is currently combined with housing.
“If we can get that additional focus by having a department specifically [look] at transportation and logistics, that provides a solid base for future development,” says Fitzgerald.
Also on the horizon is Hong Kong’s carbon neutrality target of 2050. Green transport is one of four decarbonisation strategies and measures recently announced by the government.
On a global level, the International Maritime Organisation (IMO) has unveiled more stringent regulations to curb emission from the global merchant fleet, pushing decarbonisation and sustainability up the maritime community’s agenda.
“In 2015, Hong Kong brought in legislation requiring ocean-going vessels that berth at the port to use bunkers containing no more than 0.5% sulphur, five years earlier than the International Maritime Organisation’s IMO 2020 regulation, which enacted a similar requirement,” says Lau.
Hong Kong made progress toward these climate goals by ratifying the International Convention for the Prevention of Pollution of the Sea by Oil (OILPOL), and the IMO 2020 regulations, which limit the sulphur content in bunkers and the smoke emitted by vessels.
To reduce shipping’s air pollutant and carbon emissions, Hong Kong’s government is exploring methods of encouraging the adoption of liquefied natural gas (LNG) by ocean-going vessels (OGV). These include using an offshore LNG terminal that’s being built by Castle Peak Power Company Limited (CAPCO) and The Hongkong Electric Company Limited, and is scheduled for completion in mid-2022 as a bunkering facility for OGVs. It will be Hong Kong’s first such facility for imported LNG, and plans for LNG bunkering areas and related technical requirements and safety regulations are expected in the next few years.
With its free trade regime, free market, free flow of capital and freely convertible currency stably pegged to the US dollar, Hong Kong is well known as the world’s freest economy. Given its increasing two-way integration with the GBA and favourable government support, the city is poised to enhance its status as an international maritime hub to the next level.