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GBA Legal System faces challenges but offers interesting opportunities

China’s Guangdong-Hong Kong-Macao Greater Bay Area (the GBA) is a national initiative aimed at creating the country’s most open and economically prosperous region. It is composed of the two special administrative regions of Hong Kong and Macao and nine municipalities in Guangdong Province.

In judicial practice, the GBA faces the challenges of “one country, two systems and three jurisdictions”. The economic integration of the GBA initiative will be limited by the existence of three distinctive legal systems and capital account regimes.

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As highlighted by the Chinese government’s 13th Five-Year-Plan, the GBA is a key driver of the country’s technology ambitions, market opening reforms, and facilitator of the Belt and Road initiative.

The region includes nine cities in the Pearl River Delta (Shenzhen, Guangzhou, Foshan, Dongguan, Zhuhai, Zhongshan, Huizhou, Zhaoqing, Jiangmen), and two administrative regions (Hong Kong and Macao).

With a population of about 72 million people, the GBA contributes over one-tenth of China’s economy and is home to tens of thousands of enterprises in multiple industries and sectors.

The GBA's shared sovereignty under China, combined with clear economic and commercial benefits for Hong Kong and Macao from integrating into mainland China's much larger and more dynamic markets, should provide policymakers with more flexibility over the longer run to enact structural and legal reforms. Central and provincial authorities are constantly updating regulations aimed at furthering some of the GBA's development and integration goals. China’s central government has also expressed its support for the full implementation of previously agreed measures. Despite the disruptions caused to the economy by the coronavirus pandemic, the importance of the GBA initiative has been underscored not only by the central government, but also by the local authorities.

However, according to experts, an institutional reform is crucial for the development of the GBA, with unified laws, tax policies and free exchanges of people and goods.

The main challenge is the coordination of the legal system in the GBA, which brings together the three legal systems and sets of tax rates and controls over people. Macao’s law is based on the Portuguese system, which originates from Roman law and is based on written legislation and differs fundamentally from the Hong Kong jurisdiction.

Hong Kong’s law is a combination of English common law and local legislation codified in the laws of the special administrative region. The Chinese legal system is officially referred to as a ‘socialist legal system with Chinese characteristics’ and is based mainly on the civil law model.

GBA tax regimes are also being modified. Currently, the Individual Income Tax (IIT) system of mainland China adopts a seven-level progressive rate, ranging from three percent to 45 percent, which is higher than Hong Kong’s salary tax and personal assessment. Hong Kong has a five-level progressive rate, ranging from two percent to 17 percent, or a standard rate of 15 percent.

To lower the IIT rate and offset the difference with Hong Kong, nine mainland GBA cities have introduced IIT subsidies from 2019 to 2024, which may tempt small- and medium-sized enterprises (SME) looking at Hong Kong to consider other Greater Bay Area locations, where taxes are similar but operating costs, such as rent and cost of living, are far lower.

GBA cities can transform the region into a global powerhouse of tech innovation and a hub for emerging industries while realizing synchronized development within the cluster.

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Consisting of China's most innovative cities, the GBA is expected to become a world-class urban conglomeration.

Hong Kong has technology and fundamental research power, but it lacks a large market and significant manufacturing ability. The GBA, with a massive market and strong production capability, would solve this problem.

Nevertheless, some challenges remain for the better integration of the region. For instance, how to make the elements of technological innovation be circulated among the three areas, and how can more experts and professionals be attracted to the region. For the GBA to develop, barriers on exchanges of personnel and information must be removed, and tax policies and laws must be unified. With two systems, three customs territories, three currencies and three legal systems, it seems that the institutional gaps are greater than the physical ones. Experts believe that economic laws should be based on lessons learned from Hong Kong, whose laws are the most widely recognized in the world within the GBA.

The need for cooperation within the legal industry ultimately increases with the growing interaction and conflict between the Chinese cities and two special administrative regions. The business growth in the three regions may demand legal services of a higher quality. Although this is a challenge, it is also a great opportunity for legal professionals and for the development of legal systems in the Greater Bay Area.

An agreement that regulates and coordinates the three jurisdictions is fundamental, according to specialists. A similar challenge was met while integrating European countries at the start of the European Union. Its present legal system is a good example for legislators and governors in China, Hong Kong and Macao.

Hengqin and Macao will take the lead to test institutional integration, which will also inspire and promote the prosperity and development of other cities in the GBA area. Hengqin, also a free trade zone, is an island in the city of Zhuhai, South China's Guangdong Province. What Macao has lacked is space, which has restricted the development of its industry, but this gap can be filled and supported by Hengqin.

The GBA advantages and potential in capital, talent, manufacturing capability and the market could be combined in different areas in the region, forming the world's most competitive technological innovation highland and a source of emerging industries, which can lead global economic development. The future development of the GBA will depend on the mutual cooperation and exchange of resources between cities, and the creation of intro-city railways and commute facilities.

From an investor’s perspective, the growth potential of these under-reported cities is sizeable and growing. For businesses interested in investing in the GBA, understanding these lesser-known urban centers can offer a deeper look at the overall trajectory of the GBA’s development plan and the necessary knowledge to tap into the advantages and emerging priorities held within.


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