By Christopher Fix for CME Group
The Chinese government plans to transform the 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 United States, the initiative aims to improve connectivity and co-operation between nine key cities in Guangdong Province, Hong Kong and Macau.
Detailed plans for the project were unveiled in February 2019, when the government published its Outline Development Plan for the Guangdong-Hong Kong-Macau 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 renminbi (RMB).
Improving Energy Security
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 an "energy security protection system." This system involves the construction of large petroleum reserve bases in the Pearl River Delta and new liquified 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.
Increased Internationalization of The RMB
Alongside plans to increase economic growth, the GBA blueprint also contains measures to continue with the internationalization of the RMB, 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 Macau will also be developed into an RMB clearing center for Portuguese-speaking countries. The feasibility of establishing a securities market in Macau denominated and cleared in RMB is also being explored.
The blueprint also states that financial institutions within the GBA will be allowed to launch RMB interbank lending, as well as offer RMB foreign exchange spot and forward business, RMB 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 cross-boundary RMB bonds. Hong Kong will also be supported in developing more offshore RMB, commodity and other risk management tools. In addition, there will be greater scope for cross-boundary investment by Hong Kong and Mainland residents and institutions.
The changes, when they come into force, are likely to significantly increase the level of RMB 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.
The Role of Derivatives
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 RMB continues to be internationalized. Expanding the scale and scope of cross-boundary use of the RMB 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 RMB derivative products. Currency derivatives enable investors to manage the risk of future exchange rate volatility by purchasing futures contracts at set exchange rates. As the cross-border use of the RMB increases, demand for RMB derivatives is also likely to grow.
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(This article is sponsored and produced by CME Group, which is solely responsible for its content.)
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