The battle of the bays: China’s urban ascent
The most productive urban locations in the world are found in bay areas, for example Tokyo, San Francisco and New York. Now, there is a new kid on the block - China’s Greater Bay Area, or GBA for short.
On a recent trip to Shenzhen, the Global Cities blog looked at the scale and speed of the development of the GBA, the population of which will soon exceed that of Germany.
The GBA benefits from China’s willingness to invest in transport infrastructure, as an effective high-speed public transportation system will be critical in determining whether a city achieves global dominance in the future.
Generally, people’s tolerance for commuting has been found to be about one hour in either direction. High speed transport lowers the cost of housing as a city can expand from its centre while ensuring that travel times remain within this tolerance band.
So, in the ‘Battle of the Bays’, will the GBA be the next winner?
China’s progression from a manufacturing hub to an ideas hub is the catalyst behind its rapid urbanisation. We see this happening all over the world: certain locations evolving into knowledge clusters and providing economies of scale as ideas are monetised. The best example of this is the GBA, which the Chinese government hopes will become the world’s pre-eminent tech development centre.
The GBA comprises four cities or economic zones that will serve slightly different purposes. The interlinking of large cities through transport infrastructure means that the sum becomes economically more powerful than the parts. This leads to high per capita levels of productivity.
We wrote about the phenomenon of Meta-Cities on the blog last year (of which the GBA is one).
Which bay area will win?
Although the GBA’s productivity is currently half that of its nearest rival (see chart above), we think this could change rapidly. Companies such as Tencent and DJI in Shenzhen are market leaders and the pace of knowledge transfer is set to increase. This is because the Chinese government has recognised the importance of cities in generating ideas. Unlike the other bay areas, it is prepared to spend heavily on transport infrastructure to facilitate the movement of people around the GBA, as well as ensure affordability for employees and tax breaks for highly skilled workers. In the GBA, a combination of higher density housing and rapid infrastructure also helps to contain house price inflation.
This willingness to invest is demonstrated by the rail network connecting the GBA. This is in stark contrast to the San Francisco Bay Area, home of Silicon Valley, where housing has become unaffordable within the commuting tolerance zone, mainly because the transport infrastructure is so poor and because of the city’s low density housing. This leads to skilled workers leaving the city as even pay inflation is unable to keep up with the higher costs.
We know that cities are the most efficient way for companies to grow, as ideas and people cluster together. The investment in the GBA shows that investment into this region will reap rewards for China. In the ‘battle of the bays’ our money is on the GBA becoming the pre-eminent economic region in the world. Moreover, according to Oxford Economics the GBA will be the seventh largest economy in the world by 2030.
Important Information: The views and opinions contained herein are those of Schroders' Global Cities Team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or schroders.com contains additional disclaimers which apply to third party data. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London, EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.