Hong Kong manufacturing firms with operations in China’s Greater Bay Area are struggling under the weight of burdensome regulations and are reluctant to make long-term investments to upgrade facilities because of uncertainty in the global business environment, according to a new report by the Chinese Manufacturers’ Association (CMA) of Hong Kong. The CMA, in conjunction with Lingnan University of Hong Kong, conducted interviews with 400 mostly small and medium-sized companies headquartered in Hong Kong, but with manufacturing bases in Dongguan, Huizhou, Guangzhou and Shenzhen. The areas have the highest amount of investment among the nine cities at the core of Beijing’s Greater Bay Area development blueprint. Despite Beijing’s plan to turn the area into a leading source of industrial development, the survey highlighted the difficulties that many Hong Kong-based businesses face. Among the challenges are rising operating costs, high taxation and administrative fees, rapidly changing regulation, and piracy problems in the mainland. Some 81 per cent of companies said taxation was cumbersome and administrative charges were excessive, while 83 per cent said they had issues with China’s constantly changing environmental, trade and investment policies. About 80 per cent said labour shortages were a problem. Nearly all – 95 per cent – said an improvement to government transparency and efficiency would be helpful for business, while 87 per cent said simplifying Chinese customs procedures would be of benefit, and another 83 per cent said simplifying procedures for entering the domestic market would improve the business environment. Excessively strict policies not only threaten the survival of local manufacturers and may force them to relocate, but they could also disrupt entire industrial supply chains, the CMA said in its report released on Thursday. Even firms that are not categorised as part of a highly polluting industry, such as watch making, have been negatively impacted by government policies. One Hong Kong watch assembly factory said that because the electroplating process carried out by manufacturers produces pollution, many vital firms had been forced to move production out of China. “When the accessories arrive and are assembled into the watches, they are then needed to be exported or sold domestically,” the company said in the report. “And when [the manufacturers] are forced to move to a farther place, the cost of transport is naturally affected and, as a result, costs would also inevitably rise.” Hong Kong has long been the largest source of direct investment in the Greater Bay Area, helping development of the city’s service sector in the process, which accounts for more than 90 per cent of its economy. In 2018, there were 21,345 registered Hong Kong-funded manufacturers in the Greater Bay Area, with cumulative registered capital of 317.7 billion yuan (US$44.8 billion) that provided a total of 2.71 million jobs. In 2017, their total operating profit reached 54 billion yuan and they held loans amounting to about HK$227.6 billion (US$29.3 billion). Wei Xiangdong, director of the China Economic Research Department of Lingnan University, said the actual scale of Hong Kong’s manufacturing industry and its contribution to the city’s economy had been underestimated over the past five years because companies were often classified as exporters under the services sector. In the next five to 10 years, China’s most important economic growth driver will be the integration of new economic regions to develop a metropolitan area or urban clusters Zhang Ming Many Hong Kong manufacturers in the Greater Bay Area used the city’s professional services and technical support for materials purchasing, product design and quality control, showing their close ties with the local economy. The “Made in China 2025 ” plan aims to upgrade the nation’s hi-tech industries and lessen its reliance on the United States and imports. It will take place amid China’s continued push to urbanise, creating jobs to expand its already large middle class. “In the next five to 10 years, China’s most important economic growth driver will be the integration of new economic regions to develop a metropolitan area or urban clusters,” said Zhang Ming, senior research fellow and director at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. “These core cities will lead the rest of the country no matter in real investment, real estate, job opportunities or in company registrations,” he said at the Refinitiv Market Outlook Summit this week. Upgrading hi-tech industries carries risks for Hong Kong-funded manufacturers who employ large numbers of workers, the CMA said. Owners worry that automating production will cause job losses that could damage their enterprises. The current political environment could also cause problems for Hong Kong firms in China, according to Francis Lui Ting-ming, a professor at Hong Kong University of Science. He said any reversal in globalisation would make it more difficult for these firms to sell their products overseas and disruptions in Chinese supply chains could make it harder to source raw materials from foreign countries. Some manufacturers were holding back on long-term capital investment for new factories or upgrades due to the US-China trade war , Lui said. “The problem is the world is now asking whether globalisation has become too excessive, leading to new problems,” Lui said. “I feel if [your market] can be open then you should be as open as possible and continue to reap the benefits from globalisation. But if this is not possible, then you may need to have a back up plan.”