Local investor Joe Lo looks at the prospects for Hengqin, a small island a stone’s throw from teeming Macau. What is happening on Hengqin and how is it supposed to help the world’s biggest casino economy?
Macau is one of the world’s wealthiest places on a per capita basis. But a severe shortage of space has forced its residents to live like sardines, bedeviling the city’s efforts to diversify its economy too.
What’s the solution? Less than a few hundred metres away is an island of three times its area, administered by neighbouring Zhuhai. Largely empty, it was designated as the Hengqin New Area ten years ago, with a remit as an experimental zone that would support Macau’s growth.
Over the last few years the public and private sectors of Macau have started to pour money into Hengqin, transforming it into a giant construction site. The University of Macau moved its campus there in 2014 in major land deal and Macau’s authorities have been promoting a series of innovation-focused science and technology parks parks in Hengqin, including one for incubating traditional Chinese medicine startups. Road links also are being built to connect the island with the rest of Zhuhai and Macau, including a tunnel from the island to the Hong Kong-Zhuhai-Macau Bridge, and there’s a Rmb20 billion investment fund drawn from Macau’s foreign exchange reserves to develop Hengqin’s technology parks and transport links further.
To say that Macau thinks Hengqin is critical to its future development is to put it too mildly.
Elbow room that Macau has longed for
Macau has long lusted after Hengqin. The Portuguese started a small settlement on the island before the Second World War but returned it to the Nationalist government at war’s end. Hengqin stayed scarcely populated until 1999, when a six-lane bridge finally connected it to the rest of Zhuhai. Prior to that, the only way to visit was by boat.
With Macau the most densely populated city in the world, it’s small wonder that its residents are bullish on the property prospects in Hengqin. According to Centaline, a Hong Kong-based property agency, a third of the apartments there are being purchased by Macau residents, with another third going to Hong Kong buyers.
Of the remainder, more than half have been sold to investors from other parts of China. This is no great surprise as neighbouring Zhuhai is seen as a popular wintering spot for well-off northern Chinese (there’s a noticeable increase in out-of-province cars during the colder months).
Another factor is that Hengqin’s real estate is exempt from the anti-speculation restrictions in many Chinese cities, including most other parts of Zhuhai. This meant that property values kept rising modestly last year, even as prices in the rest of Zhuhai were flat.
Another expression of ‘one country, two systems’
Hengqin is also experimental in the way that Beijing hopes Macau and Zhuhai can overlap on the island in another example of the ‘one country, two systems’ philosophy. Macau residents and foreign visitors to Macau will be able to enter Hengqin without a China visa, although they will still need one to travel beyond the island’s boundaries. Likewise, mainland residents will enter Hengqin visa-free, but not move beyond. The government is promising that Macau-licenced cars will eventually be able to enter Hengqin freely as well. Mainland-licenced cars can already do so.
It’s unclear how Hengqin will be governed as this overlapping grows. At present, the University of Macau is closed off to the rest of Hengqin, for instance, with sole access via a tunnel from Macau. The campus is run under Macau law and the Macau police maintain order. Internet access at the university is unrestricted, unlike the rest of Hengqin.
The general idea of more of a melting pot on Hengqin still makes sense as a way to give Macau businesses access to workers from mainland China, as well as offering space to grow outside of the city’s severely limited land supply. The hope is that, eventually, the fences around the university will be removed, for instance, and that Macau and Hengqin will be largely indistinguishable from a governance viewpoint.
What business is going on in Hengqin?
One sector that certainly isn’t allowed there is gaming. Instead, the island has been tasked with helping Macau reduce some of its dependence on the casinos.
In one stream of new investment, Beijing is pushing Macau forward as a centre for innovation and technology, announcing two State Council-designated State Key Laboratories at the University of Macau to conduct research into traditional Chinese medicine and to developing integrated circuits for smartphones.
Alongside the residential complexes sprouting up on Hengqin, themed office parks (both publicly-developed and private) are going up quickly too. Near the aforementioned hub for TCM, other projects backed by the local government include Hengqin Creative Valley, Hengqin Science City, and the China-Latin America Industrial Park.
They all offer cheap or free space for offices and laboratories, plus subsidies by the bushel to encourage the creation of innovation businesses.
Last year I helped a Chinese-American scientist who had been researching Alzheimer’s to establish a company in Hengqin to develop treatments for dementia. Besides the subsidised facilities, grants in excess of $2 million from the local, provincial and central governments were welcome contributions to our angel financing, with promises of further assistance when the company was ready for its Series A investment round.
Living subsidies for company officers are also on tap: PhD holders can get Rmb6,000 a month, while Masters degree holders, like me, get half that. Other benefits include personal income taxes set at levels similar to those of Hong Kong and Macau, and a corporate profit tax rate of 15%, compared with 25% for the rest of China.
Tourism and MICE
In tourism Hengqin is a key part of efforts to forge a complementary strategy with Macau’s integrated resorts (modern parlance for casino hotels), with theme parks at the fore. The Hengqin Chimelong Ocean Kingdom, an outpost of Chimelong Safari Park in the Guangzhou district of Panyu, is the world’s largest aquatic theme park, and already the world’s 10th most-visited theme park with nearly 11 million visitors last year.
US film company Lionsgate Entertainment, the producer of the popular movie franchises Hunger Gamesand Twilight, is building its first theme park in Hengqin as well. Scheduled to open in July, it is promising more than 25 rides and virtual reality experiences. Company executives talk excitedly about having Las Vegas and Orlando next door to one another, creating the ultimate destination.
Anecdotes from friends in the hotel industry suggest there is already significant tourist overlap between Zhuhai and Macau, especially for family visitors not solely concerned with gambling at the casinos. Prices for domestic air and rail transportation to Zhuhai, plus the local hotel rates, are significantly lower than for equivalent visits to Macau. As such, it is common practice for Macau-bound Chinese visitors to bookend their trips in Zhuhai. Weeknight rates at the St Regis Zhuhai were less than $190 when I checked this week, whereas it cost over $350 to stay the same night at the St Regis Macau.
Fortunately for Macau’s hotels, mainland Chinese residents can only get single-visit visas to Macau each time they apply, because of Beijing’s concerns that easier access will lead to unacceptable levels of gambling and capital outflows. For the time being this restricts visitors from daytripping into Macau from a Zhuhai hotel base, unless they only intend to spend a single day there.
Can Hengqin prosper?
Macau has no space for theme parks but it does have tourist and services economy know-how in spades. Hengqin has the land, but fewer of the softer skills. Combine the two and some of the tourism and MICE initiatives there have a good chance of success.
But whether throwing huge sums at Hengqin can truly transition Macau away from its dependence on gaming and tourism, and transform it into a centre for technological innovation is still to be seen.
Innovation industries are hugely dependent on the quality of local expertise, which, frankly, Macau and Zhuhai don’t have a lot of. The University of Macau has buckets of cash but it ranks just 443rd on the QS World University Rankings. Zhuhai’s educational infrastructure is even more undeveloped than Macau’s.
Can Macau-Hengqin really attract the world-class faculty, students and innovators it needs to compete with Silicon Valley, or even Shenzhen and Hong Kong, for that matter? Without the heavy subsidies, biotech startups have little reason to launch in Hengqin rather than Guangzhou or Shenzhen. And even with the cash incentives, I can attest that the working situation is hardly ideal. Startups on Hengqin quickly run into staffing problems; there are few qualified local graduates to hire, and core staff are inevitably imported from elsewhere.
Other practical matters also need to be resolved. Macau residents are reluctant to sign employment contracts with Hengqin-incorporated firms because they lack the protections granted by Macau’s generous labour laws. A Hengqin company cannot pay into the Macau social security fund for its employees, so a person from Macau would be giving up significant pension benefits to work there. Health insurance is another headache.
The Macau and Zhuhai governments have been looking for temporary workarounds to many of these issues but ultimately they will have to be settled by the central government in Beijing. If Macau and Hengqin really want to attract startups that go on to be unicorns, patchwork solutions won’t be enough.