ECONOMIC INTEGRATION IN THE GBA: A PRICE-BASED ASSESSMENT OF REAL AND FINANCIAL INTEGRATION IN THE GREATER BAY AREA

Abstract

THE GUANGDONG-HONG KONG-MACAU GREATER BAY AREA (GBA) WAS FIRST CONCEPTUALIZED IN 2016, WHICH AIMED TO FACILITATE TRADE AND FINANCE LIBERALIZATION AMONG THE THREE REGIONS. THE TRADE AND FINANCIAL ENVIRONMENT OF THE GBA IS UNIQUE. DUE TO THE “ONE COUNTRY, TWO SYSTEMS” PRINCIPLE, MAINLAND CHINA, HONG KONG AND MACAU ARE CONSIDERED TO BE TRADING PARTNERS BOUNDED BY WTO RULE, BUT BILATERAL FREE TRADE AGREEMENTS HAVE BEEN SIGNED BETWEEN MAINLAND CHINA AND HONG KONG, AND BETWEEN MAINLAND CHINA AND MACAU, BUT NOT BETWEEN HONG KONG AND MACAU. FURTHERMORE, EACH OF THE THREE REGIONS CIRCULATES A LOCAL CURRENCY SUBJECT TO ITS OWN EXCHANGE RATE POLICY, WITH HONG KONG DOLLAR AND MACAU PATACA CURRENTLY PEGGED TO THE US DOLLAR. THESE AFFECT THE MOBILITY OF TRADE AND CAPITAL FLOWS IN THE AREA. HENCE, THIS PAPER APPLIES THE WIDELY-USED PRICE-BASED APPROACH DUE TO CHEUNG ET AL. [5] TO ANALYZE THE DEGREES OF REAL AND FINANCIAL INTEGRATION IN THE GBA BASED ON INTEREST RATES, EXCHANGE RATES, AND PRICE INDEXES DATA FROM JANUARY, 2016 TO NOVEMBER, 2021. THE REAL INTEREST DIFFERENTIAL (RID), UNCOVERED INTEREST DIFFERENTIAL (UID) AND THE DEVIATION FROM PURCHASING POWER PARITY (PPD) BETWEEN EACH REGIONAL PAIR HAVE MEANS THAT ARE STATISTICALLY AND ECONOMICALLY CLOSE TO ZERO, IMPLYING HIGH REAL AND FINANCIAL INTEGRATION IN THE GBA. THE UNIT ROOT TESTS FOR STATIONARITY ALSO CONFIRM THAT THE TIME SERIES ARE MEAN-REVERTING, SO THE ECONOMIC INTEGRATION IN THE GBA IN THE LONG RUN IS FORESEEABLE.