As the two poles of global financial flows in Asia, a tacit rivalry has existed between Hong Kong and Singapore as both have competed for the title of “Asia’’s premier financial center.” With Hong Kong’s political turmoil showing no signs of abating, some Singaporeans may be quietly gloating, believing that the ever-reliable Lion City will become a more attractive option for finance vis-a-vis the “Pearl of the Orient”.
But according to economists Sung Eun Jung and Tommy Wu from Oxford Economics, competition between the two cities is no longer a zero-sum game. Both cities, they say, will increasingly find themselves playing different roles in global financial markets. In economist-speak, the two economies will become more complements than substitutes for one another.
Despite their obvious similarities, both economies have important structural differences. “Singapore and Hong Kong are both small, open economies with large financial sectors. But Singapore is much less mainland China-centric than Hong Kong is. Singapore is also less equity-centric in its financial services and more evenly distributed, taking a more diverse approach,” write Sung and Wu in a 15 December report.
Consequently, the economists see Hong Kong increasingly doubling down on its role as a gateway in and out of China. They see current political and economic trends leaning towards greater Hong Kong-China integration, with mainland Chinese firms comprising 80% of Hong Kong’s stock market compared to just 2% in Singapore.
Meanwhile, the city’s appeal as an international hub may be weakened. This is especially following the enactment of a controversial National Security Law, which prompted the US to withdraw its preferential status.
“Partly in response, we expect Singapore to continue to focus on strengthening its position as a key global financial center for the entire region, possibly with a greater emphasis on Southeast Asia to ride on the region’s high growth potential,” note Sung and Wu.
In addition, the asset mix in Singapore and Hong Kong markets also differ. Hong Kong markets are strongly focused on equity trading compared to Singapore, where different types of financial services like bonds and FX trading are relatively evenly distributed. That said, Hong Kong matches or slightly overtakes Singapore in all these services while significantly eclipsing it in total stock market capitalisation.
Singapore, however, has also been more successful than Hong Kong in developing itself into a regional technology hub. While an Accenture Study finds that Singapore’s fintech investment in 2019 of US$861 million ($1.14 billion) is smaller than that of Hong Kong (US$2.9 billion), Singapore is able to attract more fintech deals with a smaller average size, with 108 deals in Singapore in 2019 compared to just 2019 in Hong Kong.
“Hong Kong has also started to emphasize the innovation and technology sectors more, but progress is lagging. In fact, research and development (R&D) spending has historically been less than 1% of GDP in Hong Kong compared to about 2% in Singapore,” remark Sung and Wu.
Indeed, the duo did not see an exodus of funds from Hong Kong to Singapore despite the National Security Law being enacted in late June. Banks’ net open positions and Hong Kong Dollar deposits in the former performed strongly due to strong capital inflows amid a flurry of initial public offerings (IPO). The HKD-USD exchange rate also hit the strong side of its trading band at HK$7.75 per US$ “many times since March this year”.
Nevertheless, there has been some migration of labour and capital out of Hong Kong, say the economists. Singapore has continued to see net inflows of foreign direct investment (FDI) in recent quarters vis-a-vis sharp outflows from Hong Kong. Anecdotal evidence sees real estate buyers from Hong Kong looking into Singapore properties while several Hong Kong multinationals are moving or planning to move at least part of their operations to Singapore.
Sung and Wu note, “In all, while we have seen FDI outflow pressures amid rising political uncertainty in Hong Kong, there have been no large banking sector outflows over the past two years, indicating that its role as a financial hub is largely intact.”
Despite their undoubted financial influence in Asia, the pair do not consider Tokyo and Shanghai to be global financial hubs. Tokyo suffers from its over-orientation towards domestic markets as well as language and cultural barriers. Shanghai on the other hand, they say, is impeded by China’s capital controls as well as a perceived lack of regulatory transparency and predictability.
