How much longer will Hong Kong continue to defy predictions that it will lose its prominence as Asia’s leading international financial centre? Proponents of the city claim that because of its rules, China can easily connect to international markets and point out that many major financial firms have established roots. Currently, Shanghai handles more stock trades than Hong Kong. Its wealth management industry is struggling to keep assets as Singapore grows. Rents are very expensive despite the low tax rates.
Hong Kong’s pro-democracy protests are currently upsetting daily life, sending the local economy into a recession, angering decision makers in Beijing. A large bank wishing to grow is likely to consider a number of factors before deciding on to set up in Hong Kong.
According to data compiled by Bloomberg, Hong Kong has long been a top destination for initial public offerings. The city raised US$36.8 billion (S$49.95 billion) in 2021, making it the world’s busiest venue. K C Chan, the city’s former secretary for financial services and the treasury said, “That is what matters”.
“A financial centre’s most important functions include fundraising and asset management,” he said. He argues that when the city helps entrepreneurs sell stock, it has an advantage in winning their business for reinvesting the money.
Shanghai is establishing itself as a strong competitor, helped by the government’s loosening of policies to encourage companies to rely less on borrowing and more on equity markets for financing. This year it may raise more money via IPOs than Hong Kong for the second time in a decade.
Hong Kong may be the favoured venue to tap capital from abroad, but Shanghai is where most Chinese companies go to raise money domestically. That, along with legions of retail investors and sometimes-dramatic market swings, has fuelled Shanghai’s trading volume.
The former British colony suffered a setback last month when London Stock Exchange Group fended off a takeover bid from Hong Kong Exchanges & Clearing Ltd. An existing tie-up with the Shanghai Stock Exchange “is our preferred and direct channel to access the many opportunities with China,” LSE said in rebuffing the deal.
Hong Kong is still ahead in money management, but the stockpile of assets it tends to plateaued last year as Singapore’s kept growing. Now, Hong Kong clients are getting anxious. Goldman Sachs Group estimates investors probably moved as much as US$4 billion to Singapore amid Hong Kong’s political unrest as of August. The demonstrations have since continued. Then there is the looming question: Where might China’s massive pent-up wealth flow?
Deposits are less sticky, and in August they left Hong Kong at one of the highest rates in years. By the end of September, foreign currency deposits reached a record in Singapore. Banks including HSBC Holdings and Standard Chartered are playing down the shift, saying last week that even if some customers are weighing contingency plans for cash parked in the city, actual moves are modest.
Hong Kong’s defenders say the local economy’s slump has little bearing on the city’s attractiveness as a financial centre. Yet growth can signal where companies are betting on the future. Shanghai’s relatively rapid expansion underscores that.
“Shanghai is the financial centre of China and should continue to benefit from continued growth of the nation’s massive economy and on-going efforts to internationalize the yuan,” said Hubert Tse, a partner at law firm Boss & Young in Shanghai, who’s advised global financial institutions in China since 2003. Tse, who believes Shanghai, will establish itself as the dominant hub, moved there 16 years ago from Hong Kong and travels frequently to Singapore.
Still, China places leagues behind in a number of international rankings on doing business. It ranks 28th on the World Economic Forum’s 2020 Global Competitiveness Index, a measure of productivity, following Hong Kong at number three and Singapore at number one.
The Economist Intelligence Unit also ranks Singapore as the top global business environment among 82 regions. Hong Kong is ranked 10th and China 56th. Nick Marro, Hong Kong-based global trade lead at the research and advisory firm, said China’s closed capital account and its dense regulatory framework have weighed on its score. Another thing that is certain in Shanghai is taxes, with significantly higher rates than the competing hubs.
Singapore and Hong Kong are much more international and are used to making life easier for expats. More than a quarter of Singapore’s population comes from abroad. And in Hong Kong, an English-speaking housekeeper typically costs about half as much as in Shanghai. But in terms of rents, Hong Kong property prices truly reign supreme. Lifestyle considerations such as international schools and living standards also help determine how attractive a financial centre could be.
Outflow of capital and talent
Meanwhile, the gap between two cities is narrowing given the recent outflow of capital and talent from Hong Kong. The Hong Kong dollar was at its weakest level in over three years, driven by traders selling to buy the US dollar to enjoy rising US interest rates.
This prompted the Hong Kong Monetary Authority to intervene in May 2022, when it bought the Hong Kong dollar back from the currency market to keep the currency’s tight peg to the US dollar.
As the city cut its growth forecast to a range of 1% to 2% in 2022 – down from the previous 2% to 4% – this capital outflow could reinforce itself as the gloom spreads across the market, leading to a downward spiral of the financial hub.
Unlike previous waves of staff relocation that Hong Kong has gone through since the British handover to China in 1997, this time the most experienced executives are flocking elsewhere for business stability and quality of life improvements.
As of March 2022, JPMorgan is moving top executives and key staff from Hong Kong to Shanghai, given restrictions on business travel to mainland China. Citigroup said in February that it will shift senior equities staff and directors to Singapore for their family reasons and client coverage – around the same time Singapore authorities’ streamlined COVID-19 travel and social restrictions.
More broadly, multinational companies, such as Bank of America and Wells Fargo, were reported to have been reviewing their Hong Kong businesses and looking to relocate employees or operations to Singapore.
As more companies look outside Hong Kong’s horizons, Singapore will contend with Hong Kong as the first choice for their Asia headquarters. Especially once a few major firms start to make a fully committed move, there might be a herding effect that will result in laggard firms following suit.
This was likely the case to some extent after Brexit – an EY tracker indicated that the number of financial services firms which moved or planned to move UK operations, staff and assets nearly doubled between March 2017 and March 2021.
Singapore growing strength as a financial hub
Meanwhile, Singapore is strengthening its status as a financial hub as more affluent investors worldwide set up base. Billionaire entrepreneurs from James Dyson to Haidilao co-founder Shu Ping have established family offices in Singapore, drawn in by attractive tax rates and a stable regulatory environment. The Monetary Authority of Singapore approved more than 100 applications for family offices in the first four months of 2022
In addition to the capital brought to Singapore by family offices, these investors typically demand sophisticated financial services, creating jobs for wealth managers. The accumulation of financial and human capital goes towards increasing Singapore’s competitiveness as a financial hub.
Regional economic development is another tailwind for Singapore. China’s zero-COVID policies have triggered manufacturers to shift supply chains to countries like Vietnam, whose exports jumped by 13.4 per cent in the first quarter of 2022 compared to the previous year.
Singapore can potentially facilitate such relocations, given its longstanding business presence across Southeast Asia and familiarity with Chinese processes. Financial institutions can connect clients with investors, legal firms can support the opening of new branches, and consultancies can advise on sourcing regional suppliers and training staff.
Managing the influx of emigrants
Until then, Singapore needs to accommodate the inflow of foreign talent while maintaining the social balance and keeping inflation down. The demand for living and working in Singapore can increase quickly but the supply of housing, education, and transportation takes much longer to catch up.
In the short term, there can be bottlenecks in travel from Hong Kong to Singapore, with major airlines offering fewer flights to and out of Hong Kong due to the city’s stringent quarantine rules. Nonetheless, the senior executives are wealthy enough to make the trip. Their sudden arrival in Singapore, however, heats up high-end markets for private housing and education.
China’s rich moving their money to Singapore
More and more wealthy Chinese are worried about keeping their money on the mainland and some see Singapore as a safe haven.
Since protests disrupted Hong Kong’s economy in 2019, affluent Chinese have looked for alternative places to store their wealth. Singapore proved attractive because of its large Mandarin Chinese-speaking community and, unlike many countries, it doesn’t have a wealth tax.
The trend appeared to pick up last year after Beijing’s sudden crackdown on the education industry and emphasis on “common prosperity” — moderate wealth for all, rather than just a few.
That’s according to CNBC’s interviews with firms in Singapore that are helping wealthy Chinese move their assets to the city-state via the family office structure.
A family office is a privately held company that handles investment and wealth management for an affluent family. In Singapore, setting up a family office typically requires at least $5 million in assets.
Over the last 12 months, inquiries about setting up a family office in Singapore have doubled at Jenga, a five-year-old accounting and corporate services firm, according to its founder Iris Xu. She said the majority of inquiries come from people in China or emigrants from the country.
About 50 of her clients have opened family offices in Singapore — each with at least $10 million in assets, Xu said. According to Forbes, China’s rapid economic growth has minted hundreds of billionaires in just a few decades. Many more joined their ranks their last year.
That brought the total number of billionaires in China to 626, second only to the United States’ 724 billionaires, the data showed.
Xu said her Chinese clients “believe there are plenty of opportunities to make a fortune in China, but they are not sure whether it is safe for them to park money there,” according to a CNBC translation of the interview in Mandarin.