An economic policy green paper by HKU Business School examines the city’s evolving role as a financial center in the post-pandemic era.
The future of financial centers is to be more niche. That, it seems, is a key conclusion of the third annual green paper released late last week by the University of Hong Kong.
But reading between the lines, another interpretation could very well be that Singapore appears to be winning the longstanding fight between the two financial centers hands down, a topic that finews.asia has written about extensively – with a measure of both glee and fascination - over the years.
Different Regions
In the introduction right after the pre-amble, it flatly states that both cities are «evolving into financial centers for different regions – Hong Kong for China and Singapore for Asia excluding China».
That sounds reasonable except when you get to the actual chapter where it de facto states that Hong Kong was one of the big three behind London and New York until very recently.
Central Role
«Up to the first half of 2019, Hong Kong could be seen as one of the world’s three leading financial centers, alongside London and New York, with a central role for the entire Asia time zone, a process which had been reinforced by the re-centering of many regional functions following the 2011 earthquake in Japan,» says Professor Douglas Arner, who wrote the chapter.
Since 2019, the picture has changed markedly, with the city being challenged by domestic instability, Covid, and geopolitical tensions.
High Point
«One could argue that the first half of 2019 will historically be the high point for Hong Kong’s role as an international financial center, after which – as with so many other financial centers throughout history around the world and in Asia – its role declines, to be taken by another,» Arner writes.
Still, divvying things up with its slightly smaller neighbor may not be all bad, with Professor Amer suggesting the city is simply undergoing an inflection point, or a period of structural change, much of it due to the geopolitical crisis between China and the US.
Multiple Centers
«These however are partially reflective of a longer term evolutionary process, involving the relative reduction in the size of the US economy and the development of an increasingly multipolar global economy, with multiple drivers and multiple centers,» Professor Arner wrote.
Given that, his take is that the two cities will be functionally different and will not actually compete directly, or as much as they had been previously.
Continued Increase
According to Arner, this is evidenced by the continued increase in foreign exchange, derivatives, and assets under management in both.
«Hong Kong is the better center for China related finance while Singapore is much better for ASEAN and much of Asia ex China,» he believes.
Policy Recommendations
This is a green paper, however, and with that, it comes with a host of economic policy recommendations.
The key thing for Hong Kong will be to keep its comparative strengths «vis a vis» the mainland. In other words, the free movement of capital, information, and people and a «predictable» legal, monetary, financial, and regulatory infrastructure.
Greatest Risk
«These are the areas where – without continued attention – Hong Kong is potentially at greatest risk of weakening its differentiation and comparative advantage against other competitors,» Arner wrote.
The fundamental role of the city is that of an intermediary and this requires intensifying the links between the mainland and the rest of the world.
Tech Fundraising
When it comes to equity markets, it needs to maintain transparency, openness, and «regulatory quality».
An important part of that will be focusing on new clients for fundraising, with the best opportunity being in the finance of tech, innovation, and sustainable development.
No Simple Task
The city will have to create a de facto Silicon Valley that requires extensive effort from the Hong Kong Exchange and regulators.
«This has long been an objective: linking the technological strength of Shenzhen with the financial markets and infrastructure of Hong Kong. It has however not proven simple. With that said, attention to research and development funding and support as well as physical and data linkages offers the basis of the emerging center,» Arner wrote.
Attracting Private Wealth
Even though the level of assets under management (AuM) has grown in recent years, the city will also need to attract Chinese institutional investors «as and when they are able to invest more widely».
But there is also a take for the wealth managers and family offices of this world, with Arner indicating that efforts to get more private wealth in the city will be key to further growth in AuM.
Small Caveat
The caveat to that is people. According to him, efforts have been made to build the level of competence and the number of staff that can provide the necessary levels of expertise and service, but that «more needs to be done».
This is the first article in an impromptu series discussing the HKU green paper, with upcoming pieces to discuss an apparent brain drain and the state of the currency peg in the coming days.
