Thoma Chan argues that the SAR must map out new plans to ensure it remains an Asian global financial center and does not lose further ground to rivals in the region

Competition between Hong Kong and Singapore as the global financial center of Asia has started ever since Singapore's independence in the 1960s and its efforts to build its financial center functions on the basis of the offshore US dollar market in Asia.

Compared with Hong Kong, Singapore has been a latecomer and in the past Hong Kong emerged as Asia's top financial center by virtue of its domination in the foreign treaty system in China with the onshore support of Shanghai. Hong Kong had been directly linked with the global financial center of the British Empire in London. Hong Kong suffered during 30 years of economic sanctions against China by the US which severed financial links between Hong Kong and the Chinese mainland. However, Hong Kong survived and prospered on the basis of the growth of overseas Chinese businesses in Hong Kong, Taiwan and Southeast Asia and its usefulness to Japan (and to a lesser extent South Korea) as their offshore financial center before their own financial systems were liberalized in the 1990s.

Singapore's efforts to build up itself as a global financial center has been at the expense of Hong Kong, but the impact on Hong Kong has mostly restricted to Hong Kong's relationship with the Southeast Asian economies. Singapore could not compete with Hong Kong in the East Asia market and later even in the more lucrative financial market of the mainland during the latter's years of liberalization, reforms and huge accumulation of financial wealth. This is despite the Singaporean government's innovativeness in policy and regulatory measures and aggressiveness in developing new products, new clients and new markets. For decades, Singapore had been behind Hong Kong in the ranking of global financial centers, as the pair was behind only London and New York, but greatly ahead of Tokyo and even Shanghai.

Lately, the competition between the two cities' economies has become more intense. On one hand, Singapore has even scaled up its efforts to get businesses away from Hong Kong with its more attractive and more proactive policy regime and better city environment and quality of life. It has also massively recruited mainland talents and attracted mainland firms to invest in the upgrading and upscaling of its local financial system. The latest move is it has tried hard to divert Russian firms which have come to Hong Kong to go instead to Singapore. On the other hand, there have been little efforts on the part of Hong Kong to improve its global financial functions, in terms of improvements and innovations in its governance system, product development and facilitation of overseas financial institutions to locate in Hong Kong. Indeed Hong Kong has become a major center for the concentration of overseas hedge funds and other equity funds. These have been drawn to Hong Kong because of the mainland market and the actual situation that mainland funds have been flowing almost freely into Hong Kong despite the mainland authorities' foreign exchange controls.

Naturally, Hong Kong is the starting point of the renminbi internationalization and so far has provided the largest liquidity pool. It has achieved linking the Hong Kong stock exchange with the Shanghai stock exchange and effected mutual recognition of funds across the boundary. Its stock market is therefore becoming the proxy for mainland markets. However, all these have mainly been mostly the work of mainland authorities. The local system has seen little changes, or innovation and improvements. In addition the local environment has become worse. Air quality is very bad; greening in the city area is inadequate, transport is overcrowded; housing costs have become beyond the affordability of both companies and individuals and politically there are more disputes and even street disturbances and confrontation.

In sum, the quality of life is deteriorating in Hong Kong, whereas Singapore has been able to maintain its stability and pursue the ideals of a garden city under government controls and guidance. If we believe in Richard Florida's theory/proposition of the creative classes and if we learn from the recent development of other global financial centers in the world, in particular London and New York, we shall be able to see both the hardware and soft environment of Hong Kong to support the global financial functions are losing ground. The demonstration and propaganda against mainlanders recently in Hong Kong by extremist political groups and the public advocacy for local independence from China have greatly tarnished the free city image and caused concerns overseas about local political stability and its relationship with the central government.

Financial industries are the most risk-sensitive and risk-averting ones. If Hong Kong loses favor with the central government and if local political agitation annoys Beijing, Hong Kong's great advantage over Singapore and other cities - the "China factor" which brings in mainland funds going through the local financial system and markets, renminbi internationalization and all relevant measures, the IPOs (initial public offerings) from mainland firms, etc. - will be reduced. When this happens, how can Hong Kong compete with Singapore or even maintain its present global financial functions and benefits?

In the latest round of the global financial center index exercises, Hong Kong has lost out to Singapore, but only by a very small margin. In fact in previous years, Hong Kong had been ahead of Singapore, but also only by a very small margin. The change in positions may not indicate the beginning of the fall of Hong Kong behind Singapore; Hong Kong could easily catch up and change the small margin to its favor. Yet, the latest ratings serve as an early warning to both Hong Kong and the central government: Actions must be taken if they still treasure the value of the local global financial center functions. If Hong Kong is not going to do something, and if it just sits there and waits for help from Beijing, it would probably lose the drive and motivation that is essential to innovate and improve itself. It will allow the short-term fall in relative competitiveness to turn into a permanent downfall.

Hong Kong was once the No 1 container port in the world in terms of throughput. Now it ranks only sixth in the world, not only behind Shanghai and Shenzhen, but also behind Ningbo and Qingdao. Singapore has been able to keep its No 2 position amid formidable pressure from the Chinese port systems. What makes the two cities different would probably cost the global financial center of Hong Kong its present businesses and opportunities coming from the Belt and Road strategy, which otherwise should be a chance for Hong Kong to enjoy a resurgence and become another London.

(HK Edition 05/03/2016 page8)