Author: Leo Wang
The BRB Bottomline
Disrupted by unstable democracy protests and an unprecedented National Security Law, firms from many key industries are expecting an exodus-like relocation from Hong Kong. Yet, one city’s loss will be another city’s gain. The diminishing role of Hong Kong as “Asia’s World City” leaves a vacuum for a replacement—one which many will compete to become. Expectedly, these candidates will exercise all political and financial tools necessary to achieve their goal, whether that be through deregulation, favorable tax policy, or accessible human capital. How will this transformation shape Asia-Pacific and global markets for decades to come?
With recessions plaguing the past five consecutive quarters, including a record 9 percent shrink in the second quarter of 2020, the Coronavirus pandemic continues to deal devastating blows to Hong Kong’s economy. Yet, in the grand scheme of things, the pandemic is perhaps the least of the financial hub’s long term concerns. The big picture is straightforward: Hong Kong’s current GDP represents less than 3 percent of China’s—a remarkable decrease from 27 percent three decades ago. This consistent decline in relevance is due to a multitude of both internal and external factors. Some are obvious, others have been overlooked for far too long.
As starters, the 2019-2020 Hong Kong protests, although no longer as active as it was last year, is a movement unprecedented in its sheer scale and impact. It directly caused the local economy to shrink in the second and third quarters of 2019. Perhaps more importantly, for investors, the prolonged chaos and tension is symptomatic of Hong Kong’s instability as a political battleground. Beijing’s response by implementing an ambiguous and authoritarian National Security Law exacerbates this concern, as many businesses like data and tech firms question whether Hong Kong can remain truly autonomous in the foreseeable future. In fact, this August, a staggering 39 percent of firms surveyed by the American Chamber of Commerce in Hong Kong (AmCham) expressed plans to move capital, assets or operations as a result of current uncertainties—a whopping 17 percent increase from the same time last year.
Beyond weaknesses within Hong Kong, the rise of Mainland China poses a threat. The expanding international roles of Beijing, Shanghai, and most importantly, neighbouring Shenzhen and Guangzhou, means the function of Hong Kong as a medium to conduct Chinese business is no longer unique. This is particularly relevant to finance, where, due to the ascent and accessibility of the Shenzhen Stock Exchange, Shanghai Stock Exchange, and the newly established Star Market, Asia-Pacific companies are less reliant on HKSE listings to access capital. Similarly, even in the face of technological decoupling and a sizable US-China trade war, Wall Street banks like Goldman Sachs and Morgan Stanley continue to rapidly expand into Mainland China, hoping to untap its growing $47 trillian financial market. Thus, efforts that would otherwise be dedicated to a mature but unstable Hong Kong are allocated to Beijing and Shanghai.
While certain sectors are inevitably swallowed by Mainland Chinese cities, many other businesses will look to relocate or readjust their efforts on expanding to foreign cities similar to Hong Kong. This vacuum presents vast opportunities for countries seeking to elevate their attractiveness and economic capacity. Below are three major candidates:
Often considered the likely beneficiary of Hong Kong’s decline, Singapore provides most of Hong Kong’s attractions including corporate tax rates as low as 17 percent and one of the world’s friendliest regulatory environments without any threats of political instability. According to Singapore’s AmCham, approximately 90 percent of companies looking to move out of Hong Kong prefer the Southeast Asian city state. Yet, Singapore suffers from weaknesses ranging from its authoritarian governance to dependency on foreign labour to closer ties with Southeast Asia than China. While these are rarely traditional metrics for financial institutions to consider, they have indirect effects on the economic landscape.
As the capital of the third largest economy, Tokyo was the established financial hub of Asia up until China’s rise in the late 1990s. A potential reemergence is still possible thanks to numerous factors, including but not limited to: favorable economic policies enacted under the Liberal Democratic Party’s rule (most of which are likely to persist), yen remaining the third most-traded currency (following the dollar and euro), and controlling the second largest pool of pension assets in the world. Nevertheless, obstacles like regulatory bureaucracy and higher income and sales taxes have kept Tokyo from attracting foreign firms at the same rate as Singapore and Hong Kong.
Taipei’s benefits are, by nature, political and cultural. For example, following the eruption of protests in 2019, the percentage of people moving from Hong Kong to Taiwan rose by 28 percent. This reflects Hong Kongers preference for culture similarity and democratic governance—attributes completely unique to Taipei. In addition, Taiwan is viewed as one of the best places to live for an expat. However, where Taipei falls short predominantly relates to its existing financial system. Restrictions on foreign currency exchanges and financial products prevent the country from significantly expanding its banking sector. More problematically, as one of few countries without membership in the IMF, Taiwan has no safety net in case of a currency crisis.
Hong Kong will likely remain a key actor in the financial and business world for many years to come. However, given the political atmosphere in China and internationally, foreign firms will no longer share their penchant for “Asia’s World City” as they did during the 1990s. If this trend persists, Hong Kong’s role will continue to shrink, creating a vacuum for cities across East and Southeast Asia to fill. Nonetheless, capturing such a lucrative opportunity is no easy task. Governments will have to aggressively reform tax laws, regulations, and financial systems to outcompete other candidates and mimic Hong Kong’s favorable business environment. Between Tokyo, Taipei, and Singapore, the race to replace Hong Kong is on.