Hong Kong's ongoing political turmoil could cause longstanding damage to the city’s image, hindering its ability to compete with Singapore as a destination for overseas investors and companies, according to senior executives at asset owners, fund managers and law firms. 

Protests around the territory’s postponed extradition law, which started on March 31, stretched into Sunday (July 21), with violent clashes in Central – and later an ugly set of attacks by apparently gang-affiliated men on protestors returning home in the New Territories, as well as other passengers indiscriminately.

The disruption stands in stark contrast to Singapore, a city that has long been seen as a bastion of peace and prosperity. Representatives of asset owners and finance professionals in the Lion City who spoke to AsianInvestor in early July said Singapore may benefit in the short-term as international companies seek to avoid policy uncertainty in Hong Kong. 

Signs of this may already be emerging. The Teacher Retirement System of Texas has decided that if it sets up a regional branch, it will do so in Singapore rather than Hong Kong. The $153 billion state pension fund said it would receive subsidies from the Monetary Authority of Singapore by basing itself in the city state. A spokesman declined to comment on whether the turbulence in Hong Kong had affected the US institution's thinking, after it had initially considered both cities as potential venues.

In addition, a Singapore-based law partner told AsianInvestor that images of the protests prompted the principal of a US-based asset owner who keeps his law firm on retainer to call and check on the potential ramifications of the situation on the ground. 

Another Singapore-based law firm partner said US firms in particular need to ensure their employees’ security for their fiduciary responsibility and at the very least to protect themselves from a lawsuit for negligence. The rising levels of disruption and violence in Hong Kong has left them particularly antsy.

CHINA SUPPRESSION FEARS

One problem for Hong Kong is that there are few signs the ongoing protests and skirmishes with the police will subside any time soon. A particular worry for investment industry professionals who spoke to AsianInvestor is that China could choose to directly intervene.

While nobody expects to see a repeat of the fatal suppression of pro-democracy student protests in Tiananmen Square in 1989 that continues to be commemorated in Hong Kong, the fact this is even being raised as a comparison underlines the concern that many investors and service providers have over the current situation.

Professionals who spoke to AsianInvestor opined that hardliners in the Communist Party are unlikely to maintain a hands-off approach to the violence forever. And a direct response from Beijing may have been elevated by protestors’ desecration of China’s liasion office in Hong Kong. 

The biggest fear is that the People’s Liberation Army leaves its garrison in Admiralty – just a few dozen metres from where most of the demonstrations have been taking place – to directly put down the protests.

Such a move would likely shred the increasingly fragile One Country, Two Systems agreement that covers Hong Kong’s relations with China, and cause potentially fatal damage to the city’s reputation as an international financial centre. It could also cause the US to walk back its preferential treatment of Hong Kong, they said. 

Even existing international financial companies with regional headquarters in Hong Kong could seek to move if the situation doesn’t improve – or worsens. A sales executive based in SIngapore at a European asset manager told AsianInvestor that multinationals are often willing to relocate if political or other developments spark a prolonged rise in risks. He pointed to the move by some firms to either relocate or plan to move out of the UK to Frankfurt or Brussels in the wake of Brexit. 

Nobody that AsianInvestor spoke to for this story agreed to be directly quoted or named, due to the sensitivity of the matter. 

ZERO-SUM GAME

Singapore has been careful not to be seen as trying to profit from Hong Kong’s travails.

Authorities in the Lion City have cautioned wealth managers against aggressively wooing clients at the cost of Hong Kong, according to a report by Reuters. And Ravi Menon, managing director at the Monetary Authority of Singapore (MAS), was quoted on June 27 as saying that Singapore is unlikely to benefit as a financial hub at the cost of Hong Kong as the situation will boost regional uncertainty overall. 

A portfolio manager in Singapore agreed, telling AsianInvestor that many international investors have traditionally viewed Asia as something of a bloc when it comes to investing. A conflict between China and people in Hong Kong with the potential involvement of the US and the UK would weigh on investment sentiment across the region, including for Singapore and allied countries, he added. 

That said, Singapore still boasts some resilience, courtesy of its image as the gateway to Southeast Asia. The region of Asia has begun to emerge as an asset class of its own with a promising outlook for the second half of this year, said multiple executives.

Singapore’s financial regulator has also taken a more consultative approach to corporates and funds, while its political stability and rule of law in corporate disputes work in its favour, the executives said. That includes The city’s encouragement to technology start-ups, a potentially canny move as the global business landscape pivots in that direction. 

CHINA’S AIMS

In contrast, Hong Kong’s desire to act as the financial gateway to China could suffer as Beijing tries to directly attract foreign capital, said the Singapore-based financial professionals. 

China has been opening up its financial sector to foreign investors, including in banking and insurance, while easing investments in its stock and bond markets. Plus Chinese president Xi Jinping wants to have more Chinese tech majors to list at home – a goal that enjoyed a thumping start when shares in Shanghai’s science and technology-focused stock market surged as much as 520% on the first day of trading.

It’s early days, and this strong start is no guarantee that Hong Kong’s well-founded stock exchange will lose its appeal with Chinese firms. But it’s not a positive sign. Added to that is Beijing’s building of mega infrastructure projects to integrate the mainland with Hong Kong and the promotion of a Greater Bay area to rival Silicon Valley.

Hong Kong’s current protests are part of a sign of rising unhappiness among its people about Beijing’s increasingly heavy hand. But the uncertainty they are causing may end up merely hastening the city’s gradual diminishment as a financial centre.