As Hong Kong continues to grasp the full implications of the recently imposed National Security Law, Asian financial centres from Seoul to Sydney are using investor worries to position themselves as alternative asset locations.
The broadly written law has raised concerns that Hong Kong no longer offers a venue removed from the political oversight that dominates China’s economy and business, and that the city’s independent rule of law is being undermined.
Rival financial centres have been keen to capitalise on what Andrew Bragg, an Australian senator and former financial services policy adviser, claimed was “Hong Kong’s collapse as a credible financial centre in the region”.
South Korea’s capital, buoyed by the recent announcement that the New York Times is moving about one-third of its Hong Kong operation to Seoul, has issued a new policy statement on its status as a financial hub.
Meanwhile, Tokyo officials have been canvassing fund managers in Hong Kong, while government officials in Australia are planning to revive a campaign to promote Sydney as a financial centre for Asia Pacific.
Yet while investors have real concerns over the future of Hong Kong, international organisations know that abandoning the city would be a major loss of face for China. Doing so would probably have severe consequences for any mainland China growth or investment ambitions.
Indeed, even discussing the possibility of such a move is very sensitive. Most industry executives only agreed to speak to AsianInvestor on an anonymous basis.
The Financial Services Commission (FSC) of Korea has been keen to take advantage of growing anxiety around Hong Kong.
In an official statement on July 16 the regulator said it had discussed ways to reassess the government’s financial hub policy, “following recent changes in market environments at home and abroad”.
The FSC's 5th three-year plan for Korea’s financial hub policy, announced in May, seeks to improve conditions for hosting foreign-based firms, while bringing Korea’s financial system and regulatory frameworks up to global standards.
However, these plans face many headwinds. FSC chairman Eun Sung-soo said Seoul’s disadvantages versus other financial centres in Asia, included “high corporate and income tax rates, lack of flexibility in labour markets and lack of transparency in financial regulations”.
Worse, the government has a limited ability to change tax or employment laws. “It has become more difficult to attract foreign-based financial companies in Korea,” he said in the statement.
Other investment executives agreed. As one Hong Kong-based executive said of Seoul: “It’s never been a regional trading centre of any note. They don’t have the depth of banking, accounting and legal talent."
“Seoul is not very appealing,” agreed retired Asian fund manager veteran Blair Pickerell. “It has tough employment rules and the regulators are not really geared up to supervise aspects outside of Korea.”
Nearby rival Tokyo has a higher cost of living than Seoul, but is seen as a more credible alternative.
A senior US fund manager executive told AsianInvestor that a delegation from Tokyo visited Hong Kong a few weeks ago, targeting hedge fund managers and encouraging them to relocate.
“That actually makes more sense, because Japan’s got a big financial services industry, though obviously [it’s still] very local,” he said.
For most international investors or service providers, Singapore is the most obvious alternative to Hong Kong.
In an address on 16 July, Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), outlined Singapore’s continuing resilience. Financial services is still the fastest growing sector in Singapore and net jobs grew by 2,200 in the first quarter of 2020, he said.
Yet the Southeast Asian city state has drawbacks, say industry executives.
“It’s a six hour flight to North Asia, so you can’t do a day trip, whereas from Hong Kong you can go anywhere in the Asian region in a day, if you have to,” said the senior US fund manager executive.
“There will be some drift to Singapore at the margins. You might get newbie fund managers to Asia, someone from Connecticut, for example, saying they would feel safer in Singapore.”
In addition, the city state faces its own questions regarding authoritarianism and limitations on free speech.
“At a local level it [Singapore’s government] imposes just as strict laws as the National Security Law does in Hong Kong,” Cititrust’s managing director Stewart Aldcroft told AsianInvestor.
In much the same way as China and Hong Kong are now more frequently refusing to renew the visas of foreigners deemed to be hostile, Singapore also has the sanction of revoking permanent residency.
Meanwhile, the Australian government is reviving plans to promote Sydney as a financial hub for Asia.
Australian senator Bragg is recommending federal budget changes to capitalise on his claims of Hong Kong’s financial descent. And prime minister Scott Morrison has confirmed his government is considering incentives for companies to relocate, as well as introducing measures to let over 12,000 Hongkongers take up permanent residency in Australia.
However, Sydney has several disadvantages, including its geographic remoteness.
“They haven’t got the depth of talent. They’ve got a high tax system and it’s just too far away. Vancouver would make more sense,” said one Hong Kong-based senior fund firm executive.
For all the uncertainties raised by its national security law, Hong Kong has enduring strengths that other centres will find hard to erode.
Robert Woll, partner at Hong Kong law firm Mayer Brown, noted that firms with extensive regional business need to weigh the location with deep depths of talent and familiar business practices.
"The cross-border financial services infrastructure in Hong Kong would be very difficult to replicate in most Asian capitals other than Singapore," he told AsianInvestor.
"The industry depends primarily on factors such as regulatory and legal predictability (ideally through common law institutions); a convertible currency; a critical mass of financial intermediaries, issuers, investors, professional services; and, for now at least, prevalence of the English language.”
In part 2 of this story, we will look at why reports of Hong Kong's demise as a financial centre may be exaggerated.