Singapore and Hong Kong are often viewed as competing for the position of Asia’s premier financial centre. Many wonder whether Singapore will benefit from the political turmoil and uncertainty Hong Kong is grappling with, following the civil unrest in 2019 and the enactment of a national security law and US’ withdrawal of preferential status in 2020.
In our view, however, the two economies are complements rather than substitutes. We expect both to specialise more in the future, with Hong Kong strengthening its role as the gateway in and out of China, and Singapore as a pan-Asian hub, with a focus on Southeast Asia.
Similar cities, different roles
While both Singapore and Hong Kong serve as global financial hubs in Asia, their financial sectors show some key structural differences. The key difference is the prominence of mainland Chinese companies in Hong Kong’s financial sector as compared to Singapore’s more diverse composition. Mainland Chinese companies’ share of the stock market capitalisation is 80% in Hong Kong compared to 2% in Singapore (Exhibit 1).
We think current economic and political developments in Hong Kong will result in greater Hong Kong-China integration, strengthening Hong Kong’s role as China’s international financial centre, and making it the gateway of choice in and out of China. At the same time, we expect these developments to weaken, to some extent, its appeal as an international financial hub.
Exhibit 1: Hong Kong and Singapore have structural differences in their financial sectors
Partly in response, we expect Singapore to continue focusing on strengthening its position as a key global financial centre for the entire region, possibly with a greater emphasis on Southeast Asia to ride on the region’s high growth potential.
We forecast both China and Southeast Asia to grow relatively fast compared to other emerging markets, suggesting sizeable growth in financial services in both Hong Kong and Singapore.
There are other differences, too. Singapore’s financial services are also more evenly distributed than Hong Kong’s, which focuses heavily on equity trading. Although Hong Kong matches or slightly overtakes Singapore in market size for different types of financial services (bonds, foreign exchange trading, cross-border wealth), its focus on equities is clear because Hong Kong dwarfs Singapore in total stock market size (Exhibit 1). In comparison, the shares of all financial services in Singapore are relatively even, reflecting its more diversified approach.
For both economies, finance and insurance services, together with ancillary professional and business services, account for a sizeable share of GDP and total employment. But Singapore has shifted its focus to the technology sector in recent years. Its government recently announced a new category of work passes to attract highly skilled foreign tech talent, showing its strong intent to develop Singapore as a regional tech hub.
This does not necessarily mean new IT jobs will come at the expense of financial jobs. A combination of rapid adoption of digital technology during the pandemic and the rise of fintech could present new opportunities in both the technology and financial services sectors in Singapore. According to a study by Accenture, Singapore’s fintech investment reached $861 million in 2019, up from $365 million in 2018. That’s smaller than Hong Kong’s $2.9 billion in 2019. However, there were 108 fintech-related deals in Singapore as compared to only 25 in Hong Kong last year. This suggests that Singapore can attract more deals with a smaller average size compared to Hong Kong. Again, this illustrates that the two cities are complements rather than substitutes.
Hong Kong has also started to place more emphasis on the innovation and technology sectors, but progress is lagging. In fact, research and development (R&D) spending has historically been less than 1% of GDP in Hong Kong while it is about 2% in Singapore.
No exodus from Hong Kong to Singapore
Recent data corroborate our view that the two economies have their own comparative strengths and that Singapore isn’t about to replace Hong Kong as a financial centre. Despite the enactment of the national security law in June, banks’ net open positions and Hong Kong dollar deposits in Hong Kong have both soared, driven by significant capital inflows amid the initial public offering (IPO) frenzy (Exhibit 2). The HKD-USD exchange rate has also hit the strong side of its trading band (at HK$7.75 per US$) many times since March this year.
Exhibit 2: No large capital outflows from Hong Kong’s banking system
Having said that, we see some capital and labour migration out of Hong Kong. While Hong Kong showed sharp outflows of foreign direct investment (FDI) in recent quarters, Singapore continued to see net inflows (Exhibit 3). Some anecdotal evidence also indicates that buyers from Hong Kong are eyeing properties in Singapore, and several multinationals in Hong Kong have plans or have already moved parts of their operations to Singapore.
In all, while we have seen FDI outflow pressures amid rising political uncertainty in Hong Kong, there have been no large banking sector outflows over the past two years, indicating that its role as a financial hub is largely intact.
Exhibit 3: Net direct investment positions in Hong Kong and Singapore
Other Asian cities continue to play catch up
Major cities in other Asian countries are also keen on obtaining the global financial hub status, but they continue to trail Hong Kong and Singapore. Tokyo, for example, is already a major financial centre, but it largely serves Japan’s domestic market. Recently, the Japanese government stepped up efforts to attract international financial firms by providing tax incentives, visas and rental support for foreign nationals and companies. However, language and cultural barriers remain.
Another contender is Shanghai. The city has been striving to transform into a global financial hub by fostering financial reforms and opening up to foreign players, in both the traditional banking and capital markets as well as in fintech.
Shenzhen is also catching up, with its financial markets mainly geared towards smaller companies and the tech industry. However, China’s capital controls remain a key impediment to these cities’ ambition, while the transparency and predictability of financial regulations remain a big concern for foreign financial institutions.
All of this means that despite the best efforts of governments across the region, for the foreseeable future at least, Hong Kong and Singapore will continue to remain Asia’s leading financial centres, capitalising on their own comparative strengths.
Sung Eun Jung
Sung leads Indonesia and Singapore research and contributes to the Asia Pacific regional analysis. She is based in Oxford Economics’ Singapore office. Prior to joining Oxford Economics, she worked at the IMF as a Research Officer.
Tommy Wu
Tommy Wu is a lead economist at Oxford Economics. He covers macroeconomic research and forecasting on the Asia-Pacific region and the China economy. Prior to joining Oxford Economics, Tommy was an economist at the research department in Hong Kong Monetary Authority.
