Will Hong Kong remain Asia’s financial centre?
Nicky Burridge considers Hong Kong’s position as the financial hub of Asia and wonders whether it will stay on top.
The ease of doing business in the territory, as well as its status as the ‘gateway to China’ and the world’s largest offshore renminbi centre, makes it the obvious place for companies to locate their Asian headquarters.
But Hong Kong’s crown may be in danger of slipping as China continues to internationalise the renminbi, while political unrest creates uncertainty and other regional financial centres develop apace.
The benefits of Hong Kong
The benefits of doing business in Hong Kong are not difficult to find, ranging from the territory’s highly educated workforce to it being ranked as the world's freest economy by the US’s Heritage Foundation.
Add to that Hong Kong’s open and competitive business environment, its sound regulatory framework, and its low corporate tax rate, and it is easy to see why so many companies choose the city for their global and regional headquarters.
One of the potential threats to Hong Kong is the internationalisation of the renminbi.
Hong Kong is Asia’s largest asset management centre, with a combined fund management business worth HK$17.393tn. It also had the highest level of IPOs in the world during the first six months of 2016, with HK$43.5 billion raised through the Hong Kong Stock Exchange.
But perhaps most significantly of all, Hong Kong is the largest offshore renminbi business centre, handling nearly three-quarters of all RMB payments.
Patrick Ho, deputy head of equity, APAC, UBS CIO Wealth Management, says: “Hong Kong is the leading financial hub in Asia, there is no question about it.”
But Singapore is snapping at Hong Kong’s heels as its government continues to focus on initiatives to attract businesses.
The World Bank’s annual Ease of Doing Business Index has consistently placed Singapore ahead of Hong Kong.
Singapore has also moved ahead of Hong Kong in the Global Financial Centres Index, produced by think-tank Z/Yen Group.
Mark Yeandle, associate director at Z/Yen Group of Companies, says: “Singapore is another extremely successful city and they are looking to become even more successful.”
Raymond Yeung, senior economist at Australia and New Zealand Banking Group, believes Shanghai could also become a potential regional rival to Hong Kong.
He points out that the city has put a lot of effort into internationalising itself, while it is also benefiting from the creation of the Shanghai Free Trade Zone.
The pilot zone is being used as a testing ground for a number of economic and social reforms, including unlimited foreign currency exchange for overseas businesses located there.
But while other centres may be closing the gap with Hong Kong, Yeandle does not believe they will threaten it.
He says: “Hong Kong is established as a very, very important place to do business.”
Internationalisation of the renminbi
Meanwhile, the internationalisation of the renminbi and the gradual opening up of China’s economy to the rest of the world could lessen Hong Kong’s importance as the ‘gateway to China’.
Yeandle says: “One of the potential threats to Hong Kong is the internationalisation of the renminbi.
“At the moment Hong Kong is in such a strong position, partly because it is the natural offshore centre for mainland China.
“But I think when everybody will be able to access and convert renminbi that may have an impact on Hong Kong.”
Certainly the governance of Hong Kong is a big factor and it is a worry for people
Although he added it was just one factor that affected the territory, rather than a “fatal flaw”.
But Ho points out that despite the fact Hong Kong is no longer the only renminbi offshore centre in the world, it is still by far the biggest.
He says: “Renminbi internationalisation is one thing, but you will still need the infrastructure supporting it, such as professional services, accounting, legal professions, and Hong Kong has all of these.”
Yeung agrees: “The talent and expertise that has been built up over the last few years in terms of running the offshore renminbi market still differentiates Hong Kong from other global and regional financial centres in Asia. Many banks have already established their trading desks here.”
But Hong Kong faces significant political uncertainty, while the process for how its chief executive will be selected in 2017 remains deeply controversial. Concerns over the process triggered the Umbrella Movement in September 2014, with protestors occupying strategic locations in Hong Kong for several weeks.
Yeandle says: “There are concerns out there and it is impacting on Hong Kong’s popularity. The one thing that financial professionals really hate is uncertainty.
“Certainly the governance of Hong Kong is a big factor and it is a worry for people.”
But Yeung disagrees. He says: “As long as the local politics does not involve any major change to monetary policy, then I do not think it is a problem. The banks here are pretty remote from the politics. It is just business as usual.”
Nor does he think Hong Kong is in danger of losing its status as the financial hub of Asia any time soon.
He says: “This question has been asked for the last 10 to 15 years, but time has given you the answer.”
Do you think Hong Kong will remain as Asia's financial centre? Let us know in the comments below.