Question

IFCs: an overview

IFCs are nowadays one of the most dynamics realities of inter- national finance; according to the IMF’s definition, international Financial Centres (IFCs)—such as London, New York, and Tokyo—are large international full-service centres with advanced settlement and payments systems. They serve multiple purposes, first of all support- ing large domestic economies with deep and liquid markets where both the sources and uses of funds are diverse, and where legal and regulatory frameworks are adequate to safeguard the integrity of principal-agent relationships and supervisory functions.

Asia, centre of the world manufacturing, is also home to a few financial hubs, or IFCs - i.e., a city or centre where financial services providers, especially banks, insurance companies and stock ex- changes, concentrate. Two of them have become especially famous in the course of last century, presenting some similar characteristics but also substantial differences: Hong Kong and Singapore. More specifically,

The existence of the IFCs is not a novelty, and places like London and New York have a long tradition in this sense: Asian hubs, more recent, are assuming a more prominent character to reflect the new, dynamic role of Asia as one of the centres of world economy. Both Hong Kong and Singapore do figure prominently in the Global Financial Centres Index, compiled semiannually by the London-based British Z/Yen, a financial think-tank sponsored by the Qatar Financial Centre Authority. The tow Asian hubs represent respectively the third (Hong Kong) and fourth (Singapore) world IFCs after London and New York. “While the reputation of New York and London - the traditional financial centres- remains unchanged, Hong Kong and Singapore are narrowing the gap, and the financial centres of Korea and China are also gearing up for a new leap forward.” (GFCI17, 2015, online)Both have, on top of that, a central place in the East Asian production and distribution channels, as leading RDCs (regional distribution centres) and important locations of free trade zones, that add to their attractiveness.

Hong Kong

Hong Kong SAR (Special Administrative Region) is the oldest of the two, a former British colony handed over to China in 1997 that has nonetheless preserved an autonomous and independent economy from the Mainland according to the formula “One country, two Systems”. While considered here especially under its characteris- tics of financial hub, Hong Kong is certainly more than that, even though its financial role has strongly contributed to its success as trade and logistics hub and a leading exhibition centre of the region. The territory is the world’s 10th largest trading economy, the second in Asia as recipient of FDIs after China and often the first port of call for Western companies approaching Asian markets, both to export and for sourcing. In terms of GDP composition, Hong Kong is a very sophisticated service economy, where services account for about 90% in terms of contribution. More to the point, financial services constitute the second in importance (16.1% of GDP in 2011), after trading and logistics, and before tourism and other professional services.

Hong Kong is home to the HKEx (Hong Kong Stock Exchange), the Asia’s third largest in terms of market capitalisation behind

the Tokyo Stock Exchange and Shanghai Stock Exchange, and the sixth largest in the world. As of 31 August 2015, the Hong Kong Stock Exchange had 1,810 listed companies, 920 of which are from Mainland China - i.e., H Shares and Red Chips - and 788 from Hong Kong itself.An important addition has been at the end of 2014 the Shanghai-Hong Kong Stock Connect, which gave for the first time the opportunity to the investors in Hong Kong (including foreign companies) to access, through Shanghai,Mainland China’s stock market.

Singapore

While Hong Kong looks at the China and at the northern part of East-Asia, Singapore offers instead access to Southeast Asia, and, from its location on the tip of Peninsular Malaysia, aims at serving the fast-growing emerging markets of ASEAN. Compared to Hong Kong, Singapore is of more recent institution, having emerged as a US dollar-linked economy only in the course of the 1960s.

A veritable trade hub, Singapore, like Hong Kong, is now a key component in the Asian supply chains, and, on top of that, it presents a strong and transparent legal framework, which has proved substantial in attracting many international corporations to choose it as centre for their holdings. The fact of offering tax breaks and low rates has certainly helped in this sense.Also, it has been an early starter for what concernspreferential trade agree- ments, which have progressively become a fundamental tool in international trade, contributing to Singapore’s success in attract- ing corporations.

Its share of financial services of the GDP, while inferior to Hong Kong, is still a quite impressive 12% of the total, and growing.The Singapore Stock Exchange (SGX) was formed on 1 December 1999 as a holding company, joining together the capitals of three previous exchange companies - namely Stock Exchange of Singapore (SES), Singapore International Monetary Exchange (Simex) and Securities Clearing and Computer Services Pte Ltd (SCCS). As for 31 August 2015, there were 773 listed companies, with the commodity de- rivatives being the fastest-growing part of the trading. Forex is another important sector, whose importance is on the rise. In 2013, Singapore overtook Tokyo as the first exchange in Asia, and world’s third-largest behind London and New York.

Competition between the Asian hubs

There has always been an ongoing competition between the two hubs, with mutating fortunes over the years, which have seen one or the other taking advantages of the world’s economic and financial situation.

The main point is that, being their domestic economies rather small, both hubs are affected by what happens first in the markets they serve as access point and more in general by the rest of the financial environment.

The competition between the two is evident not only in the financial sector, but in services in general, especially the ones related to international trade. Their deepwater ports are consistently among the world’s most competitive and busy. Singapore leads in terms of container ports (world-second after Shanghai, while Hong Kong is currently forth) while the rival hosts the busiest airport for interna- tional cargoes.

This competition extends to other areas. There are many people, especially among expats, that prefer settling down and working in Singapore rather than in Hong Kong. The Lion City is considered a more suitable location in terms of superior living standards, quality of life, environment (more green areas in the city) and more afford- able accommodation. Whereas Hong Kong is certainly superior to its southern rival is in terms of stock exchange for equities and IPOs. HKSE ranks just third after New York and London. For example, in the first 10 months of 2014 Hong Kong got 67 new listings for US $17.6 bn, while Singapore got only 8 for a total US $1.9 bn(FT, 24 October 2014). Wealth management also sees Hong Kong prevail- ing, with three times the number of billionaires that have chosen Hong Kong over its rival (Hong Kong counted 82 for US $ 343 bn in 2014, according the research company Wealth-X, as reported by the FT).

Scenarios

IFCs are at present ones of the most important realities of global finance, and given the present world’s economy and status of finan- cial markets, there is evidence their centrality will continue and even soar in the following years.

Hong Kong and Singapore are the two most important Asian IFCs and they have seen their relevance growing together with the others. What makes their position somehow different is that both are certainly going to be affected by the economic fortunes of China as they have been so far and even more, if possible.

In the case of Hong Kong, being China, unsurprisingly, the main supplier of imports, even if many countries take benefit of the free- trade regime, the signature of CEPA, Closer Economic Partnership Arrangement (CEPA) since 2004 will continue to foster a progres- sively closer integration of Hong Kong’s economy with the China Mainland, not only in the traditional manufacturing and logistics sectors, but in services too, which are generally off-limits to foreign companies. Thanks to CEPA’s provisions, Hong Kong suppliers are enjoying preferential treatment when entering into the Mainland market in various service areas, and can also have professional titles and qualifications recognised in China.

But Singapore too is well positioned to exploit the increasingly busy Chinese market, especially for what concerns the financial sector, and, already as East Asia’s largest centre for both commod- ity and foreign exchange trading, Singapore has recently become also the hub of negotiation for the renminbi, China’s currency yet not convertible. This opens even more opportunities for the rise of Singapore as the leading forex centre of East Asia.

In addition to that, the ongoing regional integration in Asia, starting from the free trade area of ASEAN (AFTA) to more ambitious

plans to integrate also China, Japan and Australia in that framework, are going to offer even more opportunities for the two hubs to thrive.

Risks to Singapore and Hong Kong can come instead from exog- enous threats (like global financial crisis or the recent downfall of the Chinese stock market in 2015) or from the rise of local competitors, like Shanghai, that, building on existing vantage points like logistics and manufacturing can threaten their supremacy.

Case Questions

9-4. Discuss the IMF definition of IFCs and explain how this applies to the two Asian territories here in exam.

9-5. Describe structural similarities and differences between Hong Kong and Singapore, and describe the two IFCs in terms of financial markets and stock capitalisation. What are the most striking differences among them? What are the respective points of strength and weakness?

9-6. Both IFCs are central not only for financial services, but also for other factors, like supply chain, exhibition business and logis- tics hub. Especially their deepwater container ports consistently among the world top ten. In which way this helps their status as financial centres?

9-7. Now consider the last section, what lies ahead, and research the sources provided. Which one is more promising in terms of scenarios and why? What has to happen for having Singapore to overtake Hong Kong as the most important IFC of the region? What can do Hong Kong to maintain its dominant position?

Answer 1

(1) IMF definition of IFCs:

International Financial Centres (IFCs)—such as London, New York, and Tokyo—are large international full-service centres with advanced settlement and payments systems.

They serve multiple purposes, first of all supporting large domestic economies with deep and liquid markets where both the sources and uses of funds are diverse, and where legal and regulatory frameworks are adequate to safeguard the integrity of principal-agent relationships and supervisory functions.

The two Asian territories Singapore and Hong-Kong are financial centers where financial services providers, especially banks, insurance companies and stock ex- changes, concentrate.

(2)Structural similarities between Singapore and Hong Kong :-

Similarities:

• Both are a central place in the East Asian production and distribution channels, as leading RDCs (regional distribution centers) and important locations of free trade zones, that add to their attractiveness.
• A veritable trade hub, both, Singapore and Hong Kong, is now a key component in the Asian supply chains, and, on top of that, it presents a strong and transparent legal framework.
• Both hubs are affected by what happens first in the markets as they serve as access point and more in general by the rest of the financial environment.

Differences:

• While Hong Kong looks at the China and at the northern part of East-Asia, Singapore offers instead access to Southeast Asia, and, from its location on the tip of Peninsular Malaysia, aims at serving the fast-growing emerging markets of ASEAN.
• Compared to Hong Kong, Singapore is of more recent institution, having emerged as a US dollar-linked economy only in the course of the 1960s.

• Hong Kong is the main supplier of imports, even if many countries take benefit of the free- trade regime, the signature of CEPA, Closer Economic Partnership Arrangement (CEPA) , Thanks to CEPA’s provisions, Hong Kong suppliers are enjoying preferential treatment when entering into the Mainland market in various service areas, and can also have professional titles and qualifications recognized in China.

  But Singapore too is well positioned to exploit the increasingly busy Chinese market, especially for what concerns the financial sector, and, already as East Asia’s largest center for both commodity and foreign exchange trading, Singapore has recently become also the hub of negotiation for the Renminbi.

(3) It has helped their status as financial center by building its connectivity through multiple areas. Also, being in top 10 , the demand of the services of these two financial sectors are going to rise in future as the services provided are qualitative and that leads to higher demand. I helps in the two hubs status of being at a competitive position.

(4)Hong kong is more promising in terms of scenario because it is certainly superior to its southern rival is in terms of stock exchange for equities and IPOs.

HKSE ranks just third after New York and London

Wealth management also sees Hong Kong prevail- ing, with three times the number of billionaires that have chosen Hong Kong over its rival .

Singapore is having many more opportunities to overtake Hong kong as Singapore is well positioned to exploit the increasingly busy Chinese market, especially for what concerns the financial sector, and, already as East Asia’s largest center for both commodity and foreign exchange trading.

Singapore has recently become also the hub of negotiation for the renminbi, China’s currency yet not convertible. This opens even more opportunities for the rise of Singapore as the leading Forex center of East Asia.

Hong Kong is a very sophisticated service economy, where services account for about 90% in terms of contribution. More to the point, financial services constitute the second in importance (16.1% of GDP in 2011), after trading and logistics, and before tourism and other professional services.

Therefore , Hong kong should consider its focus on services sector as it has the most share of contribution and increase its financial contribution in the market it has started doing well in that sector but has expanded entirely.

Another areas are trading and logistics where trade can be improved and maintained to keep Hong Kong at the top position compared to its rival.