Advantage Singapore?
2024-04-06 16:58
Hong Kong and Singapore are both established financial centres with strong supporting institutions and infrastructure.
Singapore has an advantage over Hong Kong in foreign-exchange and commodity trading, and its asset management industry is developing. Financial technology (fintech) will be a growth engine.
However, Hong Kong’s dominance in the equity market is unassailable, and the territory will continue to benefit from its proximity and attachment to mainland China. Moreover, numerous accounting frauds may dent Singapore’s reputation for firms considering relocation.
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Both Singapore and Hong Kong share similar features as established financial centres in Asia. They both have the necessary infrastructure for a financial centre, including a fully open capital account, a common-law based legal system, an independent and efficient judiciary in commercial affairs and an English language-based working environment. The regulatory environments are well developed and the availability of financial instruments is excellent. These features have underpinned the core competence of these cities as financial centres.
However, large-scale and sometimes violent protests in Hong Kong in the second half of 2019 are likely to have led many financial services businesses to consider their options in term of location. The imposition of a new national security law in Hong Kong by the central Chinese government raises a new set of questions for these firms, including whether businesspeople and companies can operate as freely as they did before, and whether the local judiciary will remain independent in commercial cases. The Singapore administration has not commented on the prospect of attracting business relocations, but some companies have been actively considering such a move. How much of an opening does this give Singapore as an alternative base of operation?
Singapore has advantages over Hong Kong in some areas of financial services. For example, it is the third-largest foreign-exchange market in the world, after the US and the UK, and is likely to maintain its position. The bond market in Singapore also remains bigger than that in Hong Kong. As Singapore borders the Straits of Malacca, the main shipping lane between the Indian Ocean and the Pacific Ocean, it has become an ideal commodity trading hub. It is the world’s biggest trading centre for iron ore contracts and also clears many of those for crude oil.
Another area of advantage for Singapore is wealth- and asset-management; the city state is Asia’s most established offshore wealth management and private banking hub. The launch in January 2020 of Singapore’s variable capital company (VCC) scheme—a structure that allows easy injection and withdrawal of funds, as well as segregation of assets for tax purposes in a way that wins onshore fund business from offshore tax havens—will attract more businesses to place their funds in Singapore. By end-June Singapore had recorded the establishment of 63 VCC funds. Singapore also offers general tax rebates and incentives for new VCCs and family offices to woo fund managers.
Singapore also has an advantage in fintech. As home to South-east Asian internet giants such as Grab, as well as the regional headquarters of globally renowned businesses such as Google and Facebook (both US), Singapore has a vibrant environment for internet companies. The Monetary Authority of Singapore (MAS, the central bank) has refrained from over-regulating fintech start-ups and actively encourages the application of a fintech regulatory sandbox, which relaxes regulatory requirements to allow trials. In 2019 Singapore hosted 490 fintech businesses. The MAS is also ready to award digital banking licences this year—including, notably, to non-traditional lenders.
Specific to the implementation of the national security law, there are some internal functions that financial businesses might consider relocating to Singapore. Departments closely associated with client information and privacy might be moved—most notably data centres. The research functions will probably see Singapore as a better alternative as well, if freedom of speech and the flow of information are deemed to be impaired. However, it is worth noting that Singapore also regulates the media very strictly.
However, despite reasonably robust regulation, Singapore has suffered from a recent wave of accounting scandals and delistings that has weakened its position as a financial centre. The oil price war between Saudi Arabia and Russia this year led to a series of commodity traders filing for bankruptcy; most of them were involved in accounting scandals tied to hiding losses and duplicating bills. The most significant bankruptcy, Hin Leong, revealed losses amounting to around US$800m, and banks have found themselves trapped in a related debt exposure to Hin Leong totalling more than US$3bn.
Lenders have found that the Singapore administration has been keen not to tighten regulation towards private companies too much, so that the operating environment remains “pro‑business”. Very few charges have been made against the directors of failed businesses, despite law enforcement having uncovered misdeeds. Although an encouraging environment for risk-taking might lure some financial players, failures in handling collapsed commodity-trading businesses might lead to increased suspicion about whether the country can manage financial risks properly.
Similar stories are found in the stockmarket. The Singapore Exchange (SGX) recently removed its minimum trading price requirement, reflecting in part a desire to prioritise maintaining the number of companies listed over removing low‑quality listed companies. A series of accounting scandals has also led to a wave of distrust about the SGX’s creditworthiness. Most recently a cosmetics business, Best World, was suspected of providing inflated numbers for its sales in China.
The SGX regulatory committee proposed recently that all foreign-listed companies have a Singapore-based auditor, in a bid to strengthen investors’ confidence about SGX stocks. However, as most of the foreign businesses listed on the SGX have already hired local auditors, the effectiveness of the measure remains doubtful; we do not believe that investors’ confidence can be restored quickly.
As well as accounting scandals in Singapore, Hong Kong also holds some unique advantages. The local equity market is much broader and deeper than that of Singapore, and it has been the prime choice for large mainland Chinese businesses looking to list offshore. In contrast, SGX has suffered delistings recently, as market participants are becoming frustrated with illiquidity and poor fundraising prospects. A widening gap between exchanges has prompted an index provider, MSCI, to license its derivatives to the Hong Kong Stock Exchange (HKEX) instead of the SGX, which further weakens the latter’s offerings on derivatives.
Hong Kong’s privileged ties with the mainland market have generated years of experience in mediating direct investment, both from foreign firms into the mainland and from mainland-based companies investing globally. We expect Hong Kong to continue to leverage both this experience and preferential policy schemes, such as the Greater Bay Area, to continue to perform this function. A strong cluster effect will also help to encourage investors to stay.
To sum up, Singapore will be able to attract some finance businesses from Hong Kong, given its stable policy settings and pro‑business environment. Singapore will maintain its prime position in commodity trading and foreign-exchange clearings and will become more attractive to asset- and wealth-management businesses. Fintech will present the next opportunity for the city state to exercise dominance. Also, functions within companies that are negatively affected by the national security law in Hong Kong will regard Singapore as a prime choice for relocation.
However, Singapore stands little chance of catching up with Hong Kong in the securities sector or in wooing Chinese businesses looking to list. The administration will walk a fine line between over-regulation and ignoring the increasing number of accounting frauds, and its stance will pose questions of Singapore’s reputation as a leading financial centre.
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