Hong Kong is trying to restore its global financial center mojo

by James · February 28, 2023

but will it be enough? (Photo: DALE DE LA REY / AFP)

AFP via Getty Images

Given the competition it faces from Singapore, Hong Kong cannot afford to rest on its laurels. In recent years, Singapore has become a bigger fintech hub than Hong Kong, an increasingly important location for the regional headquarters of both multinationals and Chinese companies, and is also attracting high-net-worth individuals to set up family offices.

Singapore’s progress was reflected in its selection by the Global Financial Centers Index last year as No. 3 globally after New York and London – and top in Asia. Hong Kong was No. 4 globally and No. 2 in Asia.

There is no easy way for Hong Kong to mitigate the reputational damage from the 2019 protests and the city’s overzealous Covid-19 controls. The latter in particular made some investors and talents sour on Hong Kong.

What Hong Kong can do is focus on opportunities in new areas of financial services such as green finance and cryptocurrency. While it will inevitably face competition from Singapore, Hong Kong brings to the table certain advantages that it should be able to exploit effectively.

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Turns green

Bloomberg Intelligence estimates that combined ESG assets could rise to $53 trillion by 2025, with the Asia-Pacific region driving “the next stage of growth.”

There are many ways for Hong Kong to tap into the burgeoning sustainable finance segment. One of the most promising is supporting mainland China’s ambitious carbon targets. China aims to peak carbon emissions by 2030 and become carbon neutral by 2060. Hong Kong could help the mainland in these efforts if the Hong Kong Stock Exchange merged with exchanges in Shanghai to include stocks and ETFs present companies with sustainable business models, and raise greater funds for green finance.

Meanwhile, Hong Kong has already had some success with green bonds. The Hong Kong government announced in January the successful offering of US$5.75 billion in green bonds denominated in dollars, euros and renminbi, which it says is the largest ESG bond issue in Asia to date.

Not surprisingly, Singapore is also an active player in green bonds. According to Bloomberg, there were 272 sustainable, green, social or transition bonds listed in the city-state as of September 28, more than double the 103 listed in Hong Kong. Singapore also had an edge in issuance: $34 billion to Hong Kong’s $24 billion. In addition, Singaporean firms have issued US$39.5 billion in green loans compared to US$13.4 billion raised by Hong Kong companies.

Still, Hong Kong has a leg up on Singapore in the nascent segment of tokenized green bonds. In February, it issued HK$800 million (US$102 million) in tokenized green bonds, the first such sale by a government globally. This should facilitate regular digital bond offers in the city.

Crypto Gambit

If green finance is a relatively safe bet for Hong Kong, cryptocurrency is much more of a gamble. But precisely because crypto is mercury, Singapore is reassessing its exposure to the industry. Singapore has been explicit that it does not want to serve as a hub for crypto exchanges that target retail investors. There is an opportunity for Hong Kong – if the country has a large enough willingness to take risks.

That said, when we first heard that the city wanted to reclaim its lost cryptocurrency, we were skeptical. After all, like the mainland, so goes Hong Kong. If digital assets are largely banned there, why would Beijing allow Hong Kong to serve as a hub for them?

But it seems the central government may have a change of heart. Officials from China’s Liaison Office have reportedly appeared regularly at crypto rallies in Hong Kong. “The meetings have been friendly, with officials checking on developments, asking for reports and in some cases making follow-up calls,” according to Bloomberg.

The central government is aware that Hong Kong’s position as a global financial center suffered during the protests and the pandemic and may see the city’s embrace of crypto – as long as it does not threaten financial stability on the mainland – as useful in reviving its fortunes.

With that in mind, in late February, Hong Kong’s Securities and Futures Commission (SFC) published its proposed rules for virtual asset trading platforms and is seeking public comment until March 31. The regulator is planning a new licensing regime for crypto service providers. effective from 1 June, and is considering whether to allow licensed platforms to serve retail investors.

Cautious optimism

There is reason for cautious optimism about Hong Kong’s future prospects as a global financial center. After the pandemic, it is aggressively capturing opportunities in industry segments that are likely to become increasingly important in the coming years. Its status as China’s financial window to the world will endure, meanwhile, as Shanghai and Shenzhen must comply with the mainland’s more restrictive rules.

Although Hong Kong faces competition from Singapore in green finance, the two cities may ultimately end up focusing on different market opportunities. The city-state is better equipped to serve Southeast Asia while Hong Kong can focus on the huge mainland market.

In crypto, Hong Kong could become a dominant global hub – but only if it was willing to roll the dice and embrace retail investment. Focusing only on institutional investors won’t cut the mustard. Despite the crypto community’s undying optimism, it remains uncertain whether the city will take the plunge, as CoinDesk recently noted.

Nevertheless, it is an important warning to Hong Kong’s efforts to revive its status as a global financial center. Although Hong Kong officials insist on the integrity and independence of the judicial system, there are still concerns that it has not changed for the better. To that end, the city fell in the World Justice Project’s Rule of Law Index to No. 22 last year, its 2.8% decline the biggest in the Asia-Pacific region after Myanmar.

In contrast, Singapore’s reputation for upholding the rule of law is as strong as ever. It was number 17 in the index, the same as in 2021.

This is something that Hong Kong must deal with in order to secure its future as a global financial centre.

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I am the founder and director of Kapronasia, one of Asia’s leading providers of consulting services with a focus on the fintech industry. I have been involved in financial technology for over 20 years and cover all topics fintech and blockchain. Before Kapronasia I was Global Banking Industry Manager for Intel based in Shanghai, China and before Intel I was CIO for Citigroup Portugal. I have testified before the US Congress on issues of fintech in China and am the author of ‘Chomping at the Bitcoin: The History and Future of Bitcoin in China’ published by Penguin. I have a BS in Computer Science from Syracuse University and an MBA from INSEAD.