This article was first published in the March 2015 Singapore edition of Accounting and Business magazine.

Political stability, a transparent legal system and an attractive tax framework, together with strict banking secrecy laws, have made Singapore one of the top financial centres in the world. The city-state is currently Asia’s largest centre for foreign exchange and commodity trading, having overtaken Tokyo two years ago, as well as being an important hub for wealth management. Meanwhile, Hong Kong has developed as the leader in the region for IPOs with US$29.3bn raised last year, placing it second in the world rankings behind New York (US$74.1bn) and ahead of London (US$24.8bn).

‘Due to their geographical positions, Hong Kong is a logical gateway to China, while Singapore is a natural access point for South-East Asia. Over the years, these two complementary financial centres have developed their own value propositions that support their coexistence in the ever-changing and developing region of Asia,’ says Melvyn Low, ASEAN head at Citi Treasury and Trade Solutions, noting that as a global wealth management hub, Singapore has gone from strength to strength and is set to continue to grow even more.

With the region’s greater role in global economies in recent years, it is unsurprising that financial activity continues to shift towards Asia, and there is no doubt that both Hong Kong and Singapore are well positioned to benefit from the trend, adds James Cheo, investment strategist for Asia and Middle East at Barclays.

Indeed, Hong Kong’s position has been strengthened recently by the launch of Shanghai-Hong Kong Stock Connect, which allows foreign investors with offshore Yuan to access the Shanghai market. So far, the performance of the exchange link has been disappointing, due largely to compliance rules limitations, but the Hong Kong stock exchange (HKEx) has already announced new trading accounts for fund managers from March to help them better participate in the market. 

This new gateway to the vast financial assets that mainland China has to offer will be hard to rival as the linked exchanges effectively create the world’s third-largest equity market by market capitalisation, behind the New York Stock Exchange and NASDAQ OMX. As China continues its financial reforms, Hong Kong should further capture a larger share of mainland-related investment, trade, and financing businesses, for which the Hong Kong exchange is already planning by expanding further into Yuan-denominated assets, including commodities. In December, HKEx introduced its first Asia commodities contracts trading in Yuan: London Aluminium Mini Futures, London Zinc Mini Futures and London Copper Mini Futures. The launch was seen by HKEx chief executive Charles Li as yet another step toward replicating the Hong Kong-Shanghai Stock Connect for commodities within the next three years.

Hong Kong’s challenges

But Hong Kong faces its own challenges, says Cheo, pointing to ‘an increasingly divided society, lack of diversity in the financial services sector, and environmental issues associated with the quality of living,’ which are all impediments to Hong Kong’s further development as an international financial centre.

Hong Kong’s first-mover advantage in China-related intermediation, Cheo adds, will also likely be eroded over the longer term by other mainland financial centres such as Shanghai and Shenzhen, even though Hong Kong is likely to maintain its competitive edge for the coming years, ‘primarily because of its well-developed regulatory system, reputation and competitive advantage’.

Shanghai is currently ranked 20th in the latest Global Financial Centres (GFCI) Index established by the London-based thinktank Z/Yen, which ranks the competitiveness of world financial centres taking into consideration different measures such as skill set of workforce, flexibility of labour market, tax rate and corruption levels. This put the Chinese city far behind Hong Kong (third) and Singapore (fourth), and reflects the restrictions on the convertibility of Yuan and the free movement of capital, which make it difficult for Shanghai to build a deep financial sector in terms of products and services, especially those that involve cross-border and cross-currency transactions. 

For Shanghai to develop into a fully-fledged international financial centre, a lot of work will have to be done, Cheo says, pointing out that Shanghai needs to develop its international exposure and connectivity. ‘It has to establish a sound regulatory and transparent supervisory framework, a stable legal and competitive tax regime, modern financial infrastructure and a good standard of living, all of which would help in attracting and retaining a skilled workforce,’ he says.

Against this challenging regional backdrop, Singapore has to jostle for its position to be Asia’s leading hub. And the city-state does has several comparative advantages ‘that are difficult to replicate by other financial centres,’ Cheo argues, pointing to the country’s sound regulatory and transparent supervisory frameworks. It also boasts a well-educated, English-speaking workforce, a stable legal system and competitive tax regime and modern financial infrastructure in addition to providing a good standard of living, all of which help in attracting and retaining businesses and employees. 

‘More crucially, it’s the dynamic, competitive advantage created by policies and strategies that allows Singapore to stay ahead as a leading financial centre. For example, Singapore is building itself up as a Yuan hub, not in direct competition with Hong Kong but capitalising on its increasing intraregional trade in the fast-growing economies of South-East Asia,’ he notes.

Complementary roles

Jimmy Koh, managing director and head of investor relations and research at UOB Group, believes that Singapore and Hong Kong are playing complementary roles in China’s internationalisation of the Yuan – Singapore again as the hub for South-East Asia and Hong Kong for North Asia. 

The Monetary Authority of Singapore (MAS) has been working closely with the People’s Bank of China to boost the trading and use of the Yuan. According to MAS, Yuan deposits rose 67% per cent from September 2013 to RMB 257bn as of September 2014. Singapore has also been making progress on Yuan payments and has become the largest clearing centre outside China and Hong Kong. Last year, the Industrial and Commercial Bank of China (ICBC) Singapore – the sole Yuan-clearing bank in Singapore – cleared 37.5 trillion Yuan, compared with 2.6 trillion Yuan in 2013.

ICBC Singapore general manager Zhang Wei Wu says that Singapore’s offshore Yuan hub will continue to thrive and the bank is now looking to implement a 24-7 clearing service, as well as Yuan real-time gross settlement, which is the fastest money transfer system through the banking channel. ‘We hope to build up a more advanced financial services infrastructure so as to reinforce Singapore’s advantage as an offshore RMB market and push forward RMB’s internationalisation,’ he says.

To stay ahead, Singapore will have to continue to chart its own path, recognising its strengths while taking advantage of the opportunities around, Cheo warns. It will have to continually enhance its pro-business environment and will need to better leverage technology to enhance price discovery, market-making and customer experience, he argues. 

‘One such technology is big data analytics, which can be applied to make sense of vast amounts of customer data,’ he explains. ‘With increasing complexity in the financial markets and greater diversity in consumer preferences, Singapore will need to encourage financial institutions to use new technologies like big data analytics to allow for better risk management and more precise matching of consumers to financial products. Ultimately, the goal of technology is to enhance the customer experience by providing more relevant and tailored advice and services.’

Singapore also needs to deepen its regional connectivity, for example through the pursuit of greater integration across financial markets. ‘This involves the harmonisation of rules and regulations to develop an integrated trading, clearing and settlement infrastructure. South-East Asian regulators are currently working on a framework to facilitate cross-border offerings of collective investment schemes, and this initiative will promote greater capital flow across the region and boost investor choice,’ Cheo says.

Low believes that Singapore’s position as a major international financial centre will be further reinforced through the formation of the ASEAN Economic Community (AEC), which aims to integrate the economies of its 10 members. The launch of the ASEAN Trading Link and ASEAN Collective Investment Scheme (CIS) Framework has enabled retail investors from Malaysia, Singapore and Thailand to tap into investment products in these three countries under a streamlined process, he notes. 

Ultimately, Singapore’s value proposition is its pan-Asian focus and it remains a natural gateway for international firms looking to access Asia, and for Asian businesses to access the world.