SINGAPORE: Described as “embattled”, “in decline” or “less shiny” by observers, Hong Kong is facing significant challenges in its bid to retain its position as Asia’s leading global financial centre.
Hong Kong’s decline was made most obvious last year, when the territory fell from third to fourth place in the 19th global financial centres index, ceding its position to Singapore.
ON THE DECLINE FOR A WHILE NOW
Observers say its decline began in earnest much earlier, more than a decade ago, when other markets like Japan and Shanghai started introducing innovative financial products that give investors more options in terms of risk, including a broader range of exchange traded funds.
Signs that Hong Kong’s financial sector is in desperate need for reform have been there for a while. Hong Kong’s competitiveness has been falling since the 2008 financial crisis. Economists have attributed this to a bloated financial sector, seen in the high commission that finance companies in Hong Kong charge.
This decline seems endemic elsewhere in Hong Kong’s economy. Hong Kong is facing steep declines in container throughput as well as visits from international tourists, posing threats to the city’s future as a port city and tourism hub.
To make matters worse, Hong Kong is facing a brain drain. A Chinese University of Hong Kong survey shows that about 40 per cent of Hong Kong residents who were polled by researchers want to leave the city.
CLEAR POLICY LEFT WANTING
For Hong Kong, which had successfully transformed itself into a thriving global city and seen meteoric growth in jobs and revenue from the engines of financial services and trade in the 1990s and early 2000s, there is a sense that its administrators can do better than this.
Many ask if the Hong Kong government knows what it wants and how it can go about sustaining Hong Kong’s financial hub status. I argue that a lack of centralisation in its policy processes has proven to be its Achilles’ heel.
CENTRALISATION THE KEY
There are two aspects to policy centralisation. This first requires policy processes and institutions to be driven by a central, coherent and long-term strategy to see through policy implementation and adherence by line agencies. The second requires strong coordination between public agencies when it comes to policy-making, implementation and enforcement, to mitigate unwanted effects.
Centralisation is particularly important for governing the financial sector because it is closely linked to other sectors such as trade, shipping and manufacturing.
For instance, many banks and financiers thrive when there is strong demand for loans and financing solutions from business sectors including manufacturing and shipping. The success of these other businesses in turn also depends on easy access to capital.
In regulating financial markets, governments need to ensure that financial sector regulators are attuned to these linkages between the financial sector and other businesses. More importantly, financial sector regulators need to work closely with economic development agencies to ensure greater complementarity between the growth of banks and businesses.
A good example of this is the need to attract more venture capitalists to support start-ups and entrepreneurs. This is particularly important, given the growing significance of FinTech as a driver of financial sector growth.
Such centralised and collaborative policy-making usually depends on the presence of a strong and decisive lead policy agency that is capable of steering policy implementation and enforcement.
Agencies such as Singapore’s Monetary Authority of Singapore or Japan’s Ministry of Economy, Trade and Industry have proven to be strong central agencies that have taken a national lead in developing the financial sectors in Singapore and Japan to drive innovation.
Their leading roles help ensure that regulations are flexible and relevant enough for innovation to thrive. Top bureaucrats and Cabinet ministers have risen from these powerful agencies, signaling their status and massive influence in their respective governments.
NOT UNIQUE TO HONG KONG
Many of the problems faced by Hong Kong, such as its escalating costs of living and housing, a problematic welfare and pension system, and growing air pollution, are endemic of many high-density urban systems.
In many global cities, the solution to these problems has been to establish strong policy institutions that can centralise policy-making and coordinate the efforts of different public agencies in addressing these cross-functional policy issues.
For instance, Singapore has introduced centralised policy functions and institutions such as a Coordinating Minister for Economic and Social Affairs to ensure that growth doesn’t come at the expense of growing inequality, the Committee for the Future Economy to tackle long-term economic challenges and the Smart Nation and Digital Government Group to drive digitalisation, among others.
In contrast, Hong Kong’s public agencies tend to be organised along functional lines, with economic development led by the Commerce and Economic Development Bureau, and financial sector development by the Financial Services and Treasury Bureau. There are little institutional linkages between these different government departments.
WHITHER THE STRATEGY?
Some see a solution of re-organising government to put one central agency in charge to address thorny economic and financial sector problems that do not seem to have clear-cut solutions as a cop-out.
Critics ask, do we really think Hong Kong can solve its long neglected financial service sector just by forcing the economic policy makers and the financial regulators to sit together and think about the problems?
Indeed, ultimately, Hong Kong needs a concerted plan to rejuvenate its financial sector first before it can think about the best way to organise government to drive the plan.
But there is so far no consensus on how to tackle new challenges to its financial hub status. It is this lack of coherence in Hong Kong that prove particularly deleterious to the city’s future as a leading global financial centre.
But what makes this problem even worse is that economic and financial sector agencies often overlap in their functions. Their policy responses to emerging problems often cancel out their intended impact or sometimes worsen problems.
Take for instance, the significant regulatory overlaps and conflict that exist between the two entities tasked with regulating Hong Kong’s securities markets, the Securities and Futures Commission (SFC) and Hong Kong Exchanges and Clearing (HKEx).
While the Hong Kong Monetary Authority (HKMA) is in charge of maintaining Hong Kong’s financial infrastructure and ensuring the stability of its financial system, the division of labour among the HKMA, the HKEx and the SFC is unclear. This is evident in ongoing conflict between the HKEx and SFC with regards to the listing of public companies, with both agencies seeking greater authority over the approval and regulation of new listings.
Even as the SFC and HKMA seek to consolidate more regulatory activities under their oversight, the HKEx is reluctant to relinquish its autonomy to approve and regulate new listings.
As a listed company that derives part of its income from listing fees, the HKEx’s continued role in approving the listing of companies presents potential conflicts of interest. Yet at the same time, increasing the SFC’s regulatory authority may give rise to greater costs of compliance to firms.
Both Hong Kong’s and China’s policymakers are well aware of the territory’s increasingly fragmented and problematic policy processes. Steps have been made to address the problem.
For instance, the HKMA and SFC have proposed reforms to Hong Kong’s stock market listing regime that will shift the authority to set listing policies from the HKEx to a new listing committee jointly set up by the HKMA and SFC.
More recently, China and Hong Kong authorities have established a new bond trading link to provide global access to Yuan-denominated assets through Hong Kong.
The move has been seen by many as a bold bid to rejuvenate Hong Kong’s financial sector by giving investors new access to Chinese interbank bond markets. Chinese authorities, the HKMA and the HKEx also promised to work together to harmonise regulatory differences between Hong Kong’s and China’s bond markets.
Taken together, these moves point to a desire to introduce greater centralisation in Hong Kong’s policy-making with regard to its financial sector, not just within the city, but also in its linkages with China's central government.
These are encouraging signs that may pave the way for a more consolidated, considered approach to developing Yuan-denominated investments in both Hong Kong and China and reforming Hong Kong's financial sector governance more broadly.
But will Hong Kong attain all it needs to re-assert itself as a leading global financial centre? I think we need to see whether a formal central body that drives economic and financial sector development emerges and if it can exercise strong influence in regulating the financial sector.
In this, only time will tell.
Woo Jun Jie is an Assistant Professor in the Public Policy and Global Affairs Programme at Nanyang Technological University and Rajawali Fellow at the John F Kennedy School of Government, Harvard University. He is also the author of the newly released book, 3-in-1: Governing a Global Financial Centre.