FT : Singapore Gaining Edge On Hong Kong

Wednesday, April 28, 2010

When Thomas McMahon and his Indian backers were deciding where to locate an Asian commodities exchange, they turned initially to Hong Kong – attracted by its proximity to China and the mainland’s booming, commodity-hungry economy.  Three years later, the exchange, a subsidiary of India’s Financial Technologies group, is about to open – not in Hong Kong but nearly four hours’ flying time to the south in Singapore.  “We looked at Hong Kong with a view to being able to serve the China market, but we decided that we couldn’t run a viable independent commodities exchange from there – the business environment just wasn’t right,” says Mr McMahon, a former director of Nymex Asia.  “Inversely, Singapore was very welcoming.  The authorities were completely happy with the concept of an independent foreign-owned exchange competing with the existing exchange and the view seemed to be there should be a totally competitive environment, which is just what we wanted.”  The city-state’s enthusiasm for what will be called the Singapore Mercantile Exchange, and its willingness to countenance potential collateral damage to the locally listed incumbent, the Singapore Exchange, neatly illustrates the business-friendly approach that is helping the island to emerge as a strong competitor to Hong Kong in the battle to be Asia’s 21st-century international business capital.  Others put it more graphically.  “You walk into Changi airport and they practically give you a hedge fund start-up kit,” James de Castro, one of the founders of Hong Kong-based Asia Alternative Asset Management, told a recent conference on the island’s financial centre.

The prize is huge.  Rapid economic growth around Asia is creating all sorts of opportunities, dragging in large numbers of bankers, traders, lawyers and other professionals.  More big companies in Europe, North America and India are deciding they need a regional headquarters – and the demand for English and reliable communications means the choice is usually between Hong Kong and Singapore. Japan remains the world’s second-largest economy and Tokyo the second-biggest stock market.  But it is not really in the game as it is almost entirely domestically focused.  For example, as a consequence of regulatory and language barriers, the Tokyo Stock Exchange has attracted fewer than 10 overseas listings since 2004, compared with hundreds bagged by Hong Kong and Singapore.  Nor is anyone writing off Hong Kong, an indispensable entrepot for China and the regional home for most global investment and commercial banks, private equity funds, large investment institutions and international legal and accountancy firms.  The self-governing Chinese territory is a big player in the capital markets, hosting a succession of blockbuster initial public offerings of Chinese companies and preparing this summer to co-host (with Shanghai) the IPO of Agricultural Bank of China, which at up to $29bn (€22bn, £19bn) is expected to be the world’s biggest listing.  Underlining its importance, Michael Geoghegan, HSBC chief executive, recently relocated from London to Hong Kong and JPMorgan moved the head of its international private banking unit there from New York to focus on regional opportunities.  Anthony Bolton, star stock picker at UK-based Fidelity International, has scrapped his retirement and decamped to Hong Kong to launch a China equities fund.  The latest ranking of global financial centres, published last month by the City of London Corporation, shows Hong Kong has narrowed the gap with London and New York to its smallest since the study was introduced five years ago, with fast-improving Singapore just behind in fourth place.  The advance of both cities is clearly worrying western competitors.  “We cannot afford to be complacent in the face of growing competition across the world, not just in the US but also increasingly Asia,” says Stuart Fraser, City of London policy chairman.  “There is a danger that new regulation could accelerate this shift in the financial centre of gravity towards fast-developing markets.”  At the same time, though, Hong Kong has developed serious problems. Official pollution readings last month soared to record levels – five times the usual high – forcing schools to ban outdoor activity.  Air quality reached “dangerous” levels on one day in eight last year.  “There are air quality issues in Hong Kong, which affect companies’ ability to attract staff, and international business groups have made representations on this issue to the relevant authorities,” says Deborah Biber, head of the Australian Chamber of Commerce in Hong Kong.  Those willing to breathe the air must pay property prices that are up to three times higher than Singapore.  A 1,600sqft (150m•) apartment typically costs upwards of $10,000 a month to rent. In leafy Singapore, a house and garden several times the size can be had for less than $4,000.  Potentially most damaging, Hong Kong appears increasingly inward-looking, with its politics and business focus becoming ever more fixated on China just as the rest of the region becomes more globalised.  While Singapore plots how to dominate Asian commodity trading or take a chunk of the Islamic finance market from Malaysia, Hong Kongers contemplate how to handle political interference from Beijing.

Singapore, sitting near the equator at the centre of Asia’s trade lanes, suddenly looks both more central and more cosmopolitan.  As a result, Singapore is emerging as not only a leading Asian centre for the commodities industry, trading both physical goods and futures, but also as a regional headquarters location for non-financial businesses, especially in information technology, pharmaceuticals, electronics and manufacturing.  Other big companies use it as a base for their operations in the sub-region of south-east Asia, itself an area with nearly 600m people and an economy bigger than India’s.  In finance, many institutions run divisions from Singapore, including Standard Chartered, Deutsche Bank and Barclays.  In a sign of the times, the UK’s Prudential announced on Friday that it was adding a secondary listing in Singapore to its proposed dual primary Hong Kong listing as part of a $21bn capital raising linked to its plan to acquire the Asian assets of America’s AIG.  The decision to add Singapore, says Magnus Böcker, chief executive of the Singapore Exchange, reflects the city state’s greater strength in fund management – its $1,250bn assets under management are about twice Hong Kong’s.  “There is an attractiveness for them in reaching out to the Singapore-based institutional market,” says Mr Böcker.  Importantly, the island state is also better placed than Hong Kong to benefit from India’s rise, which is prompting businesses in the subcontinent to find ways of expanding abroad.  Wipro and Tata Consultancy Services, the information technology and outsourcing businesses, both have their headquarters for Asia in Singapore, and as many as 2,500 other Indian companies also have bases there, according to the India Business Forum.  “We could have had our HQ in India, Sydney, Hong Kong or Singapore,” says Girija Pande, head of Asia Pacific for TCS.  “[We came here because] we have a reasonable business in Singapore, which is larger than in Hong Kong, [and because] Singapore has very strong air links and connections to India, far more than Hong Kong. A lot of technology companies with whom we work . . . are headquartered here as well, so this is a kind of tech hub.”  Many Indian expatriates say they feel more at home in Singapore than elsewhere in Asia outside their own country, in part because Singapore has a prominent Indian community of its own – the finance and law ministers are both Singaporean Indians, for example.  The republic is India’s second-largest foreign investor and attracted more Indian foreign direct investment than anywhere else in Asia in 2008-09.  “Every large Indian company is seriously looking at Singapore” as a potential international Asian hub, says Mr Pande.  “Indians are in a lot of places here – industry, government, technology, banks; Indians are very comfortable here.  We call it sometimes the cleanest city in India.”  The close relationship is not an accident.  “There are a few [Indian] companies in Hong Kong, but since 1991 [when New Delhi began liberalising its economy] this has been one of the main countries that Singapore has concentrated on [winning investment from],” says K.N. Raghavan, first secretary at the Indian High Commission in Singapore.  Underlying these strategic developments, Singapore is also undergoing a gentle social transformation designed to alter its international image from sanitised nanny state to cutting-edge icon by injecting a dash of the edginess for which Hong Kong is famous throughout Asia, in sharp contrast to Singapore.  The most dramatic example is the construction of two casino resorts, together costing about $10bn.  The second, built by Las Vegas Sands, will open its doors shortly, giving the state that once banned chewing gum two of Asia’s biggest gambling operations.  The government has also found other ways to make the city a more relaxed place, for example by reducing artistic censorship – cuts to films and plays are now largely restricted to contentious religious issues – and introducing a “don’t ask, don’t tell” approach to homosexual relationships, which remain illegal but are increasingly tolerated.  It has built facilities such as a world-class concert hall and taken initiatives such as the annual Formula One grand prix.

Some things have not changed, however.  In contrast to Hong Kong’s robust and vibrant free press, Singapore’s media is partly state-owned and entirely state-supervised.  The country has regular elections, but the government is always formed by the same People’s Action party.  That will almost certainly remain true after a poll due by next year, although provision is being made for more defeated opposition candidates to sit in parliament under a “best losers” scheme.  None of that cuts much ice with international business, which is more interested in political stability and the rule of law than in opportunities for opposition politics.  Hong Kong is not a full democracy either.  But the gradual social liberalisation that is occurring in Singapore does reinforce its business proposition by making it a more interesting, more open and more cosmopolitan place for people of many different backgrounds to live.  Ronald Arculli, chairman of Hong Kong Exchanges and Clearing, says the city is confident it will maintain its edge as the region’s leading financial centre and has taken steps to broaden its focus away from just China.  It is attracting increasing numbers of listings from global companies…..“We are more than just a gateway to China,” says Mr Arculli.  “Trading volumes are far higher than before and we have launched new products also.”  In Singapore, though, the authorities remain confident that the momentum in this battle is with them.  “I think Hong Kong wants to be open, but it is becoming a more Chinese city in composition, in instincts and in governance,” says a senior Singapore official.  “That’s not a bad future for Hong Kong, because southern China has a great future.  “But we’re thinking about Asia and the world – there’s Shanghai, there’s Bangalore, there’s Hyderabad, there are key western cities that are not going to stay still.  That’s the way we think of our world.  Hong Kong is not in the middle of the radar screen at all.

Reference : The Financial Times, Apr. 26th, 2010.

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