Singapore's financial centre will emerge as big winner of a draconian Chinese law
- Tensions in Greater China have led analysts to warn that many businesses can move from Hong Kong to Singapore.
- China approved a law on Thursday that tightens its grip over Hong Kong, seen as a violation of Hong Kong's "one country, two principle" systems.
- Hong Kong ranked as the world's sixth-largest financial center in 2020 and Singapore took the fifth position.
- Analysts say Singapore could overtake Hong Kong if it loses lucrative business.
- Singapore is facing its worst recession since Independence and expects GDP to drop as much as 7% in 2020.
Hong Kong, currently the world's sixth-largest financial center, may struggle to retain its position as companies consider moving to neighboring Singapore to escape the wrath of a new Chinese draconian law, analysts say.
If realized, the prediction will be a blow to Hong Kong after months of political turmoil that has rocked the region.
On Thursday, China approved a new law that targets subversion of state power, terrorism activities, and foreign interference in the former British colony.
The US responded by declaring it no longer considers Hong Kong to be autonomous from China.
So far, stock reaction has been muted, but analysts question Hong Kong's long-term ability to stop the decline of its financial hub.
Why Singapore is braced to win from this
The 27th edition of the global Financial Centres Index (GFCI) ranked Hong Kong marginally behind Singapore, the world's fifth-largest financial center in 2010.
GFCI ranked Singapore as fourth-biggest in 2019, a position it lost in this year's ranking.
But analysts think Singapore is set to outperform Hong Kong significantly and the gap between both countries' rankings could widen further.
Arthur Dong, a professor at Georgetown University's McDonough School of Business, said: "The bill will accelerate the decline or demise of Hong Kong as one of the world's biggest financial centers."
Dong added: "Hong Kong's status as East Asia's premier financial center is supported by Hong Kong's unique status under "one country two systems" granted by China during the 1997 handover from Britain to China."
He pointed out two factors that have secured Hong Kong's global financial center is the protection of property rights and predictability, adding that the law violates both principles.
Dong is not alone.
Dr Ying Wu, Assistant Professor at School of Business at Stevens Institute of Technology, said: "This April, we already noticed a dramatic down drop of almost 100 billion dollars of the global capital out of emerging markets, including China, from all around the world. "
Dr Wu said: "The bill has strengthened the expectation that money would further be leaving the Asian financial hub, such an important bridge between China economic engine and the rest of the world."
As of March, she pointed out that foreign currency deposits at both domestic and international banks operating in Singapore have nearly doubled since July, totaling $15 billion.
"Although it is not disclosed where the capital comes from economists perceive it is the signal that money has started to flow out of the city and into Singapore, another regional safe haven," Dr Wu added.
Jeffrey Halley, senior market analyst, Asia-Pacific at OANDA, said: "The big winner out of this could be Singapore if we do see an exit of companies from Hong Kong.
"If Hong Kong is imposing Chinese law by the backdoor in Hong Kong, it questions why companies need to be in Hong Kong.
"If they don't want to be under Chinese law but want to be more under a Western legal system, then they may as well go to Singapore," Halley added.
But Hernando Gomez, principal-in-charge of the business valuation division at MBAF, thinks it may not be that easy for Singapore to snatch business from Hong Kong, as the island is facing its worst recession in the history of its independence.
"One could say that some rival cities like Singapore or Shanghai may benefit from the chaos but unfortunately, under the current circumstances, I do not see that many winners as the city has been dragged into a recession."
The coronavirus pandemic has ravaged two of Singapore's key industries, tourism and shipping.
The country's trade ministry warned this week the economy could contract as much as 7% this year and 4% in a best-case scenario. Previous growth forecasts for the country lay between -4 to -1%,
But Halley added: "I can only see Singapore progressing. Singapore is also pushing very hard for financial centers to put data centers there. Most of the world's financial data runs between three hubs Tokyo, London, and New York."
"Now they are starting to put huge data hubs also in Singapore. Hong Kong has been competing for some of that business as well but I don't see how they are going to be competitive if Hong Kong is against the Great Firewall of China."
Part of Hong Kong still shows hope
But Hong Kong's stock exchange group received a boost as it was able to snatch a key derivatives licensing agreement from Singapore after 23 years, this Wednesday.
It paves the way for Hong Kong Exchanges and Clearing to offer options and futures from June based on 37 of MSCI's equities indices.
So there may be a light at the end of the tunnel for Hong Kong. Whether the US slaps sanctions against the former British colony or China may ultimately determine how much better Singapore ranks as a financial hub relative to Hong Kong.