Singapore steals lead while we worry about Shanghai

PUBLISHED : Wednesday, 01 February, 2012, 12:00am
UPDATED : Wednesday, 01 February, 2012, 12:00am


The lead story on the front page of yesterday's South China Morning Post warned that Shanghai is out to eat Hong Kong's lunch.

Apparently the National Development and Reform Commission has decreed that Shanghai will become the global centre for yuan trading and pricing within three years 'directly competing with Hong Kong's own ambitions for offshore trading in the mainland currency'.

We've heard this sort of guff before. In 2009 the State Council declared that Shanghai would become a major international financial centre to rival London or New York by 2020.

The mainland authorities can proclaim Shanghai's ascendance as many times as they like; but it will take a lot more than announcements to create an international financial centre to rival Hong Kong.

The most obvious reason Shanghai won't qualify as an international financial centre any time soon is the mainland's regime of capital controls.

As long as Beijing prohibits the free flow of investment capital across China's borders, Shanghai will remain at best a second-tier financial market in international terms.

And Beijing isn't going to relax its controls any time soon. It needs them to prop up a banking system that the Hong Kong Institute of Monetary Research - an arm of the Hong Kong Monetary Authority - described in a research paper published last month as 'woefully dysfunctional'.

But even if Beijing were able to dismantle its restrictions on cross-border capital flows without precipitating the collapse of the mainland's banking system, Shanghai would still have decades of work ahead of it to catch up with Hong Kong as an international marketplace.

First, it would have to establish the sort of regulatory credibility that Hong Kong has accrued over the last 20 or so years. That's not going to happen overnight, or even over the next decade. An internationally credible regulatory system can only be built by lots of hard work over many years. And credibility is a fragile thing. It can be shattered in an instant.

And even if Shanghai were to succeed in persuading the rest of the world that its financial regulatory regime was on a par with Hong Kong's, the city would still lack Hong Kong's extensive international networks and deep pool of talent.

As a result, there is little danger of Shanghai surpassing Hong Kong as an international financial centre within the foreseeable future. It might well dominate China's domestic markets, but as far as institutions in the rest of the world are concerned, Hong Kong will remain the place to transact their financial business with China.

When Financial Secretary John Tsang Chun-wah delivers his budget speech today, he will give us an advance estimate for how much Hong Kong's economy grew last year.

The figure will be somewhere around 5 per cent. Factoring in Hong Kong's relatively high inflation rate, that will mean the city's gross domestic product last year was around HK$1.9 trillion, or roughly US$248 billion.

That sounds pretty respectable - until you compare it with Singapore's economy.

Last year Singapore's economy grew by 4.8 per cent in real terms, slightly slower than Hong Kong's. But when you factor in its own elevated inflation rate together with the appreciation of the Singapore dollar, which climbed by some 8 per cent, then Singapore's economic output for 2011 came to around US$266 billion; some 7 per cent greater than Hong Kong's.

It's hard to swallow, I know. For years Hong Kong was able to look down upon its Southeast Asian neighbour, and comfort itself with the knowledge that its economy was twice the size of Singapore's.

No longer. Over the last 20 years, heavy immigration and the establishment of new businesses, most recently casino gambling, have massively boosted Singapore's economic output.

While we were worrying needlessly about Shanghai eating our lunch, we've been overtaken by Singapore.