Comparing Financial Markets of Singapore & Hong Kong

Economic development
Singapore and Hong Kong have achieved similar economic success through very different economic approaches path of economic development diverged after World War II similar experience under British colonial rule divergent political development after WWII divergent economic models after 1960s

Colonial legacies
Both became entry ports to mainland both benefited from British management and technological expertise both attracted inflow of Chinese emigrants Chinese population in Singapore doubled in 1820s Chinese population in Hong Kong quadrupled between the two World Wars

Divergent paths after WWII

Hong Kong restructured its economy population quadrupled 1945 - 1955 large-scale relocation of capital, entrepreneurs, and assets from mainland China trade embargo against mainland China after Korean War broke out actually benefited HK relative political stability popular political apathy Singapores Peoples Action Party faced severe internal and external conflicts in 1960s PAP became a elitist and paternalistic party neo-Confucianism? government intervention in the economy drew up a state development plan

Singapores development 1960s

New institutions Economic Development Board promote industrial development Housing and Development Board develop industrial estates Development Bank of Singapore provide industrial financing Jurong Town Corporation acquire, develop, and manage development sites

Hong Kongs development

governments laissez-faire principle reactive, selective, & reluctant intervention development of public housing provide lower-middle-income families with access to home ownership social expenditure & community development development of human resources intervention to maintain competitiveness

Financial Markets
Singapore Hong Kong Monetary authority Monetary Authority of Singapore (MAS) Hong Kong Monetary Authority (HKMA

Currency issuer

MAS Currency Department

HSBC, Standard Chartered Bank, Bank of China

Three-tier structure

Full licensed bank Whole Sale licensed bank Offshore licensed bank Merchant bank Finance company Finance holding company Money broker SGS Market Dealers Insurance company/broker Central Provident Fund (CPF Representative office

Licensed bank Restricted bank Deposit-taking company Insurance company Pension fund Unit trust Development Loan Fund Money broker Mandatory Provident Fund (MPF) Representative office

Non-Bank-financial institutions

Other

Exchange rate regime

Limited flexibility w.r.t. a basket (Jun 73 Jun 83) Managed floating (Jul 87 Sep 04)

Peg to USD (Jul 72 Oct 74) Independently floating (Nov 74 Oct 83) Peg to USD (Oct 83 Sep 04)

Banking Sector
Both economies do not have a central bank, relying instead on the respective monetary authorities to conduct monetary policies Singapore conducts its monetary policy by managing a trade-weighted exchange rate index (TWI) on the Singapore dollar while Hong Kong on the other hand, conducts its monetary policy by pegging the Hong Kong dollar to the US dollar since 15 October 1983 Singapore as an export center would have a greater need to ensure that the Singapore dollar is not being speculated as the effect of exchange rate volatility would cause uncertainties of exports and trade so they use TWI Hong Kong is benefited from the fixed regime viz. the linked exchange rate by escaping from the possible financial collapse .The peg means that the Hong Kong dollar carries no exchange risk vis--vis the US dollar and can act as a proxy for the US dollar in futures and options hedging

Banking Sector
Singapore has 61% of the Top 100 banks whereas Hong Kong has 63% excluding the equivalent number of representative offices in both economies Overall, the total size of assets of Singapore banks vis--vis that of banks in Hong Kong is almost three times larger. The relatively larger asset base of Singapore banks means they are less likely to be acquisition targets compared to the banks in Hong Kong Non Performing Loan (NPL) level, there might be some indications that the Singapore banks are lending to riskier profiles compared to their Hong Kongs counterparts. (Average NPL to total loan of 7.5% versus 2.83% Contrasting fortunes of the banks in five aspects with regards to their ranking on The Bankers Top 1000 list. The five measures are 1) Tier One Capital; 2) Size on Assets; 3) Profits; 4) Return on Assets and 5) NPL to Total Loans

Banking Sector
Rank on Banker Top 1000 Bank Strength Tier One Capital US$M 5754 5659 4641 16054 2052 1196 Size Assets US$M Profit US$M Return on Assets % NPL to Total Loans % Credit Ratings (Standard & Poors) A+/Positive/ A-1 A+/Positive/ A-1 A+Stable/A-1 7.50 BBB+/Stable/ A-2 BBBpi/--/-90 91 101 UOB DBS Bank OCBC Total Bank of East Asia Shanghai Commercial Bank Wing Lung Bank Dah Sing Financial Holdings Wing Hang Bank Liu Chong Hing Bank CITIC Ka Wah Bank Asia Commercial Bank Total Singapore 66702 946 93835 49681 845 1.42 0.90 1.45 2509 1.20 1.62 8.10 Na 6.90 1.26 2.50 2.10

201 311

718 210218 Hong Kong 25567 306 9636 156

403 481

851 661

8731 8213

130 145

1.49 1.76

2.49 1.55

BBBpi/--/-BBBpi/--/--

484 499 504 965

656 631 623 189

11431 5145 9972 1680

130 47 98 9

1.14 0.92 0.98 0.52

2.98 4.80 Na 3.39

BBB+/Stable/ A-2 N.A N.A N.A

6859

80375

1021

1.20

2.83

Fund Management
Hong Kong has maintained a larger market scale Singapore's Total assets under management (AUM) grew by 40% in 2009 to reach SGD 1.2 trillion (USD 875.9 billion eqv.), breaking the record high and exceeding the pre-crisis level in 2007. In contrast, Hong Kong's market total AUM of Hong Kong's fund management business reached USD 926.8 billion by the end of 2009, still below the high of USD 963.1 billion in 2007. Singapore has registered faster growth According to official resources, Singapore's total AUM registered a compound growth rate of 19% per annum in the five years towards 2009. In comparison, Hong Kong's average annual growth rate was similar at 18% during the period, excluding hedge funds Sources of funds mainly from overseas Nearly all major fund management houses in the world have established offices in Hong Kong and Singapore. Overseas assets occupied a share of 65% and 80% of the total AUM in the two territories respectively.

Factors contributing to Singapore's rapid growth

Strong government support In Hong Kong, the fund management business is primarily market driven. There is no official body responsible for promoting the business. In Singapore, the government's role is more crucial. various measures have been implemented to foster the development of fund management business. For example, minimum capital requirement for "group shareholder" of investment advisors and minimum AUM requirement for parent company were lowered to SGD 100 million and 1 billion Preferential and more flexible tax treatments As mainly operated by foreign capital, both sides have provided some preferential tax treatments for foreign investors. In both country, taxes are charged on income derived locally. Hong Kong has granted offshore fund management houses conditional tax exemption, but uncertainties remain in the determination of eligibility and there is still no judicial interpretation on the issue. In contrast, the Singapore government has already laid down exact terms for entitlement to tax exemption by offshore fund houses in July 2002

Factors contributing to Singapore's rapid growth

Outstanding product innovation capability Financial product innovation is an important driver of the fund management business. Hong Kong's stock market is the second largest in Asia, but its bond market only ranks 7th and there is no independent gold or commodities futures exchange. With indexes and derivatives not so well developed as Singapore, Hong Kong's product innovation capability appears less strong, hindering the development of fund management business. Focus more on connections with overseas markets While the Asian market is the major investment destination of both Hong Kong and Singapore funds, both have emphasised connections with the regional markets. Yet, Singapore has appeared more proactive and flexible. In particular, Singapore has been active in strengthening ties with the Mainland

Recommendations
Hong Kong should consider more competitive taxation arrangements Resolve the differential treatments towards offshore and domestic fund houses Hong Kong should consider strengthening the innovation mechanism in various markets, satisfying the needs of the fund management business Hong Kong should capitalise on its strengths, seizing the opportunities from China Strengthening its product innovation and improving its operating environment, so as to maintain its leading status