The front page of England’s venerable weekly The Spectator recently headlined an essay titled “The Doom Delusion.” The author Johan Norberg writes that objective evidence shows that “there’s never been a better time to be alive,” but “we’re hardwired not to believe this. We’ve evolved to be suspicious and fretful: fear and worry are tools for survival.”
This delusion is ever present in Hong Kong, recognizing many real problems, but fearing darker consequences than are likely. After recent elections in Hong Kong, it is vital that new policymakers understand not just the problems that we have, but also the Special Administrative Region’s strengths. If we do not recognize what is right in Hong Kong and exaggerate our ailments, our elected and unelected officials are likely to prescribe the wrong medicines.
There are similar risks for all financial centers. The assault on financial privacy, onerous regulations leading to the decline in profitability of the financial services industry with large-scale redundancies and extraordinary global monetary policies that undermine the foundations of the financial system are together a steep challenge. However, there are risks that in response to these fears, policymakers undermine the foundations of the growth and success of offshore financial centers.
Economically, Hong Kong’s economy is not doing so badly compared to many. Since the global financial crisis, nominal U.S. dollar GDP growth in Hong Kong per person has averaged 4.26 percent. That is higher and more stable than the growth for Singapore and Korea, two countries that Hong Kong’s political masters often look to for examples. The IMF projects that Hong Kong will continue to have an almost 1 percent per capita growth advantage over Singapore in the next five years.
There are positive reasons for this edge. In many ways, Hong Kong has a more flexible economy. We have not had activist industry policies and planning that risk misallocation of capital. By contrast, Singapore’s planning regime long ago decided that the city should become a hub for IT. In the fading PC (personal computer) era, Singapore was home to manufacturing for many of the more advanced parts in our computers. However, as the PC has become commoditized, this part of the economy has faded. Singapore also decided that it would boost the local IT industry by requiring local storage of almost all data for financial firms. In the era of the global “cloud,” this has become a real problem for Singapore. These rules make it difficult for companies to choose to keep global data in Singapore, because it could be caught by the local regulatory regime. However, it requires separate local infrastructure that adds to costs and reduces the incentives to innovate locally. With energy and cooling costs an important driver of the economics of datacenters, Singapore needs to ensure that it plays to its comparative advantages. Access to data, its use and protection rather than physical “location” needs to be the new focus.
Singapore has always been a vital shipping hub and has done everything it can to keep this industry alive. However, the recent slump in freight rates has not been kind to Singapore-headquartered shipping companies. By contrast, Hong Kong’s port has been under constant competitive threat from neighboring Yantian in Shenzhen and other regional ports. This has constrained the growth and investment of the port, but actually increased the importance of the city as a regional logistics center and base for managing the network of ports in the region.
Singapore put many eggs in the basket of becoming a financial center, offering a raft of subsidies and incentives to companies that choose the city as a base or regional headquarters. Singapore has particularly favored large financial firms that can become big employers. Given the low tax regime, location and rule of law, Singapore would always have had a key financial services role. However, it has found that since the financial crisis, the sector has cut back and the fintech revolution threatens the behemoths that they encouraged.
Contrast Singapore’s focus on large firms with other jurisdictions. The Cayman Islands offers an effective low-cost regime for fledgling hedge funds and Bermuda has always harbored insurance and reinsurance, from the smallest to the largest firm.
Hong Kong does not have an ideal regime in this area. The licensing regime administered by the local SFC (Securities and Futures Commission) has become increasingly onerous and arbitrary, raising the number of full-time staff required for start-ups, lengthening approval times and adding to start-up working capital requirements. The system does not easily deal with the separation of research or advice from execution or trading. Licensing processes are bound by license categories or “types” that are less appropriate as the dynamic industry adapts to customer needs. By contrast, start-up funds and providers of financial advice are increasingly finding the processes in the U.K. efficient, effective and commercially realistic.
Hong Kong officials have also chosen target industries and sought to boost their development – many the same industries as selected by Singapore and every other regional center. Yet these measures have been frankly ineffectual and that has been a good thing.
Restrained by prudent budgeting, legislative gridlock, rule-driven officials and residual respect for the market, Hong Kong has been less effective at creating market-distorting, privileged industries.
Other offshore financial centers can be more realistic. With a lesser endowment of population or location, the focus on reinforcing comparative advantage is stronger than grand and fashionable schemes for governments to design new industries.
China has provided a competitive check on government largesse in Hong Kong. It makes no sense to subsidize our ports and shipping, when on the doorstep lies Yantian with real competitive advantages. Why create an industry policy for financial services, when some of the most interesting innovations in the world are happening in China’s second financial center in Shenzhen. Instead of closing its doors, Hong Kong companies have been able to nimbly integrate with these developments in China. Hong Kong has avoided gross misallocations of capital. Integration with China and the region has been largely driven by private enterprise and very real comparative advantages.
In this global election season, financial centers must avoid the siren song of promises to close borders and redesign industries, culture and relatively free markets. That hubris, often founded in unjustified fear, will simply reduce growth.