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Alicia Garcia Herrero

How does Hong Kong fare as international financial center


Comparing Hong Kong with Singapore: Which one is larger? Hard to tell

Hong Kong and Singapore are not really large international financial centers when compared with those of major economies but they clearly are for the size of their economies. Although it is argued that Hong Kong and Singapore have their own comparative advantage in China and Southeast Asia, respectively, they have been competing with each other for decades to be the next largest international financial center after Tokyo.

The two have their comparative advantage in two different sectors: the stock market –namely IPOs - in Hong Kong and derivatives and foreign exchange markets in Singapore. When looking at the banking system as a whole, and not only at the off-shore activities, Hong Kong continues to be bigger, according to BIS statistics, but Singapore is catching up. In fact, Hong Kong’s consolidated bank claims (shown in Graph 4 as external position) rose steadily from 250 billion USD in the beginning of 2003 to 450 billion USD at the end of 2009 (i.e., 11% yearly increase) while Singapore’s consolidated bank claims (Graph 5) increased from 130 billion USD to 260 billion (i.e., a 14% annual growth).

When we looked into the off-shore banking sector only, the size is quite similar. In fact, external assets of banks in Hong Kong and Singapore are at about 750 billion USD in 2009. However, external total liabilities are quite different. In Hong Kong, external total liabilities were about two third of external total assets in the past decade; in contrast, in Singapore, external total assets and liabilities were almost the same. This means that banks in Hong Kong have financed their expansion abroad from Hon Kong while this is not the case of Singapore. The difference between the two probably stems from Singapore’s much stricter offshore banking regulation. As for the evolution of external bank assets and liabilities, both banking centers have grown at a similarly rapid speed during the last few years; in fact their external position has doubled until the beginning of the global crisis and have stagnated since in Hong Kong, or even fallen somewhat in the case of Singapore.

If we look at broader definitions of size, both Singapore’s and Hong Kong’s banking sectors tend to rank close in existing international surveys. A recent example of such survey is the one conducted by the City of London (Global Financial Centers 2010) ranks Singapore and Hong Kong as global and deep financial centers, together with Chicago, Frankfurt, London, New York, Toronto and Zurich. Such classification is based on three key criteria: degree of connectivity (how well known a center is known around the world); diversity (how many industry sectors flourish in each center); and “specialty” (the quality and depth of certain sectors offering financial sectors). Notwithstanding Hong Kong’s recognized merit, the survey shows that it has been losing some of the clout as shown by its decreasing ranking in business environment, human capital, infrastructure, general competitiveness and market access. The most rapid fall in the ranking actually refers to human capital.

Hong Kong banking center more bank oriented and Singapore more corporate-oriented

When examining the components of external total assets in Hong Kong and Singapore, financial sector related assets account for 80% of external total assets for banks in Hong Kong on average, and non-bank assets account for the rest (Graphs 6 and 7) . The numbers for Singapore are similar to Hong Kong prior to 2005 but the financial sector related assets rapidly went down thereafter below 70% in 2009, while non-bank assets’ share went up to about 30%, accordingly (Graphs 8 and 9). This reflects Singapore’s efforts to become a large corporate banking center as opposed to Hong Kong which is a more pure banking sector (with most transactions happening between banks).[2]

This could possibly have negative consequences for the future of Hong Kong is a far as it leads to a less diversified economy. However, it may be beneficial in terms of attracting foreign financial institutions which are hesitant as to which financial center to choose when operating in Asia.

Subsidiaries versus cross-border lending

Other than size, Hong Kong and Singapore banking centers differ in as far as Hong Kong attracts more assets from assets from foreign banks’ subsidiaries (60% of total foreign bank assets as shown in Graph 10) while Singapore attracts more cross border bank loans (over 60% of total as shown in Graph 11). In fact, cross border bank loans into Hong Kong and Singapore are actually very similar in absolute size so the difference lies on the role of subsidiaries, much more active in Hong Kong than in Singapore.

The difference in the composition of bank flows has been found to make a difference in terms of the origin of bank assets but also in terms of their stability. In particular, Garcia-Herrero and Martinez Pería (2006) show empirical evidence of local bank assets (i.e., those from foreign banks’ subsidiaries in a certain country) being more stable than cross-border bank financing. In we now turn to the experience of the recent global financial crisis, cross border funding in Hong Kong and Singapore fell 20% and 22% respectively between the second quarter and the fourth quarter of 2008. Local assets by foreign subsidiaries, though, fell much less (7% in Singapore) or even grew by 11% in Hong Kong during the same period. We can see that in 2009 it went back to its trend in Hong Kong, much quicker than in Singapore where it barely increased (see Graph 12 and 13).

This is in line with the literature consensus on the higher stability of subsidiaries as opposed to cross border flows and favors Hong Kong given its composition of bank assets.

Hong Kong banking sector very dependent on British banks, Singapore much more diversified

Hong Kong and Singapore banking centers are dominated by British banks followed by euro-zone ones. Asian banks, mostly Japanese banks, rank third and US ones only fourth. The weight of British banks has increased substantially over time, although it was always large while the weight of euro-area banks is decreasing over time (Graph 14). The origin of banks located in Singapore is much more diversified (Graph 15).

In conclusion, Hong Kong is still a larger banking center in absolute terms but it looks much more similar to Singapore when focusing on the off-shore market. The fact that Singapore may be catching up as an international banking center should be seen by Hong Kong authorities and other operators as a signal that measures have to be taken for Hong Kong to lure international banks to continue to operate in Hong Kong.

On the positive side, the fact that Hong Kong has a very large number of foreign banking institutions and that it is more concentrated on banking and not on direct borrowing from corporates should clearly help. Furthermore, the fact that Hong Kong is less dependent on bank branches and more on bank subsidiaries should also imply –according to existing literature – less volatility of foreign banks’ exposure to Hong Kong.

These positive aspects about Hong Kong are mitigated by the looser definition of off-shore versus on-shore banking activities in Hong Kong versus Singapore. In fact, Hong Kong have financed one third of external operations with local funds while liabilities and assets from non resident are perfectly matched. The crises experienced by some off-shore financial centers in the past (an example would be Uruguay in the 1980s) warns against having large open positions between non-residents’ assets and liabilities

3. Hong Kong’s special niche: China’s offshore banking center

The comparison between Singapore and Hong Kong may be interesting but hides a very important fact, which is the two city-sates’ different relation with China. This, in fact, may change any conclusion we may have taken merely looking at the past.

Hong Kong is set to benefit more from the modernization and internationalization of mainland’s financial system, at least in the near term. Hong Kong has a clear advantage of geographic and cultural proximity, as well as very close political ties. Within that proximity, Hong Kong’s skilled labor, strong regulatory environment, and high quality of business services are just what mainland is short of. We should, thus, expect Hong Kong to continue to provide financial expertise to China and the development of China’s financial system. In return, Hong Kong’s position as a financial and banking center and gateway to China will be strengthened with China as its main hinterland.

Hong Kong’s specialty in terms of its relation with China is demonstrated through seven different Closer Economic Partnership Arrangements (CEPA).These agreements give Hong Kong banks an easier access to China in several ways. First, less capital is required to open a branch in China, less time is needed to offer RMB services and it is also easier to have an incorporated bank. All these advantages basically imply that foreign banks should find it interesting to be placed in Hong Kong as a gateway for China. The fact that the number of foreign institutions has remained stalled during the last few years (see Graph 2 above) does not seem to support this hypothesis. The reason behind might be that foreign institutions actually prefer to access the Chinese market directly as shown by the rapid growth of foreign financial institutions in Shanghai.

Hong Kong’s niche market as regards China also goes in the opposite direction, i.e., Chinese banks opting to operate in Hong Kong for their offshore services. Beyond culture and language reasons, an important factor which explains the growing presence of Chinese banks in Hong Kong is the peculiar way in which China is opening its capital account. In fact, Hong Kong has so far been only place where you can offer a wide range of RMB services (from deposits for residents to RMB settlements for trade-related operations to issuance of RMB denominated bonds).[3]

It goes without saying that this advantage should favor Hong Kong’s role as offshore center. However, it will also push Hong Kong towards being more and more dependent on China’s financial services and less so on European financial services. The key issue is whether Hong Kong will manage to maintain that comparative advantage (i.e., attracting banking business from China) even after China’s capital account is fully liberalized.

4. Hong Kong and Shanghai: complementary more than competitors

Hong Kong, as international banking center, has two key challenges for the next few years: One is to continue to be a large Asian banking center and to be able to withstand the competition coming from Singapore. To that end, maintaining international standards and human capital seems key. The other key challenge is to adapt to Shanghai’s becoming an international financial center on its own.

In fact, Shanghai’s achievements have attracted the world’s attention in past years, especially when its GDP passed Hong Kong’s in 2009. Chinese central government and Shanghai municipal government both aim at establishing the city as an international financial center. However, this does not mean that Hong Kong’s position have to be replaced by Shanghai. On the contrary, Hong Kong could actually benefit from Shanghai’s growth if it is to find its niche.

Hong Kong’s primary role should be to serve as a main international offshore financial center for China, Asia but also the Globe. On the other hand, it could also facilitate foreign capital into the mainland. Instead, Shanghai main target should be to become a major domestic financial like Tokyo (or actually bigger). Hong Kong should also remain key to conduct financial services between the Pearl River Delta and the rest of the world.

In conclusion, Hong Kong should be complementary with the development of Shanghai as major banking sector. This is also what history according to McCauley and Chan (2007). Their complementarity should be more the case the more slowly China’s capital account liberalization proceeds. In fact, Hong Kong will benefit more than any other financial center from the controlled outflows of funds from China. This is due to China’s better knowledge of Hong Kong’s financial system.

5. Conclusions

The banking industry is key for Hong Kong’s economy but Hong Kong is not a big international banking center, at least not when compared with other centers belonging to large economic areas, such as New York and, to a lesser extent, Tokyo. Within Asia, Hong Kong has a larger banking sector as a whole but similar if we focus on the off-shore side of it and growing faster than in Hong Kong. Furthermore, Singapore is being more active as a banking platform for international corporates while Hong Kong remains larger in terms of banking relations. In fact, Hong Kong continues to have one of the highest concentrations of large banking institutions in the world.

Such international banking platform, together with the increasing local presence of Chinese banks, offers Hong Kong a unique opportunity to become a major banking center, probably the largest off-shore center in Asia. Whether Hong Kong will reap this opportunity will very much depend on how it navigates among the opportunities that China offers in is current situation of capital controls without losing its international clout. In fact, Hong Kong banking system should benefit from the business from China coming off-shore due to capital controls (including RMB settlements but also issuance of RMB-denominated bonds). However, it should also look for non-Chinese related banking business so as to ensure that it remains distinguishable from Chinas’ domestic banking system in the years to come.


Bank of International Settlements (2010), “Consolidated banking statistics”, internet access via

Bank of International Settlements (2010), “Locational banking statistics”, internet access via

City of London (March 2010), “Global financial centres 7”

Garcia-Herrero, Alicia and Soledad Martinez Peria (2006), “The mix of international banks’ foreign claims: Determinants and implications” Journal of Money and Banking, Vol 31, Issue 6, pp 1613-163

The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.

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Alicia Garcia Herrero

Alicia Garcia Herrero

Alicia Garcia Herrero is Chief Economist for Asia Pacific at NATIXIS. She also serves as Senior Fellow at European think-tank BRUEGEL and research fellow at Real Instituto El Cano. Alicia is currently adjunct professor at Hong Kong University of Science and Technology (HKUST). She holds a PhD in Economics at George Washington University.

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