The similarities between Hong Kong and Singapore are striking. Both are gateways to much larger Asian markets, have ambitions in the wealth management space and are positioning themselves as international fintech hubs. Kimberley Long looks at how the two are working together to punch above their respective weights.
Hong Kong and Singapore are in constant competition, with both laying claim to being the leading financial centre in the Asia-Pacific region. Their economies are similar in size: in 2017, Hong Kong recorded a gross domestic product (GDP) of $3.41bn, compared with Singapore’s $3.24bn. Both are considered attractive places to live, ranking high in quality of life surveys. In the most recent survey by human resources company ECA International, for example, Singapore was found to be the most liveable city in the world, while Hong Kong came in 41st. Each looks to the other as the location to beat.
Yet amid the competition is also a high level of interconnectedness. Hong Kong was Singapore’s second largest export market in 2017 (after China), with $46bn-worth of imports, according to data from World’s Top Exports. In reverse flows the same year, Singapore imported $11.2bn of Hong Kong’s exports.
Better together?
Interestingly, Hong Kong and Singapore are strengthening their ties to increase their regional and global relevance. For example, the Hong Kong Monetary Authority (HKMA) and the Monetary Authority of Singapore (MAS) have partnered on the development of a distributed ledger technology (DLT) platform for trade finance, dubbed the Global Trade Connectivity Network (GTCN). With many DLT initiatives being launched across the financial services industry, the move signalled that the two regulatory authorities were ensuring the continued success of their bilateral trade into the digital age.
The platform will support flows across Singapore-Hong Kong trade channels. While many countries in the region are looking on with interest, this move gives Hong Kong and Singapore a first-mover advantage. And having the regulators’ backing means the platform will set a standard for the trade finance industry.
HKMA and MAS are working with a consortium of banks. For example, HKMA is working closely with HSBC, Standard Chartered, Bank of China HK, Hang Seng Bank and Bank of East Asia, while MAS has DBS, UOB, OCBC and MUFG working on the project. The likes of IBM, R3 and Mastercard have also been invited to help develop the platform. The GTCN is expected to go live in the first half of 2019.
A HKMA spokesperson says the GTCN will provide a common platform and encourage other trading partners to participate. “Accordingly, the cross-border platform will adopt an open architecture that aims to accommodate different types of digitalised trading standards, and connect trading partners and private sector-led consortia from around the globe,” adds the spokesperson.
Developing the platform in this way benefits Hong Kong and Singapore, making both players stronger in a strategic sense in regional trade and trade finance. DLT is a faster and more secure way to exchange trade finance information than the existing paper-based system. As both jurisdictions are important reciprocal trade partners, alleviating the pain points related to cross-border trade will be of mutual benefit when their industries are looking for new export and import opportunities.
Duncan Fitzgerald, a partner at PwC Hong Kong, believes that having an open DLT platform tackles one significant hurdle faced in the development of this new technology. “One challenge when using blockchain is the many different blockchain protocols [and networks], including Ethereum, Eos and Bitcoin. These do not interact with each other very well, so it will be important for future developments to deal with inter-connectivity of the different blockchains,” he says.
A paperless chain
The early focus in the development of the GTCN is on reducing the amount of duplicate invoice financing. This is when a supplier sends the same invoice to several different financial institutions, but changes the details of the invoice to receive additional funding on the same invoice. This is more likely to occur in paper-based transactions, whether through deliberate fraud or simple human error.
However, a DLT system is transparent in that all transactions are public, traceable and immutable. Invoices can be permanently stored on the network and accessible to the stakeholders, so duplicates will be flagged up, alerting banks if multiple invoices are made for the same trade. This will result in a reduction in fraud.
Even before the GTCN has gone live, other jurisdictions and potential partners have expressed interest in joining the network to make trade more secure, according to a MAS spokesperson.
The spokesperson adds that this fits in with the long-term ambitions of the partnership, saying: “Within the Hong Kong-Singapore corridor, movement of goods and transfer of documentation will become more efficient and secure. As a cross-border infrastructure intended to digitalise and therefore facilitate trade and trade finance, the vision for the GTCN is to attract more participants not just from Asia, but to be a truly multilateral network with international participation.”
The next phase of developing trade between Hong Kong and Singapore could come in the shape of improvements to the flow of funds, using technology that is already in place. Imad Abou Haidar, managing director for Asia-Pacific at technology company Finastra, says: “Hong Kong’s Faster Payment System and Singapore’s Fast and Secure Transfers further advance the two jurisdictions towards cashless societies. I think the next step could be to address the slow, expensive and opaque cross-border payments systems that exist both between Hong Kong and Singapore, and on that note, globally. “
To move forward, Mr Haidar believes further assistance from the regulators is required. “Regulators can provide trust and compliance to assure businesses and individuals. Regarding Hong Kong and Singapore, it would be interesting to see how collaboration between the two financial hubs can increase cross-border payments efficiency and improve customer experience in the region,” he says.
Building a bridge
The GTCN was the first joint project announced following a deal made between MAS and HKMA in October 2017 to foster stronger fintech links. “MAS and HKMA have an existing co-operation agreement to collaborate on joint innovations, share information on fintech trends and refer fintech companies to each other’s markets,” says the MAS spokesperson.
“Both authorities have set out milestones towards the development of the GTCN, and will continue to work together, including in developing agreed standards, with the support of our banks.”
While both jurisdictions are working together to promote emerging technologies, Singapore was the first one to take steps in developing DLT use cases. It is perhaps for this reason that Singapore ranks third on the Bloomberg 2018 Innovation Index, while Hong Kong is in 37th position.
Rex Wong, managing director of Blockchain Investment Fund and founder of the Hong Kong Blockchain Industry Association, believes that although Singapore moved first, Hong Kong is taking strides to catch up. “Singapore has a more innovative attitude towards blockchain development. Hong Kong has been slower to take up the opportunities and did not really start to explore the potential until 2018. Since then Hong Kong has been more active. One example is the Hong Kong banking regulator working with the local banks to develop a trade finance platform on the blockchain,” he says.
HKMA launched eTradeConnect, a DLT-based trade finance platform developed by a consortium of 12 banks in Hong Kong, in October 2018. Mr Fitzgerald at PwC adds that working with local banks has helped Hong Kong to take a lead in tackling fraud within its own jurisdiction. Hong Kong is also looking at other use cases for DLT.
“Blockchain can have more applications than just trade and [moving] money,” says Mr Fitzgerald. “For example, blockchain is already being used in the luxury goods industry to protect against counterfeit products. And with recent scandals around baby milk in China and vaccinations [in Hong Kong], these are more use-cases where using blockchain could help prove authenticity and provenance of important and sensitive products.”
In competition
While working out the mutual benefits of co-operation, Hong Kong and Singapore are still finding themselves in direct competition. More specifically, both have been trying to attract prospective fintech unicorns to list on their respective stock exchanges by allowing dual-class listings for the first time in 2018.
In addition, the wealth management sector has become an exciting market for potential expansion in both jurisdictions, on the back of the increasing affluence across Asia. An important part of this expansion is the rise of the family office. Beyond wealth planning, high-net-worth families are increasingly looking for advice on estate planning and philanthropy. They are also looking for ways to best manage their offshore funds.
Singapore’s importance is growing in the wealth management space. Hong Kong-based Raffles Family Office, for example, established a Singapore branch in October 2018. While the move has expanded the company’s operations to a new jurisdiction and gives it access to clientele across Asia, including Malaysia and India, the move was in part prompted by the request of existing customers. And since these customers hold a total of $1.5bn with the company’s Hong Kong office, there was considerable incentive to follow their wishes.
Chi Man Kwan, CEO and founder of Raffles Family Office, says the reason for the move came from customers wanting to hold their funds beyond the reach of the Chinese mainland. “Hong Kong clients are, in large part, made up of families in mainland China. But as China becomes more involved and Hong Kong is seen as being [less] independent, clients want to move their assets to Singapore. They also want there to be a physical presence [in the jurisdiction],” says Mr Kwan.
Hong Kong is also looking to attract more family offices to expand its wealth management sector. The Hong Kong Private Wealth Management Report 2018, conducted by the Private Wealth Management Association and KPMG China, found 41% of wealth managers are expecting family offices to become the most significant drivers for growth in the wealth management industry in the special administrative region, second only to greater opportunities in mainland China. Respondents suggested there was a need to improve the current regulatory environment, as currently family office investors are treated in the same way as retail clients.
Established presence
In Singapore, the attractions for wealthy individuals are more established, as they can gain permanent residency through the Global Investor Programme. Those who invest a minimum of S$2.5m ($1.84m) through a business or a single family office can gain residency, as long as they also have an investment portfolio and significant family assets.
Mr Kwan believes that if Hong Kong wants to grow its wealth management sector, it should take some tips from its Asian rival. “While the Hong Kong Exchange and the government are looking to promote the [wealth management] industry, the regulations are getting tighter and making it more difficult. There is not much space for it to grow and it is a more difficult experience.”
Suggested improvements include a range of changes to Hong Kong’s tax system, which would bring the special administrative region’s regime closer in line to that of Singapore.
Mr Kwan says it would be beneficial if potential changes could go a step further and the two jurisdictions could agree a level of equivalence. “If regulations were more cohesive between the two jurisdictions, this would help to foster greater growth in the [wealth management] industry. Given that Hong Kong is looking to promote the industry and has the same know your customer processes and risk profiles [as Singapore], it would make it easier if HKMA would accept the MAS licence. This would attract more wealth managers to Hong Kong. For example, the MAS licence could allow managers to operate for a couple of years [in Hong Kong] to get the business established,” he says.
Mutual protection
For Hong Kong and Singapore, one of the main benefits of working together is access to markets much bigger than their own. Mr Kwan says: “Both [jurisdictions] need to play to their strengths: Hong Kong gives access to China, Singapore to the rest of south-east Asia.”
For Singapore, the potential to tap into the Chinese market unencumbered presents a huge opportunity for growth. On the other hand, Hong Kong relies heavily on China as an export market and could face problems if the trade tensions between China and the US escalate. Therefore, having greater access to south-east Asia could help Hong Kong to further diversify its trade relations.
With the uncertainty hitting Europe around Brexit, this could be a chance for the Hong Kong and Singapore regulators to step in and find ways of making both locations more attractive for the global financial industry. While Hong Kong and Singapore take up only a small part of the Asian asset management market, according to figures from Raffles Family Office, new opportunities to seize a greater proportion are opening up.
Mr Kwan says: “Both Singapore and Hong Kong are lagging behind Europe. While they have about a 5% market share of the entire Asia external asset management market, Europe has 30%. If the two places could work together the percentage would go up faster. Hong Kong and Singapore need to collaborate to be viable competition to Europe.”
