Global finance is facing an Eastward shift, with Asian cities such as Singapore, Hong Kong and Shanghai now ranked among the world’s leading financial centres.

The recently-released Global Financial Centres Index (GFCI) 17 revealed that Hong Kong and Singapore remain, respectively, the third- and fourth-most competitive financial centres in the world. The GFCI ranks the cities based on five major areas of competitiveness: Business environment, financial sector development, infrastructure, human capital and reputational factors. Crucially, what underpin these five areas are good governance and policy effectiveness. The rise of Asia’s financial centres is, therefore, predicated upon good governance.

Late last month, chairman of Abu Dhabi Global Market (ADGM) Ahmed Ali Al Sayegh declared that the Swiss banking model and its reliance on bank-client secrecy are dead. He also argued that the Singaporean model of private banking, with its transparent way of dealing with tax evasion issues, represents the way forward.

The ADGM has indicated its desire to learn from the Asian model of financial governance, not least by appointing a Singaporean — former Singapore Exchange regulatory chief Richard Teng — as its chief executive.

Asia’s growing strength in global finance is, therefore, marked by the strength of both its financial markets and governance model. This raises two important questions. How have Asian financial centres developed their governance regime and what more can players such as Singapore do to harness their competitive advantage in this area?

LEARNING FROM THE PAST

Good governance does not occur overnight. The robust regulatory regime and effective financial policy mechanisms that characterise the governance model of many Asian financial centres were developed from the region’s experience with the 1997 Asian financial crisis.

Emerging from the aftermath of the crisis, Asian nations sought to improve their financial regulatory infrastructure. This ranged from national-level efforts at stepping up regulatory oversight to multilateral initiatives such as the Chiang Mai Initiative, which provides a pool of liquidity for nations facing currency attacks.

Financial regulators in the region have also been proactively implementing international regulatory standards such as Basel III.

As a consequence, Asia was able to recover quickly from the 2007-2008 global financial crisis. In contrast, the Western world is still grappling with the implications of the crisis. In fact, the crisis had emanated from a lack of regulatory oversight in Western financial centres that had led to “regulatory capture” — or the infiltration of regulatory agencies with private interests — and the proliferation of “too-big-to-fail banks”.

However, good governance is not simply a product of history. Ensuring good governance also requires commitment and hard work on the part of governments.

GOVERNANCE AS DRIVER OF SUCCESS

Singapore has long been regarded as a transparent and reliable destination for investment. Indeed, the GFCI 17 ranks Singapore third for its business environment, which is measured by the rule of law and level of corruption. Singapore is also ranked first in the World Bank’s Ease of Doing Business Index.

Importantly, both rankings highlight the importance of regulation in ensuring a financial centre’s attractiveness to businesses and investors. Singapore’s robust and transparent regulatory framework is, therefore, a key pillar of the good governance.

However, the Republic will continue to face the challenge of keeping up with the pace of financial innovation and identifying unethical industry practices. While it has the fundamentals of good governance, it still needs to work closely with banks and other financial institutions to identify emerging threats to governance and encourage industry compliance with regulations.

Governance is becoming an increasingly important driver of success. The points of differentiation between financial centres are becoming increasingly marginal, as financial centres emulate the comparative advantages of their competitors. While Abu Dhabi seeks to emulate the success of Singapore, Shenzhen’s proposed financial services hub in the Qianhai Bay Economic Zone has been touted as a “mini Hong Kong”.

The highly globalised nature of finance and easy replicability of traditional financial sector policies such as sectoral incentives, subsidies or the implementation of technological enhancements to trading platforms has made competition fluid and comparative advantages difficult to sustain. But despite their declining margins of return, economic and sectoral comparative advantages continue to preoccupy policymakers and researchers alike.

As a consequence, policymakers tend to be overly focused on emulating the policies of other successful financial centres. For instance, Shanghai has relied on the establishment of its free trade zone to stimulate the sort of trade-driven financial sector growth that has contributed to the success of Hong Kong and Singapore. But financial activity within the zone remains stunted by a lack of regulatory transparency. There is thus a need to build on the foundations of good governance, before other policy measures are put into place.

Good governance is in itself a key comparative advantage. With economic comparative advantages becoming increasingly replicable and hence difficult to sustain, financial centres of the future will need to focus on developing governance as a comparative advantage. Prioritising this contributes to sustainable growth by enhancing a financial centre’s attractiveness to investors and ensuring its resilience in the face of crisis.

ABOUT THE AUTHOR:

Woo Jun Jie is a postdoctoral research fellow at the Singapore University of Technology and Design.