As small city-states, Hong Kong and Singapore have always had to deal with the economic constraints associated with the lack of a natural hinterland. While both cities have managed to leverage their strategic locations to become leading global financial centres, their continued success at the interstices of global financial flows will require access to an economic hinterland.

Such a hinterland exists. Hong Kong and Singapore are situated within the proximity of growing economies that require access to global finance, namely China and South-east Asia. Despite the globalisation and digitisation of finance, the success of a financial centre continues to hinge on its proximity to growing markets. This is why financial centres still exist as specific localities.

Hong Kong and Singapore will need to develop strong links with their economic hinterlands to tap the growing demand for financial services in China and South-east Asia.

Linking stock markets

A first step towards establishing such links is through inter-exchange links on the stock markets. Linked stock exchanges allow investors to trade in the stock markets of both countries, avoiding brokerage costs and hence contributing to greater liquidity.

Driven by its geographic, economic and political proximity to China, Hong Kong is seeking to establish closer links with mainland stock markets. For instance, the Shanghai-Hong Kong Stock Connect was launched late last year. While it faces operational problems related to ownership of securities and the settlement of trades, the Hong Kong stock exchange has recently announced that it will release an upgrade that promises to address these issues.

Furthermore, Hong Kong intends to establish a Shenzhen-Hong Kong stock connect scheme within this year. This will largely target retail investors trading in small-cap stocks and exchange-traded funds. Both the Shanghai and Shenzhen stock connects provide Hong Kong with access to growing Chinese markets. More importantly, Hong Kong can establish itself as a gateway to China for global investors. Shanghai is currently the largest financial centre on mainland China, while the Shenzhen bourse is the fourth-largest in the world by turnover.

Not to be outdone, Singapore also plans to establish a stock market link with Taiwan by the first half of this year. A letter of intent was signed by the two exchanges late last year. Singapore is also looking to establish closer links with Chinese markets, particularly through its continued development as an offshore yuan centre. This involves expanding the suite of yuan-denominated financial products, such as the foreign exchange futures contract on the yuan, which was launched last year.

POSITIONING SINGAPORE AS ASEAN’S FINANCIAL CAPITAL

While Singapore must continue to seek opportunities for tapping into China’s continued rise as an economic superpower, the reality is that the city-state is geographically situated in South-east Asia. This makes the South-east Asian region its economic hinterland. The gross domestic product of Association of South-east Asian Nations (ASEAN) stands at US$2.3 billion (S$3.14 billion), making it the seventh-largest economy in the world.

Fortunately, Singapore enjoys close relations with the region, especially through its role as a founding member of ASEAN. Both Singapore and its ASEAN partners have been working at establishing closer economic and financial ties within the region, particularly through economic integration. The ASEAN Economic Community (AEC) is slated for completion by the end of the year. The AEC aims to establish ASEAN as a single market for the free flow of goods, services, investments and labour, enhancing ASEAN’s competitiveness in the global economy.

The economic consolidation of ASEAN benefits Singapore immensely. As noted in public intellectual Kishore Mahbubani’s new book Can Singapore Survive?, Singapore has always benefited from the regional stability and economic opportunities provided by ASEAN. Foreign Minister K Shanmugam has also noted that Singapore will benefit from the successful formation of the AEC by becoming the New York of ASEAN. Singapore must, therefore, seek to establish itself as the financial capital of ASEAN and engage the South-east Asian region as its economic hinterland. There are several ways it can do this.

First, it can take its cue from Hong Kong and establish more stock exchange links with its neighbours. In fact, it has begun to do this. The Singapore Stock Exchange recently signed an agreement to enable cross-border capital raising with the securities market authorities from Malaysia and Thailand. However, other ASEAN members may not be ready to participate in a regional link yet. Singapore should consider establishing more bilateral stock exchange links with other ASEAN markets.

Second, Singapore can contribute towards the provision of infrastructure finance to its rapidly urbanising neighbours. The Asian Development Bank said Asia’s infrastructure requirements have been projected at US$800 billion annually until 2020. Singapore can leverage its deep capital markets and its connectivity to the global financial markets to channel capital towards ASEAN’s infrastructural needs.

Finally, Singapore’s policymakers and regulators can contribute to financial capacity-building in ASEAN by sharing their expertise and lessons learnt. While existing efforts such as the Roadmap for Monetary and Financial Integration of ASEAN (Ria-Fin) and the ASEAN Finance Ministers’ Meeting have sought to accomplish this at the regional level, Singapore can work at the bilateral level by directly engaging with financial regulators to develop shared expertise and regulatory capacity.

Financial centres such as Hong Kong and Singapore need to explore and develop closer links with their economic hinterlands, China and ASEAN, respectively. Such links will allow both cities to tap growing demand for financial services in emerging Asian markets. More importantly, Hong Kong and Singapore play an important role in facilitating economic development among its neighbours, by providing them with access to financial capital.

Financial centres need to engage their hinterlands to guarantee their continued survival and success. No city is an island, figuratively speaking at least.

ABOUT THE AUTHOR:

Woo Jun Jie is a Postdoctoral Research Fellow at the Singapore University of Technology and Design.