The Chinafication of Hong Kong has global CEOs and investors eyeing alternative financial capitals in Asia. Not surprisingly, the smart money is on Singapore or Taiwan.
What is startling, though, is how little attention – if any – relocation teams are paying to East Asia’s bigger economic powers: Japan and South Korea.
The risks bearing down upon Hong Kong, branded “Asia’s world city,” have been in plain view over the last 10 days. We have seen Beijing announce that it will impose a national security bill imposed on the city by fiat. And the US government is moving to alter its classification of Hong Kong as an economy separate from the Mainland’s opacity and legal system.
The latter step puts hundreds of billions of dollars of trade in jeopardy. The US and Hong Kong alone do about $66 billion of businesses annually. Xi Jinping’s Hong Kong power grab augurs poorly for corporate transparency, basic political freedoms and economic growth.
It will give investors pause about listing in Hong Hong. It also has multinationals mulling new headquarters. How far off, for example, is a move to enact by fiat, the extradition bill that fueled 2019’s massive protests?
Australian giant Macquarie Group is already walking away from office space in IFC, one of the city’s most exclusive addresses. Japan’s Nomura also plans to dial down its Hong Kong office space rental. These are just early signs of finance companies having second thoughts about Hong Kong’s “green zone” status in the greater China region.
If not Hong Kong – where?
Stable, predictable Singapore is an obvious Plan B for market players. So is Taipei, which has already put out the welcome mat for Hong Kong protesters seeking refuge.
Taiwan’s cultural similarities, proximity and $600 billion economy make it an attractive off ramp for multinationals worried about President Xi remaking Hong Kong in China’s image. The same goes for foreign media outfits realizing they need to reconsider the placement of China-region bureaus.
Why are Tokyo and Seoul not in this game? After all, Japan’s Prime Minister Shinzo Abe has been vocal about morphing Japan into a financial mecca.
In September 2013, nine months after taking office, he took his Japan-is-open-for-business pitch to the floor of the New York Stock Exchange. In 2016, Tokyo Governor Yuriko Koike convened a 15-member panel of experts to turn the metropolis into the “London of the East.”
The result was an uncreative mix of special enterprise zones, minimally reduced red tape, slightly loosened visa restrictions, more international regulatory environments and tactics designed to make business easier to transact. Implementation was glacial.
On Abe’s watch, Shenzhen came into its own, meaning Tokyo had to compete with Hong Kong, Shanghai and yet another burgeoning Chinese city with a stock exchange. Meanwhile, Abe’s government slow-walked bold reforms to boost Tokyo’s street cred in financial circles.
Japan mistakenly believed hosting the 2020 Tokyo Olympics – now postponed thanks to Covid-19 – would magically upgrade its attractiveness as a destination for capital. Instead, Tokyo saw a steady exodus of global banking names. During Abe’s tenure, the Bank of America Merrill Lynch, Citibank, HSBC, Royal Bank of Scotland, Societe Générale, Standard Chartered and myriad others, either left or sharply reduced Japan operations.
The reasons why will be familiar to Korea investors. Since 2008, a succession of governments talked big about pulling more economic energy Seoul’s way. Other locations – including, bizarrely, rural North Jeolla Province, rolled out plans to create their own global market centers.
North Jeolla is teeing off the relocation of Korea’s National Pension Service, the world’s third largest public fund, to the countryside outside the local city of Jeonju. The NPS move was part of a government-led decentralization drive, but the little rural city shows no signs of becoming a global hub of high finance. Nor does anywhere else in the country.
Hardware vs software
The problem for Japan and Korea is that both excel at hardware, but lag in the economic software department.
Both have storied pasts in recent decades as manufacturers that have taken the inventions of others and turned them up to 11. These skills, make no mistake about it, are plenty profitable. They have propelled both nations from the ashes of wars to Northeast Asia’s most advanced economies. Every country in Asia, including China, wants its own Toyota or Samsung.
Yet the void Hong Kong may be about to leave reminds us how bad Japan and Korea can be at free-wheeling finance, welcoming hedge funds and providing regulatory certainty. Both have moved glacially to end cross-shareholdings between friendly companies that stymie innovation, and in both countries, there are any number of takeover defenses.
It may be 2020, but foreign activists still have a near-impossible time getting their voices heard: Think Daniel Loeb’s Third Point struggling to shake up Sony and Paul Singer’s Elliott Management demanding greater transparency and returns on investment at Samsung Group.
What to do? First, realize that, yes, the financial future is Asia’s to lose, but winners must fight for relevance. “Competition remains fierce among financial centers,” says Michael Mainelli, executive chairman of that Z/Yen Group, which does an annual ranking of top market hubs.
Recent optimism about Asia “appears to reflect levels of confidence in the stability of Asian centers and in their approach to sustainable finance, which appears to be growing in its effect on the overall rating of centers,” Mainelli says. Even so, he adds, “uncertainty about trade, [and] the economic impact of the Covid-19 pandemic has led to much more volatility in the index results than is normal.”
To break through, Japan needs a bold restructuring package: lower corporate tax rates, less rigid labor regulations, more liberal immigration policies and increased English proficiency. Tokyo also must get off “Galápagos Island.”
The reference here is to a problem Japan Inc. has been trying to shake for 30 years. In decades past, Japan created new species of highly-evolved, game-changing products that thrive in the home market but not so much beyond the water’s edge. Financial Darwinism has seldom flourished in Tokyo. Executives and government bureaucrats focus more on saving antiquated businesses from extinction than letting better ones evolve.
Koike worries, rightly, that Tokyo’s financial scene has devolved into a Galápagos where “regulations and tax systems that are far from global standards have prompted the world’s financial institutions to go to Singapore, Hong Kong and Shanghai where it’s easier to do their jobs.”
Japan has the raw materials. The globe’s third-biggest economy also has its largest pool of pension assets, prints a top-three currency and is a leading provider of foreign direct investment. Tokyo is home to one of the biggest clusters of Fortune 500 companies anywhere. Yet microeconomic snags are getting in the way of a solid macro narrative.
Corporate taxes must come down drastically. Abe cut the levy 10 percentage points, but at 30.62% it’s still roughly double the Hong Kong rate. And far away above what businesses pay in Singapore and Taiwan. Nor is a top income tax rate of 55% a magnet for foreign chieftains. Ditto for Tokyo treating capital gains as income, unlike Singapore or Taiwan.
High costs are another problem. Though Hong Kong rents have topped Tokyo’s, neither the city nor the national government is doing enough to create special enterprise zones, offer office-space subsidies to startups or provide more regulatory alerts or prospectuses in English.
Neither Abe nor Koike has demonstrated a greater commitment to multiculturalism to incentivize punters to give Tokyo a try. Japan ranks behind Russia in the World Bank’s ease-of-doing-business survey – 27 rungs behind Singapore, 26 behind Hong Kong and 24 behind Korea.
South Korean President Moon Jae-in would be wise to exploit that gap with Abe’s Japan. Trouble is, virtually all of the above Japan critiques apply to Moon’s economy.
Most recently, Moon’s move to tighten international travel restrictions despite easing Covid-19 infections is a microcosm of the problem. The foreign business community is right to decry these redundant and illogical curbs that don’t apply to Koreans.
The confusion runs afoul of Moon’s claims that Korea, like Japan, is open for business.