Hong Kong versus Singapore – Why Does It (not) Matter?

By Michael Olesnicky, KPMG, Hong Kong (01/05/2019)

Twenty years ago, the SOHO area of Hong Kong was a grubby concoction of warehouses and tenements, not readily accessible because of its narrow lanes and steep hills.  To reduce the traffic flow and encourage more pedestrianisation in the Mid-Levels area, the government decided to install the world’s largest escalator system from close to the Hong Kong shoreline to the top of the residential hills, to encourage more pedestrianization.


 As luck would have it, the new escalator went directly through the SOHO area. It’s unclear whether the escalator succeeded in reducing traffic volumes, but one thing it did do was to make SOHO more accessible. The immediate result was that a few bars and restaurants established themselves in the area and gradually drew customers, although the area remained niche. Then, one of the big chains noticed this trend and decided to demolish some buildings and construct a large modern bar complex in the area. The plan prompted outrage as night-lifers bemoaned that the new bar would attract all the visitors to the area and lead to the demise of the existing bars and restaurants.


 Undeterred, construction proceeded, and eventually the Staunton’s Bar was opened. It seems to have done very well since. What is noteworthy is that, despite the initial fears that this establishment would monopolise the night life in the area, the existing bars and restaurants continued to thrive as Staunton’s popularity increased. Fairly quickly, even more bars and restaurants opened and now the SOHO area is one of Hong Kong’s busiest and liveliest night-life areas.


What has this story got to do with the rivalry between Hong Kong and Singapore? Let’s come back to that later.


From time to time, I have been asked to participate in debates on a perennial topic – ’Which is better – Hong Kong or Singapore?’.  In recent years, I have declined these invitations, for two reasons.  First, most of these debates take place in Singapore where I would be likely to lose the argument. Secondly, and more seriously, there seems to be no point in debating this topic. The results are always inconclusive.


Yes, there are some differences between the two jurisdictions. For example, Singapore has anti-forced heirship legislation and Hong Kong has perpetual trusts; Singapore recently introduced variable capital companies and Hong Kong introduced open-ended fund companies shortly thereafter. But do these differences make any real difference? Do they make one jurisdiction ’better’ than the other? Does anybody really care? The answer is no. The differences between what the two jurisdictions offer are hardly earth-shattering.


Indeed, both Hong Kong and Singapore do pretty well when it comes to managing funds, setting up and administering trusts and other wealth-holding structures, and providing an array of wealth management services. Both Singapore and Hong Kong can rightfully claim to be world leaders and offer world class facilities as far as these industries are concerned.


As a result of their proximity to each other, there is a degree of perceived competitiveness between Singapore and Hong Kong. The reality is that both jurisdictions have more in common with each other than they have differences between them. Instead of debating their differences, we should instead reflect on their similarities and understand how both jurisdictions would benefit by working more closely together.


Let’s start by testing the assumption: do Hong Kong and Singapore really compete? Despite the initial perception, a cursory review suggests no. For example, when we discuss the amount of assets under management, the difference is relatively small, and the amounts are dwarfed in any event by Switzerland where the real competition for funds management lies.


When we analyse where clients are based geographically, the Hong Kong industry focuses on markets in Mainland China, Taiwan, Korea and Philippines, whereas Singapore focuses on Indonesia, Malaysia and Indo-China. Yes, there are leakages, but there is not a huge amount of competition there either.


And finally, when we talk about setting up and administering trusts, the competition between Singapore and Hong Kong is even less apparent. Singapore promotes the use of Singapore-law trusts and Singapore-based trustees. By contrast, the Hong Kong industry sets up trusts and utilises trustees anywhere except Hong Kong, in jurisdictions such as British Virgin Islands (BVI), Jersey/Guernsey, Cayman Islands and even Singapore. The reality is that Hong Kong practitioners do not routinely set up Hong Kong-law trusts and using Hong Kong based trustees except in niche cases. In fact, Hong Kong practitioners are just as likely to set up trusts in Singapore as anywhere else.  As far as trust administration is concerned, Hong Kong thrives as a back-office for trustees who are based elsewhere.


Yes, there is competition between Hong Kong and Singapore when it comes to routine trust administration, but the choice between them is usually dictated by the location of the client, which in turn determines where the client relationship is based. The choice of the applicable trust law is usually dictated by where the trustee is located or by special features of the trust law that benefit the trustee concerned.


So where is the so-called competition between Hong Kong and Singapore? All these factors suggest that the trust and wealth management businesses in both jurisdictions are synergistic rather than competitive. For both dominions, the real competition comes from jurisdictions outside Asia such as BVI, Cayman, Jersey/Guernsey and others.


Imagine what Hong Kong and Singapore could achieve if they banded together against the competition from other regions instead of focusing on the competitiveness between them. The trust and wealth management industry in Asia is not a zero-sum game. It’s not the case that if Singapore gets additional wealth to manage or one more trust to set up that Hong Kong loses an equivalent amount of funds or the opportunity to set up one more trust. It’s like the Staunton’s Bar in SOHO mentioned above. The new bar didn’t take customers away from the other bars – it increased the popularity of the entire SOHO area to the benefit of all the existing establishments. It even led to the setting up of new bars and restaurants.


And so it is with Singapore and Hong Kong. By banding together to promote a positive vision of Asia to the wealth management community, both jurisdictions stand to capture more of the global market. Think about Guernsey and Jersey – on the one hand they compete, but together they create a brand for the Channel Islands which ultimately enlarges the pie and attracts more work than the mere sum of the individual parts. By changing their mind-set, Hong Kong and Singapore could achieve the same collective advantage.


Both jurisdictions have a strong Chinese ethnic base. They have similar legal systems and English language skills. They both have prosperous and dynamic economies that have had real impacts on the world’s economic stage, far in excess of their expected punching abilities. The governments of both keep a close eye on what the other is doing to ensure that differences are minimal.


There is yet another reason why Singapore and Hong Kong should collaborate. Global pressures are increasingly being imposed on countries through initiatives such as Base Erosion and Profit Shifting (BEPS) Foreign Account Tax Compliance Act/Common Reporting Standard (FATCA/CRS), Know Your Customer/Customer Due Diligence (KYC/CDD) and Anti-Money Laundering (AML).  Larger countries in Asia such as Japan, Australia, China and India won't rush to help smaller jurisdictions like Hong Kong and Singapore – indeed, the interests of larger countries are very different from those of smaller jurisdictions, so the latter must stand up for and defend themselves.


Smaller countries will only have a louder voice if they speak collectively. Together, Singapore and Hong Kong could form a bloc to represent not only their interests but the interests of other countries such as those in Indo-China, Philippines, and Malaysia. They could have more influence in the Organisation for Economic and Cooperation Development (OECD) and other global forums if they acted together to represent Asia and to promote Asian interests over those of Europe, North America and Latin America. They could more effectively promote Asia as a hub for fund and wealth management and trust establishment and administration.


To achieve the growth of Asia, Singapore and Hong Kong should accept that they each have different strength and geographic focuses as well as essential commonalities. The two governments, and their professional bodies, should work together proactively and not reactively in responding to trends worldwide.  Cooperation, not competition, is key.

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