Battling for position

Wealth management

The rivalry between Hong Kong and Singapore over which is the region’s premier financial hub has been something of a recurring theme over the years. But with a number of banks in the region scaling back operations and culling staff over the past few months, Asia’s financial centres are doing everything in their power to attract financial institutions and asset managers to base their regional headquarters in their respective countries.

In fact, it’s no longer even a two-horse race. China’s entry into the World Trade Organisation last year, and South Korea’s progress in corporate restructuring since the Asian crisis in 1997/98, have boosted investor confidence and created new business and investment opportunities in north Asia. Consequently, Hong Kong, Seoul, Tokyo and, over the longer-term, Shanghai, are expected to benefit from increased activity. This is particularly true of the region’s derivatives desks, as banks look to leverage off investment banking opportunities in north Asia. “As you move your derivatives business in the direction of being more client orientated, more structured solutions orientated, what you are really doing is trying to get as close to the investment bankers as you can,” says one derivatives banker at a major US bank. “Our investment bankers are based in Hong Kong, so [our derivatives desk] is now in Hong Kong.”

In the face of this perceived north Asia/south Asia divide, Singapore appears to be changing tack. The country’s Economic Review Committee (ERC), a government body set up to formulate strategy for the development of the economy, recently called on the Lion City to fashion itself as a regional hub for both wealth and risk management. “A number of engines of growth have reached maturity,” says Robert Stein, chairman of the Financial Services Working Group (FSWG), that put together the report. “The only question is really what’s next.”

While Singapore’s regulator, the Monetary Authority of Singapore (MAS), has been developing its regulations on retail hedge funds, with final guidelines due to be released by the end of the year, the ERC believes the country can do more to attract asset managers and boost the industry domestically. “We have looked more closely at [asset management], asking what we can do to accelerate the growth because right now in Asia, if you leave aside Tokyo, there are Hong Kong and Sydney competing for a major slice of the asset management pie,” Stein says.

Consequently, the FSWG has put forward a series of recommendations to build critical mass locally, such as removing the minimum requirement of S$100 million ($56 million) in assets under management for a fund, while also recommending the exemption of tax on domestic investment income and foreign in- come remitted to Singapore. It also goes as far as suggesting the government provide seed capital or take equity stakes in start-ups and small and medium-sized fund managers.

But not to be outdone, Hong Kong has also been developing its own initiatives. The regulator, the Securities and Futures Commission (SFC), announced its own guidelines for retail hedge funds in May (AsiaRisk June 2002, page 5), and the Special Administrative Region has now established a Financial Market Development Taskforce consisting of a number of working groups. The SFC is represented on the Working Group on Fund Management, with a remit to examine issues relating to the development of the fund industry in Hong Kong, including tax, legal and regulatory requirements. The initiatives are expected next year.

But some participants remain sceptical as to whether a single regional hub for wealth management can even exist. Henry Lee, director at Hong Kong-based asset management company Hendale Advisors, says: “I don’t think there can be one centre. It doesn’t make sense.” He notes that Singapore and Hong Kong serve different markets – Hong Kong services China, while Singapore is more focused on servicing South East Asia. “Hong Kong is a small market, so funds service China from Hong Kong, and increasingly people are going directly to China,” he says. “Singapore is a good service hub for South East Asia and it will continue to be that.”

Stein, however, contends that the aim of the ERC initiatives is to attract funds that move out of other Asian countries, including China. “To be quite frank, we’re not going to see large fund flows [from China], but people are starting to make decisions about where to put their money and Singapore is an attractive destination,” he says. “The hope is that there will be enough product reasons, manager reasons or performance reasons to attract people [to Singapore].”

However, the ERC has gone one step further than its Hong Kong rival in mooting the concept of a risk management facility, dubbed the Asia Risk Exchange (ARX). The idea is to create a central point for banks to hedge residual portfolio and credit risk and insurance companies to hedge or insure catastrophe and sudden event risks, Stein says. “Having spoken to a number of representatives from the capital markets, banks and insurance companies, there is a genuine desire to have a central transaction and meeting point for these types of risk and the discussion around risk transfer,” he says. “Right now a lot of these deals, such as event risk or terrorist risks or catastrophe risk, are being done bilaterally or not at all. The banks are very keen on getting involved in alternative risk transfer and the insurance companies would probably like to do more of a syndication on these latter types of risks.”

Currently, a government-sponsored committee is carrying out a feasibility study on the ARX. While no deadline has been set, it is hoped that further details will be included in the MAS response to the ERC report, expected in January 2003.

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