Months of unrest in Hong Kong has invited debate over the city's viability to remain Asia's premier financial hub.
Actions by the government have raised questions about the special administrative region's autonomy, while frequent demonstrations have brought the city to a standstill.
At the same time, Hong Kong is facing heightened competition from regional alternatives.
Across the border in mainland China, gradual financial and regulatory relaxations have made cities like Shenzhen and Shanghai more realistic competitors to Hong Kong.
To the south, longtime rival Singapore stands out as a similarly business-friendly but more stable jurisdiction located in the heart of the booming Southeast Asian region.
Political instability and regional developments have undoubtedly damaged Hong Kong's reputation as "Asia's world city". Some foreign investors may very well now find their needs better served elsewhere in Asia.
But all is not lost for Hong Kong. At least not yet. For foreign investors looking for a gateway to access mainland China – Asia's biggest and most important market – Hong Kong still holds advantages not found elsewhere.
While some of Hong Kong's institutions may be eroding, the unique functions it provides for both mainland Chinese firms and international investors means that it cannot be easily ignored.
How Hong Kong became a hub for global finance
To understand where Hong Kong fits within Asia's economic landscape today, it is worth considering what made it a hub for global finance to begin with.
When mainland China was largely closed to foreign business, Hong Kong's geographic connectedness and people-to-people links made it an indispensable intermediary.
As the mainland gradually opened up and opportunities for foreign investment multiplied, Hong Kong became an even more important gateway to China.
This gateway role was underpinned by international openness, rule of law under an independent common law legal system, low levels of corruption, low taxes, and high financial freedom.
Although this combination contributed to soaring levels of inequality within Hong Kong, it also allowed it to become a wealthy global financial center.
Increasingly, firms operating in Hong Kong are being pressured to follow political demands for fear of reprisal. Cathay Pacific Airways, HSBC bank, the "Big Four" accounting firms, and even an Indonesian instant noodle maker are among firms that have reportedly felt pressured in Hong Kong.
These developments are fundamentally changing the calculus for operating in Hong Kong. Foreign firms and executives now face risks that were previously never thought possible – and doing business in Hong Kong will likely never be seen the same way again.
The rise and rise of Shenzhen and Shanghai
While doing business in Hong Kong has become more precarious, mainland China has become more open to business. Directly across the border, Shenzhen is seen as the Chinese city "overtaking" Hong Kong, while Shanghai, as China's commercial and financial capital, has similar potential.
In relative terms, Hong Kong is less important today as a driver of the economy than in the past.
An oft-cited stat shows that at the time of Hong Kong's handover from the UK to China in 1997, it represented 16 percent of the China's total GDP – compared to just three percent today. It was also the world's busiest container port until 2004 but has since been dwarfed by Shanghai.
The decline in Hong Kong's importance to the national economy is most explicit in comparison to Shenzhen. Three decades ago, Shenzhen was a tiny fishing village. In 2018, the size of its economy surpassed that of Hong Kong for the first time, and continues to grow over twice as quickly.
Shenzhen, like most of China, is also becoming more open to international business.
In August, the Chinese government released plans to further develop Shenzhen into a leading global city, including by expanding foreign currency conversion – a key role traditionally played by Hong Kong. The release of the plan came with an explicit message to Hong Kong in state media, warning that the special administrative region could fall behind Shenzhen.
Why it would be remiss to leave Hong Kong
The benefits of Hong Kong to China's economy – and to both foreign and domestic firms – is not primarily in its share of total economic activity. Rather, Hong Kong acts as a platform for capital to flow into and out of China.
Despite talk of the region's decline, about 64 percent of FDI into mainland China and 65 percent of ODI from the mainland flows through Hong Kong. It is also responsible for about 70 percent of mainland Chinese overseas IPOs and 60 percent of its overseas bonds.
Although there have been piecemeal financial reforms within pockets of the country, no mainland Chinese city can take on Hong Kong's role for fundraising and international financial transactions as long as the RMB remains heavily managed and protected.
Moreover, despite recent damage to Hong Kong's institutions, they are much more transparent and business-friendly than those of the mainland. The Heritage Foundation, a conservative think tank, has ranked Hong Kong as the world's freest economy for 25 years in a row; in 2019, China was ranked 100th, one spot behind Namibia and one ahead of Papua New Guinea. The World Justice Project's 2019 report similarly found that Hong Kong vastly outperforms mainland China in all but one measure relating to the rule of law (the ability to access and afford civil justice).
It is true today that many firms can invest directly in the mainland without having to go through Hong Kong to set up a holding company or other structure. But even with the gradual opening of China's economy, the relative decline of Hong Kong's importance is overstated. Hong Kong's value lies not in its size, but the unique services it offers.
Understanding the Singapore factor
As with Hong Kong, Singapore offers a transparent common law legal system, low levels of corruption, and a low tax and business-friendly environment. Hong Kong and Singapore's many similarities have made them long-time rivals battling for the title of Asia's leading financial center.
Crucially, Singapore now holds advantages in terms of political stability and freedom from outside interference. In response to the unrest in Hong Kong, there have been reports of tycoons shifting hundreds of millions of dollars from Hong Kong to Singapore to reduce their risk exposure.
But Singapore is not just useful as a hedge against risk in Hong Kong. Rather, there is an argument to be made that it is closer than Hong Kong to the growth opportunities of tomorrow.
While Hong Kong provides access to Asia's biggest market, Singapore is arguably better positioned as a base for accessing Asia as a whole.
As of 2016, Singapore was home to the regional headquarters of 4,200 firms, compared to 1,389 in Hong Kong, according to a report from the real estate company Cushman and Wakefield. Google, Facebook, and Twitter are among some prominent firms to have their Asia Pacific headquarters in Singapore.
Singapore holds double tax agreements (DTAs) with 76 countries, compared to Hong Kong's 31. It also has 24 free trade agreements in effect, while Hong Kong has just seven.
With China's economy slowing, Singapore is perhaps closer to the next wave of fast-growing economies. Rising costs in China and its trade war with the US have accelerated investments in rapidly expanding Southeast Asian countries like Vietnam and Indonesia.
As a member of the ASEAN economic bloc, Singapore has special access to these markets and is ideally situated as a regional hub. Compared to Hong Kong, Singapore has closer geographic and cultural connections to India, another Asian giant.
Where Hong Kong clearly outranks Singapore is in its proximity to China and the size and scope of its financial services industry. But with the risks facing Hong Kong, it may just get pigeonholed as a financial center for China rather than Asia as a whole.
The sheer size of the Chinese market means that there are still opportunities for Hong Kong, but competition with Singapore will only become steeper as a result of recent unrest and rapid growth in Southeast Asia.
Hong Kong – damaged but persisting
In terms of the economy, the narrative of "the death of Hong Kong" is an exaggeration.
Hong Kong will continue to play a crucial and irreplaceable role for doing business with China, even if political risks are growing. Hong Kong can perform functions that no mainland city can and is better placed than Singapore for many aspects of doing business in China.
Simply put, mainland China still needs Hong Kong, despite the fraught relationship.
Yet, while Hong Kong will persist, lasting damage has been done. Recent political developments have surely damaged its reputation and have probably forever changed how it will be approached by international business people.
In the process, Hong Kong also risks losing some of its economic dynamism and becoming an increasingly one-dimensional vehicle for Chinese capital. And with the engines of regional growth moving further south, Singapore is as strong an option as ever for foreign firms to base their regional operations in Hong Kong's place.
For foreign investors, the decision to base operations in Hong Kong, mainland China, Singapore, or elsewhere must be considered not only by looking at each region's strengths and weaknesses, but also how they fit into a broader strategy for Asia.
Hong Kong will continue to be an essential contributor to a successful Asia strategy. But whereas it was once a bastion of stability, transparency, and dependability, it increasingly must be treated closer to the politically unpredictable environments that characterize much of emerging Asia.
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