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Hong Kong hands its financial centre crown to Singapore in Covid meltdown

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One of my good friends is Felix Hamilton, who is based in Hong Kong. This is the city that recently had a meltdown, due to government regulation removing many citizen's rights. It is also a city that is meant to be a global financial and FinTech hub, but this does not seem so likely as it's now having a meltdown due to Covid. Here's Felix's take:

The end of Hong Kong as a financial centre, by Felix Hamilton

Once seen as one of Asia’s most attractive cities for expatriates, the city has lost its sheen as an international business hub in recent years as it contended with anti-China protests, then the Covid-19 pandemic. In early 2020 following mainland China’s strict zero covid approach, Hong Kong quickly closed borders which isolated the city from the rest of the world. Since then, travellers entering Hong Kong have had to endure one of the strictest quarantines in the world, enforcing 21 days locked in a hotel room with no access to fresh air (it has now been reduced to 14 days due to the shorter incubation period of the omicron variant).

Hong Kong has become a shadow of the once vibrant city it once was and has rapidly spiralled to become one of the worst places to be in the Covid era, according to Bloomberg’s Covid Resilience Ranking, as the city battles its worst-ever outbreak. With new daily cases surging past 30,000, the outbreak is overwhelming its health care system. The current mood in the city is subdued, and people in Hong Kong are becoming increasingly agitated and frustrated.

The draconian and inept way that the government has dealt with the Covid-19 pandemic has prompted an exodus of expats from the city. The main concerns revolve around flight bans and travel restrictions; school closures; extended quarantine in government facilities; and separation of children. Schools have closed months early so they can be used as venues for testing, isolation and vaccinations, and the city is building tens of thousands of isolation units, suggesting zero-Covid is here to stay for the long haul. According to the European Union Office to Hong Kong and Macao, around 10% of EU citizens living in Hong Kong have left the city, as the strict measures have frustrated residents when the rest of the world learns to live with Covid and treat it as an endemic disease. With three rounds of compulsory mass testing planned for the entire city of 7.4 million in April, the exodus may accelerate further.

Options to get out of Hong Kong by air are the most limited in at least two decades, just as the number of residents wanting to flee the city of 7.4 million surges. A total flight ban on nine countries including the U.S., U.K. and Australia has been in place since December 2021 and has now been extended to April 20, while transit travel is also banned for all passengers except those from the mainland and Taiwan. Despite the dearth of flights, departures from Hong Kong airport still reached their highest levels since the pandemic began.

Last week, a net 21,698 people left the city last week, compared with a net inflow of 11,461 in the same week of 2021, government data showed. Of those who left, 72 percent departed through the airport, with the rest leaving via two land crossings with mainland China.

Before the pandemic, a passenger plane would leave Hong Kong every three minutes, on average, making it almost as busy as New York’s John F. Kennedy International Airport. These days, a whole hour could pass without a single departure. With many routes barred and some destinations blacklisted because of high levels of Covid, airlines ran just 592 flights out of Hong Kong during the whole month of February, an average of only 21 a day. That’s the fewest number of flights since August 2003. Pre-pandemic, on average there were more than 14,000 services taking off from Hong Kong every month. The dearth of overseas connections is deepening Hong Kong’s isolation while other nations including rival hub Singapore open up in an attempt to co-exist with Covid.

When looking into the detail as to why Hong Kong’s Covid-19 strategy ultimately failed, one must look at the extremely low vaccination rates in the elderly, which was less than 30% when this current wave began. This has meant that the recent death rate has been one of the highest in the developed world.

The government failed to persuade the older generation to get vaccinated, and there was also a failure to communicate to the public that the vaccines were safe which caused vaccine hesitancy. There was also a sense of complacency in the public as there were zero cases for many months, so people felt there was no need to get vaccinated which limited the natural immunity of the HK population. These factors have now combined to disastrous effect with hospitals reaching maximum capacity. The recent chaotic photographs from hospitals depict scenes more reminiscent of early 2020, when the pandemic was at its worst and there was no vaccine available.

It’s hard to believe that Hong Kong didn’t make better preparations for this type of large-scale outbreak.

Life in Hong Kong has been very subdued for most of this year. On 7 January, the government banned dining in restaurants after six o’clock and bars were all closed. They also closed all of the gyms, sports facilities, hair salons and more recently public beaches. Masks, which are compulsory to wear at all times, now must also be worn when exercising outside, which is incredibly uncomfortable in the heat. Lan Kuai Fong, which used to be the bustling epicentre of Hong Kong’s nightlife now resembles a ghost town, as many of the bars and restaurants have shut down. The food and beverage sectors have been hit the hardest, with about 5,000 restaurants, or almost one third of Hong Kong’s eateries, considering shutting down for months in order to cut costs. More than 1,200 restaurants have already suspended business, and 300 have permanently closed according to a recent poll. There are concerns that the minimal government stimulus measures won’t be enough to stem losses.

The death knell for Hong Kong has been sounded many times since Britain returned this city to China in 1997. However, this time people feel it’s different, and more ominous. A quarter century of Beijing rule – a period punctuated by mass protests, the erosion of civil liberties, crackdowns on press freedom and more – has taken a toll on the city’s collective psyche. Two crushing years of the pandemic, with no immediate relief in sight, have left Hong Kong a city in perpetual crisis.

Hong Kong is fast losing its status as an international finance hub. The white-collar workers who helped to shape the city’s identity and make it a place where business thrive, have concluded that the best days are over. London, New York, Singapore now look like attractive alternatives. Expats from Europe and the U.S. have been steadily dwindling in the past few years, just as Hong Kong’s new business aristocracy have risen to prominence - the mainland Chinese.

Official figures bear this out: new visas for foreign financial-service workers fell 49% to 2,569 between 2018 and 2021, according to government data. Such visas issued to mainland Chinese rose 8% over the period, reaching 2,314 last year.

Financial business operating conditions are very tough in Hong Kong now as, at any given moment, several key members of their workforce could be forced into a government mandated quarantine due to testing positive or being deemed a close contact. Banks must mitigate against this risk, and are reluctant to publicly pivot away from Hong Kong in case it is seen by Beijing as turning their backs on China. Privately, however, many bankers say that their frustrations are growing. Rising numbers of employees are asking to be relocated, which are reviewed on a case-by-case basis to avoid drawing attention. Senior moves are particularly sensitive.

In a recent conversation with the head of talent recruitment at Credit Suisse, he concurred that retaining talent in Hong Kong was a huge problem, and hiring was also an issue as potential candidates are reluctant to relocate to Hong Kong. Banks now have to offer more attractive packages to entice talent.

At some banks, change is afoot. Citigroup is quietly moving a half a dozen equities bankers to Singapore and other markets. A similar number of managing directors at JPMorgan Chase have left over the past six months, some moving back to Europe for bigger jobs. Mandarin Oriental has also shifted its top management to Singapore, as their CEO described Hong Kong as “very, very poor today” as a base for running a business.

Hong Kong is ceding ground to Singapore at a very fast rate. The main Asian rival has been steadily lifting restrictions and getting its economy back on track. Businesses that are weary of the Hong Kong restrictions, and the strict quarantine, have been shifting to Singapore.

Bank deposits show the clearest sign of a shift. Deposit growth in Hong Kong has roughly halved in the last three years, dropping to an average of 4.3% year on year from 9.1% in the prior three years. Singapore’s deposit growth grew on average 7.3% between 2019 and 2021, about double the pace in the previous three years, according to data from the cities’ monetary authorities.

As Hong Kong continues to fight the fifth wave of the pandemic, the Credit Suisse banker gave a blunt characterisation of the current state of affairs: “There is no light at the end of the tunnel.” All we can do is hope that the Hong Kong government accepts the new reality, and transitions away from their strict zero Covid policy, which is considered by many as futile considering how transmissible the omicron variant is. But, as its expats depart, Hong Kong begins to resemble what some always feared it might one day become: another city in China.

It’s beginning to feel like that.

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Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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