OFC face accusations of being centers of tax-avoidance, money laundering and hot money. Additionally they are also challenged by a variety of regulatory authorities and existing onshore center competition.
London’s breadth and depth makes it vulnerable to attack from other centers, however, its proven ability to adapt and innovate, history, allied to deep pools of skilled personnel and strong regulator are clear positives.
Financial institutions and markets do not exist in isolation – centers need to focus on non-financial factors too.
Will latest U.S. moves to punish China over disputes on trade, IP, coronavirus origins and recent imposition of national security laws on Hong Kong affect its status as a major regional financial center? Eliminating policy exemptions and treating Hong Kong as part of China is bound to affect existing rules on travel, extradition treaties, investment and export controls as well as trade and financial market regulation.
We studied major financial centers around the world and uncovered some generic critical success factors. People – the availability of good personnel and the flexibility of labor markets: Business Environment – regulation, tax rates, levels of corruption and ease of doing business; Market Access – levels of trading, as well as clustering effects from having many financial services firms together in one center; Infrastructure – the cost and availability of property and transport links; General Competitiveness – to be good at most things.
It is against such and other criteria that Hong Kong’s future competitiveness may be examined.
The offshore world is physically dwarfed and legally separated, but institutionally connected and closely linked. For many smaller economies, this is sometimes seen – incorrectly – as an “easy way” to break into the financial industry. Now, many countries are refusing to let companies registered in offshore tax havens access financial aid from coronavirus bailout packages – Gibraltar, Bahamas, Andorra, Bermuda, British Virgin Islands, Cayman Islands, Panama are increasingly scrutinized. France, Poland, Belgium and Denmark exclude companies from taxpayer-funded relief programs. But Ireland, the UK, Luxembourg and the Netherlands as well as U.S. companies that engaged in corporate inversion transactions are eligible.
Despite the coronacrisis and Brexit, New York and London to continue to dominate. Other important regional and specialist centers are increasingly vying. Frankfurt, Singapore and Tokyo will continue to assert role as hubs, with the status of Hong Kong now somewhat challenged. Financial centers have critical mass, transparent, liquid and broad markets alongside the talent required to execute business – these skills and structures can be adapted for new markets.
China to strip Hong Kong of legal autonomy. U.S. to decline certification of autonomy from China which may trigger financial sanctions under Magnitsky Act and other provisions under Hong Kong Human Rights and Democracy Act. This will affect trades, visas, customs, banking and law enforcement and regulation cooperation. Financial centers are always reflections of a wider context, from current market issues, to local financial players, to international investor flows, to the culture and history of the country in which they operate.