Asia Pacific: Special Report - A tale of two cities

Reinvention is what Hong Kong and Singapore do best - now it is services that keep these two economies ahead of the rest.

by Michael Backman, World Business
Last Updated: 23 Jul 2013

Hong Kong and Singapore have seen their comparative advantages shift several times in their histories and each time they have had to reinvent themselves. 'Made in Hong Kong', once ubiquitous, is now rarely seen, and Singapore's economy has seen business slip away to China and Malaysia. As those economies develop, Singapore's infrastructure no longer seems as special as it once did.

Both city-states have been through tough times in recent years. Hong Kong's unemployment rate hit almost 9% in 2003, a year in which Singapore also faced record levels of unemployment. But the ongoing struggle to maintain relevance is one that both economies have kept winning. At about $37,000, Hong Kong has a per capita income on a purchasing power parity basis higher than that for Japan, Australia, the UK and Germany, and, at $29,000, Singapore is not far behind.

Services now drive both economies. Both have enriched themselves from what an Indonesian cabinet minister once termed the "incompetence" of their neighbours, by providing services - financial, legal, accounting and healthcare - to the likes of mainland China, Malaysia and Indonesia. But neighbourly incompetence is fast changing too. Shanghai is emerging as the new Hong Kong and local financial services are displacing the need for Singapore's. So once again Singapore and Hong Kong are in the position of having to carve out new roles.

Hong Kong's government recently unveiled a raft of economic proposals to complement China's 11th five-year development plan. They are designed to bolster Hong Kong's position as an international financial hub, but also to try to capture some mainland financing activity from which Hong Kong so far is largely excluded. Hong Kong has urged China to relax restrictions on the ability of Chinese firms to launch IPOs in Hong Kong, and China recently approved a law to allow mainland lenders to sell renminbi-denominated bonds in Hong Kong.

Financial services are important for Singapore too, accounting for 22% of its economy. But a large part derives from money parked and invested there by wealthy Indonesians. The Asia-Pacific Wealth Report, published in 2006 by Merrill Lynch and Capgemini, estimated that at the end of 2005, of an estimated 55,000 high net worth individuals in Singapore, a third were of Indonesian origin, holding an estimated $87 billion in assets.

The Singapore government has been laggard in negotiating an extradition treaty with Indonesia, and so today it is home to many Indonesians wanted back home for corporate crimes. This is not to say that all Indonesians in Singapore have broken laws in Indonesia: most are ethnically Chinese and they find Singapore a comfortable place to live. Both Singapore and Hong Kong have relatively low rates of corporate tax: 17.5% in Hong Kong, and in January 2007 the Singapore government indicated that it would lower its rate from 20%.

Like Hong Kong, Singapore is making itself more attractive to tourists and particularly mainland Chinese tourists, who, the UN World Tourist Organisation estimates, will make 100 million foreign trips annually by 2020. Approval has been given for two mega casinos, known locally as Integrated Resorts, aimed at attracting mainland Chinese and Indonesian gamblers.

A consortium headed by Las Vegas Sands will build and operate the first casino - a $3.6 billion hotel, gaming and convention centre complex due to open in 2009. One risque foray came unstuck, however - the local franchise of the Paris Crazy Horse nude review closed in February amid mounting losses and after just one year's operation.

Another factor for Singapore is its shrinking citizenry. The city-state bolsters its population with foreign workers - officially, the population is 4.3 million, but only 3 million are actually Singaporean. The country's fertility rate is among the lowest in the world and has been below the replacement rate of 2.1 live births per woman since 1976. Currently, it is about 1.25 and among Chinese the figure is even lower - at 1.08.

Hong Kong does not have this problem. Its population is swelling, as many mainland Chinese move to the territory. Also, tens of thousands of other mainland Chinese now commute into Hong Kong each day to work - 20 years ago, most would have been unable to get a visa simply to visit.

HONG KONG'S PRIORITY SECTOR

Tourism and conference-related travel have become a priority sector for Hong Kong's administration. Last year visitors from mainland China accounted for about 12 million of the estimated 25 million visitors to the territory, compared with less than a third of the 13.7 million visitors in 2001. By the end of 2006, Hong Kong had almost 45,000 hotel rooms in 123 hotels, and a further 5,400 rooms in almost 500 guest houses. Hotels owned by mainland Chinese companies have been among the newer hotels to have opened.

Hong Kong is opening new attractions and upgrading existing ones. The Hong Kong Wetland Park opened in May 2006 and Hong Kong Disneyland opened the previous September. The Disneyland franchise has been modified to make it more appealing to mainland Chinese tourists; for instance, advertisements showing the venue as a family has been amended to show parents with only one child.

The Hong Kong Convention and Exhibition Centre is the premier exhibition venue, with a dramatically expanded new wing that opened in 1997 on reclaimed land in Hong Kong harbour. It has a total internal rentable space of 46,600 square metres, including five exhibition halls and 52 meeting rooms. It hosts more than 45 international trade fairs a year and is regarded as one of the best convention and exhibition centres in the Asia Pacific region. Bookings at the centre are in such demand that the manner in which they are allocated has been the subject of controversy.

Is Hong Kong's bid to reshape itself as a tourist destination working? Hong Kong's Tourism Commission estimates that in 2005 expenditure by inbound tourists was worth $13.5 billion, and record arrivals were achieved in 2004, 2005 and 2006. The numbers speak for themselves.

SINGAPORE'S INDUSTRIAL PILLAR

The Singapore government nominated life sciences as one of the country's four industrial 'pillars' in 1999 (the other three are electronics, engineering and chemicals) and in 2005 it raised its commitment to the sector to $8 billion over five years.

The life sciences sector generated $12 billion in manufacturing output in 2005 and the government target is for $16 billion by 2015. Construction of the Biopolis, a $300 million research park, has been part of the push, attracting foreign life sciences firms and scientists to Singapore with subsidies and tax breaks.

Ironically, Singapore's authoritarianism is an attraction and it's one that the government doesn't mind proclaiming. Activists are closely monitored, so scientists working with live animals will not face the harassment they do elsewhere.

Philip Yeo, chairman of Singapore's Agency for Science, Technology and Research, said at the time of his drive to recruit top scientists: "I promise them secure funding for their research, reasonable time horizons, the best facilities I can afford and enough mice for their research."

With the strict controls on public debate, the Singapore government can actively encourage stem cell research. It was the first government worldwide to allow cloned embryos to be kept for up to 14 days. Novartis, GlaxoSmithKline, Schering-Plough and Eli Lilly are among the multinational drug companies with production plants and research facilities in Singapore. GlaxoSmithKline has announced plans to build a state-of-the-art R&D plant that will incorporate remote real-time monitoring.

It's not yet clear whether Singapore will be a net winner from its life sciences push once all the tax concessions and subsidies are taken into account, but what is certain is that it will offer foreign companies the best facilities that money can buy.

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