Has Singapore Lost the Race to Hong Kong?

The Monetary Authority of Singapore (MAS) appears to have stepped up enforcement of regulation pertaining to irregular trading at the Singapore stock exchange recently. In the last few weeks, several improper share trading cases have either come before the courts or been settled out of court.

The most high profile case concerns the actions of Dr. Tan Chong Koay and his Pheim Asset Management (Asia) and Pheim Asset Management (Malaysia). In litigation before the Singapore High Court, the MAS have accused Dr. Tan of manipulating the share price of United Envirotech in December 2004. Envirotech was listed on the Singapore Exchange in April 2004.

The MAS moves come hard on the heels of tough action by Hong Kong's Securities and Futures Commission (SFC). Since July 2008 the SFC has successfully prosecuted nine cases of insider trading. The proceedings represent a drastic shift for a city where insider trading was not a criminal offense until 2003.

Notably, some of the SFC successes have involved influential Hong Kong businessmen.

Mr. Richard Li's attempts to privatize telecommunications provider PCCW were scuttled after SFC efforts. Another case involved the Chinese electronics tycoon, Mr. Huang Guangyu and his alleged attempts at securities fraud in the shares of GOME Electrical Appliances Holdings Ltd.

Are the MAS actions meant to signal that Singapore remains a serious regional stock exchange and is not to be left behind in the race for regional financial leadership?

A stock exchange is a key part of any vibrant capital market. Without a deep and liquid stock exchange, the development of a robust financial sector is seriously limited.

In the 1990s, Singapore's outlined its aspirations to become a regional financial hub. A key plank of the strategy centred on encouraging Singapore's development as a regional hub for the asset management business.

The plan made eminent sense, especially given the large pools of investable capital available to the government through various entities such as GIC and Temasek Holdings. It was believed the capital will be used to reward new and existing asset management businesses that expanded operations in the Republic.

Singapore has lost the race to become an asset management center but has emerged as a leading player in the private banking industry

One can argue that until several years ago Singapore was competing fairly effectively with Hong Kong in the asset management area. It has a competitive business cost structure. The regulatory framework is world class. The legal and operating environment is simple, clear and transparent.

Even Singapore's attractiveness as a place to live and work was being reviewed so as to shed the city's international image as dull and boring city. Strait jacket Singapore was loosening up on its strict social mores and its PR machine was advertising the fact.

Without a doubt, it takes time for a city to establish itself as an international financial centre. There are many factors and a confluence of events which determine success, or lack of it.

Broadly speaking, Singapore remains in the running as a regional financial center. The city plays a significant role in the global foreign exchange market and is a strong (new) player in the private banking arena.

But in the area of asset management and capital markets Singapore's growth has been lacklustre. The following data illustrates the extent of the gap which has opened up between the exchanges of Hong Kong and Singapore:

                                                          Singapore            Hong Kong

Market Capitalization (USD Billion):265                     1,329

Share Turnover (USD Billion):        260                       1,630

Listed Companies:                          767                       1,261

(All data is for calendar year 2008.)

Unfortunately, Singapore's stock exchange has not provided a solid foundation from which to build a regionally competitive capital market. The inadequacies of size and liquidity are painfully evident to local and regional market participants. 

MAS efforts in enforcing a strict regulatory framework are welcome as no exchange can thrive unless it is well regulated. Even so, without increasing its size no amount of transparency will catapult Singapore's stock exchange into the big league.