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How Global Institutions Can Thrive across Asia’s Financial Hubs

Power of Ideas
How Global Institutions Can Thrive across Asia’s Financial Hubs

The race to be the next super financial hub in Asia is more heated than ever amid sustained global macro shifts and growth in Asian markets. Most global financial institutions realize the necessity of having a presence in the region but debate which market will deliver the most impact. Each market will have differing implications for a firm’s growth trajectory in the region, which is something Two Sigma has learned over more than a decade expanding in key markets and establishing offices in Tokyo, Hong Kong, and Shanghai. We believe that it is important for market participants and employers to be purposeful in their expansion efforts and commit to each financial hub they enter for the long term. Here are some of our key takeaways as financial practitioners explore where we can thrive and how we can collectively build thriving financial centers.

Key Financial Hub Attributes—Scale and Innovation

Scale in capital markets is a natural starting point when considering building blocks for the most prominent financial hubs. Shanghai, Tokyo, Shenzhen, and Hong Kong are the top exchanges in Asia by market capitalization. Why does this scale matter?

Capital markets scale has multiple ancillary effects on the rest of the financial industry. Strong flows and interest from market participants in deep, large capital markets attract more high-quality companies to the hub. This positive cycle creates an ecosystem of talent and professionals serving the industry. For regulators and governments, the natural starting point in building or maintaining a financial hub is to implement policies and approaches that will enable capital markets depth and breadth.

Factors like a low-tax business environment, city liveability and connectivity, policy stability, and innovation are also important. Innovation is a crucial engine for transformative change. As financial innovation continues at a rapid pace, policymakers must help foster innovation while maintaining necessary regulatory oversight. In areas related to blockchain technology, corporate governance, and ESG investing, we are seeing that regulators who are proactive and work hand in hand with industry leaders to draft and implement new policies are receiving the most engagement.

We should not view this as a zero-sum game. There can—and should—be multiple ‘winners.’

Hong Kong and Singapore—Complementary Roles

For many years, Hong Kong and Singapore have been framed as competing hubs given their shared British colonial history and roles as havens for global talent. However, we should not view this as a zero-sum game. There can—and should—be multiple “winners.”

These two cities play quite different roles. Hong Kong is the gateway to China and part of the Greater Bay Area region, one of the largest economic engines of the country. In the medium- to long-term, Hong Kong will likely cement its status not only as the hub for Chinese companies looking to go global but also for global firms looking to grow in China.

In contrast, part of Singapore’s value proposition is built on its strong base for wealth and investment talent and helpful policies for new family offices. It is also now building itself to be a center for startups and access to the big Southeast Asian markets. The two cities are complementary to each other, offering access to different types of businesses and investors.

Tokyo and Shanghai—Domestic Leaders

Tokyo and Shanghai are also leading contenders in the race to become the next Asian superhub. They are currently best positioned to serve large domestic markets. Tokyo is home to some of the largest Japanese financial institutions, and many global financial institutions have a large presence in the city.

Similarly, Shanghai is playing the role of a key hub supporting one of the world’s largest domestic markets. In 2022, the Shanghai Stock Exchange ranked as the third largest market capitalization, just after NYSE and Nasdaq. This is no small feat for a capital market that is relatively young.

How Can Global Financial Institutions Thrive and Win?

We’ve found that a global-local approach must be applied to achieve staying power in the region. Global financial institutions should bring their global market expertise, but they cannot underestimate the importance of combining this with real domestic know-how. Simply shipping a team from headquarters will not work; domestic capabilities built with on-the-ground teams will be key to success.

The verdict is still out on whether there will be only one superhub in Asia. There is a higher likelihood that there are several strong hubs—Singapore, Hong Kong, Tokyo, and Shanghai chief amongst them—each playing its own unique role within the larger ecosystem. For global leading financial institutions, it should not be one choice over another. The real question is: What types of capabilities need to be built for each so that we all can realize the maximum potential?