Japan Finds Luring Business from Hong Kong May Be Tough

Tokyo is on a charm offensive, aiming to attract businesses in Hong Kong, frightened by demonstrations and controversial security regulations introduced by China. But the city proves to be a difficult seller.

"I want to make Tokyo Asia the number one financial city," Governor Yuriko Koike said in October, as the Japanese capital opened an information center in Hong Kong for foreign companies considering a move, reports AFP.

Tokyo's courtship comes with some tangible promises, including temporary office space in the city for international financial companies who want to try out their life in Japan.

There are also a range of more potential benefits, including tax cuts, simplified red tape, and even a special economic zone like Shenzhen, China's Silicon Valley.

In some ways, Japan might seem an obvious alternative for businesses looking to leave Hong Kong: it is the world’s third-largest economy, home to the Tokyo Stock Exchange, and already houses outposts of numerous financial institutions and international firms.

But there are some serious stumbling blocks, and rivals who claim that Tokyo's ambitions for regional financial supremacy might be nothing more than a pipe dream.

For instance, Japan's income taxes are sky high compared with Singapore's 22 per cent and Hong Kong's 17 per cent.

Low levels of English fluency are also a chronic handicap, as is the comparatively slow adoption of digital technology in the region.

Trade on Tokyo’s stock markets was halted for an entire day last month because of a “hardware failure” — a glitch seen as unlikely to boost confidence and bring new traders flocking.

– Fierce competition –

Michael Mroczek, president of the European Business Council in Japan, said there were high hopes for new Prime Minister Yoshihide Suga’s digitisation and deregulation push.

But “there’s also a lot of scepticism because there haven’t been a lot of changes” over the years when similar initiatives have been proposed, he added.

Japan’s particularly strict approach to border control during the pandemic — for months foreign residents were not allowed to return even as Japanese citizens did — has been seen by some as “discrimination” and could also be off-putting for tentative transplants, added Mroczek.

Tokyo is also not the only Asian city seeking to take advantage of a potential Hong Kong exodus.

Australia has announced new visa opportunities for Hong Kong students and entrepreneurs, and officials have said they will be “very proactive” in encouraging businesses to relocate.

And while Singapore’s government officially says only that it seeks a “stable, calm and prosperous” Hong Kong, it is probably the most obvious alternative for firms, said Rajiv Biswas, Asia-Pacific chief economist at consultants IHS Markit.

“Most international financial services firms may already have a large presence in Singapore, and therefore may prefer to expand their existing operations in Singapore rather than finding another new location,” he told AFP.

– ‘Wait and see’ –

There are still questions, though, about whether an exodus from Hong Kong is really on the cards, whichever regional city stands to gain.

“I wouldn’t expect big firms to announce that they are pulling out of Hong Kong completely,” Mark Williams, chief Asia economist at Capital Economics, told AFP.

“It’s more likely that firms will just gradually reduce their headcount in Hong Kong and increase it elsewhere.”

And despite jitters over freedom of expression, Hong Kong “remains the primary gateway to mainland China” for investors and financial services companies, said Stephen Innes, chief global markets strategist at AxiCorp.

Since 2014, the Hong Kong stock exchange has been directly connected to Shanghai’s, allowing companies based in Hong Kong to invest in listed Chinese companies more easily.

And Hong Kong’s proximity to Shenzhen is another important plus for some businesses

“Wait and see is the general attitude,” one expat employee at a major Western bank in Hong Kong told AFP on condition of anonymity, adding he personally was not yet thinking about relocating.

Innes said regional hubs like Singapore might also fear China’s wrath if they seek to siphon off business.

No one “in the region wants to bite the hand that feeds”, he said.

“It is way too early to write Hong Kong off.”