Not so long ago, when Hong Kong was struggling with the impact of civil unrest and strict Covid-19 controls, other cities in Asia sensed an opportunity to bolster their respective financial center credentials. Not Singapore, which is already an established Asian financial center – and has grown in recent years – but cites such as Tokyo and Taipei.

While some lofty announcements were made, and ambitious plans unveiled, the result has been underwhelming. No other cities in Asia have been able to seriously position themselves as international financial centers, or even regional ones.

This holds true for all sectors of financial services, including cryptocurrency, where once again it is a two-city contest in Asia between Hong Kong and Singapore.

The Curious Case Of Tokyo

Tokyo has been the most ambitious of any Asian city in promoting itself as a financial center. In theory, the idea makes sense. Tokyo is undoubtedly the paramount financial center of Japan, the world’s No. 3 economy, while its stock market has performed extraordinarily well in the past few years. Foreign-direct investment in Japan is at a 15-year high.

Tokyo has enacted certain policies to boost its prospects as a financial center. These include simplified registration procedures for fund managers focusing on overseas investors, exemption in inheritance tax on overseas assets of foreigners under certain conditions, and an expansion of the scope of companies that can claim performance-based compensation paid to executives as a deductible expense.

However, the reality is that Tokyo is still subject to the Japanese tax system, which is high in comparison to Hong Kong and Singapore. Income taxes in Japan can reach a maximum 55%, compared to 16% in Hong Kong and 22% in Singapore.

”For Tokyo to become a hub of asset management business, I do strongly believe that we do need to change tax treatment for individual people,” Monex founder Oki Matsumoto told Bloomberg TV in a recent interview.

Another issue is that English is not widely spoken in Japan, despite increasing government efforts to promote use of the language. Most international financial professionals want to work and live in an environment where English can be used regularly.

Taipei: Imagining Itself As A Financial Center

During the early days of the coronavirus pandemic, the financial policy community in Taiwan was deliberating over the potential for Taipei to become a financial center in Asia. While the Taiwanese government had mooted this idea in the past, this time it seemed like a real opportunity, given the challenges Hong Kong was facing as well as all the positive press Taiwan was getting for its then-stellar containment of Covid-19.

We were present for several of these brainstorming sessions with financial professionals and researchers at think tanks. It became evident quickly that while the Taiwanese government very much liked the idea of Taipei gaining prominence for something besides being a technology hub, it was not prepared to make changes to laws and regulations that would increase the city’s competitiveness as a financial center. High income tax relative to Hong Kong and Singapore was one issue (a maximum of 45%), but arguably more important were the restrictions on certain financial products and onerous requirements for setting up a company.

One idea that emerged from these discussions was trying to establish a financial research hub in Taipei as some hedge funds at the time were reducing headcount in Hong Kong and considering where to send their research teams. From a regulatory standpoint, financial research is not subject to the same tight controls as other aspects of the industry. Taipei is also much less expensive than Hong Kong in almost every respect.

Yet ultimately, the Taiwanese government decided to shelve its financial center idea and redouble its efforts in familiar territory: technology hardware, and especially semiconductors. Perhaps it was for the best: On May 13, the Taiwan Stock Exchange’s main board hit a new high of more than US$2 trillion, the gains driven by Taiwan Semiconductor Manufacturing Co.’s (TSMC) strong sales performance.

And Then There Were Two

The growth of the digital assets sector in Asia primarily in Hong Kong and Singapore illustrates how these two cities remain the region’s paramount financial hubs. Though some competition exists between the two cities, thus far, their efforts are mostly complementary. Singapore is more focused on cultivating a market for institutional investors, while Hong Kong would like to also serve retail investors (though it is discovering how difficult that will be).

To be sure, Japan has an abiding interest in digital assets, and continues to enact legislation broadly supportive of the sector. It has been a leader in adopting regulations for stablecoins and in February, its cabinet approved a bill that adds crypto to the list of assets Japanese investment funds and venture capital firms can acquire. However, the same tax issues are relevant for the cryptocurrency industry as other financial services segments.

In Hong Kong’s case, it will be imperative to follow developments affecting its legal system as its integrity is foundational for a thriving financial services sector. Three foreign judges have announced their departure from Hong Kong’s top court this month, which follows the passage of a new national security law in March.