beyondbrics

By Shaun Rein of China Market Research Group

“Shanghai will become Asia’s finance center,” the Hong Konger said dejectedly. With “power tilting to the mainland,” he continued, “Hong Kong will become an afterthought.”

Is he right? Are the doomsday scenarios that have haunted Hong Kong since the handover in 1997 finally coming true?

It might appear so as towering skyscrapers like the just-opened HSBC towers in the IFC dot the Shanghai skyline. Investment banking profits are soaring as Chinese companies like Youku skip the HKSE to list in America. Trying to cash in on profits, financial institutions have announced mad hiring sprees: Citigroup for one will triple its mainland employees to 10,000. Every week a billion-dollar hedge fund or private equity firm seems to announce an office there.

Yet, as confident now in my adopted city’s growth prospects as I was when I moved to Shanghai a decade ago, Hong Kongers don’t need to fear that Shanghai is poised to replace their home as a financial powerhouse anytime soon for three main reasons:

Education, still a thorn
First, Shanghai’s talent pool is weak. Although Shanghai middle school students generally outperform Hong Kongers and Americans on standardised tests, the reality is that Shanghai’s education system does not adequately prepare its students for a globalised world.

They focus too much on rote memory and not enough on training students to think analytically. The biggest obstacle for growth – according to several dozen senior finance executives we’ve spoken to – is not government regulation or corruption but the lack of qualified talent. Turnover often tops 30 per cent a year as loyalty is in short supply.

Even hiring secretaries is tough as anyone who can do PowerPoint or write an email in English wants to be an analyst. Hong Kong’s relatively strong university system prepares a larger group of students qualified for low and middle management financial sector positions.

Tax, tax, tax
Second, China’s personal income tax is far too high, which leaves bankers unwilling to relocate to the mainland where the highest-income tax brackets rise to 45 per cent versus the 17.5 per cent flat tax in Hong Kong. Finance executives prefer to be based in Hong Kong and fly into Shanghai during the week – it’s only a 2-hour flight.

China’s personal income tax system is going under major reform as it tries to eliminate taxes on poor people to spur more domestic consumption, but it’s doubtful high earners will get any break anytime soon. To stave off inflation and oversized economic disparity, the government is actually increasing taxes on wealthy people through property taxes on luxury apartments and is talking about implementing more capital gains taxes.

Cheap? Not anymore
Finally, many wrongly feel Shanghai is a cheap place to live. It is not if you want to buy global brands and pay for international school tuition fees for the children. All those luxury brands like Omega and Zegna that bankers and their significant others like to buy cost 20-30 per cent more than in Hong Kong because of import duties. Car prices are even higher than that, with the Mercedes S600 topping $350,000.

The reality is that most bankers now enjoy a cheaper life in Hong Kong than Shanghai. Bankers have to justify working 100 hours a week by buying the good things in life – and salaries go farther now in Hong Kong than Shanghai for the finer things.

No, Hong Kong is not about to be eclipsed by Shanghai as a financial powerhouse anytime soon because it has a strong education system, better tax code and is cheaper to live in. Hong Kong cannot sit on its laurels, however, and needs to continue to evolve to remain competitive, as Shanghai is catching on fast.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm, and is based in Shanghai. You can follow him on Twitter at @shaunrein.

Related reading:
Education: the thorn in China’s upside, beyondbrics
Breakfast with the FT: Stuart Gulliver
Hong Kong and Shanghai can rise together, FT
Three Growth Megatrends in China, Businessweek