Can Taiwan Replace Hong Kong as Asia’s Premier Financial Services Hub?

Written by Lee Faulkner.

Image credit: Taipei 101 by Ryk/Flickr, license CC BY-NC-ND 2.0

The imposition of national security laws appears to be the final straw for Hong Kong. The decline in jurisprudence in the city that formerly set the standard in Asia has been such that we don’t even know which legal system the new laws will fall under, nor which bodies will enforce them. While the chief executive and justice secretary have parroted assurances, it is far from clear that they themselves know what the laws will mean nor how they will be enforced. Many families and businesses are planning on leaving or are searching for a safer place to park their money. The probable drip, drip of prosecutions under the new laws, and the likelihood that they will be subject to “reinterpretation” by Beijing should they fail to function in the manner intended, could see a process of gradual deformation akin to watching a slowly deflating dinghy.

For the insurance and financial services sector the effects will, in my opinion, be terminal. It is hard to see how an international financial research centre can continue to function if everyone is looking over their shoulder and self-censoring to avoid breaking an amorphous law subject to the interpretations of capricious authorities. The free flow of information and the ability to discuss and challenge government policy aren’t “nice to haves” but essential tenets of a capitalist economy. The impact this will have on professionals, such as auditors, accountants and actuaries, will likely be profound – an opinion that they may need to give could be classed as “against national security” if Beijing doesn’t like it, and could run the risk of a jail term. The laws will pit professionals against their own codes of conduct and stop them being independent. Another fundamental pillar of capitalism – reliance on the opinions of independent professionals – will be destroyed.

The once-creeping but now less disguised politicisation of corporations is insidious. How can a bank or an insurance company operate in the best interests of its shareholders and stakeholders if it has to bend an obsequious knee to Beijing just to be able to operate? In its June 2014 paper on its “comprehensive jurisdiction over Hong Kong” Beijing made no secret that its policy is that the judiciary, like the government, are mere agents and administrators of the state – and that now appears to be broadening to encompass private companies. But why should a business compel itself to take sides on political issues and kowtow to Beijing just to do business if it can go somewhere else where it doesn’t have to?

At the moment, a financial services company doesn’t have much choice about where to relocate – only Singapore presents itself as a safe alternative. However, I believe that now is the time for Taiwan to quickly step up to the plate and develop itself into an alternative regional financial services centre. As Beijing engages in what appears to be the slow-motion strangulation of Hong Kong, this could be Taiwan’s big moment in history. 

For Taiwan to become a financial hub it needs to be honest with itself about why this hasn’t already happened, despite the island having had the intention to make this happen for many years. There are many possible explanations – exchange controls, its regulatory structure, the legal system, the lack of appropriately qualified professionals, inadequate levels of English language competence, and so on. But not one of these is irredeemable.

Developing Taiwan into a regional financial services centre is not one of President Tsai Ing-wen’s strategic priorities, but events in Hong Kong now mean that it should be. Taiwan needs to be bold, ambitious and, why not, even audacious. No country ever achieved anything without being bold, and being bold is never without risks, but history will be unkind to Taiwan if it misses this opportunity.

What, then, are the key policy initiatives that could help Taiwan achieve this? I believe there are three key planks – technology, regulation and the legal framework.

Technology is an enabler, not a solution in its own right. To illustrate what I mean, we need to go back in time. The phrase “one country, two systems” is toxic today in Taiwan for obvious reasons, but the concept is interesting and shouldn’t be dismissed just because Beijing doesn’t keep its promises. The Hong Kong version was based on geography and history – the expiration in 1997 of Britain’s lease of the New Territories – but imagine if the Internet had existed when Deng Xiaoping and Margaret Thatcher made their Joint Declaration in 1984. Would they have set up a “virtual special administrative region” instead? Technology makes things possible – what’s to stop Taiwan setting up its own “VSAR” using the potent power of blockchain and “virtual” communities? Technology offers almost limitless possibilities – the guarantee of absolute confidentiality, the removal once and for all of the powers of governments to intervene, and the irrefutability of naming beneficiaries are but a few examples.

Secondly, Taiwan needs to look at regulation. There is little doubt that for a financial services hub to flourish, controls on capital movements and foreign exchange would have to go. For the large part they’ve already gone, so it’s perhaps not such a big step to go the whole hog. If necessary, this could be limited to transactions within a VSAR. And making new business “digital only” would solve a lot of other potential problems. For a real quick growth hit, and to allow companies to re-domicile immediately rather than waiting for a full regulatory review to be completed, Taiwan could contemplate honouring existing Hong Kong laws and regulations over a transition period. Regional companies, in particular multi-national companies that have set up offices in Hong Kong, need to be incentivised to relocate to Taiwan, so whatever can be done to make their life easier can only be of benefit to Taiwan. Those individuals working for companies who are desperate for a way out would probably jump at the chance should such a facility be made available.

Thirdly, and perhaps most problematic, is the issue of law. Taiwan has a well-respected legal system that generates confidence and stability – that needs to be protected and not undermined. But financial services seem to find a natural home in the common law system – all the world’s leading financial centres (New York, London, Singapore and of course Hong Kong) use it, so there must be a reason why it fits so well. Taiwan needs to study why this is and carry out reforms to replicate it. If that can’t be done, then alternatives need to be examined, perhaps even as fundamental as making a VSAR a separate legal virtual area operating under common law. To avoid any conflicts with local Taiwan law and companies that are already authorised to operate in Taiwan, a VSAR could exclude Taiwanese residents buying products from any companies registered there (this would be similar to the way that other financial services centres operate). 

As well as learning from Hong Kong, and replicating what works, now is also the perfect moment to correct what it hasn’t done right – in particular problems with the standards of ethics of its public servants. For example, the representative of the insurance sector in Hong Kong’s legislative council applied for and got an insurance licence for his own business, and both he and the Insurance Authority apparently think that’s fine. Imagine Rishi Sunak applying for an insurance licence from the Prudential Regulatory Authority for his own business interests, with neither he nor the PRA batting an eyelid. Another issue is that Hong Kong has been slow to embrace technology and adapt to changes. Taiwan could accelerate the development of financial services for the new “sharing economy” and post-Covid-19 world. There is a huge pent-up need for small mutuals and cooperative institutions in the financial services sector – I believe that’s where the sector is going in the 21st century, and Taiwan has a chance to become the regional leader in this domain.

In summary, for Taiwan to put itself on the map, it would do well to copy what Hong Kong has done well, improve what it hasn’t, and explore avenues for finding a new place in the 21st century financial services world. Ideas should be bold and, yes, audacious, but I believe we are at a unique time in history in which Taiwan is uniquely positioned to reap considerable benefits. There are many practical considerations and hurdles to be overcome but, with political will and ambition, these hurdles could be jumped over with room to spare.

Hongkongers, and many ex-pats living there, love Taiwan.  Many would move to Taiwan if they could get a job in their chosen field. For the first time, Taiwan is shifting into a position where it could arguably beat Hong Kong as a preferred destination in the region. Taiwan can capture this opportunity or let it pass – but I believe that this could well be Taiwan’s moment in history.

Lee Faulkner is a Fellow of the Institute and Faculty of Actuaries (IFoA), the UK’s sole actuarial body. He was elected to the Council of the IFoA in 2017. He passionately believes that the Public Interest role of actuaries is fundamental. He has lived and worked in a number of countries and is a Permanent Resident of Hong Kong SAR.