In recent years of international geopolitical tensions, Hong Kong has experienced unique challenges due to its distinctive position and circumstances. In the intense competition between the United States and China, Hong Kong has been paying a high price as a result.
After several years of ups and downs, the fate of Hong Kong has undergone a significant shift. The island's communication and connection with international markets have decreased compared to the past. The degree of market freedom in Hong Kong is also declining, where there is reduced international capital inflow with increased outflow. Many multinational corporations that once chose Hong Kong as their base are starting to relocate elsewhere. Amid the great changes in the international landscape, Hong Kong will increasingly look to Mainland China for its development opportunities.
As one of the world's three major financial centers, Hong Kong's capital markets were once highly active, leading the way in capital trading in Asia. However, over the past few years, a considerable amount of capital and institutions have withdrawn from there. According to data from the Hong Kong Census and Statistics Department in November 2022, there were a total of 8,978 overseas companies in Hong Kong, a decrease of 71 compared to the previous year, with 46 of them being regional headquarters. The number of companies established by countries such as the United States and the United Kingdom on the island has been consistently declining. U.S. companies have been decreasing since 2018 and have continued to do so for four consecutive years, with a cumulative reduction of 93 companies (as of June 2022, the number of U.S. companies has dropped to 1,258, the lowest since 2004). On the European front, the number of UK companies decreased by 4 to 134, and French companies decreased by 9 to 80. As capital flows out of Hong Kong, the once-active real estate market has also contracted, with property values declining. Data from the Hong Kong Land Registry and real estate agencies shows that Hong Kong's housing sales fell by 40% in 2022 compared to the previous year, reaching the lowest level since the 2008 global financial crisis. Meanwhile, in 2022, the number of Mainland Chinese companies setting up regional headquarters in Hong Kong exceeded the number of American companies, possibly for the first time in thirty years.
Where then will those foreign companies that have left Hong Kong go? Will Singapore be their destination?
To be sure, Singapore is one option. Under normal circumstances, very few multinational corporations are willing to give up their business in China, regardless of changes in the geopolitical situation, as the country remains a highly crucial market. When Hong Kong underwent major changes, many of these corporations either chose to relocate their regional headquarters to Mainland China or establish Asian hubs in Singapore. For a long time, Singapore has been a competitor to Hong Kong in the Asia-Pacific region's financial and commercial centers, and it seems natural that they would benefit from Hong Kong's situation.
However, ANBOUND’s founder Kung Chan believes that one should not overestimate Singapore's role as an alternative to Hong Kong. As a small city-state, Singapore has not been and is unlikely to become, a geopolitical replacement for Hong Kong. While Singapore offers an excellent business environment and efficient government services, it also has notable and strong regulations. Indeed, Hong Kong in the past was much freer than Singapore. Therefore, multinational corporations choosing Singapore is clearly a second-best option, rather than having a perfect substitute for Hong Kong.
Chan pointed out that the West will need to recognize that there is no place that can truly replace Hong Kong. Neither Singapore, India, Vietnam, nor Malaysia can serve as a substitute. In the current world, Western companies preparing to leave Hong Kong must make structural adjustments instead of aimlessly seeking one replacement after another around the world.
During the process of relocating from Hong Kong or the Greater China region, what are some possible structural adjustments that these multinational corporations may undertake? In our view, the most likely layout adjustment is "close produce". Chan believes that the production methods of such corporations are increasingly characterized by a spatial production approach. International production has evolved from a purely corporate activity into a spatial production behavior influenced by complex factors (Chan, 2022). In recent years, the geopolitical costs within transaction costs have risen tremendously. Changes in costs resulting from spatial conflicts and contradictions have made geopolitical factors affecting spatial production a risk factor that needs continuous adjustment. These factors drive and even determine changes in overall costs.
A possible solution, according to Chan, is to introduce the "close produce" model, which is in fact an inevitable choice. The term "close produce" refers to deploying major component industries around the central market and productivity centers to create a production system that is as proximate as possible. The term "close" here has two aspects, i.e., spatial and social-environmental. Companies will need to deploy and organize production in areas with minimal conflicts and contradictions. Such structural adjustments undoubtedly cause disruption. However, deglobalization is not without costs and inevitably implies enormous impacts. The difference lies only in the form, timing, and where these impacts occur.
The "reshoring" and "nearshoring" initiatives promoted by the United States are, in fact, specific manifestations of the close produce model. According to a report by the Reshoring Initiative, an organization promoting the return of manufacturing to the U.S., approximately 350,000 jobs are expected to return there in 2022 as a result of American companies' relocation. This number is much higher than the 265,000 jobs in 2021, a top record since the data-tracking began in 2010. In 2010, only 6,000 jobs returned to the U.S. from abroad, and the number of jobs expected to return in 2022 is over 50 times the figure in 2010.
Another similar approach is that many American companies are shifting manufacturing processes and supply chains to the neighboring country Mexico. Due to its proximity to the U.S. and its membership in the North American Free Trade Agreement (NAFTA), Mexico has become a favored destination for manufacturing in the global supply chain adjustments driven by geopolitical factors. According to data from the U.S. Census Bureau, the average share of Mexican goods in U.S. imports increased to 15% in the 12 months ending in July 2023, reaching a record high in 30 years. In the first six months of 2023, the total value of U.S. imports from Mexico reached USD 236 billion, breaking historical records. In terms of growth, this represents an increase of over 5% compared to the same period the previous year. Mexico has surpassed Canada's USD 210.6 billion and China's USD 203 billion. From 2009 to 2022, China had consistently been the largest source of U.S. imports. This means that in the close produce model, Mexico has replaced China as the largest source of imports for the U.S.
Final analysis conclusion:
The relocation of multinational corporate headquarters from Hong Kong represents an operational adjustment by foreign capital to reconfigure their supply chains and industrial chains with the goal of moving away from China in a world dominated by geopolitical considerations. In a deglobalized world, locations like Singapore, which lack economic depth and market capacity, will not be their primary option. Instead, they will shift towards the close produce model and, in accordance with this principle, choose new production layout focal points.
