Hong Kong consolidates position as world’s leading financial centre

The Financial Development Report measures and analyses the factors enabling the development of financial systems in a number of economies around the world. Not surprisingly, the top three spots are held by countries hosting major financial centres. As in last year’s Index, Hong Kong remains first, while the United States and the United Kingdom rank second and third, respectively.

Hong Kong first rose to the top of the Index last year, becoming the first Asian financial centre to achieve this rank. This year, Hong Kong not only maintains its position, but also manages to increase its relative score, thereby creating a wider gap between it and United States.

Hong Kong’s increase in relative score can be attributed to strong intermediate financial results. It scored higher on both banking and financial services, and financial markets, respectively due mostly to an increase in the size and efficiency of the banking sector, and strong equity and bond markets. These markets profit strongly from the contribution of mainland Chinese companies. For example, in 2011, 43% of firms listed on the Hong Kong Stock Exchange were mainland Chinese companies, accounting for 56% of the Exchange’s market capitalization.

In second position on the Index, the United States has seen little movement since last year but shows an improvement in rank within the financial stability pillar, as its banking system is becoming more stable. The reason for this can be found in its substantial increase in tier 1 capital ratio, indicating that banks are preparing for regulatory reform and strengthening their balance sheets.

While the United States shows minimal movement across the ranks of the seven pillars, the United Kingdom, which ranks third overall on the Index, portrays a more mixed picture. The greatest increase can be seen across the United Kingdom’s institutional and business environment pillars. Greater trust in politicians and a decrease in the burden of government regulation benefited the institutional environment, while an improvement in retaining and attracting talented people, among other factors, influenced the increase in the business environment. The greatest decrease in rank among the seven pillars can be seen in financial stability, driven by a drop in rank in currency stability. The decline of the current account balance to GDP is among the largest contributors to this drop.

As a Hong Kong official put it last year in an interview – it is more difficult to maintain the top spot than to achieve it. So it will be interesting to follow how these markets evolve in the coming years.

Author: Michael Koenitzer is Head of Project Management, Financial Services Industries for the World Economic Forum.

Image: View of the Hong Kong Island skyline as seen from the Peak in Hong Kong REUTERS/Bobby Yip