The death of Hong Kong is exaggerated. Despite China's imposition of a draconian national security law in the city, the erstwhile British crown colony remains Asia's premier financial center for now. Those looking hard for an exodus of capital and financial talent from Hong Kong will have to look harder.

Inertia is a powerful thing. For many financial institutions, the costs of leaving Hong Kong far outweigh the benefits.

Some hedge funds will open Singapore offices, but will not jettison their Hong Kong bases. Hong Kong's hedge fund sector is the largest in Asia by a wide margin, managing more than US$91 billion in assets, according to research firm Eurekahedge. That exceeds the combined total in Singapore, Japan and Australia.

In 2020, Hong Kong was the world's second-best performing IPO market after New York, led by the Nasdaq. Hong Kong had 145 new listings last year that raised HKD 397.3 billion (US$51.2 billion). While total deals fell 12% from 2019's 164, IPO proceeds rose 26%. It was impressive that the market flourished amid the coronavirus pandemic and a global economic downturn.

Chinese firms dominated listings on the Hong Kong Stock Exchange last year, accounting for a whopping 98% of all the money raised. 16 listings, including six secondary share offerings, raised at least HKD 7.8 billion each, according to Deloitte China.

Had Ant Group's expected blockbuster IPO not been abruptly nixed, Hong Kong's IPO market would likely have raised an additional US$18.5 billion. The US$37 billion Ant deal was to be split evenly between Shanghai and Hong Kong.

Therein lies the rub for Hong Kong: The city's capital markets are at the mercy of the ruling Communist Party in Beijing, for which politics always comes first. In this case, China's rulers aim to cut Ant down to size. The company became too large for its own good, infringing on the territory of incumbent banks and posing a challenge to the state's control of the financial system.

As Hong Kong focuses on serving as China's offshore financial center, its regional paramountcy will erode. In particular, Beijing's assault on Hong Kong's independent judiciary will have consequences. Without the rule of law, Hong Kong will struggle to attract globally oriented fintechs to set up regional headquarters in the city. They will head to Singapore instead.

The rising Lion City

Singapore is racing ahead of Hong Kong to become the most important fintech hub in Asia. The city-state is the ideal base for economically ascendant Southeast Asia, where digital finance is growing fast. For that reason, UK-based fintech giants such as money-transfer service TransferWise and neobank Revolut have established their Asia-Pacific headquarters in Singapore rather than Hong Kong. 40% of Southeast Asian fintechs are based in Singapore while the Lion City accounted for 65% of investment in regional fintechs from 2015-2019, according to research firm Oliver Wyman.

"Singapore has the right ingredients: regulatory support, talent, tax treaties, ownership, and share structures, and it’s politically friendly standing in the region makes it a good petri dish for innovation and expansion into other markets," Vinnie Lauria, founding partner of Golden Gate Ventures, said in a December report published by Oliver Wyman and the Singapore Fintech Association.

The proof is in the pudding: Singapore has tech giants of its own that are building regional digital services ecosystems. Grab, valued at US$15 billion, began in ride hailing, then expanded to food delivery and digital banking. NYSE-listed Sea Group, Singapore's most valuable public company, has large gaming and e-commerce businesses, as well as a growing fintech arm. Grab and Sea have a presence in every major Southeast Asian economy. The two firms won Singapore digital full bank (DFB) licenses in December that will allow them to serve both retail and non-retail customers. Should. If their digibanking businesses flourish, that will further cement Singapore's standing as Asia's top fintech hub.

China's fintech giants also aim to use Singapore as a springboard for emerging markets in the region. Ant Group won a digital wholesale bank (DWB) license that will allow it to serve non-retail customers in Singapore. If that business is successful, Ant will want to take it to other markets in the region. For its part, Tencent can tap Southeast Asia digibanking thanks to its 40% stake in Sea Group.

Singapore may award one additional DWB license. Potential contenders who did not make the first cut include Chinese smartphone maker Xiaomi and tech giant ByteDance.

Japan's virtual currency niche

Singapore has said little about the fact that its rise as a fintech hub is coming in part at Hong Kong's expense. The Singaporean government is careful not to depict itself in competition with Hong Kong, wary of how that would look to Beijing.

Japan has no such concerns. "Japan aims to bring in financial talent from overseas to become an international financial center for Asia and for the world," Prime Minister Yoshihide Suga said in November. Tokyo is the most obvious choice, while Osaka and Fukuoka have also signaled interest.

The national security law was the catalyst for Japan's financial center push. "Japanese businesses are concerned that their access to information has been curtailed by the national security law," Seiji Imai, senior managing executive officer at Mizuho Financial Group, said at Nikkei's Virtual Global Forum in November.

Japan could certainly lure home some Japanese financial firms from Hong Kong with the right incentives. But attempting to replace Hong Kong as a regional hub for Asia is another matter. Japan is bureaucratic and has high taxes compared to both Hong Kong and Singapore.

Rather, Japan should seek to build on its existing strengths as a cryptocurrency hub. Japan's regulators have been among the world's most forward looking when it comes to virtual currency. As a result, Japan has a nascent regulatory foundation for cryptocurrency in place while most countries are still thinking about whether they need such regulations (they do).

In 2017, Japan amended its Payment Services Act, legalizing digital currency as a form of payment, and introduced a registration system for crypto exchanges. Since then, Japan has issued 22 cryptocurrency licenses.

Last October, Ripple CEO Brad Garlinghouse highlighted Japan's importance for virtual currency. He said that "Japan is one of our fastest-growing markets" and that Ripple may consider relocating its headquarters from the U.S. to the Land of the Rising Sun.

Japan looks set to grow as a crypto trading hub following the December acquisition of London-based B2C2 by SBI Group, Ripple's largest external investor. B2C2 is one of the world's top crypto traders with customers including brokerages, exchanges and fund managers. That deal follows SBI taking a minority stake in B2C2 in July.

The deals will make SBI the first major financial group to operate a digital asset-dealing desk. In the future, SBI and B2C2 may expand into crypto options and derivatives.

Ironically, it was Beijing's fear of crypto-related systemic financial risk that buoyed Japan's digital currency fortunes. China was once the world's largest cryptocurrency market, accounting for about 80% of Bitcoin transactions as of mid-2017. That came to an abrupt end when Beijing decided decentralized virtual currencies posed an unacceptable systemic financial risk. To be sure, Chinese regulators had legitimate concerns about capital outflows and money laundering, but those worries did not require crypto be purged from the Chinese financial system.

Japanese regulators have similar concerns. Yet they are pursuing a more nuanced approach, gradually building a progressive regulatory regime. It is thus no surprise that the crypto industry has boosted its presence in Japan while largely exiting China.

As for Hong Kong, Beijing's long shadow now looms larger than anything else over the city's future as a financial center. Investors should keep that in mind.