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Hong Kong’s status as a financial capital is at risk. Can Tokyo snatch its crown?

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This is the web version of Eastworld, Fortune’s newsletter focused on business and technology in Asia. Subscribe here to get future editions in your inbox.

In recent weeks, Hong Kong has been hit by a chain of events some fear poses an existential threat to the city’s status as Asia’s leading financial center.

The new national security law, imposed by Beijing, grants China’s central government sweeping authority to surveil, interrogate, fine, and imprison individuals deemed a danger to national security and has cast a chill over culture and society in this freewheeling city.

The Trump administration, decrying the law as a breach of Beijing’s promise to allow Hong Kong a “high degree of autonomy” after the territory’s 1997 handover, has revoked the territory’s special trade and tax relationship with the U.S. Trump has threatened sanctions against Chinese officials implementing the law and any firms that support them; Beijing vows to retaliate in kind.

The U.S.-China tussle over the city has spooked global banks and businesses operating here. A survey released this week by the American Chamber of Commerce in Hong Kong found that 76% of respondents said they were “somewhat concerned” or “extremely concerned” about the legislation, with 30% saying they’re considering moving assets or capital out of Hong Kong in the medium- to long-term future.

American tech companies including Facebook, Google, and Twitter have hinted they’re prepared to pull out of Hong Kong. On Wednesday, The New York Times announced plans to relocate its digital news operations for Asia from Hong Kong to Seoul.

Lawmakers in Britain, Australia, Taiwan and the U.S. all have proposed measures to take in Hong Kongers as refugees, potentially draining the city of talent. Meanwhile, Beijing has announced plans to tax Chinese citizens on their global income, a move that could increase the tax rates of many mainland bankers in Hong Kong from 15% to 45%, further fueling talk of “brain drain” from the city’s financial industry.

So is Hong Kong finished as Asia’s financial hub?

Mark Clifford, executive director of the Hong Kong-based Asia Business Council and former editor of the South China Morning Post, warned in that newspaper this week that Hong Kong “risks an accretion of damage to its international standing from people in a party who don’t understand that institutions of free press, a strong and uncorrupt civil service, and an independent judiciary system are fragile objects…” The city, he argues, stands “in danger of seeing its traditional role as a portal between China and the rest of the world destroyed.”

But I’m not so sure.

As we’ve reported in Fortune, U.S. lawmakers’ effort to chase Chinese companies off U.S. stock exchanges is likely to prove a multi-billion dollar bonanza for Hong Kong’s financial industry. There are myriad ways Beijing can channel capital and investment banking deals to the city.

And, as American Chamber of Commerce president Tara Joseph acknowledged in an Eastworld Spotlight conversation with me this week, it’s hard to imagine another city in the region capable of snatching away Hong Kong’s crown.

Singapore, most frequently touted as Hong Kong’s heir apparent, is comfortable and cosmopolitan. It offers a British-style legal system and English is widely spoken. But it’s a five-hour flight from the nearest Chinese city. And the total market capitalization of Hong Kong’s exchange, about $5 trillion, is six times that of the Singapore exchange. Hong Kong attracted 161 initial public offerings and first-time listings amounting to $40 billion last year, while Singapore drew 11 deals worth $2 billion.

Arcus Research analyst Peter Tasker argues that “the most obvious candidate” to replace Hong Kong as Asia’s financial hub is Tokyo. I agree. Tokyo is capital of the world’s third-largest economy, home to the largest pool of pension assets after the U.S., and a leading source of foreign direct investment. It helps, too, that the yen is the most-traded currency after the dollar and the euro.

I worked for the Wall Street Journal in Tokyo in the go-go years of the early 1990s when no one questioned that city’s financial pre-eminence in the region, and I chronicled the beginnings of its spectacular demise. So I’m intrigued to see that Japanese Prime Minister Shintaro Abe’s Liberal Democratic Party is drafting a plan to revive Tokyo as a financial hub. Recommendations include relaxing banking regulations and developing a stock-market link to China similar to the Shanghai-Hong Kong Stock Connect program. I find it enormously encouraging that the Financial Services Agency this week tapped Ryozo Himino, a veteran regulator and former secretary-general of the Basel Committee on Banking Supervision, as its vice minister of international affairs.

Any bid to create direct trading links between Tokyo and exchanges in Shanghai or Shenzhen would require the support of Chinese financial regulators, as would efforts to increase the number of Chinese companies traded on the Tokyo exchange. Why would Beijing help Tokyo dethrone Hong Kong as Asia’s financial center?

Japan’s biggest problem is tax. Abe has cut Japan’s corporate tax rate by about 10 percentage points to about 30% in recent years, but that’s double what businesses pay in Hong Kong. And Japan has increased the top tax rate for personal income to 55%, more than triple the rate in Hong Kong. Capital gains, which aren’t taxed in Hong Kong or Singapore, are treated as income in Japan. As Tasker admits, it’s hard to imagine that Abe will be able to sell Japan’s equality-loving voters on the idea of dishing out huge tax breaks for rich bankers and big foreign firms.

More Eastworld news below.

Clay Chandler
clay.chandler@fortune.com

This edition of Eastworld was curated and produced by Grady McGregor. Reach him at grady.mcgregor@fortune.com

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