Hong Kong slipped from top spot to second because of concern over its growing deficit, openness to competition, and the adaptability of its labour force, the EIU said yesterday, April 24. It also cited fears of political interference from Beijing as another reason for Hong Kong slipping in its poll, which aims to forecast regional business conditions for the next five years.

The EIU findings will come as good news to Singapore, which is trying to stem a recent exit of business to Hong Kong, such as the investment banking operations of Lehman Brothers and the top regional management of Philips, the Dutch electronics group.

The EIU said that Singapore's healthy fiscal surplus would allow it to cut taxes while Hong Kong's fiscal deficit might force it to raise them.

Singapore recently announced it would reduce top corporate and personal tax rates to a uniform 20 per cent over the next three years, although they would remain higher than Hong Kong's 16 per cent corporate tax rate and 15 per cent flat-rate income tax.

But economists believe that tax cuts alone will not improve Singapore's competitiveness as a business centre because it suffers from a limited talent base and is in the centre of south-east Asia as the region loses manufacturing investments to China.

However, Singapore is planning to reduce its heavy dependence on electronics and attract new investments by diversifying its economy into biotechnology and developing into a regional hub for such service industries as healthcare, higher education and private banking.

Economists in Hong Kong reacted with scepticism to the news that Hong Kong had dropped below Singapore as the premier Asian business hub.

The EIU cited such factors as the city's declining share as the gateway for China's trade, the continued prevalence of cartels in its domestic economy and a new ministerial system that led to a lower "political effectiveness" score in the EIU rankings.

Hong Kong's defenders point to the city's efficiency as a hub for regional headquarters of multinationals and investment banks and its proximity to China, South Korea and Taiwan, increasingly the locus of economic growth in Asia, as enormous advantages. Additional reporting by Reuters in Hong Kong

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