Goh Chok Tong, the island-nation's senior minister, said in November that as China and India relax controls on capital outflows, individuals, banks and companies in the two emerging Asian giants will increasingly invest overseas.

Singapore could provide them with "a base to expand into the region," said Goh, a former prime minister and the current chairman of the central bank.

What if it's the other way around? What if, instead of sending money to Singapore or raising it there, China and India use greater capital mobility at home to sponsor their own rival financial centers and lure away a chunk of Singapore's banking and fund-management industry?

A clear indication of the danger facing Singapore's preeminence as a financial powerhouse - it's the fastest- growing wealth-management center in Asia and the world's fourth most active currency-trading hub after London, New York and Tokyo - emerged last weekend when India announced a plan to make the rupee fully convertible sometime between next year and 2012.

A day after Indian Prime Minister Manmohan Singh spelled out his intent, Montek Singh Ahluwalia, the government's top economic planner, made it clear why convertibility was essential.

"Making Mumbai a regional financial center is not possible without a convertible rupee," Ahluwalia, the deputy chairman of the Indian Planning Commission, said in Mumbai.

Singapore's planners should pay attention.

India isn't opening up its capital account to send business Singapore's way; it's doing so because it wants the financial intermediation that Indian companies and banks currently buy in Singapore, Hong Kong or Tokyo to be available in Mumbai.

And that isn't all. Global banks such as JPMorgan, Morgan Stanley, Goldman Sachs and Lehman Brothers are using India for back-office services and "offshore" equity research. With full convertibility, it may not take Mumbai too long to become a trading and asset- management hub, too.

That may make a dent in Singapore's S$21 billion (HK$100.9 billion) financial services industry, which accounts for 11 percent of its economy.

The mainland already has a captive financial hub in Hong Kong - one of the world's open economies for trade and capital flows. Hong Kong has a top- notch legal system, a free press and a stock-market value of about US$1.2 trillion, four times that of the Singapore Exchange.

Even with such obvious strengths, Hong Kong is on shaky ground. The authorities in Beijing have made no secret of their aim to develop Shanghai as a financial center. With the government's investment of US$40 billion over a decade in the remaking of Shanghai, the urban infrastructure is in place.

So while it may take 10 or 20 years, once China cleans up its banking and legal systems, makes the yuan convertible, and allows enough press freedom to expose lapses in corporate governance, the most populous nation will need little of what Hong Kong has to offer today and even less of Singapore's financial services.

India, by comparison, has so far looked like a country that would continue to need Singapore - especially for services such as loan syndication - because the second most populous nation doesn't have a Hong Kong in its backyard.

That might change when the rupee is freely exchangeable into other currencies. The Indian economy will have grown at an annual average pace of 8.7 percent in the three years to the end of this month, presenting opportunities for financial intermediation.

India was Asia's fastest-growing market for new stocks and bonds last year. Indian companies sold US$14.4 billion in shares and equity-linked securities, a 19-fold jump in two years.

The other reason why Mumbai will pose a real challenge to Singapore is availability of talent. The city-state's financial industry relies heavily on imported professionals. India is a major exporter of bankers to Singapore.

Indian wages are fast approaching developed-country levels, ending the rush among Indian professionals for jobs abroad and threatening the supply of talent to Singapore. Take this year's graduating class at the Indian Institute of Management in Ahmedabad. Of the 90 students who have received overseas job offers, 18 have decided to work in India instead.

Capital mobility alone, however, won't be enough for Mumbai, a city that has been enfeebled by decades of civic neglect. It isn't an easy city to live in. The transport system is creaking under the weight of six million commuters, many of whom live far from their workplace. A power shortage looms, and the cost of real estate is already a drag on competitiveness.

Singapore must boost the sophistication of its financial industry, and quickly. Once Mumbai sorts out its urban mess, it might be able to do in banking what Bangalore has done in software code-writing. The threat isn't to be taken lightly.

BLOOMBERG

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