Economic power has moved to emerging markets in the wake of the financial crisis, increasing the likelihood that new centres of world trade could eclipse long-established hubs and create new spheres of financial influence.
London and New York have been the world’s preeminent centres of finance for the last 100 years. As first Britain and then America became the world’s leading economic powerhouse, their respective financial capitals assumed global significance. New financial centres, such as Tokyo, Hong Kong and Singapore, grew and prospered after the Second World War, but by and large the locus of world finance has remained static over the course of the past century.
Yet times are changing. The emerging economies will contribute twice as much growth as the developed markets over the next forty years and will be bigger collectively than the developed markets by 2050. New 'south-south' trade routes have already opened-up, bypassing New York and London as faster-growing economies connect to counter economic stagnation in developed economies.
Any aspiring financial centre needs a well-designed and carefully calibrated tax and regulatory regime. It also needs to be an attractive location for big corporations, have a highly skilled workforce and be open and amenable to the world
Just as New York and London grew on the back of their proximity to the epicentre of global growth, so new centres might be expected to emerge as that epicentre moves south and east.
Several cities are already seeking to challenge the established order. Shanghai, Dubai, Doha, São Paulo, Warsaw, Johannesburg, Istanbul and Mumbai (to name but a few) have all declared ambitions to become major financial hubs, with the backing of their respective governments.
The plans of some cities are more advanced than others. The Chinese government has thrown its substantial weight behind Shanghai’s ambition to become an international financial centre by 2020. The Shanghai Stock Exchange is already the third largest in the world. Chatham House has predicted that Shanghai’s equity market will be able to compete with London, Tokyo and even New York if it continues its current pace of growth. The concurrent emergence of Beijing and Shenzhen as regional financial centres will complement rather than compete with Shanghai, further bolstering its position.
Other cities may take longer to establish themselves. Whereas Shanghai was the largest financial centre in Asia prior to the Second World War and is building on strong foundations, other cities have set off from a standing start. They are discovering that the development of a lasting financial centre involves much more than simply capitalising on a favourable market trend.
First of all they need to decide what kind of centre they want to be. To my mind, existing financial centres fall into two broad categories. They are either "connectivity hubs" or "domestic conduits". Connectivity hubs are trade and finance entrepots which bridge geographies and connect distant regions, such as London or Hong Kong. Domestic conduits are backed by large and productive domestic economies and are therefore more import, export and equity driven, like New York or Shanghai. Many of the emerging centres could easily fall into either category, which makes it essential for them to identify which kind of hub they wish to become at the very beginning of their journey. After all, it is gross folly to mark a path without first mapping a destination.
|Global Financial Centres
Source: Long Finance 'Global Financial Centres Index', September 2012
Any aspiring financial centre then needs a well-designed and carefully calibrated tax and regulatory regime. It also needs to be an attractive location for big corporations, have a highly-skilled workforce and be open and amenable to the world. Above all, it has to be a place where people want to live and work. Many cities fulfil some of these criteria, but very few fulfil them all.
Many of the aspirant cities have undertaken large programmes of reform as a means of accelerating their progress. For instance, Doha and Moscow have invested heavily in new financial services infrastructure, São Paulo is taking steps to improve its business environment and Istanbul has overhauled its regulatory system and built a new metro line to serve its new financial district. This has not been without impact - the recent decision by Fitch to raise Turkey to 'investment grade' illustrates the progress that the country has made in bolstering its financial credibility.
Still, the old centres will not be displaced overnight. New York is likely to remain the world capital of equity trading as long as the United States remains the world’s most entrepreneurial economy. London’s position as the global centre of foreign exchange will be safe as long as it continues to adapt to new trends, such as the internationalisation of China’s renminbi. Other centres will start to emerge as emerging economies begin to liberalise and grow, but it takes a long time to create the conditions for global prominence.
Yet uncertainty remains. The future impact of potentially transformative regulation currently under discussion in both Europe and the US is unclear. Some fear that a banking exodus could result if policymakers get it wrong, while some sectors are already on the move. A survey by The Banker magazine in October 2011 suggested that although the international banking community is staying put for now, the more nimble asset management sector is beginning to relocate eastwards.
As the attractions of emerging markets grow larger, London and New York are going to need to work hard to retain their positions at the top.
Earlier this year Antonio Simoes addressed the International Institute of Finance conference in Istanbul on the lessons that aspiring financial centres can learn from established centres.