In my Money Week column this week, I've been lookig at the fresh challenges the cuty faces from financia;l centres in the emerging markets. Here's a taster....
Three years on from the start of the credit crunch, plenty has been written about how not much has changed. The banks are all paying big bonuses again. Trading levels are close to where they were before the crisis began, and equity markets have recovered the bulk of the losses they suffered when the markets crashed. At this rate, even Sir Fred Goodwin will be able to show his face in public again soon.
But one thing has changed, and decisively so.
In the wake of the credit crunch, all the traditional financial centres have lost ground. The City of London, along with New York and Tokyo, is being challenged by rising group of new capital markets in places such as Seoul, Mumbai, Shenzhen and Dubai.
That trend is not going to reverse anytime soon. In response, the City has to work out how to remain competitive in the decade ahead. It should focus on three tasks. Concentrate on its Northern European heartland. Encourage more inward investment. And focus on selling expertise and advice more than financial products themselves.
There is little mistaking the way the hierarchy of financial centres has been shaken up in the wake of the credit crunch. We were used to a financial universe in which New York, London and Tokyo were the dominant forces (and pretty much in that order). Hong Kong, Singapore, Frankfurt and Geneva played supporting roles, taking the stage to perform character parts, but never threatening to hog the main action, rather like John Cleese playing Q in a James Bond movie.
Now, however, there are signs that is starting to change. The traditional centres are gradually losing their share of the market. For example, the US and the European Union between them accounted for 75% of global stock market capitalisation in 2001, but are down to 50% this year. The number of listed companies from the BRIC nations (Brazil, Russia, India and China) was just 2% of the global total in 2001. It is 22% now. Last year, more than half of the world’s IPOs were in China alone. Likewise, Asia’s share of the total investment banking revenue pool rose from 13% in 2000 to more than 20% in 2009.
Not surprisingly, new financial centres are emerging to capitalise on that boom. In the annual ranking of the competitiveness of financial centres published by the City of London, London and New York have remained at the top for years. But look at the smaller cities racing up the table. Cities such as Beijing, Seoul, Shenzhen, Shanghai, and Dubai have improved their global ranking hugely since 2007: Beijing is up 20 places, Seoul up 17, Shenzhen up 14, Shanghai up 13, and Dubai up seven spots. Seoul has increased its competitiveness by 42% in just two years. They are clearly the rising powers of global finance.
“In the long-run, emerging financial centres, especially in Asia, are likely to succeed in establishing the scale and scope in their market environment that will help them advance into the top group of global locations,” concluded a recent report on the subject from Deutsche Bank. It predicts a ‘multi-polar’ financial market, with many different centres sharing the available revenues. The big three will remain strong, but they will never be able to recapture their traditional dominance.
It is no great surprise that Seoul and Shenzhen are ring fast up the rankings. That is where the growth is. Other centres may join them. The Russian President Dmitry Medvedev spoke recently of turning Moscow into a major financial hub, and the rouble into one of the world’s reserves currencies. For a country that was defaulting on its debts only slightly over a decade ago, it might not sound very likely. But with Russia’s rapid growth, it would be foolish to bet against it.
So how should the City respond?
There are three ways it can remain competitive.
First, it needs to focus on its Northern European hinterland. All financial centres have strong ties to their local markets. The City has spent too much time focussing on being a global hub. But having decisively bested Frankfurt and Paris to become the main European financial centre, and with the euro not looking like much of a threat to anyone anymore (except possibly to itself), it should be serving the French, German, Dutch and Scandinavian markets. It should be the place entrepreneurs from Eindhoven, Hanover or Lyon come to raise funds, and stage their IPOs. The City needs to widen its definition of its backyard – then make sure it dominates it.
Next, encourage more inward investment. It has done brilliantly as a base for the giant American and European investment banks. Big JP Morgan and UBS offices have made it hugely powerful. But those banks are not the rising forces. What the City needs is to attract a new wave of incomers. It should be the place that Indian, South Korean, Chinese, Brazilian and Russian banks and brokers set up their European offices. It needs to figure out what they need, and how to offer it to them. Ideally, London should be the place a Shenzhen bank plugs itself into the global money markets quickly and cheaply.
Thirdly, get into the picks and shovels business. In a gold rush, it’s the guys selling the digging equipment who make the most money. The new financial centres still have weak infrastructure. They need IT systems, back offices, and the expertise to run banks and bond markets. London should concentrate on selling it to them. Just as the German economy benefits from the rise of the BRIC economies by selling them the machine tools they need to build all those factories, so London should be selling them the machine tools they need to get into the financial services industry.
If London can do all of that, it should be able to remain competitive. But it needs to guard against complacency – because it isn’t going to be easy.