Three years on from the start of the credit crunch and plenty has been written about the lack of significant changes. 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 soon be able to show his face in public again.
But one thing has changed, and decisively so: all the traditional financial centres have lost ground. The City of London, along with New York and Tokyo, is being challenged by a 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. Firstly, it needs to concentrate on its northern European heartland; second, encourage more inward investment; and third, focus on selling expertise and advice.
Before the credit crunch we were used to a financial universe in which New York, London and Tokyo were the dominant forces. Hong Kong, Singapore, Frankfurt and Geneva played supporting roles, taking the stage to perform character parts, but never threatening to hog the main action. Now, however, there are signs that this is starting to change.
For example, the US and the European Union between them accounted for 75% of global stockmarket capitalisation in 2001, but are down to 50% this year. The number of listed firms from Brazil, Russia, India and China was 2% of the global total in 2001. It is 22% now. Last year, more than half of the world’s initial public offerings (IPOs) were in China alone. And 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: 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. 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 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 will never recapture their traditional dominance.
It’s no great surprise that Seoul and Shenzhen climb up the rankings so fast. That’s where the growth is. Other centres may join them. 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 just over a decade ago, it may sound unlikely. But with its rapid growth, who would bet against it?
But all is not lost for the City. There are three ways it can remain competitive. Firstly, 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 focusing 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), London 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, it needs to encourage more inward investment. London has done brilliantly as a base for the giant US and European investment banks. Big JP Morgan and UBS offices have made it hugely powerful. But what the City needs now is to attract a new wave of incomers. It should be the place where 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 where a Shenzhen bank can plug itself into the global money markets quickly and cheaply.
Third, it must 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 be supplying this.
If London can do all of that, it should be able to remain competitive. But it needs to guard against complacency, because such a transition isn’t going to be easy.