Capital of the world

Will Hong Kong and Shanghai emerge as the pre-eminent world financial centres? Andrew Scott enters the futures market.


There have been three basic stages to globalisation. The first was when companies in the West outsourced activities to other countries because of the cheapness of doing so. The second phase of globalisation was when the West saw fast growing markets as an opportunity to sell more of what it produced; the dream of 1.3 billion Chinese consumers.

Now, we are in the third wave of globalisation. This is when companies in the so-called emerging markets, or what I prefer to call the growth economies, are moving up the value chain. They are looking to develop their brands and technology. Some are coming to the West, acquiring companies and moving into developed markets.

For business schools, this has led to lots of interesting developments. When we reviewed the London Business School MBA programme we were looking at a strong product we wanted to make stronger. One of the things the School is very, and rightly, famous for is being global. Historically, this has meant people from around the world coming to London, mixing in the classroom, studying very global material, and then working for western companies in Europe and North America.

What we’re seeing now with globalisation is a much more lattice-like structure, rather than the world being dominated by Western Europe and North America. We take students from around the world, bring them to London in a very global classroom, give them very global material, but we have to prepare them for working for companies from and in any part of the world. That requires change and the Global Business Experience part of the MBA programme is an element of that process of taking the global element out of the classroom. It takes students on the road to give people of all nationalities experience and understanding of what is happening in a variety of countries, industries and firms.

The lure of Asia

What’s interesting about the world at the moment is how much the centre of the global economy has shifted. Imagine a map of the world economy and try to pinpoint its centre. Over the last 30 years, that centre has shifted from somewhere in the Atlantic to the Middle East. While there has been a huge shift of economic gravity thanks to China’s growth, financial centres haven’t shifted quite so rapidly. London and New York remain dominant.

That will change. The lattice-like structure mentioned earlier will grow and shape capital flows. We are already beginning to see the rapid rise of financial centres in the East whether it is Singapore, Shanghai or Hong Kong. They will become larger and larger as the centre of the world economy shifts in their direction.

An additionally interesting element to this is that Asia is an area of very high savings compared to the West. A lot of the financial industry, whether it be banks or insurance companies, bases itself where the savings are. If you think about Switzerland and Germany and the insurance sector, they’re based there because of high savings. So with Asia having such high levels of savings, it’s clearly going to attract many financial centres.

Of course, another reason why money and financial flows are going to go there is that there are many high growth regions with lots of investment opportunities – especially in comparison to the West. For all the size of global financial flows, it’s still the case that investors have better returns when they’re actually located in a region.

And then the final element pushing the financial world towards Asia is regulatory arbitrage – the tendency of organisations to migrate to the areas where regulations better suit their needs.

Chinese walls

China adds uncertainty to the mix. The renminbi is not a freely traded currency. There are controls in place, but to be a global financial centre you need to have a freely convertible currency, strong rule of law and investor protection. China is improving all of those things but, of course, Hong Kong already possesses them.

Hong Kong is especially interesting because for so long it was the bridge to the West for that part of the world. Since it has become part of mainland China, the Hong Kong financial system has got closer and closer to China. As a result, one of the themes of London Business School’s recent Global Business Experience trip to Hong Kong was to think about its future as a global financial centre; its role in helping finance China’s development; and whether Hong Kong is likely to be threatened or boosted by the growth of Shanghai.

What struck me was just how rapidly the Hong Kong financial system has integrated with China already – not just from a Central Bank and a regulatory perspective, which was striking, but also in terms of how much bank financing and bank loans are happening between the two. Wherever you go in Hong Kong and whoever you meet, you are constantly reminded of the scale of ambition and the expectation that this will be the world’s economic and financial centre.

The Columbus moment

Inevitably, the rise of Hong Kong and other financial centres has repercussions elsewhere. It’s hard to avoid the conclusion that London will experience relative decline as a financial centre over the next 50 or 60 years. When I teach, I illustrate this point by showing a picture of the column of Christopher Columbus at the bottom of La Rambla in Barcelona. The statue points out to the Mediterranean. Before Columbus discovered America, the Med was a world hub and Barcelona was a thriving port and financial centre. After Columbus, Barcelona went through 200 years of relative decline as the centre of the world shifted west. When the centre of the world economy lay between Europe and North America, London’s time zone was an advantage. When the US was the biggest economy in the world, speaking English and selling food recognisable to Americans were also big advantages.

When the central world economy is somewhere over China and there’s a seven-hour time difference, as well as substantial cultural differences, the challenge is much greater.

Yet, in the 21st century, London has massive advantages. It is the only truly global financial centre and will still continue to grow. But, what we are seeing are more and more regional hubs beginning to have a global role in certain niches. It will take years until Shanghai or Hong Kong are rivals in size or breadth with London or New York. Until there are capital controls and a free convertible currency, China is not going to dominate. However, we will see much more rapid growth in Hong Kong and Shanghai than in London, partly because of regulation, and partly because of where the savings are. Taking a really long-term view, Shanghai may in the end become the pre-eminent banking centre, but that is likely to be some 50 years down the road.

Having said that, I would not underestimate London’s willingness to innovate. After all, it maintained its position as a global and financial capital long after sterling was no longer the world’s reserve currency. It will be interesting to see how politics and regulations play out. There’s a clear contradiction at the moment in UK policy. The British Government is trying to encourage Chinese firms and banks to operate in the UK and to issue renminbi bonds. At the same time, it is trying to encourage the UK financial system to become smaller so that it doesn’t become too big to fail. The battle is between seeing the City of London as the UK’s major export that should be developed and the post-crisis concern that a big city brings about financial instability. 

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