beyondbrics

Never let a good crisis go to waste, they say.

So, have China, India et al used the Great Recession to challenge the traditional financial order? Yes and no, says a report from Deutsche Bank.

New financial centres – such as Seoul, Shanghai and Beijing – are growing faster than emerging economies as a whole, thanks to smarter domestic regulation, greater credibility and the underlying shift in the global economy.

But their rise is likely to be very gradual. Financial centres benefit from economies of scale, and established centres still have three-quarters of the market. From 1990 to 2007, and during the crisis itself, equity trading actually became more concentrated in the big four hubs (New York, London, Hong Kong, Singapore).

Emerging centres are starting from a very low base: currently, the only emerging centres in the world’s financial top 20 are Shanghai, Beijing and Dubai, with Seoul and Mumbai in the top 40.

But, of the 20 financial centres with most improved competitiveness, nine are from emerging markets. The best performer is Seoul, whose competitiveness rating jumped 42 per cent, but notably three are in eastern Europe: Prague, Budapest and Warsaw. Moreover, of the 20 least improved centres, none are from emerging markets.

Hence, the report forecasts that:

In the long-run, emerging financial centres 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. The crisis may accelerate this trend.

That coincides with the thinking of Jim O’Neill of Goldman Sachs, who said last month that emerging markets would be slow to produce financial centres. O’Neill added that – without “basic ingredients” such as the use of English and good business law – such countries “have no chance”.

However, the Deutsche Bank report emphasises one dynamic working in the newcomers’ favour:

financial flows from the advanced to the emerging economies are expected to stay behind the levels seen in the past, suggesting that much of the financing needs [for Asian growth] in the coming years will need to be satisfied by domestic emerging financial markets.

[For example, in China, growing domestic demand and the government's reform policies are expected to bring the Chinese financial industry's] shares in the global financial market from 9% to 13% in banking, from 2% to 5% in bonds, and from 6% to 16% in equities.

In other words, national prominence can be the route to global competitiveness.

But the new financial centres won’t be much different to the traditional powers. As Steffen Kern of Deutsche Bank told beyondbrics:

It’s a classical catch-up process. [New financial centres] benefit from the progress that we see in the established big four financial markets.

Is it a new paradigm? No, it’s a shift in weight. But will everything stay the same? No.

Financial innovation will not come primarily from emerging markets, but from the traditional players keen to hang on to their advantage. That might also help mitigate one of the potential drawbacks of a multi-polar financial world: namely, that international regulation would become more difficult.

As Kern says:

Even in a multi-polar envrionment, there is great scope for reasonably-aligned international progress on financial market regulation. It’s a matter of urgency [...and] the G20 made a strong commitment.

After all, emerging financial centres – and Dubai especially – know that crises are not limited to traditional homes of finance.

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