FINANCIAL CENTRES
All shapes and sizes
Sep 13th 2007
From The Economist print edition
Asia's financial centres reflect its vast geography and divergent economies
LOCALS and foreign visitors alike enjoy a stroll along the Bund, the famous embankment along the Huangpu river in Shanghai. With performers, pedlars, couples and families all milling around, the waterfront has a carnival-like atmosphere. Behind it, a string of historic buildings—from the old Peace Hotel to a granite dome that used to house the Hongkong and Shanghai Bank—recall the Bund's glory days as the Wall Street of China.
But today the real attraction is on the opposite bank of the Huangpu, where the Pudong financial district is sprouting new skyscrapers at a remarkable pace, most of them the work of well-known architects from around the world. The 88-storey Jin Mao tower, currently the tallest in China, houses a spectacular Grand Hyatt hotel as well as the offices of international firms ranging from Société Générale to Aon. Next year it will be overtaken by the Shanghai World Financial Centre. Nearby the Oriental Pearl Tower sports futuristic pink bulbs that form a favourite backdrop for holiday snaps. As the skyscrapers rise in Pudong, the luxury-goods shops in the upmarket quarters of the city do steady business, and old buildings along the Bund are getting new leases on life as smart restaurants and bars.
The Shanghai Stock Exchange offers further evidence that this city is awash with money. The leading market index has surged by more than 300% in the past 18 months. Foreign investors are clamouring for a bigger share of the action, but the authorities have kept capital controls in place to ensure that most of it goes to the Chinese domestic market.
An estimated 70-90% of investors on the Shanghai exchange are individuals (“retail”, in the industry jargon). Perhaps 300,000 new retail trading accounts are being opened every day, and about 50m Chinese have accounts. Some people are taking out loans on their houses to funnel more money into the stockmarket, fuelling a boom in property as well. Insider trading is said to be rampant. “It is a remarkable cocktail to manage as a regulator,” says a British lawyer who works in China.
The government is trying to maintain control without unduly hampering the market's growth. A key element of that control is the Chinese currency's lack of convertibility. In an effort to calm the stockmarket frenzy, the authorities earlier this year tripled the stamp duty charged on transactions. When further dampening measures were put in place the market dropped in late May and early June, but the trend during the summer was firmly upward.
Controls also remain on trading in derivatives, a fast-growing sector trying to handle the country's big appetite for commodities and financial products alike. The China representative for Calyon, a foreign brokerage that has a joint venture with the government-backed CITIC, says it is inching towards approval from the authorities that will allow it to enter the market.
There are some glimmers of light for foreign companies looking for openings. The insurance sector has been partly liberalised, thanks to an agreement reached during the negotiations over China's accession to the World Trade Organisation. Firms ranging from AIG (a long-time presence in the region) to Aviva (a relative newcomer) are planting their flags across China. Restrictions on foreign banks are gradually being eased. And in one of the more intriguing signs that China seeks further engagement abroad, its government recently bought a stake in Blackstone, a big American private-equity firm.
As for Shanghai, the Chinese government wants to make it a great financial centre again, as part of its broader goal of “leading China out of poverty into a glorious future,” says an analyst in the city. But for all the money and business flowing into Shanghai these days, it also shows up all the problems of emerging financial centres in developing markets. Many foreign visitors arriving at its international airport travel to the city on a Maglev train, the world's fastest, which can reach 430km (267 miles) an hour. But it terminates miles from the city centre. Like the Maglev train, Shanghai needs further development to meet global standards.
Size doesn't matter
Shanghai is just one of several important financial hubs in Asia. Unlike in America and Europe, though, no single Asian hub has yet emerged as a clear leader. At present the lion's share of equities traded in the region goes through Tokyo, Hong Kong, Shanghai and Singapore (see chart 3). There are also plenty of smaller financial centres, from Sydney to Seoul. But Shanghai's and Mumbai's hopes for regional leadership have yet to be realised.
There had been worries that Shanghai would steal Hong Kong's thunder, but the former British colony remains a vibrant place for stock listings, mergers and other financial transactions. Hong Kong recently marked its tenth anniversary as a special administrative region of China and remains the international gateway to mainland China and Taiwan.
A slew of international investment banks, ranging from Goldman Sachs to Allianz, ABN Amro and BNP Paribas, have offices in Hong Kong, as do many international hedge funds, private-equity firms and insurance companies. A variety of home-grown firms play an important regional and international part. The legacy of British colonial rule—including the widespread use of English, a Western-based legal system and international standards of corporate governance—continues to serve Hong Kong well a decade after the handover to China. Support services such as international law firms, whose operations remain highly restricted on the mainland, base themselves in Hong Kong. One-third of Hong Kong's company stock listings and about half of the market capitalisation on the financial exchange come from mainland Chinese companies, including the successful joint listing last year of ICBC in Hong Kong and Shanghai.
Financial services have become more important to Hong Kong's economy as its manufacturing base has shifted across the border. Given Hong Kong's space restraints, that has been all to the good. But costs have soared in recent years, air quality has deteriorated and traffic jams seem worse than ever. You hear a lot of stories these days about fund managers moving to Singapore to get away from the smog.
But for any firm that is serious about the China market, Hong Kong is a must—and Shanghai is as yet no substitute. The price differential in stocks listed dually in Shanghai and Hong Kong tells its own story. Martin Wheatley, who used to work at the London Stock Exchange and is now the chief market regulator in Hong Kong, puts the premium for shares listed there at about 50%. He and others say that Hong Kong's stringent regulatory standards give any Chinese firm listing in the territory an instant credibility boost in the eyes of foreign investors. Whether and when this gap narrows is a matter of close interest across the region. “Hong Kong aspires to be the Wall Street of China, and Shanghai is its only competitor in this region,” says a Hong Kong based lawyer.
Tiny Singapore, like Hong Kong, has long had to rely on its ingenuity to succeed. Compared with the relatively free-wheeling capitalism of Hong Kong, Singapore has a much more managed economy. Decisions are taken and implemented swiftly. Only a couple of decades after the government identified finance as a priority sector, Singapore has a thriving financial exchange, is considered a prime hub for wealth management and has a growing number of boutique hedge funds.
Singapore owes its success as a financial centre to a combination of economic and political stability, financial incentives and a willingness to build international bridges, as well as a leafy and calm (if steamily tropical) environment. Critics consider it dull, increasingly costly and too heavily influenced by government. Foreign law firms are restricted there as well.
Growth in private banking has been especially strong. Official estimates put the size of the wealth-management market at $200 billion-$300 billion, but some in the industry reckon it could be twice that. It has helped that smaller “boutique” funds are very lightly regulated. “You can become a money manager almost overnight,” says one analyst.
Singapore's financial exchange, SGX, trades both stocks and derivatives. It has become increasingly global in recent years, and about two-fifths of its market capitalisation now comes from foreign companies. SGX has tried to specialise, creating liquid markets in sectors such as shipbuilding and property.
A bull market in derivatives has prompted trading volume to surge in the past few years, says Seck Wai Kwong, a leading exchange official. SGX has been collaborating with Chicago's CME for over 20 years, has explored a retail link with the Malaysian exchange and has a 5% stake in the Mumbai bourse. In June the Tokyo Stock Exchange, Japan's leading exchange, took a stake of nearly 5% in the SGX. The city-state has become a popular outpost for Japanese financiers and their families, who are drawn to its stability and lifestyle.
Singapore has also positioned itself as a gateway to India, drawing on its cultural ties with that country (a sizeable portion of Singapore's population is of Indian origin). But Mumbai itself, too, hopes to become a global centre in the medium term. With a population of 1.2 billion and a fast-growing economy, India holds great promise for the world's financiers. For now, though, it is less of a global hub than an important national centre.
The vast majority of investors on India's exchanges—some reckon as many as 95%—are individuals rather than institutions. “No product in India can succeed unless there is retail support,” S. Ramamurthy of the National Stock Exchange told financiers in London recently. He estimates that foreign institutional investors account for about 10% of the volume of Indian stocks. As in other developing markets, the aim is to increase the number of institutional investors over time to give the markets more depth and maturity.
For the moment, though, protectionist regulations and poor infrastructure make Mumbai a difficult environment for international financiers, though there are hints of change to come. “The Indian government is making all the right noises” about opening its markets, says one of them. Among the changes they would like to see is an end to the current strict limits on foreign participation in the markets.
Meanwhile, though, a growing number of Western investment banks and insurers are outsourcing their back-office operations to India. For their part foreign exchanges also note that India is an especially popular location for trading arcades—computer-filled rooms where active traders buy and sell financial instruments, either on their own account or for proprietary trading firms—which are having an impact on international markets.
Catching up on a lost decade
Tokyo is by far the biggest financial centre in Asia, although it caters largely for the domestic market. It has been an important financial hub for centuries, and is home to some of the world's largest corporations. The Tokyo Stock Exchange (TSE) is the world's second-largest share market. But Tokyo's financial firms and some politicians are waking up to the fact that other Asian cities are grabbing a bigger share of the surging financial flows in the region. The government has embarked on various reforms intended to make Tokyo more attractive as a financial centre. For instance, the financial sector's regulator has announced plans to rearrange the firewalls between banking and trading securities to allow financial groups to serve their customers better.
The TSE, having suffered a series of hitches, some of them technological, is trying to become more effective. Hence the 5% stake in Singapore's SGX, and plans to go public in 2009. Yet reform will not come quickly or easily.
Tokyo's financial sector still seems haunted by a “lost decade” when economic woes prompted Japan to retreat from its role as a top international investor in the 1980s. Banks, the bedrock of the financial sector, went through a crisis in the 1990s and pulled back from the capital markets as well. Bank lending remains relatively more important in Japan than in America, where capital markets are much more active. Taxes are high. Regulation is seen as inefficient, excessive and unwelcoming to foreigners. Accounting rules differ from the most widely accepted international standards.
Even so, foreigners dominate activity in the financial markets. One Western executive says young Japanese investment bankers typically have far less experience of deals than their counterparts in London or New York. Once the brightest and best Japanese graduates went for jobs at big Japanese banks; now more and more of them are being recruited to firms such as Goldman Sachs or UBS.
One of the things that differentiates Asia is that few big financial exchanges have demutualised and gone public, a process that has increased efficiency and competition in the West. And for all its booming stockmarkets, Asia also remains cautious about more innovative areas of finance, such as derivatives and the short-selling (betting that a stock will fall) so popular with Western hedge-fund managers. Painful memories of the Asian financial crisis in 1997 still linger. Many of Asia's capital flows are still channelled through global investment banks with headquarters in New York or London.
Wait for it
To Paul Chow of the Hong Kong exchange, Asia's multiple and varied financial centres reflect not only the region's vast geography but also its different economic realities. “At the end of the day there is no one solution for all,” he says. “Everyone is at different stages of development, facing different challenges.” But in 20 years' time, he adds, the picture is likely to look much more like that in the West.
Advertisement
Advertisement
