Monday, May 19, 2008

Global Financial Centers: Hong Kong or Shanghai to be the third?

Current Global Financial Centers

New York City: Currency, Equities, Banking, Leveraged Finance, Corporate Law, Energy
London: Currency, Equities, Banking, Metals, Interest Rates, Corporate Law, Shipping

Current Specialist Financial Centers

Bermuda: Reinsurance
Chicago: Futures and Commodities
Tokyo: Japanese Equities
Hong Kong: Chinese Equities
Singapore: Asian Derivatives & Commodities

A recent report by the Corporation of London highlights key features of global financial centers:

"Part of the continuing appeal of London to foreign companies is its cosmopolitan status. Frankfurt and Tokyo, for example, are primarily market places for domestic participants to which foreign players are granted access. London, and to a lesser extent, New York are characterised by foreigners trading with each other. In an increasingly international economy, London seems to have a solid future as a global financial centre."

The report goes on to discuss perceptions on the emergence of a third global financial center, which they claim will likely be Shanghai:

"We examined perceptions about whether the two global centres of London and New York were all that the world economy needs or whether there is scope for a new, third, global financial centre. Views on a third global financial centre are split. Most people, however, agree that if a third global financial centre develops it is most likely to be in China and probably in Shanghai. It is unlikely that Hong Kong, Singapore or Tokyo will ever become more than regional financial centres."

However, Hong Kong continues to be well ahead of Shanghai in public offerings of Mainland Chinese companies as evinced by the following graphic:

Graphic courtesy NYT

In fact, as China's torrent of public offerings and its enduring demand for commodities continues unabated, debate has become increasingly rancorous over which city in China can become the third global financial center.

Beijing, while the host of the 2008 Olympics, is mainly a government and tourism oriented city, not a major business powerhouse. The only two contenders are Shanghai and Hong Kong: Shanghai being the historical business center of China, and Hong Kong rising to pre-eminence in the 1950's as a result of Communist takeover of the rest of the mainland and the resulting influx of entrepreneurs/capital from other parts of China.

Even the NY Times is getting wind of the battle, highlighting the increasingly public duel between the two cities in its piece: Hong Kong and Shanghai Duel for Financial Capital

Why all the Hong Kong and Shanghai hubbub? China is mapping out a new national financial regulatory policy and each of the two cities wants to be the main beneficiary. Trillions are at stake.

The Corporation of London writes:

"Respondents to our surveys believe that the two most important competitive factors for the formation of international financial centers are:

1) Availability of skilled personnel
2) Nature of the regulatory environment"

Personally I have little first-hand experience with either city, please comment with your thoughts...

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