As European and North American markets continue to face uncertainties, the global financial landscape is witnessing new players coming to the fore. With the centre of gravity shifting to the East, Asia’s international financial centres (IFCs) look set to become the economic powerhouses of the future.
“At the moment we are generally noticing not just increased regulation [in North America and Europe], but also the fairly flat economies in Europe and North America are creating a push factor,” says Simon Galpin, director-general of investment promotion at Invest Hong Kong. “We are seeing companies that would normally have expanded elsewhere in Europe really looking to come into Asia as part of their expansion, and this applies to financial services as much as it does to any sector.”
While New York and London, the traditional top two IFCs in the world, remain secure in their status, the capitals of finance in Asia are rising through the ranks. Asian IFCs are posing increasing competition for their developed market counterparts, and accounting firm Ernst & Young reports that the banking sectors and institutions of emerging markets will make a strong move towards increasing their presence on the global scene. “We are seeing an emergence of other sources of growth, and other economies that are increasing in their relative importance,” says Richard Webster-Smith, manager of international primary markets at the London Stock Exchange (LSE). “So it is only natural to see other financial centres increasing in their relative importance as well.”
The Global Financial Centres Index (GFCI) for 2011, compiled by think tank Z/Yen Group, revealed that Hong Kong, Singapore and Shanghai finished behind London and New York as the third, fourth and fifth largest IFCs in the world, respectively. Furthermore, a closer look at the GFCI shows that hubs in emerging markets are increasing in their appeal. With Asia hosting other renowned IFCs, such as Tokyo and Seoul, other less well-known centres are also making their mark as aspiring financial centres. While Beijing was in the top 20, Taipei, Shenzhen, Osaka, Kuala Lumpur and Mumbai were ranked among the top 75 IFCs in the GFCI.
Moreover, according to IFC rankings compiled by fDi's sister publication The Banker, the scores for the top two IFCs, New York and London, were reported to have been slightly lower in 2011 than in 2010. Conversely, the other IFCs within the top five – Singapore and Hong Kong ranked third and fifth, respectively – reported improved scores and rankings in 2011.
While the US and EU financial markets continue to provide about three-quarters of global financial services, according to findings from Deutsche Bank, overall levels of market activity reduced substantially in many areas after the 2008 global crisis. As traditional centres lose market share, Deutsche Bank maintains that emerging markets, which have grown strongly over the past few years, will accelerate their catch-up process.
“What you are going to see is far more aggressive thinking about how Asian institutions can exploit some of the opportunities that exist,” says Kevin Burrowes, UK head of financial services at accounting firm PricewaterhouseCoopers. “The real opportunity here is for the institutions that are more Asian-based, given the challenges that we see in the eurozone and American economy.”
As the eurozone crisis continues to affect Europe's IFCs, some centres in Asia are making the most of this window of opportunity. Data from greenfield investment monitor fDi Markets reveals that two years after the 2008 crisis, between the first quarter of 2010 and the first quarter of 2012, business and financial services were the leading sectors that captured the most FDI projects coming into Asia. While business services was the leading sector, accounting for 11% of all projects, investments into financial services grew by 9.6%. Z/Yen Group has observed that Asian IFCs are registering significant improvements in their performance, as shown by Hong Kong’s rating improving by 11 points, while Singapore, Shanghai and Seoul’s rating improved by 13, 30 and 28 points, respectively.
Asian players are actively reshaping the global financial architecture through improving and strengthening as global IFCs. “We will see that some of the Asian centres are doing very well and continuing their growth,” says Mark Yeandle, senior consultant at Z/Yen Group. “Hong Kong, Singapore and Seoul in the longer term are likely to do very well.”
The Asian outlook
While several Asian hubs are emerging as key IFCs, only a select few will continue to possess the gravitas to capture the attention of top financial players in the near future. Singapore, ranked the top Asian IFC by The Banker, will retain its lead, according to the City of London Corporation, as it has established itself as the leading wealth management and private banking centre in Asia, surpassed only by Switzerland in this field.
Hong Kong, proving highly resilient as an IFC, will be well placed to function as an international gateway into China for the wider region, and the global economy. “Hong Kong has certain strengths in terms of its offshore renminbi capabilities,” says Invest Hong Kong's Mr Galpin. “[It] is very much the test market for further liberalisation of the renminbi, [serving as] China’s offshore renminbi centre.”
“The thing is that nobody is quite sure,” says Mr Yeandle. “A few years ago you had clear leading centres. In the American time zone New York was king; in [Europe] London was king. In Asia people were not sure where the business was going to reside. That caused a lot of volatility; people not quite knowing which way it will go. Yet I think now they are looking at Hong Kong, Singapore, Seoul and Sydney [as] very meaningful centres.”
Nevertheless it still appears that the traditional IFCs, namely New York and London, will continue to rule the roost. fDi Markets data reveals that business and financial services between the first quarter of 2010 and the first quarter of 2012 grew at a higher rate in North America than in Asia-Pacific. FDI projects in business services grew by 23.1% and financial services by 25.7%. Also, in western Europe, FDI projects in business and financial services grew by 6.2% and 9.8%, respectively.
“I do not see a precipitous decline in London or New York [as IFCs],” says Mr Yeandle. Mr Webster-Smith at the LSE echoes this sentiment, saying: “While there has been a lot of commentary on the increased importance of certain Asian financial centres, we [believe] that the unique set of attributes that have made London a successful financial centre will remain in place despite the challenges in the past few years. What makes London such a compelling financial centre [is the] intrinsic links and expertise that it has in supporting the needs of various emerging markets and other state actors in high-growth economies. London has been very well connected into a number of markets that have been doing well over the past few years.”
While New York and London will continue to feature as significant IFCs, Mr Yeandle argues there will be an increase in smaller Asian IFCs specialising in a certain aspect of financial services. “I [foresee] European and American centres playing key roles in finance in the future. The Asian centres will [also] become more important, but they will not overtake London or New York. They will just be other centres that are important [and] globally, IFCs will become slightly more balanced.”