Move over London, hello Hong Kong-Beijing-Shanghai as the world’s top financial centre?
Chris Rowley says the hunt for the city that will take over London’s mantle as the top global financial centre has been unduly focused on Europe, when Asia is the region to watch
There have been fierce debates in the United Kingdom and the rest of Europe since the Brexit vote about what might happen to the City of London in terms of its position as the world’s pre-eminent financial services centre. These arguments by commentators, practitioners, policymakers and academics disappointingly, but not unexpectedly, have been conducted in a simple, narrow, extremely eurocentric, even ethnocentric, manner which treats the subject as a zero-sum game.
Too many commentators seem to think the “best” and “most obvious” – and by implication “only” – competitors to London’s financial crown are in the European Union. To shed some light on this narrowness, we can look at the widely used Global Financial Centre Index, which ranks all the major centres. Its latest report continues to rank London first but the EU’s most commonly mentioned alternatives ranked poorly. Frankfurt was 20th (down nine places), Paris 24th (up two), Dublin 31st (down one) and Amsterdam 50th (down 17).
Interestingly, too many senior bank executives, especially vastly overpaid US ones, fly into various EU destinations on very short visits and naively proclaim how they could do business in city X, Y or Z. Yet, this is more banker rhetoric than reality. Being shuttled around on closely choreographed and micromanaged visits in these cities bears no connection to the everyday realities of living and working in the location being lauded.
Thus, too often, the unacknowledged costs of relocating financial services to these alternatives are frequently ignored. These include language capabilities, salaries and bonus structures, direct and indirect tax rates, cost of living, requisite housing and schooling provision, skills base and related support staff, and physical infrastructure. For example, employment in the financial sector in London stands at around 729,600, compared to 333,000 in Paris, but just 74,700 in Frankfurt and only 35,500 in Dublin.
To help put these numbers into perspective, we can look at the scale of some US finance institutions in the UK. JP Morgan alone employs about 16,000 people while Goldman Sachs and Morgan Stanley each employ another 6,000. The City’s agglomeration effects, benefit of history, scale and scope of financial services will not be easy to replicate, especially in the short term, by more niche players.
In contrast, many leading financial centres in the Asia-Pacific region improved their ratings in the Global Financial Centre Index rankings. Tianjin was a new entrant, Qingdao rose significantly while Guangzhou, Chengdu and Dalian were also ranked. Hong Kong and Shanghai came in at third and sixth respectively, with Beijing and Shenzhen also in the top 20.
The index also noted that Shanghai and Qingdao were the top two centres that finance professionals thought would become more significant in the future. This view is underpinned by China’s liberalisation reforms, which include state-led ambitions of developing Shanghai into a global financial centre. However, there are some important constraints to this goal, such as the need for the rule of law, robust institutions and reducing the moral hazard of ultimate government rescue.
Of course, Asian rivals face the huge task of matching not only the depth but also the breadth of London’s financial might. In this respect, the network of China’s financial centres may prove to be important. This might involve creating synergy between the different financial centres with each bringing to bear their own strengths, for example.
The obvious trio would first include Hong Kong, as a well-established and highly developed international financial hub and gateway to China, which attracts leading global commercial and investment banks, and wealth management, hedge fund and private equity firms. Second, Shanghai, as a commercial international financial centre with many financial markets, including stock, gold, financial derivatives and foreign exchange, and which hosts foreign commercial, investment and state banks. Third, Beijing as a political-financial centre with major financial regulatory agencies and state-owned banks.
In sum, the UK’s Brexit vote has raised important issues, including the future of the City of London as the world’s top global financial centre. However, the debate seems to have been reduced to just an inward-looking, EU-focused discussion, whereas the big picture requires us to see that we are now in what will be the Asian century, characterised by the region’s growing and dynamic economies and, in particular, China’s rise.
The fact that the Global Financial Centre Index includes several Chinese centres, some of which performed very well, is indicative of the ongoing shift of global economic power and the increasing importance of China in international finance. We may hypothesise that it will be Asian financial centres, such as Tokyo, Singapore, a hub for Southeast Asian financial networks since the 19th century, and cities in China, not those in the EU, that may prove to be potential competitors to London’s pre-eminence in financial services post-Brexit.
Professor Chris Rowley is a visiting fellow at Kellogg College, University of Oxford. He is a leading figure in the study of employment and human resource management, and business and management in Asia