In my keynote address at the 20th China International Finance Forum (CIFF) in Shanghai, I focused on the city’s aspirations to become an international financial centre, stating that different jurisdictions must take specific actions to create a globally recognisable and transposable business environment.
CIFF has evolved since its establishment in 2004 into an annual gathering of globally renowned regulators and experts to discuss the internationalisation of the Chinese market. It was held on 14 December 2023. The conference was the same one at which Jack Ma had spoken at in 2019 that landed him in a lot of trouble. This was the first time the conference was convened since the pandemic.
Drawing examples from a range of successful financial centres , I shared the story of the factors that enabled Singapore to surpass Hong Kong and Tokyo to become the most important foreign exchange hub in the region and the story is more prosaic than we imagine. My favourite global financial center is Bermuda, an island of no more than 70,000 residents. I talked about accidents in history, including the one the moved Chinas financial center from Shanxi province to Shanghai after the first Opium War. Against the backdrop of geopolitical tension and economic uncertainty, wealth is seeking safe havens today.
With the country opening up and zeroing in on attracting international capital investing in the real economy, Shanghai needs to identify new inflection points to create breakthroughs and develop new market share.
There is also a conscious, methodological way to build a financial center. I call it the “hurry up and wait” principle.
I was asked during the Q&A session for this conference as to why it is important for China to have a credible global financial center onshore. My reply to that was because China needs a global “price discovery” mechanism for all the assets it has been creating, because otherwise it will not know what its own economy is worth.
Here is the full transcript:
Thank you to the organisers for inviting me to share my thoughts on the future of Shanghai’s financial centre. I can speak a little Chinese. I’m using my Chinese now. I know.
Shanghai is already a financial centre but the competition is fierce. Since 2002, I came to Shanghai every month. I saw changes happened in Shanghai. I’ve seen development in other financial centres as well. So today I’m sharing from my experience. I will do my presentation in English. Thank you.
So, the presentation that I hope I will give this afternoon builds on everything that has been said since this morning. Let’s just start with the map of the financial centres around the world. As Michael Waddle just said, his organisation should look at about 122 financial centres around the world or centres that claim to be financial centres around the world. So, we looked at all of them and we sort of divided them into global centres, topical centres, and regional centres. So, big, medium, and small. The big ones are easy to identify and recognise. Like London and New York, they have a strong and long history, very deep domestic markets, and, in the case of the UK, a worldwide colonial legacy to build on and become a global financial centre. They also benefited from geopolitical changes that happen from time to time.
But my favorite financial centre of all times is a small little island in between the UK and the US called Bermuda. It has no reason to be a financial centre, but it houses 1,100 insurance companies carrying $1.6 trillion in assets and writing about $268 billion in premiums every year. Why is that the case? Because Bermuda leverages its position between Europe and the US, using the rules, laws, and expectations in each of these markets. It’s what we call in the financial centre terms a booking centre. If you go to Bermuda today, it’s got no more population than 70,000 people. It cannot take more people; it’s a closed island. Every household has to generate its own fresh water, regardless of whether you are rich or poor. And it cannot grow the population anymore. The most important business in Bermuda is the custodians and the accountants. Companies like KPMG, which are large and dominant in Bermuda, almost none of the insurance companies domiciled there actually have people working in Bermuda. So, let’s have that at the back of our minds as we discuss this topic of global financial centres.
In the East Asia region, of course, you have Tokyo, then down to Hong Kong and Singapore. In that context, we want to discuss Shanghai and its future as a financial centre. Now, this is from Michael’s own criteria for developing the Global Financial Centre Index is developed. As Michael has said, there are five different criteria: business environment, human capital, infrastructure, financial sector development, and all the developments taking place.
Of all the factors he’s mentioned, the one that is most interesting is the business environment. Many jurisdictions have to do something specific to create a global, internationally recognisable, and transposable business environment while not losing touch with domestic needs and limitations. For example, Dubai, with its offshore financial centre and onshore financial institutions, has a different legal infrastructure and the court structure to support its offshore financial centre regime. That is something that China and Shanghai should think more about. The UK’s English-speaking common law theme seems to be the most important underlying jurisdictional infrastructure that is the basis for many successful financial centres globally. Many centres have to balance their domestic culture and goals with being seen as a global financial centre.
Now, this is the current ranking. New York and London leading is not surprising. But Singapore is the third most important global financial centre, which might be unexpected. I come from Singapore and have served in government subcommittees, where the government of Singapore mobilises the private sector to give it ideas in terms of how it can respond to new challenges and start to build a vision of what the country should look like in the future. The two committees that I served in, one was in 2001, and that was just a few years after the Asian financial crisis, and another was in 2010. And they put CEOs of various types of organisations, including banks, and go round the table and ask us what is it that we need to do to be a successful financial centre. And I remember vividly the conversations that we had in the second session that I was part of. We went around the room and came to the conclusion that the two areas that Singapore should focus on would be risk management and wealth management. And that was in 2010 and the state used the rest of that period from 2010 to today to build those two infrastructures in terms of skill sets, in terms of legal infrastructure, in terms of financial promotion and going out to the market and getting as many private banks as possible to be domiciled in Singapore.
Then came the inflection points. The inflection points are the points in history where something happens that works in your favour. So, in the era of private banking, for example, the Ukraine-Russian war sends a lot of private banking clients scurrying around the world, looking for financial centres to be domiciled. But at the same time, in the era of risk management, building up the risk management infrastructure and with greater KYC (know-your-customer) requirements by legislators around the world, Singapore became a skill set centre for risk management, which then fed into the corporate treasury business. So, that’s how I saw Singapore rise through the ranks.
Another area in which Singapore rose through the ranks is seen in this listing of what makes the different financial centres and gives them their profile. So, when you look at this listing of the different financial centres alongside each other, there are few things that we can see. One of the things that you will see is that, except for maybe London and New York, which are very deep financial centres, the centres that do well in equity tend not to do well in bond markets, discourage to build bond markets. And I remember this conversation that I’ve had both in Singapore and in Hong Kong. How do we build a domestic bond market? How do we build bench line indicators or indices for the bond markets?
Of course, as you can see from the chart, China is a natural bond market because it issues its own domestic bonds. You’ve got a whole range of issuers from provincial governments to state-owned enterprises, and so on.
And then you have Japan, which is a very interesting bond market because it is domiciled and its investors are entirely, almost entirely domestic. And when a rating agency rewrites the Japanese index or indices for bond markets, it doesn’t cause a ripple because it is entirely domestic.
The big competition between Singapore and Hong Kong is like this. Hong Kong’s equity market is four times the size of Singapore. And so, there is no way in the world that Singapore will be able to match that. And it has a momentum all its own. When Singapore took a lead against Hong Kong in the market, and the story of how that evolved is a very interesting one. For a very long time, Japan was the FX market for this time zone and one of the top three in the world. Now, you would not see this in this chart, but the FX rankings will show that Singapore is now number three, if I’m not mistaken, Global FX Centre. And the reason for that was very simple. They managed to get all the English-speaking youth who had moved to Japan and to move instead to Singapore. For more than 10 years, Japan was a global centre simply because undereducated, English-speaking youth from countries like the UK, Australia, New Zealand would congregate into Japan and get jobs as traders and then build the FX market. But Japan did not give them long term visas. And Singapore slowly solved that problem and eventually they gravitated towards Singapore. That created the critical mass from which Singapore then stole market share from a country like Japan.
Shanghai obviously has competition not just from abroad but from other jurisdictions within China, in commodities, in gold, and in FX. Shanghai has about 20% or 25% of market share. But it’s a battle that you continue to fight. And it’s good that there is competition within the country because that ensures that there is continued innovation and continued progress and the creation of market share over a period. We need to see that Shanghai is integrated not just with the rest of the world but with the rest of the country. Going back to the theme of the inflection point. Just think about this, that Shanghai was not originally slated to be the financial centre. The origins of banking in the Chinese with Chinese characteristics comes from Shangzhi. For a long time, the most important bankers in China were Shangzhi people. Shanghai’s moment came because of the Opium Wars and because of the opening of China and the advent of foreign banks that chose to be domiciled in Shanghai instead. That was where the rise of Shanghai took place. Looking into the future, we need to look for inflection points that will create a breakthrough from where new market share can be developed.
I want to end my presentation by making some very simple points. The purpose of my presentation is to give life to this topic so that we talk about it in a creative and open manner and not just look at the numbers for what they are. The story of financial centres is the story of people who like to meet with each other. Michael said the coffee culture in London, it’s the bar culture in many different countries. You want to see a good financial centre. Look for the bar street around that financial centre and see how alive it is. That’s where the deals are made. The other criteria today that is increasingly important is the relationship between the state and free enterprise. In many jurisdictions, the state is becoming an important player. The state runs all the financial innovation and marketing activities, but it needs to give space for free enterprise to create the new future. We don’t know which of the asset classes will become important in the future. We’ve had discussed fintech, for example, financial technology, but also blockchain technology, cryptocurrencies, and so on. It is not clear yet, which of these will form new asset classes, which is open for any one of the major financial centres to grab and to create critical mass and to dominate and to be the financial centre of the future. I think I’ve sort of covered all the points quite clearly, and I hope that this gives you food for thought.