February 3, 2011
All panel participants agreed that there is a place for a few more financial centers in the modern world. The most popular candidates mentioned were Hong Kong, Singapore, Mumbai, Moscow and San Paulo. Given the shift of economic growth to Asia, it would be logical to see financial centers moving to the East. There is also an opportunity for the specialization of financial centers.
There are also risks involved in this process. As argued by Peter Derby, financial centers could be at the core of financial crises if not regulated efficiently. William Winters gave an example of the existing centers of London and New York, which showed that flawed regulation can lead to serious consequences.
The discussion was focused mainly on the difficulty in creating a financial center in an emerging economy. The key necessary factors for this include high-quality human capital, efficient infrastructure, solid regulation and the existence of domestic institutional capital. All countries have their own approach to solving the problem of a lack of human capital. As mentioned by Shachindra Nath, India has been exporting human capital to international financial centers for decades, and people are now starting to come back. As argued by Mr Derby, Russia has specific cultural aspects that allow citizens to return. However, brain drain is still an important negative factor for the country. Michael Milken emphasized that the most important factors for quality human capital are education and healthcare. If the country is unable to provide these, it will have to buy human capital from abroad. Mr Nath said that his company decided to buy human capital from abroad, as organic growth is too slow and opportunities have to be sought quickly, within the next 10-20 years.
Creating a domestic capital base was another important point of discussion. China is a good example of a market that became attractive as a source of capital. UC RUSAL’s Oleg Mukhamedshin said that the existence of a huge capital base from Mainland China was among the most important factors for his company to consider placing shares in Hong Kong. He noted that they are seeing more and more interest from Chinese retail and institutional investors. India is also seeing substantial growth in domestic capital, as the population is becoming younger, and young savers prefer riskier instruments, such as equities, over the older generation, who prefer hard assets.
Financial centers also need quality infrastructure. This can be something very basic, like getting from the airport to the city. Besides that, financial centers also need social infrastructure to make life there attractive to the people (e.g. restaurants and other places to go out).
Sound regulation and efficient institutions are also crucial for creating a financial center. MICEX’s Ruben Aganbegyan explained how these issues are being solved in Russia. The goal is to make investors feel no difference between dealing in Russia and in London or New York. There is still a lot of reform that needs to take place, but things are gradually improving. Mr Aganbegyan argued that Russia has a second-starter advantage, as it is more or less clear what needs to be done: a central depository, real-time clearing, investor-friendly disclosure, and so on. And there is clear momentum in building an international financial center in Moscow.