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International Financial Centres in
the post-crash era
Vanessa Rossi, Senior Research Fellow, Chatham House
March 2009
Overview
• The global recession and financial storm has
not yet abated – a stress test of survival
• The crisis has highlighted the massive
increase in balance sheet risks compared
with national incomes
• Iceland marked the end of the “small
country-big bank” model of global finance
• Yet banks will become more important as
financial intermediaries if saving deposits
rise and retail investors shun risk: the
“Tokyo scenario”
2
World trade smashed by storm
• 2009 may be down 20-30% versus 2007 data –
larger losses for Japan and the energy exporters
1.80
1.60
1.40
2007
2009
$ trillions
1.20
1.00
0.80
0.60
0.40
0.20
0.00
EU
(2
7)
na
C
hi
U
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S
pa
Ja
G
C
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ad
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Ko
a
R
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H
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Ko
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Exports in US $ trillion: 2007 data versus 2009 estimates
Source: WTO
3
Investment trends: exodus from risk creates global asset imbalance
High growth and
inflation
The US: “The Anglo
Saxon Model”
• US financial wealth was
$60-65trn, over 4x GDP
The EU: “Balanced
Portfolio”
• Total financial wealth
similar to US
•But household wealth
held in equities lower
Risk averse
JAPAN: Cash
• Wealth $30 trn
•Nearly 55% of
household wealth
in bank deposits
Low growth and inflation
• Under 15% of household
wealth in bank deposits, as
much as 50% in equities and
corporate bonds
Risk taking
Holdings of debt, equity and deposits
2008 – shaded areas represent estimated
losses in equity values by March 2009
30.0
Bond Market
25.0
Bank Deposits
$ trillions
20.0
Stock Markets
15.0
GDP
10.0
5.0
0.0
US
EU (G5+Euronext)
Japan
China
Wealth losses almost 1 year’s GDP equities shrink, role of government rises
WORLD FINANCIAL WEALTH
TOTAL SHRINKS
FROM $200 TO $160 trillion?
GLOBAL TOXIC ASSETS $3-5trillion?
BANK DEPOSITS and CASH
around $70 trillion
Larger than world GDP of $55 trillion
TOTAL BONDS
VALUE DOWN FROM $65 to $55 trillion
Government share up from 50% to 60-65%
Government debt up, corporate bonds fall
EQUITIES - OTHER ASSETS
VALUE FALLS
From peak $65 to $35trillion?
Implications:
• Big banks: few “global players”, a cluster in
the US, China and Japan and, arguably, the
Gulf region backed also by “oil deposits”
• Europe - cross-border issues?
• Other IFCs will have to focus heavily on
financial services with low balance sheet
exposure – stiff competition
• London may be the most affected of the
major financial centres – this crisis is the
banking equivalent of previous restructuring
in reinsurance and Lloyds of London
7
Japan’s banks: expand assets abroad
liabilities
assets
JAPANESE BANK DEPOSITS
TOTAL
$10 trillion
PRIVATE SECTOR LOANS
$5 trillion
LOANS TO
GOVERNMENT $3 tn
about 35% of Gov Debt
FOREIGN
ASSETS $2 tn
LIABILITIES $1 tn
Prudential reserves
$0.2 trillion
China’s banks: “cash” now mobilised
liabilities
assets
CHINESE BANK DEPOSITS
TOTAL
$6.5-7.0 trillion
Prudential reserves
Over $1 trillion
Policy easing
PRIVATE SECTOR LOANS
$5 trillion
LOANS TO
GOVERNMENT $0.5 tn
about 100% of Gov Debt
FOREIGN
ASSETS $0.3 tn
LIABILITIES $0.1 tn
Economic ranking by size of GDP – which
countries are big enough?
GDP estimates ($ tn)
Rank
Region
2007
2017
1
EU (inc UK)
17
25
2
US
14
21
3
Japan
4.4
7
4
China
3.4
12
5-9
Canada, Brazil, Russia, India,
Korea
1-1.5
(India) 3
=10
GCC total, Mexico, Australia
0.8-1
(avg.) ~2
World total
54-55
95-100
10
Comparison of GDP and Stock Market
Capitalizations as Shares of World
25.0%
USA
GDP (Share)
20.0%
15.0%
10.0%
5.0%
JAP
GER
SGP
SWI
0.0%
0.0%
CHI
Euronext
UK
HK
10.0%
20.0%
30.0%
Market Capitalization (Share)
Shares of World GDP (%)
(chart data at 1990 constant prices, own estimates)
30
US
25
Eurozone
20
Japan
15
10
UK
China
5
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
0
1970
• China the only
economy gaining
share
• It is the only
sizeable
contender of the
BRICs
• Stock market
capitalisations
will broadly
follow these GDP
trends
Japan’s shares in world economy
and markets
• Japan’s shares in world wealth and other market
indicators much larger than share in global GDP
25%
Wo rld wealth held
abro ad
20%
20%
B ro ad M o ney
14%
15%
10%
5%
0%
GDP
8%
Sto ck M arket
Capitalizatio n
7-9%
B o nd M arket Wo rld Wealth
15%
15%
Japan is the 3rd largest bond market
• Larger share
in global
bonds than
equities:
approx 15%
versus only
8% share of
world GDP
and equities
$ trillion
30
Other
25
Government
20
18.4
15
8.4
10
1.7
3.7
5
6.8
8.5
7.8
5.6
0
US
EU
Japan
Rest
Holding of JGBs by foreign investors trend
up but still low, close to $0.5 trillion
50
6.6%
Holdings
Percent
6.3%
45
5.8%
6.0%
5.6%
5.4%
40
5.1%
5.0%
4.2%
4.0%
30
4.0%
3.6%
3.3%
3.0%
3.0%
20
15
2.0%
10
1.0%
5
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Holdings (Trillion Yen)
4.2%
5.0%
4.6%
Percent of Total Holdings
4.6% 4.7%
35
25
7.0%
Potential growth in foreign
investment in Japanese markets
5.0
High
($ trillions)
4.0
3.0
Total
Investment
Low
2.0
Value of
equity
investments
1.0
0.0
2007/2008
2017
• High estimate: bond
holdings rise to match
equity stakes
• Low estimate: no
increase in holdings
except for modest
increase in equity
investments based on
maintaining share of
market
The Asian debt market should expand
• Critical to rebalance global asset demand
and supply and to fund development in low
savings countries such as India, Bangladesh,
Vietnam
• Potential to grow dramatically - possibly
$1trillion pa?
• Japan would be a key participant here
• e.g. Samurai bonds: “rare oasis” during
credit crunch. Froze after Lehman collapse
but reopened in February: $2.2bn (Westpac),
$1.5bn (Indonesia)
17
MARKET OPINION?
18
The March 2009 City of London Survey:
Tokyo and Sydney drop below top 10
GFCI4 (Fall 2008)
GFCI5 (Spring 2009)
1
London
1
-
London
2
New York
2
-
New York
3
Singapore
3
-
Singapore
4
Hong Kong
4
-
Hong Kong
5
Zurich
5
-
Zurich
6
Geneva
6
-
Geneva
7
Tokyo
7
+1
Chicago
8
Chicago
8
+1
Frankfurt
9
Frankfurt
9
+2
Boston
10
Sydney
10
+3
Dublin
23
Dubai
15
-8
Tokyo
27
Melbourne
16
-6
Sydney
34
Shanghai
23
-
Dubai
43
Bahrain
28
-1
Melbourne
45
Qatar
35
-1
Shanghai
19
Recommendations regarding the City
of London Surveys
• Two possibilities for consideration:
• (1) The report may be more widely understood and accepted
as a barometer of IFCs performance and strength if it were to
adopt a two-pronged strategy and rankings:
• Firstly comparing countries’ leading international financial
centres (ex: London, New York, Tokyo)
• Secondly comparing secondary (regional or niche) financial
centres around the world (ex: Chicago, Geneva, Channel
Islands)
• This might help focus attention on the most critical factors in
the international surveys and underlying changes in view.
• (2) Greater methodological weight could be placed on the size
and development of financial sectors rather than on “ease of
access” type factors. We agree that it is important to preserve
the nuances brought into the survey by the direct personal
input of market participants and these are not an issue.
GFCI5 divided into international and
secondary centres: more representative
GFCI5 - International
GFCI5 - Secondary
1
London (UK/Europe)
1
Geneva
2
New York (US/Americas)
2
Chicago
3
Singapore (SE Asia)
3
Boston
4
Hong Kong (China/SE Asia)
4
Dublin
5
Zurich (Switzerland/Europe)
5
Guernsey
6
Frankfurt (Germany/Europe)
6
Jersey
7
Toronto (Canada)
7
Luxembourg
8
Tokyo (Japan/Asia)
8
San Francisco
9
Sydney (Australia/Pacific)
9
Isle of Man
10
Paris (France/Europe)
10
Edinburgh
21
Other rankings: looking beyond IFC
competitiveness surveys
WEF Financial
Development Report
2008
MasterCard –
Worldwide Centers of
Commerce 2008
PWC – Cities of
Opportunity (Financial
clout – 11 cities)
1
United States
1
London
1
New York
2
United Kingdom
2
New York
2
London
3
Germany
3
Tokyo
3
Paris
4
Japan
4
Singapore
4
Tokyo
5
Canada
5
Chicago
5
Frankfurt
6
France
6
Hong Kong
6
Toronto
7
Switzerland
7
Paris
7
Chicago
8
Hong Kong
8
Frankfurt
8
Atlanta
9
Netherlands
9
Seoul
9
Los Angeles
10
Singapore
10
Amsterdam
10
Singapore
THANK YOU
www.chathamhouse.org.uk/internationaleconomics
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