Shanghai as World Financial Capital: Maybe Next Century

Getting paid by Chinese companies

Just finished a fascinating article in Atlantic by Richard Florida, “How The Crash Will Reshape America.” It makes some interesting points as to why Phoenix and Las Vegas (and large swaths of Florida) may never recover and why New York, Austin, and Seattle will do just fine. But within it, and of great relevance to this blog, is a section on why New York will remain as the world’s financial capital and why, despite the projected growth of Asia’s economies, we should not expect Shanghai, Hong Kong, or anywhere else to usurp it.

At least not for an exceedingly long time.

At first glance, few American cities would seem to be more obviously threatened by the crash than New York. The city shed almost 17,000 jobs in the financial industry alone from October 2007 to October 2008, and Wall Street as we’ve known it has ceased to exist. “Farewell Wall Street, hello Pudong?” begins a recent article by Marcus Gee in the Toronto Globe and Mail, outlining the possibility that New York’s central role in global finance may soon be usurped by Shanghai, Hong Kong, and other Asian and Middle Eastern financial capitals.

Amsterdam stood at the center of the world’s financial system in the 17th century; its place was taken by London in the early 19th century, then New York in the 20th. Across more than three centuries, no other city has topped the list of global financial centers. Financial capitals have “remarkable longevity,” Cassis writes, “in spite of the phases of boom and bust in the course of their existence.”

The transition from one financial center to another typically lags behind broader shifts in the economic balance of power, Cassis suggests. Although the U.S. displaced England as the world’s largest economy well before 1900, it was not until after World War II that New York eclipsed London as the world’s preeminent financial center (and even then, the eclipse was not complete; in recent years, London has, by some measures, edged out New York). As Asia has risen, Tokyo, Hong Kong, and Singapore have become major financial centers—yet in size and scope, they still trail New York and London by large margins.

In finance, “there is a huge network and agglomeration effect,” former assistant U.S. Treasury secretary Edwin Truman told The Christian Science Monitor in October—an advantage that comes from having a large critical mass of financial professionals, covering many different specialties, along with lawyers, accountants, and others to support them, all in close physical proximity. It is extremely difficult to build these dense networks anew, and very hard for up-and-coming cities to take a position at the height of global finance without them. “Hong Kong, Shanghai, Singapore, and Tokyo are more important than they were 20 years ago,” Truman said. “But will they reach London and New York’s dominance in another 20 years? I suspect not.” Hong Kong, for instance, has a highly developed IPO market, but lacks many of the other capabilities—such as bond, foreign-exchange, and commodities trading—that make New York and London global financial powerhouses.

“A crucial contributory factor in the financial centers’ development over the last two centuries, and even longer,” writes Cassis, “is the arrival of new talent to replenish their energy and their capacity to innovate.” All in all, most places in Asia and the Middle East are still not as inviting to foreign professionals as New York or London. Tokyo is a wonderful city, but Japan remains among the least open of the advanced economies, and admits fewer immigrants than any other member of the Organization for Economic Cooperation and Development, a group of 30 market-oriented democracies. Singapore remains for the time being a top-down, socially engineered society. Dubai placed 44th in a recent ranking of global financial centers, near Edinburgh, Bangkok, Lisbon, and Prague. New York’s openness to talent and its critical mass of it—in and outside of finance and banking—will ensure that it remains a global financial center.

I completely buy it. Do you?

19 responses to “Shanghai as World Financial Capital: Maybe Next Century”

  1. I completely buy it.
    Las Vegas and Pheonix shouldn’t even exist. What kinds of boobs built major cities in the middle of the desert and then expected everyone in Mexico and the rest of the US to simply give them enough water for swimming pools and green grass. Both will be dusty ghost towns in 50 years and the millions who own property or invested there will be left with nothing.
    Florida is destroying itself as its aquifers are emptied to pander to the throngs of elderly boomers demanding the best at a next to nothing cost (boomers, the scourge of America). Rising sea levels, no fresh water and too many old people means that all that will be left other than the panhandle will be a patchwork of ecologically decimated islands in a salt marsh. Tampa Bay and Disney World may be all that is left of the former glory.
    And HK is in decline as Beijing stifles the natural need of the finance community to blow off steam through naughty behavior. Where to floor traders and analysts go when they get their bonuses? Posh strip clubs. You can’t really show off your new riches in KTV rooms.

  2. Great argument, but I don’t entirely buy it. While NYC continues to attract the cream of the crop, its infrastructure is becoming a major impediment to development. Unless transportation systems are overhauled and significant space is made for “middle-income” housing (hovering around $150k annually by NYC standards), it will be difficult to maintain the top spot over the next few decades. Shanghai has one major advantage- much of the city is new, modern. Not so in Manhattan.
    My friends who make a decent living in the financial sector here are not too happy about having to commute from Queens or Brooklyn to get to work, especially since they would be considered “high income” anywhere else but are unable to afford a decent pad in Manhattan… Quite a deterrent.
    Next time you’re waiting for the L or 7 train, take a look around and think about what those lines may be like 50 years from now.
    Just a thought.

  3. Hi Dan,
    Yep, I do buy it.
    It all falls under the rubric of the US not knowing enough about China, but China knowing a heck of a lot (if not most) about the US.
    The line on China is that it’s still:
    ** a “gross infringer” of “human rights.”
    ** a polluting manufacturing juggernaut (even if the culprits responsible for “making it so” are the Western industrial economies).
    ** command, top-down, and rules-obsessed.
    ** suspicious if not downright contemptuous of Westerners (esp. the Japanese).
    Until that basic impression is dislodged from the minds of most OECD-type citizens, I don’t see Shanghai benefiting from an influx of Western talent. They might head East for a short visit — even a sojourn — but they’ll be darned if they’re going to stick around for the long-term.

  4. In all such things there is the general and the personal. Generally New York and London are still top of the pack and that simply does not look likely to change in the next 10-20 years, but the choice as to where to work, where it is best to invest time – this must be made on personal factors. I don’t know New York, but I do know London, and I can tell you that there are few places better to be if you make over £60,000-70,000 pounds a year and have no commitments. If you do not, other places start to become more attractive . . .

  5. I buy it for two reasons. Language and openness. I think that before a city becomes truly global, it has to be able to attract people, those newly arrived must feel comfortable there and feel that they can establish themselves there. But in the case of Shanghai or Beijing, without being able to speak Chinese or having a culture that is open for outsiders to easily understand, the chances that enough on-China Hands (or people not already interested in China) will make the decision to move to China and live out there life there to establish the community and diversity that makes a NYC such a thriving city (that consistently attracts new lifeblood) are slim. I mean even amongst us China Hands, there are few I know that would decide to move to China permanently. There may come a day when that happens (and I think blogs like this and others that help explain China to laymen are extremely important in making that possibility come true) but I can’t see it happening in the near future.

  6. Shanghai doesn’t need to be the financial center of the world to attract money, it’ll have its hands full being the financial center of the China.
    Further onward though, Asian economies will itself develop financial centers away from New York. No reason to park all the hard earn saving in NY and let others earn the fees.

  7. There is another reason to buy the conclusion: would you list your stock in NYSE or Shanghai ? If you have a choice of stocks of similar quality, would you invest in one listed in NY or Shanghai ? And why ?

  8. I only partially buy it, but more so because of concerns about the State (NY State and US Central State) killing the goose that lays the golden eggs. The US as a place to IPO has lost a lot of attractiveness due to the ill informed SOX regulations and compliance costs. Tax rates and declining services in NY State, NJ, and CT are causing professionals to seek safer lower tax environments. And then there are the infrastructure issues that Aimee mentions above. One great thing about the correction is that we may see more reasonable living costs in London and NYC, but…. governments just tend to grow and grow and grow and are slow responders to market forces if responsive at all. I can’t see all the leeches (public sector/unions etc.) on NYC’s prosperity willingly give up their hold on the riches the financial sector has provided even when those riches are in a state of decline. Adding to this, the now popular lambasting of Wall Street in Central Govt. circles to deflect attention from their own complicity in our current state of affairs makes NYC future as a financial center look somewhat tenuous.

  9. “Shanghai doesn’t need to be the financial center of the world to attract money…”
    Yes, but it so desperately *wants* to (or at least the Central Gov’t wants it to).
    Two of Shanghai’s biggest obstacles and weaknesses though: 1) No Rule of law and 2) weak transparency.

  10. “What kinds of boobs built major cities in the middle of the desert?”
    The kinds of boobs who sleep each night on a big pile of money.

  11. Shanghai will have trouble becoming a world financial center as long as the central government makes seemingly random changes to visa policy with no warning or explanation.
    “This month has a name longer than 6 letters but there has been slightly more rain than usual. Visa application denied!”

  12. Terry is right – rule of law and transparency are crucial. But, with the visa restrictions and other impediments to hiring from overseas which have been imposed by BO’s govt. will New York be allowed to attract and keep the talent it requires.
    Another thing is that no “global” financier would want to work for a Chinese company.

  13. How can Shanghai be the financial center when the flow of information is severely restricted, the GFW strangles internet connections (makes trading a bit difficult, eh?) and there is no comprehensive legal protection for investors or law enforcement against insider traders (like party officials).
    And the currency is still non-convertible.

  14. I buy it
    I think a shift will start happening mid of this century, not next.
    Some things are of course hard to move / build up (competence, transparency etc) but these things normally move where most money is.
    Money is strongly linked to a sizable middle class so a shift towards China / Asia is not unthinkable.

  15. Anyone mentioning China’s restrictive visa habits needs to look in their own backyards. Talented Chinese people (and Brazilian, Korean, Indian, etc) have a tough go of getting in and staying in the U.S.; perhaps less so in the U.K. I’m not sure about the U.K.
    The future belongs to that place that simply allows people to come and do their thing, and that description applies less and less to the U.S. Despite China’s tightening of the rules, I guarantee that overall, someone with a little bit of capital and a bit of drive and moxie can get into China more easily than they can the U.S.
    What this argument fails to take into account is that a lot the talented people who show up in New York and London are no longer Americans and Brits, they are people who need to be able to get in and out of the country without the hassles that now exist.
    A master’s grad from the University of Chicago wanted to work for me on an intensive, several month project, but was faced with a $5000 cost to get a 2 year business visa. That, on top of giving her a salary, and being faced with the prospect of not being able to sack her if she wasn’t up to par (though she clearly was) made me just throw my hands up and “outsource” it. For $5K, I can fly to Shanghai, spend a month vetting talent, hire them, and pay them a lot less than I’d have to pay someone who felt they needed to ask for $$$ cuz they went to an Ivy League caliber school. Now, if I were a huge firm, that sort of cost might not be a problem for me to absorb, but I’m not a giant. However, what I am is China savvy, and pretty soon more and more people will see that looking beyond the usual suspects can mean increased savings.
    That’s one example. Then too, I know of a factory that went under because the prospective Chinese buyers couldn’t get quick visas to get over here, got turned off by the whole process and backed out of negotiations.
    We in the U.S. spend way too much time worrying about which other countries will overtake us, when what we seem to be doing is anxiously and diligently submarining our own best interests.
    Johns Hopkins now has a master’s program in Nanjing. Liverpool University is partnered up with another uni. Why even come to the U.S. or the U.K.?
    I think that there is a lot of false bravado in all this talk of continued dominance. One day soon, a black swan will coming floating along…

  16. I have a feeling that the alternative to NY will emerge in Mumbai. The reason is very simple, Indians form a large part of the global workforce, the legal system is similar to the Western system and English is the business language. It will soon be the largest country in the world and with deep ties to US and Europe it is likely that Mumbai will come up.

  17. Dan, I would probably buy it if you gave me some numbers. Much of what you are saying is in general terms. Are there comparative volumes that you could provide? Personally, I believe Shangahi will be a greater financial center, based on market value, than London by 2020. So, when you speak of a close network of financial professionals and a critical mass, can you quantify? And why would it take China til the next century to develop that critical mass? And you had said, even after WWII, London still edged out NY. But in what way? It’s a general statement, but without some quantitation comparison, how does one determine that London edged out NY in someways? So, how many financial professionals do Shanghai need in order to catch up with London and NY. I’m sure China would make sure they will have them in place well before 2100.

  18. @Taishan –
    “So, how many financial professionals do Shanghai need in order to catch up with London and NY. I’m sure China would make sure they will have them in place well before 2100.”
    Something like this is not something you can put in place simply by setting targets for the number of financial professionals who have been trained.
    Quantification is easy – how many companies decide to establish their HQs in that city, how many companies list themselves on that market, total market capitalisation etc. The causes of success, on the other hand, are very difficult to measure, but include effective rule of law, relative lack of red-tape, freedom of speech, education, cultural factors etc.
    On any one of these measures Shanghai is far outstripped by Hong Kong, let alone London! Hell, the RMB is not even freely convertible, and who would establish their Asian HQ in the PRC if HK, Seoul, Taipei, Tokyo, or Singapore were viable alternatives? Shanghai lacks the certainty of law, the educational excellence, the freedom of speech, or even the cultural attractiveness of any of these cities.
    I say this as someone who loves Shanghai – whilst it is surely the financial centre of mainland China, it will not even surpass Singapore in the next 20 years. Saying that it will surpass London by 2020 in market capitalisation or anything else is simply a joke.

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