China the new Wall Street?

Is the centre of global finance gradually moving from Wall Street to China? Goldman's vice chairman Mark Schwartz has been sent to Beijing, the new battleground for foreign banks. China is dominating Asia IPOs and the street has decided that's where the money is. Devote 3 minutes to watching Breakingviews' Wayne Arnold and Wei Gu talk about why the focus is moving to Beijing:

When it comes to capital markets Chins today is where the US was in the late 70s. For anyone, apart from multinational companies, to raise capital is almost impossible. But then came the 80s and suddenly virtually all US companies could. China is now going through a similar transition. So for international banks being downgraded by rating agencies, such as Moody's, the timing is perfect for moving in. 

China opening up its financial markets

It started in April this year when China increased the amount of money that international fund managers can invest in China to $80bn i.e. almost tripled it.

Beijing wants to increase investment and competition in its financial and banking sector. Opening up its financial markets is a way for Beijing to build up the yuan as an alternative to the US dollar as a global reserve currency.  

Wall Street swiftly moved in

Question is how will Wall Street's presence affect China? Will the Chinese allow the kind of new innovative financial products that Wall Street come up with on a regular basis? Is it even possible that China will be the new centre for dealing in risky financial products that could be regulated in the West? Maybe the Chinese market will be more tightly regulated when it comes to protecting China as opposed to the rest of the world?

Can China, once again, re-write the rules of competing in the global economy? Will the centre of finance gradually move from New York to China? The same investment banks may still dominate and set the trends, but their branches, or head offices, in China will be in charge?

Will China avoid making the same mistakes Japan did when building a capital market? How will China's equity, bonds and derivatives markets evolve? Is the investor mix in China changing? How will new financial products be received? Will the yuan emerge as a global reserve currency? Do you believe the centre of the world of finance will long term be in China instaed of New York? 


20 thoughts on “China the new Wall Street?

  1. As always Catarina, you have started a very interesting discussion. I believe the US is definitely keeping an eye on the situation. There's certainly enough discussions and differing viewpoints being offered by economists. I found Susan Oakes, comment about the mandarin language being the second most popular language spoken in homes. We have had this discussion before. I truly believe that anyone who is seriously looking into doing business globally should consider learning Mandarin. I for one think that it should be available as an elective in our public school systems.
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  2. We are talking many different thinks in one brief.
    1. International currency
    -..still ca 80% of world transactions are in US$-….but China has signed swap agreements separately with 20 countries to hold their mutual transactions in yuan
    -60% of international reserves are in US$- still a long way to go..official yuan outflow abroad is small and Via very few hubs HK, London
    -inter-bank clearances and individual savings..Still rather held in US$- looking globally.
    So as we see it will take …50
    years lets guess.. if nothing horrible happens in China
    2. Capital markets- with internal operations under state control.and not fix rules yet…it is quite risky …but exciting to try to operate on Chinese markets for foreigners… Chinese players however have not big choice.. is exciting to try but unless there are more transparent rules and variety of instruments… hopefully more sophisticated .. the play is for courageous and risk taking enthusiasts… but didn't they won huge stakes in the past???

  3. Catarina, you bring forward some excellent information about current trends regarding financial markets and China. I am terrible at future predictions, but years ago, I remember a friend fearing Japan would take over the U.S. markets. Well, that didn't happen. Who knows what the future holds.
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  4. The political system in China is, I believe, the stumbling block to China becoming the new U.S. or center of finance. It is too unreliable for the world markets to have trust in its ability to be the dominant and stabilizing global currency. Despite our problems, foreign capital is still pouring into the U.S. In New York alone, foreign investors are setting new records for the prices they are paying for luxury housing. They are parking their money here because of their faith in the U.S. dollar.
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    1. Jeannette, it's not going to happen over night. Troughout history "empires come and go" and the United States is no exception. What will the world look like, say, 50 years from now or a hundred?

  5. As always an very interesting read Catarina. It could happen, although I think it also depends on how and when the US and Europe come out of the recession. China does not do things on a whim and my guess is they having been learning from Hong Kong since they took over.

    On a totally different issue, our census data just came out and after English, mandarin is the second most popular language spoken in homes.
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  6. I am reserving speculation on this one. Most definitely food for thought. ๐Ÿ™‚
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  7. Interesting post, Catarina, and certainly food for thought. There's no question that China is moving more aggressively into investment: as Chinese companies' growth rates lower due to both global and, now, domestic demand slowing, so these companies are looking at other ways to achieve bottom line growth. Investment is increasingly seen as a good way of doing this.

    For example, Chinese companies are more open to extended payment terms for their customers – once completely unheard of – as this enables these customers to grow their own businesses without the hard-to-get bank loans that might otherwise be the case.

    Hong Kong has been a global financial powerhouse for many years (look at the origins of HSBC for example) so to my mind the only question is whether it will be Hong Kong, Beijing or, perhaps, as a bridge, Shanghai that will become the financial powerhouse of the East.

    Of course, whether this will eclipse New York or London altogether remains to be seen, but it's certainly a possibility.

    1. Glad we agree Guy. Good points. It will not happen over night but is definitely a possibility in the long run. It may even be Goldman & Co that move their operations to China:-)

  8. The news has been horrible out there! Economic growth and said it would extend a bond-buying program through the end of 2012, disappointing investors who had hoped for bolder steps from the central bank to get the economy going again.
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  9. It will be interesting to see what China will do with this move. China has been very good at copying what others have done but do they have the tools, imagination and creative will to make a significant move. Only time will tell.
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  10. Of the $12 trillion-worth of US Treasuries held abroad, China is said to hold 13%, and it is true that there is money in China. However, the country has a long way to go before it can replace the dollar as the global currency. The perception of a country also matters, when it comes to the country having a global acceptance.
    The Economist (June edition) had carried an article on how the US is using the power of the dollar to ensure that countries do not import oil from Iran. Banks that deal with the Central Bank of Iran are denied access to correspondent American banks, considering that the currency for global trade is the dollar, many countries have begun to wilt under this 'dollar-threat'.
    The dollar is clearly here to stay for quite some time.
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    1. Lubna, it's not happening over night. But in the long run it't definitely a possibility that China will be the new Wall Street. And what will be the reserve currency of the future? Most likely it will be more than one currency. So why not the yuan?

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