Title: Developing international financial centers in Russia, India, and China based on a report for the Min
1Developing international financial centers in
Russia, India, and Chinabased on a report for
the Ministry of Economic Development of Russian
Federation
Alexei Goriaev New Economic School / CEFIR
2What is an IFC?
- Financial center
- Concentration of asset demand from individual and
institutional investors - Broad range of financial instruments (asset
supply) - Effective infrastructure and financial
intermediation - International financial center
- Focus on the foreign capital, investors and
intermediaries - Transnational operations fund raising, asset
management, risk management, tax management,
exchange trading, project financing (e.g., for
PPP)
3Why do RIC countries need an IFC?
- Additional funding for national companies at a
lower cost - More efficient asset allocation for local
investors - More risk management opportunities
- Making ruble/rupia/yuan a reserve and settlement
currency - Deeper economic integration with other countries
- Diversification of the national economy
- Directly raising the share of financial sector
in GDP - Indirectly stimulating young, growing industries
- at a cost of higher sensitivity to global risks
4IFC competitiveness index (2007)
Source Report The Global Financial Centers
Index 3 by the Z/Yen Group for the City of
London.
5Best practice of leading IFCs
- Flexible legislation
- Stimulating taxation of financial operations
- Unified regulation system for all segments
- Efficient legal system (often, a specialized
court) - Modern centralized financial infrastructure
- Global integration, openness to foreign market
participants - Developed financial intermediaries
- Broad range of instruments
- Large and flexible labor market
- Favorable business environment
- Stable and positive macroeconomic situation
6Traditional IFCs London, New York
- Strong national economy (EU region for London)
- Democracy and rule of law
- Anglo-Saxon legal system
- Multinational, multilingual workforce
- Easy to develop connections to the countries of
origin - Strong financial intermediaries and institutional
investors - Language
- Openness, no capital controls
- UK unified, flexible, principles-based
regulation - US business education and research, innovations
7Young IFCs Singapore, Hong Kong
- State-driven development of the financial sector
- Globally oriented strategy (due to relatively
small size of the national economy), no capital
controls - Mostly focused on the Asian region
- Efficient infrastructure
- Trading, transport, communications,
- Workforce relying largely on expatriates
- Regulatory and fiscal incentives to foreign
institutions - HK has profited from its role as a gateway to
China
8Emerging IFCs in RIC countries
- Increasing financial globalization and
competition - Either national financial centers become
internationally competitive or concede to leading
IFCs - The ongoing financial crisis questions the
current financial system - and leadership of traditional financial centers
- Large, dynamic national economy (f)needs
development of active, efficient financial
markets - IFC requires reforms in legislation, regulation,
infrastructure, labor market, and business
environment - Develop long-term institutional investors and
attract population - Impose more transparency and disclosure
requirements - Increase liquidity and scope of financial
instruments - Need to overcome bureaucracy, corruption
9Russia Moscow
- The concept of creating an IFC was adopted (only)
in October 2008 - Most developed financial market in the region,
but - cap and liquidity are concentrated in the blue
chips (mostly oilgas) - Segmented, non-flexible legislation and
regulation system - Tax pressure on financial companies and
operations due to high effective tax rates and
inefficient administration - Lack of efficient and transparent legal system
- Low standards of information disclosure
- Segmented financial infrastructure, not
well-integrated into global capital markets (no
central depository, RTGS, DVP3 trading) - Tough access for foreigners (inefficient visa and
migration regime) - Low level of social and business environment
10Shanghai and Mumbai
- Gradual development of national financial markets
as IFC - For foreigners, access granted only to qualified
institutional investors - Narrow market for qualified local labor, rely on
brain drain reversal - The infrastructure needs to be further developed
- India
- Anglo-Saxon legal system and rule of law
- Unified regulator of financial markets (SEBI)
- High corporate governance standards, compulsory
IFRS reporting - English language and links to the UK
- Over 9,000 stocks are listed, but most are
illiquid active equity futures trading - China
- More conservative approach, controlled by the
state - Enormous potential for the internal market
- Separate regulators for financial markets, banks,
insurance companies - Slow-to-change codified legal system,
bureaucracy
11Regulation system protecting investors vs.
enforcing contracts
12Taxation system rates vs. administration
13Financial markets cap vs. trading
Source BIS Quarterly Review (as of end-2007)
14Institutional investors vs. banks
Source OECD (as of end-2007, with exception of
as of 2006)
15General competitiveness freedom vs. political
risk
16Conclusions for RIC countries
- The crisis exposed weaknesses of RIC markets
- but also gave them a chance to avoid mistakes of
the traditional financial centers - Need unified risk-based regulation approach
across different countries and types of financial
services - Hedge funds, sovereign wealth funds,
- Minimize infrastructural and legal risks
- CSD, contract enforcement, role of offshores,
- Make financial engineering transparent
- Put more responsibility and disclosure
requirements on financial intermediaries - Revise the role of the state