Developing international financial centers in Russia, India, and China based on a report for the Min

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Developing 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
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What 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)

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Why 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

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IFC competitiveness index (2007)
Source Report The Global Financial Centers
Index 3 by the Z/Yen Group for the City of
London.
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Best 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

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Traditional 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

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Young 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

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Emerging 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

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Russia 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

10
Shanghai 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

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Regulation system protecting investors vs.
enforcing contracts
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Taxation system rates vs. administration
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Financial markets cap vs. trading
Source BIS Quarterly Review (as of end-2007)
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Institutional investors vs. banks
Source OECD (as of end-2007, with exception of
as of 2006)
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General competitiveness freedom vs. political
risk
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Conclusions 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