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Developing international financial centers in Russia, India, and China based on a report for the Ministry of Economic Development of Russian Federation

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Title: Developing international financial centers in Russia, India, and China based on a report for the Ministry of Economic Development of Russian Federation


1
Developing international financial centers in
Russia, India, and China based on a report for
the Ministry of Economic Development of Russian
Federation
Alexei Goriaev New Economic School / CEFIR
2
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)

3
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

4
IFC competitiveness index (2007)
Leading IFCs Place Rating
London 1 795
New York 2 786
Hong Kong 3 695
Singapore 4 675
Zurich 5 665
Frankfurt 6 642
Geneva 7 640
Chicago 8 637
Tokyo 9 628
Sidney 10 621
Emerging IFCs Place Rating
Dubai 24 585
Shanghai 31 554
Mumbai 48 481
Moscow 56 423
Source Report The Global Financial Centers
Index 3 by the Z/Yen Group for the City of
London.
5
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

6
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

7
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

8
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

9
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

11
Regulation system protecting investors vs.
enforcing contracts
Measures London New York Frankfurt Mumbai Shanghai Moscow
Rule of Law, World Bank, 2007, from 0 to 100 92.9 91.9 94.3 56.2 42.4 16.7
Regulatory quality, World Bank, 2007, from 0 to 100 98.1 90.8 92.7 46.1 45.6 35.0
Ease of doing business (rank from 178 countries, IFC, 2008), incl. 6 place 3 place 20 place 120 place 83 place 106 place
Protecting investors 9 place 5 place 83 place 33 place 83 place 83 place
Enforcing contracts 24 place 8 place 15 place 177 place 20 place 19 place
Paying taxes 12 place 76 place 67 place 165 place 168 place 130 place
12
Taxation system rates vs. administration
Measures London New York Frankfurt Mumbai Shanghai Moscow
Individual income tax rate 10-40 to 35 15-45 30 25-33 13 Non-resid 30
Capital gain tax rate 10-18 (indiv.) 21-28 (inst.) to 35 25 10-40 33 13 Non-residents 30 (indiv.) 24 (inst.)
Dividend tax rate 25 (indiv.) 0 (inst.) 0-30 20 20 10 9 Non-residents 30 (indiv.) 15 (inst.)
Interest income tax rate 20 0-30 0 20 10 13 Non-residents 30 (indiv.) 20 (inst.)
Total tax rate ( from the firms profit), IFC 2008 35.7 46.2 50.8 70.6 73.9 51.4
tax payments, IFC 2008 10 21 39 162 104 58
Time spent on tax reporting (hours/year), IFC 2008 22 122 65 105 167 151
13
Financial markets cap vs. trading
Measures (bln) ( GDP) London New York Frankfurt Mumbai Shanghai Moscow
Stock market cap in a country 3 851.7 139 15 650.8 113 2 105.2 63 1 819.1 166 3 694.3 113 1 221.5 95
Annual equity trading volume in the exchanges 10 334 373 29 910 216 4 325 130 344 31 4 069 125 1 261 98
Volume of IPOs 50.4 76.5 10.4 17.6 63.3 26.7
Face value of exchange-traded bonds 3 782 136 29 240 211 5 335 161 468 43 1 565 48 243 19
Face value of exchange-traded corporate bonds 453.2 16 17 418.7 126 1 146 34 38.3 3 486.7 15 50.2 4
Trading volume of bonds at the exchanges 3 603.1 130 - 315.6 10 60.4 5.5 26.3 8 115 9
Open positions of options 172 848 6 234 402 235 2 906 33 242 1 001 397 36 0 0 52 4
Open positions of futures 451 757 16 294 857 278 6 193 137 581 4 141 2 557 233 0 0 240 19
Source BIS Quarterly Review (as of end-2007)
14
Institutional investors vs. banks
Measures (bln) ( GDP) London New York Frankfurt Mumbai Shanghai Moscow
Assets of non-state pension funds 1 763 78.5 13 310 100.5 116 4.0 33 4.2 38 1.7 19.2 1.5
Assets of mutual funds 820 34 12 496 100.5 348 12 36 4.6 56 2.5 32 2.5
Assets of insurance companies 2 184 97.9 6 074 45.9 1 224 43.8 104 13.3 141 6.3 9 0.9
Bank deposits 2 930 122 10 028 76 3 033 104 640 73 4 469 169 415 32
Bank loans 3 289 140 8 278 71 - 278 41 4 018 208 426 33
foreign banks 486 253 106 29 74 71
Share of population investing into stocks 21.6 11.3 5.7 0.6 5.6 0.4
Share of population investing into mutual funds - 15.5 9.8 0.4 - 1.2
Source OECD (as of end-2007, with exception of
as of 2006)
15
General competitiveness freedom vs. political
risk
Measures London New York Frankfurt Mumbai Shanghai Moscow
Human development index (from 177 countries, UNDP 2008) 16 place 12 place 22 place 128 place 81 place 67 place
Global competitiveness index (from 131 countries, WEF 2008) 9 place 1 place 5 place 48 place 34 place 58 place
Index of economic freedom (from 157 countries, Heritage 2008) 10 place 5 place 23 place 115 place 126 place 134 place
Index of press freedom, from 0 to 100 (WB 2008) 93.8 85.1 94.7 58.7 5.8 20.2
Government effectiveness index, from 0 to 100 (WB 2008) 93.8 91.5 92.4 57.3 61.1 42.2
Corruption perception index (from 180 countries, Transparency Intl 2007) 12 place 20 place 16 place 72 place 72 place 143 place
Index of political risk, from 0 to 100 (WB 2008) 66.3 55.8 81.3 17.8 32.2 23.1
16
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
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