The Role of Financial Centres in Emerging Economies

  • 20-06-2018

What do the world’s established financial centres have in common?

For starters, they often stand on the foundations of an already-rich trading history. New York, by playing on its advantages as the first port of entry for immigrants and its location by the Hudson River, surpassed Philadelphia as the center of American finance. London has always embraced innovation in finance, from the establishment of the first modern banks (Barclays in 1690 and Bank of England in 1694) and t he legislation required to regulate modern banking, to the pivot to FinTech that it’s so popular for right now.

Good positioning also plays a factor in these centre’s success. New York benefitted from a big labor force and the variety of cultures that immigrants brought to the city, while London’s time zone allows it to reach out to the Middle East, America, and Asia within a business day.

These two have had the privilege to spearhead the entry into finance and innovation and are competing closely to become the world’s top financial centre. Following closely behind are Hong Kong and Singapore.

These Asian markets are locked in a competition of their own — they're racing neck-to-neck for the title of top financial centre in Asia. While Hong Kong once had the upper hand because of its connection to its mainland, Singapore has caught up with its successful push towards innovation and technology.

Next to only New York and London, these two are longtime contenders for the title of most prominent Asian financial centre. For now, Singapore has a 2-point lead over Hong Kong, but that could quickly change next year.

Singapore

Singapore’s modern financial centre is only the latest evolution of a rich history in related activities. Its strategic position made it a major trade and shipping hub under the British Empire, and financial services that came with these activities such as international currency exchange, shipping insurance, and maritime finance, set the backdrop for the country’s expansion to modern financial services — which led to the Singapore in the present day.

The modern financial hub started with the establishment of an Asian Dollar Market in 1968, bridging the gap between the downtime of the American market and the opening of the European market on the following day. This, alongside the Asian Currency Unit (ACU) created with the ADM, laid down the foundation for banking and finance in Singapore, as it allowed for more participation from foreign banks and financial institutions in Singapore’s financial sector.

Their early exposure and knowledge built on the link between trade and finance helped them focus their efforts on this sector’s growth, not just as a means of supporting the progress of other existing industries, but as an entire growth industry of its own.

Hong Kong

Hong Kong was under the British Crown rule from 1841 to 1997 but is now a Special Administrative Region (SAR) under China. Fortunately, its historical back-and-forth between China and the UK has not hindered its progress as a region.

Prior to branching out to financial services, the Special Administrative Region (SAR) specialized in light industry —particularly, with toys. It was one of the best toy production places in the world because of their low production cost, diversified toy product designs, high quality, promptness in filling an order, punctuality in delivery, respect for the copyright of customer’s products, and flexible marketing strategies.

The toy industry started failing when insufficient supply of land and labor in Hong Kong drove up the cost of production, along with wages and rents, from the 1970s to the 1980s. This, coupled with the reform and opening-up in the mainland, encouraged many businessmen to move their factories to the mainland for investment.

To support the sudden loss in businesses, Hong Kong needed to provide different types of business and financial services so they could support production line in the mainland. These financial services include import and & export transportation, raw materials purchasing & sales of products, product design, insurance & financing services, to name a few.

Its initial purpose of supporting another industry eventually gave way to these financial services actually becoming an industry in itself, as the labor force gradually migrated from the toy industry to service industries. One of their strongest selling points as a financial centre is its role as a bridge between China and the rest of the world, and it continues to build on that.

This was how Hong Kong eventually developed into an established financial centre, and today they provide financial services to the world and to other regions of Asia.

Former trade and shipping hubs that have grown into full-fledged financial centres — do those success stories sound familiar?

It’s quite clear that New York and London are the financial centres of their respective regions, while Hong Kong and Singapore are still neck-to-neck for the Asian region, but we have yet to look at the Middle Eastern area. In this respect, the United Arab Emirates (UAE) - a small country perched on the tip of the Persian Gulf - is quickly taking strides to taking that title for itself.

The UAE was also under the British influence. They gained independence in 1972, and forty-six years later it stands on its own as home to two of the leading financial centres in the Middle East and North America (MENA) — the Abu Dhabi Global Market (ADGM) and Dubai International Finance Centre (DIFC).

From an oil-and-gas-based economy to commerce and financial services, the UAE has been through similar circumstances. Its location between London and Beijing means that it can cover the western and eastern within a day, and it’s always been a tourist attraction and promising place for migration. It’s had to transition to where it is now under heavy duress, especially during the 2008 financial crisis and the debt incurred during that time frame.

The country is still strongly dependent on their oil and gas, but their financial centres have attracted businesses and foreign investment from all over the world because of the conducive business environment and regulations that support foreign growth. 

DIFC has managed to adapt a solid regulatory model and legal structures that are patterned after international practices, and in addition to its FinTech efforts, is now working on establishing the Rules of the Future Court — a legal structure for the advent of technology and automation. 

The ADGM, with a similar structure, is also taking its own foray into the FinTech world.

Looking at these financial centres and their impact on their countries has helped in understanding that their role is indeed crucial, especially for emerging economies. Their existence helps the country position itself in the world, especially in this era for innovation and technology and its unlimited potential for application in the financial sector. It also helps diversify their sources of income and connect them to a global network.

 
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