02/08/2014 Talking Business with Linda Yueh


02/08/2014

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What makes a successful international financial centre?

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Why do a handful of centres like London and New York dominate

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Is there scope for new centres like Shanghai to take a piece

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Here in Singapore, I'm Linda Yueh, and we're Talking Business.

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Global financial centres like London and New York have existed

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for more than a century, but new centres are being boosted

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by governments such as China and Qatar to compete for business.

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Since the creation of the Eurozone, Luxembourg has seen its position

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as an international financial centre grow.

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It has attracted global banks, such as the big Chinese ones,

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to locate there in order to serve the European single market.

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I caught up with the Luxembourg Finance Minister, Pierre Gramegna,

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to discuss the challenges of being and remaining

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Our greatest advantage has been to always play the card of the European

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single market since the very beginning, and always being

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the first to translate legislation into the national one, I mean EU

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And that is, for example, what triggered the birth

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of the investment fund industry in the middle, end of the '80s,

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and so we developed the know`how quite quickly,

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and again here it was this speed and the openness that helped us.

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So today we are, after the United States, the largest investment`fund

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But there is still a high degree of competition, for instance London

:01:59.:02:05.

and Frankfurt getting clearing banks to allow them to trade RMB offshore

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with a clearing bank, CCB for London, Bank of China for Frankfurt.

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That must put Luxembourg at a disadvantage in a growing area

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I am just coming back from a mission to China in the last days, and I

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must say I'm very glad to report that the central bank of China has

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signed a memorandum of understanding with the central bank of Luxembourg

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to also allow Luxembourg to now do the clearing.

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So this is brand`new, and it will boost our role as a renminbi hub.

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In fact, we are, for the time being, already number one

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for the internationalisation of the renminbi.

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If we look at the listing of renminbi denominated bonds,

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we have 46 listed at the Luxembourg stock exchange,

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And also, if you look at the funds denominated

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in renminbi in the investment fund industry, we are also number one.

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So the market had already chosen Luxembourg to some extent,

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but now that it's the clearing possibility, I think we

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Let me also say that the Chinese have recognised very well that

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if you want to achieve something, and if you want to reach

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your goals, you better play on the market economy and the competition,

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I know one thing which Britain and Sweden and other countries are

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What are some of the changes that you are working towards within the

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Eurozone, and how might it affect these countries which don't have

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the Euro but have massive banking systems which are very integrated

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Well, I think, first of all, if you had asked me two years ago

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if I believed that Europe could achieve the banking union, most

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people, and me included, would have said that it's impossible to reach

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The same was said about the birth of the euro 25 years ago.

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So we have achieved something which is very difficult,

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and which has never been done in the past, is that countries that have

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the same currency, in this case the euro, will have a common umbrella.

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A common umbrella to supervise the banks, a common umbrella to protect

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deposits of the customers, and a common umbrella to deal with a

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banking crisis in one country, or in several countries in a common way.

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So to put it very simply, because banking is a complicated

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issue, if a bank in France has a problem, it will get the help of the

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single resolution fund of the whole of the banking union countries,

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If a bank has a problem in England, well, it can only count

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The same for Sweden, because they are outside of it.

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Mind you, the rest of the world is like that.

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You just depend on the country where you are located,

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and we have here done a piece of integration that's quite amazing.

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Now, there's been some criticism that it's not going far enough,

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So I think we have made a good compromise, and over the years it

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will prove that it stabilises the eurozone, that it gives back

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credibility to the banking system, because all the banks are going to

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be assessed, will have to undergo a stress test,

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and also all the assets of the bank going to be double checked.

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So I think the credibility of the banks in the eurozone will

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be increased, and last but not least, this will enhance

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Do you think that will enhance the role of Luxembourg

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as an international financial centre over, say, a centre outside

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Because from what you're describing, you have a much bigger backing

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for any banks that would get into trouble.

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That raises the security of the banks, so it sounds to me, by not

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joining, you're suggesting that the countries which are outside, their

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banking systems only have their own governments to rely on, and over

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time that doesn't sound to be a great position to be in.

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The British might answer that they prefer to have that independence,

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and they prefer to have their own currency, where they also have more

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influence where that currency stands and what role it plays.

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So it's a give and take that you have to make.

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For us, Luxembourg, there's no doubt that to be inside this umbrella is

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by far better, because it gives common rules, and these common rules

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are what investors outside, I suppose, want to see,

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What else is still coming down the line for eurozone?

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After the banking union, will there be a fiscal union?

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Will there eventually be a political union?

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Well, obviously, Europe has been built step`by`step.

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Even the banking union, which is now more or less put

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into place, with some treaties that needs to be ratified,

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it is not going to happen in one day, so it is a gradual effort.

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The same is probably true for fiscal union and political union.

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And one must have a measured approach to all these subjects.

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Fiscal matters, there is unanimity, I have to underline that, that means

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that countries have to accept fiscal union or have to accept changes

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in fiscal policies, which means again that this is the heart of

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sovereignty, and that is why this is a subject that has also been

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So my guess is that, in this field there's going to be

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Being a global financial centre can add substantially to

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London accounts for one fifth of Britain's GDP.

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Can existing financial centres hold onto their positions

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For instance, China is pushing to establish Shanghai as

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According to the Global Financial Centres Index, the top centres

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remain the long established cities of New York and London.

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Asian centres such as Hong Kong and Singapore are also

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Frankfurt and Luxembourg are just outside the top ten,

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while new centres like Shenzen and Shanghai are in the top 20.

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So can new entrants topple the existing centres?

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After all, London has remained a top financial centre despite the rise of

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What is needed for a global financial centre to

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hold onto its place, and which new centres could begin to redefine

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Here with me to discuss this are David Zemans, Asia managing partner

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of global law firm Milbank, and joining us from London is

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Chris Cummings, CEO of City UK, an independent body promoting

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David, you have worked with emerging markets,

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what are the key traits that make a successful financial centre

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from a new emerging markets perspective?

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I think the key is to be able to attract the best and the brightest.

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People who want to move here, whether individuals or company,

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both human and financial capital are very mobile these days.

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You need to create an environment where people want to come and they

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want to live, where they know there is financial, regulatory certainty,

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where they know when they've been offered something by the government,

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And Singapore, Hong Kong and other financial centres

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in the emerging centres have proven that this can happen.

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I think the real challenge over the next few years

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are going to be the more truly emerging markets of today,

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like Indonesia and Jakarta, Shanghai,

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if they can really follow through on these promises

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and make these places attractive in the long term.

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PK, what is it about, say, Singapore and Hong Kong that has

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allowed them to really rise very quickly to become leading centres

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against, frankly, centres that have been around for a century,

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Well, of course, the fact that they are in Asia,

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the fastest`growing part of the global economy,

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that there is some depth in their own financial markets.

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There is a very vibrant market in Hong Kong.

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Singapore has worked very hard on creating its own bond market.

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It is a kind of artificial bond market,

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but it's got a certain amount of vibrancy.

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And the competition in Asia has withered away.

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If you think about the lead up to the Asian financial crisis,

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Bangkok had the international banking facility.

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Kuala Lumpur was trying to become a financial centre.

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And they all decided that those ambitions were

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a little bit excessive post`Asian financial crisis.

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And so Singapore and Hong Kong were the survivors that grew rapidly.

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And the fact that they had some depth in their own markets,

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the fact that there was a lot of fund management

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going on in Hong Kong and Singapore, helped a great deal,

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Chris, outside of that competition, especially coming from Asia,

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can London hold onto its place as a leading financial centre,

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given, as PK says, the growth increasingly as coming from Asia?

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The challenge for London is actually not too see these

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financial centres as competitors, but as emerging partners.

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The reason that London has managed to maintain its position is by being

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relevant, by actually offering its expertise, whether that is in legal

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services, professional services, consultancy, banking,

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to help emerging financial centres really take advantage

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of the trade flows that we now see emerging.

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So, actually, that's why we take great credit and great comfort

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where the City of London was able to further its appeal

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as the RMB trading centre for the West.

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It is why we are so pleased that Islamic finance

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is now really taking hold in London as well.

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So it's about being relevant and offering expertise,

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PK, is that consistent with what you just said about Hong Kong

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and Singapore being the survivors and others sort of falling away?

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Do you see London and Frankfurt and Luxembourg as partners,

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or actually they are competitors in some sense, aren't they?

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Well, they are competitors, but they are also partners to some degree.

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The important thing about London in New York is that they have the lead.

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They have critical mass that almost nobody else has,

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so if you just compare London to Frankfurt or Luxembourg,

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the lead that London has is enormous.

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Frankfurt has been attempting to become the centre.

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It has the ECB, but it still is not a financial centre

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of anything like the size that London is.

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In Asia, we got Hong Kong and Singapore as emerging competitors.

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You have to think back to 20 years ago,

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when Tokyo was well ahead of both Hong Kong and Singapore.

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I'd say now in Asia there are really three centres,

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People often overlook Tokyo, but it still remains relevant,

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because it has the depth of its own capital markets,

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it has the depth of a liquid global currency,

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which is a slight disadvantage for Hong Kong and Singapore.

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Hong Kong, of course, doesn't really have a currency of its own,

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Singapore has to make its own way as a centre in Southeast Asia,

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as a global centre based in Southeast Asia,

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but trying to cater to the whole world.

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really pushing Shanghai as an international financial centre.

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I think the major problem for Shanghai

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is that China still doesn't have a convertible currency.

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There is the offshore renminbi market,

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is that it doesn't have a properly convertible currency,

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to have a global financial centre based in China.

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I see no reason why they should try to duplicate Hong Kong in Shanghai.

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a place where a lot of corporate headquarters are based.

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The financial centre is Hong Kong, and it is a pretty successful one.

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The Hong Kong currency is a genuine hard currency,

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The certainty that comes from having a convertible currency

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is what gives Hong Kong its edge, as well as, of course,

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the rule of law, predictability and all of the other things,

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transparency and so on, that make a financial centre.

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David, do you think that China can succeed here?

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Because they've had some regulations and some policies

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that have worried foreign investors in particular.

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I think Shanghai will no doubt be a huge financial centre.

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Whether it's a global financial centre is a different question.

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It will be huge, just because of the sheer size of the Chinese

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economy, huge because people have to be there because of that.

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But whether or not it actually attracts the best and the brightest,

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if it can sort out its regulatory issues,

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whether it can make Shanghai a place where people want to live.

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It is obviously a vibrant, exciting place,

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but pollution is a real issue, day`to`day living.

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If people, when they have an option to station their business,

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Is it going to have all of these buzzwords that we've talked about,

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you know, transparency, rule of law, consistency?

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I think that is, again, very much an open question.

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Chris, let me bring you in here, because Shanghai has clearly tried

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to position itself as an international financial centre.

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It would be good to get your take on that,

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but obviously the internationalisation of the RMB

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is transforming quite a lot of global business,

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that a lot of financial centres would want a piece of.

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Indeed, and that has been one of the success stories of London

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and the City of London has worked very hard to make itself relevant

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and interesting to the Chinese authorities,

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to make London the main RMB clearing centre in this part of the world.

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That is another good example of an emerging, aspiring partnership.

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But on the wider issue of China, there's no doubt that the size of

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the economy, business interest in doing business there,

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and the vibrancy of Shanghai means that there is great opportunity,

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and we have been really happy to work with Shanghai authorities

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to see the development of the Shanghai free`trade zone.

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But it does come down to the attractiveness

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of the location, both for businesses.

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Of course, we've seen that, because people want

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to be close to the market, but it is about the talent.

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Do people who want to have a global career

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want to be based in some parts of the world compares to others?

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people want to have that London stamp in their passport,

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because basically it means you can compete with the best in the world.

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And that is part of the hidden attractiveness

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But I do think there is a great deal that we can do to work

:17:45.:17:50.

with the Chinese authorities, particularly in Shanghai,

:17:51.:17:52.

and the other emerging free`trade zones,

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And that is actually how businesses will be attracted,

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beyond financial services, and to help the economy grow more stably.

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I want to do predictions now from the panel.

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We have talked about financial centres,

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what makes good practice, the challenges.

:18:13.:18:15.

what are your three leading international financial centres

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that will dominate the global financial services landscape?

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I'd start with London as being the major global financial

:18:30.:18:43.

It will look different, because of London's desire

:18:44.:18:46.

to continually reinvent itself to be attractive.

:18:47.:18:48.

But I'm going to plump for either a major Asian one...

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If you were to ask me to choose between Singapore,

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Hong Kong and Shanghai, perhaps there is a hub network there...

:18:56.:18:58.

I don't want to disappoint Chris by not mentioning London,

:18:59.:19:08.

and I think London will still say relevant, for sure,

:19:09.:19:12.

but I think New York will continue too,

:19:13.:19:13.

it will continue to be a mecca of talent

:19:14.:19:18.

I think that I would put my sort of outlier vote on Mumbai.

:19:19.:19:27.

I think that 50 years is enough time for a place like Mumbai,

:19:28.:19:31.

with such an enormous population, a well educated one by and large,

:19:32.:19:35.

English`speaking population, where I do think

:19:36.:19:38.

that world business being in English is very relevant,

:19:39.:19:44.

will hopefully find its way to that top three.

:19:45.:19:48.

And then I agree, actually, I think the battle

:19:49.:19:50.

I think that there are a lot of bets you could put down.

:19:51.:19:55.

I'm not sure where it will end up, I think it may be a miscue,

:19:56.:19:59.

rather than somebody doing something great.

:20:00.:20:01.

I think there is also a lot of exciting times ahead for Asia,

:20:02.:20:05.

but a lot of potentially volatile ones as well,

:20:06.:20:07.

and political and social and economic instability

:20:08.:20:10.

Well, 50 years is a very long time, I think that over the next 50 years

:20:11.:20:21.

the demographic advantage will ensure

:20:22.:20:23.

that an Indian financial centre emerges as quite important.

:20:24.:20:28.

So it could be Mumbai, it could be Delhi, it could perhaps be Calcutta.

:20:29.:20:31.

It is almost unthinkable at the moment,

:20:32.:20:35.

but you know, one of those, or perhaps even Bangalore.

:20:36.:20:39.

So one Indian financial centre among them.

:20:40.:20:41.

New York certainly will be among them, and I think that

:20:42.:20:45.

the third one will either be London or it will be Hong Kong,

:20:46.:20:51.

or perhaps Shanghai, Perhaps even Shenzen.

:20:52.:20:57.

a China financial centre of some significance.

:20:58.:21:01.

I think there will be four global financial centres,

:21:02.:21:03.

London basically has a huge lead, but it has a disadvantage

:21:04.:21:10.

in that it on currency, sterling, is a relatively minor currency.

:21:11.:21:18.

The euro will probably become of less importance

:21:19.:21:24.

as we look 20, 30, 40 years down the road.

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And so I think it will be a China financial centre,

:21:27.:21:29.

an Indian financial centre, and the US one.

:21:30.:21:33.

That was PK Basu, David Zemans and Chris Cummings from London.

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Being an international financial centre

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can be an important driver of economic growth.

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Once established, there is a longevity to financial centres

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such as London and New York, but to ensure that position it's essential

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to continue to adapt to the changing nature of global business,

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such as the growing use of the Chinese currency internationally.

:21:55.:21:57.

Also, there's more competition than before,

:21:58.:22:00.

as new centres, especially in Asia, are catching up fast.

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Check out our website and me on Twitter, I'm @lindayueh.

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Join us next time for more Talking Business with me, Linda Yueh.

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