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Saskia Sassen
[75]
SECRETS OF SUCCESS
tu rn s an a
What ordinary city into global financial center? Although
many factors can boost a city's status, two elements stand out. The
first is national consolidation, which favors cities with major institutional
1 comes
Information cited herein from the Bank for International Settlements in
jiili?
S**58^
HOT FUSION
a consolidated
about 25 major fund managers, along with telecom
munications industry offering them services spanning the globe.
Electronic networks too are testing the merger waters.
Perhaps
most was the announcement last summer that the London
spectacular
Stock Exchange and Frankfurt's Deutsche B?rse were tying the knot
to attract the top 300 shares from all over a
Europe and form blue-chip
European exchange. Feeling snubbed, Paris first reacted by proposing
that major European create an alternative alliance. Then
exchanges
Madrid, Milan, Amsterdam, and Helsinki indicated interest in joining
London and Frankfurt, and Paris decided its best option would be to
to start up its own network. Else
jump aboard also rather than try
where, the Chicago Board of Trade is now loosely linked to Frankfurt's
Eurex, the largest European electronic futures exchange, and the
Chicago Mercantile Exchange has hooked up with the Paris futures
exchange, the Matif. The New York Stock Exchange is considering
partnerships with exchanges in Canada and Latin America and is
already talking with the Paris Bourse. Nasdaq's parent is having
similar discussions with Frankfurt and London.
GLOBAL BONDING
change? Not much. When China launched its 100-year bond in 1996,
it aimed at selling it not in Shanghai or even Hong Kong, but inNew
York; rather than going the U.S. government, it went
through
through J. P. Morgan. At the same time, China left major domestic
reforms unaddressed. In a similar vein, Japanese firms operating
overseas standards long before Japan's govern
adopted international
to be listed on the New York Stock
ment considered requiring them
that I have
Exchange?an example of "strategic denationalization"
discussed in my book Losing Control?
CAPITAL CAPITALS
is the
London preeminent city for global finance today, in good part
due to the numerous international firms that have located key operations
and resources in the City, Londons financial district. It leads the world
in institutional equity management, over $1.8 trillion in assets
holding
at the end of 1997?a 48 percent increase from $1.2 trillion in 1996,
boosted by the 25 percent stock market rise in the last two years (before
the all-time high of July 1998and the subsequent sharpfall).The mighty
a mere ninth in institutional
capital of the eurozone, Frankfurt, ranks
s stock market
equity holdings. London capitalization atNovember 1998
stood at over $2.1 trillion, topping those of Frankfurt and Paris
combined. London, together with another eurozone outsider, Zurich,
accounts for over half of all market in Europe. It is
capitalization
s net exporter of financial services, with a
arguably the world biggest
surplus of $8.1 billion in 1997. It also leads in international bank lending,
on cross-border mergers and and trading and
consulting acquisitions,
issuing international bonds. Finally, London is the leading global foreign
a 40 percent market share, far ahead of New York.
exchange center, with
Wall Street sbrilliantfinancial engineering and
What London lacks is
Frankfurt s location as the capital of the eurozone. It does not hold Japans
enormous or
savings accounts Hong Kongs strategic advantage as a link
between global capital markets and China. Much of Londons promi
nence is due instead to the U.S. and investment firms
leading European
that have located key operations there. U.S. firms in London are
using the
- 1
FOREIGN AFFAIRS Volume78No.
[84]
New York isby far the biggest domestic capitalmarket. The New York
Stock Exchange is the world s largest, listing about 3,000 companies,
albeit for an overwhelmingly domestic market. Even this is changing,
however. The nyse now has well over 300 foreign firms listed, thanks
to the recent rash of international initial public offerings. In contrast,
the Tokyo stock is still even after the
exchange losing foreign firms,
government eased listing requirements and costs. The nyse will also
over the next few years
begin trading in decimals rather than fractions
to move closer to international standards. Finally, the U.S. Securities
DISCREDITED IN ASIA
The Asian crisis has cast a long shadow on the regions preeminent
financial centers, Hong Kong and Tokyo. Despite Hong Kongs
as a
unique role bridge between the world economy and China and
its abundance of specialized services, it has yet to overcome the
shocks of financial turbulence. In 1997, it lost 23 percent of the value
of assets under its management. Stocks and real estate have tumbled
by half in the past year and may fall further, even though they recovered
a quarter of their value last autumn. This a
collapse has been led by
recent
slump in properly prices, since property-linked companies
dominate the stock index. To stem these losses, the government
placed around $3 billion in foreign reserves in August into stock
no avail. This failure made clear that no can
purchases?to government
thwart through intervention a sustained attack on itsmarkets. Combined
debt has reached 150 percent of gross domestic product, one of Asia's
over are
highest debt ratios. Stores all Hong Kong going bankrupt, with
the best ones at
bought up by foreign firms fire-sale prices.
Although the outlook for Tokyo is not much brighter, recent steps
toward deregulation could put it back on track as the financial power
house inAsia that itwas in the 1980s. This time around,
deregulation will
see more of assets and business
Japans falling under international
management. This includes the $10 trillion in bonds, savings, and
schemes held by Japanese citizens
pension planning for retirement.
top-level functions
are
consolidating in cities that are transcending their
national attachments. Clearly, the global financial system is here to
stay. But by its very design?based on connectivity, and
mobility,
will continue to be enormously volatile. And therein lies
speed?it
the rub: For emerging markets, hot capital flows may not be the most
to finance therefore need to
prudent and steady way development. We
understand better what itmeans to install global financial institutions
into national markets and replace domestic plans with an international
corporate agenda. Countries will further facilitate capital flows by
privatizing assets, abolishing rigid national controls, and standardizing
to international norms. All of these measures will reinforce
operations
the existing network, make it more transparent, and let more new
join the game. Although markets will continue to thrive on
players
must draw on the
volatility, they unique strengths of the leading
cities and their second-tier partners to reduce the pain of future
turbulence. In this way, piece of the global
emerging markets'
financial can amount to more
than just a few crumbs. And
pie
while London and New York will continue to lead, the wealth
they
can
manage spread from the few to the many?