Josef Ackermann, Deutsche Bank's chairman of the management board and group executive committee, was the keynote speaker at a luncheon hosted by the Hong Kong General Chamber of Commerce yesterday. More than 350 people were in attendance, and warmly welcomed Ackermann, giving him not one but two welcome applauses – the second after he wished all in the room Kung Hei Fat Choi.
For other speeches Ackermann has given in the region, see: Deutsche Bank's Josef Ackermann at the IMF in Korea. Below, is an excerpt from his speech yesterday.
This year’s World Economic Forum in Davos again highlighted the geopolitical shifts in the world. The tone of US participants reflected the theme of President Obama’s State of the Union address, which focused on how the US might regain its former competitiveness. Europeans, in turn, had a lot of explaining to do on the future of the euro and the European Union. All of this stood in marked contrast to the brimming self-confidence that was evident in how Asian entrepreneurs, managers and politicians presented themselves.
The financial system has also been impacted by the geopolitical changes. Although the US and the EU still account for more than two-thirds of all financial stocks, if you look at the growth rates, it is clear that the momentum is in emerging markets, which is signalling a fundamental shift in the global financial system.
It would be a mistake to believe that these changes are simply a reflection of the impact of the crisis on the economies and public-sector budgets of the Western economies. The crisis has only further accelerated the structural shifts in the global economy that already started several decades ago.
Let me illustrate these shifts with a few striking numbers:
• While financial market volumes in Western Europe have risen by 70%, and in the US by more than 40% between 1999 and 2008, domestic financial assets grew by around 200% in Latin America and nearly 300% in Central Europe as well as in Asia’s emerging markets, the Middle East and Africa. Although in many cases this growth started out from a low base, the dynamics are nonetheless clearly visible.
• China’s financial markets, in particular, still have huge potential and the country’s share in the world’s total financial market volume is set to rise substantially. The country’s share in global bond and equity markets alone is about to grow by 2.5 times within this decade.
• The rise in emerging countries’ financial markets has been mirrored by the rise of their financial institutions. The share of banks in established markets measured by market cap of the top 25 banks worldwide has dropped from 80% to less than 60% between 1999 and 2008. At the same time the share of banks from other regions, above all from Asia, has grown correspondingly. In 1999, all but one of the top 25 banks were headquartered in the U.S., Europe or Japan. Today, ten of them are headquartered in emerging markets or countries like Canada and Australia, whose financial systems emerged relatively unscathed from the crisis.
• Along with the rise of individual financial institutions, emerging markets’ financial centres are continuing to grow in importance. A number of emerging countries have ambitious plans to build global or regional financial centres. In the latest edition of the City of London’s Global Financial Centres Index, three Asian financial centres – Hong Kong, Singapore and Shanghai – made it into the top ten, and five “Emerging Asia” cities are in the top 25: namely Beijing, Shenzhen, Taipei and Seoul in addition to Shanghai. When asked which financial centers are likely to become more significant and where banks intend to open up new operations, it is precisely these financial centers that top the list.
• Finally, the growing importance of emerging markets is also visible in global capital flows and the net asset position of countries. While emerging countries were traditionally capital importers, they have now become the largest creditors in the world and the majority of mature economies are now dependent on capital inflows from abroad. This will not be reversed any time soon. Because of legacy effects from the financial crisis as well as demographic trends, aging and indebted countries will continue to run deficits, which will require capital inflows from surplus countries – and many of these will continue to be emerging market countries. Public debt in mature markets is expected to soar to 133% of GDP in 2020, from just 100% in 2010. In contrast, emerging markets’ public debt-to-GDP ratio will fall to 35% in 2020, from around 46% in 2010.
Growing role of state and regulation
Other sea-changes we have seen during recent years took place in the regulatory framework and the role of the state in the financial system. Again, a combination of crisis-related and structural factors is at work here.
After nearly three decades of deregulation, liberalisation and market integration, the financial crisis has brought the pendulum to swing back in the opposite direction: Regulators have decided that market forces need to be reined in, and the G20 has agreed on a comprehensive catalogue of regulatory measures, which is now being implemented. At the same time we can observe a worrying tendency to endorse a re-nationalisation of financial markets. Some regulators and politicians have apparently concluded that the interests of financial stability are best served by forcing banks to hold local pools of capital and liquidity and by inducing banks to operate, in each country with a self-contained subsidiary.
I am far from disputing the need for a thorough overhaul of the regulatory system in light of the multiple deficiencies revealed by the financial crisis. But we need to make sure as well that the inevitable efficiency losses in the wake of new rules are not getting out of proportion relative to the problems we want to address. A refragmentation of the financial markets would certainly be a detrimental development for the whole world. Unfortunately, the danger of such refragmentation is very real: Notwithstanding the Financial Stability Board’s efforts, the G20 may, in the end, not be able to agree on common rules. And even if they do, it is most likely that actual implementation of the rules will differ significantly across the various jurisdictions.
Against this background, the role of Asian countries in the G20 is pivotal. Given Asian countries’ present and future importance, it will be crucial to ensure that they support the process of reforming the international regulatory system. Asian governments and financial market players can act with great self-confidence in this respect. They can approach the regulatory changes from a position of strength and should thus find it easy to fully implement a G20 consensus. Given the dynamic growth and profitability of their home markets, for instance, they will have fewer problems in meeting the new capital requirements than many banks from mature, unprofitable home markets. One fact that is often overlooked when analysing the impact of the new rules on competition is that even if the new rules are implemented in an identical manner across all jurisdictions, the competitive impact would still vary significantly according to differences in the profitability of banks in the respective markets.
Apart from the risk of regulation-induced market refragmentation, the crisis reinforced another worrisome trend: a greater role of the state. The influence of the state in the financial system has increased, not only through more intrusive regulation, but also through the stakes governments have acquired – often unwillingly – in financial institutions. Thus, in many cases the state is no longer a neutral referee of the activities in financial markets, but itself a participant. Admittedly, there is little evidence that governments intend to hold on to this role longer than necessary. But it might take quite some time for them to exit the game. This is all the more relevant as in many emerging market countries, the state has never ceased to play a significant role in domestic financial markets. China is a prime example of this. Furthermore, Chinese banks now top the world rankings and are looking beyond their home shores.
Of course, sovereign wealth funds, or SWFs, are another example. It would certainly be too simple to say that SWFs are nothing but the prolonged arms of their governments, and many SWFs have reformed their governance structures to make themselves more independent from their sponsors. But in the end SWFs are state-owned entities that have become influential players in the global financial markets. And their decisions on asset allocation have a strong impact on international capital flows. By the end of the decade, they are expected to reach a size of $7 trillion.
The growing role of SWFs can also be seen as part of a wider phenomenon: state capitalism. It comes as no surprise that the financial crisis has rekindled the debate about capitalism.
The crisis not only caused substantial losses in prosperity, but it has also undermined the trust in the laissez-faire free-market capitalist model. Although it would certainly be worth discussing whether the financial crisis really can be attributed solely or even mainly to a failure of free markets. In my view, a good deal of scepticism is warranted here. There is ample evidence of state failure, too: Regulatory and supervisory mistakes have been made as well as mistakes made in monetary, exchange rate and housing policies. But in wider public there is a perception that state capitalist systems have not only weathered the crisis well, but also are better at dealing with the multiple challenges our economies are facing like securing access to raw materials, forcing through structural changes or taking a longer-term perspective…
To continue reading this speech, please go to page two.
The Euro
Ladies and gentlemen, allow me to digress briefly here to say a few words on the euro: I have no doubts whatsoever that the euro will continue to be an important part of the global financial system. The current difficulties in the Eurozone have been contained and will finally be overcome. Thanks to the measures taken by the countries concerned and the EU as a whole, clear progress is being made towards establishing a robust framework to prevent a repeat of the recent events and/or to deal with them more effectively should they occur nonetheless. In any case, it must be said that what we are seeing is a debt crisis of a small number of European Monetary Union members and not a crisis of the euro! The Asians, who are savvy investors know this and have invested substantial amounts in the euro lately. China’s reserve managers bought sovereign bonds from the euro area’s periphery and the Japanese alone subscribed to about one fifth of the European Financial Stability Fund’s recent first issue.
The euro is the second most important international currency in the global economy and will continue to be so. Of course, other currencies, notably the Chinese Rmb, will gain in importance. As you are aware, the government in Beijing has recently taken a number of initiatives to allow for a greater international role of its national currency. Specifically, in the summer of 2009 it launched a programme for the processing of cross-border trades in Rmb through Hong Kong and Macao clearing banks. This, in turn, has helped spark demand for Rmb-denominated investment such as so-called “Dim Sum” bonds, which have grown since they were launched in 2007 to a market volume of 32 billion renminbi by the end of 2010 and are expected to surge to 75 billion renminbi this year.
Furthermore, in August of last year, a pilot scheme was launched for RMB clearing banks and other eligible financial institutions outside of China to invest on the mainland onshore interbank bond market, subject to quota approval by the People’s Bank of China.
These are all useful and welcome steps. Nevertheless it will take many years before the renminbi will achieve an international status comparable to that of the euro or the dollar.
Ladies and gentlemen, let me conclude: financial markets are, by nature, constantly changing. They evolve in response to market forces, regulatory developments and geopolitical changes. It is therefore not surprising that we are currently witnessing a period of particularly pronounced change. This poses challenges not only to market participants, who will need to adapt their strategies to a new market environment, but also to policymakers. This dual set of challenges underlines the importance of close cooperation between the public and private sectors.
