The following is an excerpt of a keynote address entitled "The new financial system and the role of Asia" given by Josef Ackermann, Deutsche Bank's chairman of the management board and group executive committee, at the IMF conference in Daejeon, Korea on Monday.
I believe the geopolitical consequences of the financial crisis have been underrated and widely neglected so far. Let's face it: The reputation of the Western world has been severely damaged by the financial crisis that originated in the US, which was thought to have the most sophisticated financial system in the world.
In contrast, Asia emerged relatively unscathed from this crisis if only for the reason that they are operating in a growing home market and are profitable with no incentive or necessity for banks to engage in risky foreign investments.
Besides the damage to its reputation the financial crisis also reinforced the relative economic decline of the West. Not only has the recession in the US and wide parts of Europe been deeper and the recovery less vigorous than in many emerging markets, in particular in Asia, the crisis has also caused a further expansion in the fiscal burdens that Western nations have to bear.
The rebalancing of economic and geopolitical power was already in progress before the crisis but the crisis clearly accelerated this trend. The rise in Asian influence and financial prowess manifests itself in many forms:
- One is the increasing role sovereign wealth funds (SWF) play. SWFs will become a permanent feature of the global financial scenery and will be ever more important and resourceful investors. For the most part, SWFs operate in line with market principles with the state playing a dominant role. This ensures that national interests and a longer term perspective are paramount in their investment policies and behaviour. One example for this is the use of funds and investments in land and resources in Africa, Central Asia and Latin America by Asian, particularly Chinese SWFs, to secure the resource base for future growth of their countries.
- A second trend is the rise of financial centres in emerging markets. Even before the crisis, places such as São Paulo, Singapore, Shanghai or Seoul had started to catch up to incumbents. The financial crisis helped them to post some gains in market share. Emerging market financial centres have the higher growth of their economies going for them as well as the abundance of capital generated and the accompanying demand for financial services. They also benefit from the fact that local financial institutions have suffered less during the crisis or not at all and will be less impeded by regulation going forward. Some western financial institutions are taking advantage of these trends and have embarked on shifting some of their activities to Asia, also partly in response to imminent or new financial regulation in the world's traditional financial centres.
- A third pertinent symbol of shifting fortunes is the rise of financial institutions domiciled in emerging markets in the global financial league tables. Whereas at the end of 2006, before the start of the crisis, no bank from outside the US, Western Europe and Japan had made it into the top-30 based on market capitalisation, by the end of 2009, banks from these regions accounted for only 70% of global market cap. Twelve banks had dropped from the list, a further three were acquired by others. In their places, banks from China and Brazil entered the top league. Today four of the world's 10 biggest banks by market value are Chinese -- in 2004 none was.
- Together with the rise of their banks there has been a rise in the importance of emerging countries' financial markets in general. The extent of the changes we're feeling here is truly stunning: While only ten years ago the US equity markets accounted for half of global market capitalisation, this figure has now fallen to 30%. In contrast, the Bric [Brazil, Russia, India and China] countries' share of global market capitalisation has risen from less than 1% to 17% today. Asia has been especially dynamic. Just one example -- between 1999 and 2008, the growth of domestic financial assets was nearly 300% in emerging Asia. Admittedly these growth figures have to be seen against a low basis, but they show the dynamics involved.
The shifting landscape in the financial sector and the rise of emerging countries, particularly in Asia, mirror a more general rise. Emerging markets' share in the global economy has already surpassed the 50% mark. In particular, between 1990 and 2007, the share of Asia (excluding Japan) in global GDP had already doubled from 12% to almost 25%. This trend will continue; especially as companies in Asia can benefit from the positive dynamics I described earlier. This is already visible in the area of the "green economy", where the competitive race is on and Asian firms are rising quickly to prominence. This area is also a prime example for how the public and the private sector can engage as partners towards a more sustainable future.
As we emerge from the global economic downturn, "green growth" is one key avenue towards recovery. Governments around the globe directed more than half a trillion dollars of stimulus money to green sectors and industries during the past 18 months.
As power shifts from West to East, Asia plays an increasingly important role in investing in the low-carbon economy of the future. Nearly two-thirds of the half trillion dollars of "green" stimulus money was spent in Asia -- and while investment in low-carbon sectors and industries declined in the US and Europe in 2009, it grew by 37% in Asia. Korea made a particularly notable contribution with its ambitious $59 billion "Green New Deal Package", while China allocated nearly $220 billion to green sectors including rail, the electric power grid, and water.
While fiscal stimuli are being withdrawn, governments will need to focus on creating the right conditions to promote greater private investment in low-carbon sectors and industries. This includes putting a price on carbon -- but also will require risk reducing instruments (e.g. loan guarantees, insurance products, investment grants), and interventions to address incomplete or weak domestic capital markets and start-up barriers (e.g. technical assistance and capacity-building programmes). Small amounts of public funds can leverage large sums of private capital. The right policies can create the transparency, longevity and certainty that investors need.
In 2009, global investment in clean energy was $162 billion. That will need to scale-up to $348 billion a year by 2020 to meet the climate challenge -- and capital needs outside clean energy (e.g. in agricultural adaptation) will also be substantial. Unleashing private-sector investment in the space will be vital. This is because of the capital intensity of low-carbon sectors and industries. This challenge as well as others like securing the raw materials, energy and infrastructure base for sustainable growth can only be met if one takes a long-term view and if government and private money team up in public-private partnerships.
Deutsche Bank is committed to showing leadership in this area. Many of our activities in financing the transition to a low-carbon economy for example take us to Asia. We have originated and restructured dozens of carbon offset credit projects across Asia. And we are in dialogue with investor groups in Korea and across the region about providing further "green" financial products.
Earlier this year UN Secretary General Ban Ki Moon appointed an eminent group to the UN high level advisory group on climate change finance. The group is working on dealing with the challenge of financing climate change in the developing world, and we are participating through our vice chairman Caio Koch-Weser.
Climate change is a tremendous opportunity -- both for the growing economies of Asia, and for financial services firms like my own. And it will further increase Asia's weight in the global financial system.
The rise of the Asian countries, therefore, is not just due to the fact that they were less affected or even unaffected by the US subprime mortgage and subsequent financial crises. Rather than simply mirroring cyclical or crisis-induced patterns, the relative rise of the emerging market and Asian countries reflects structural factors that will continue to shape their economic prowess.
Today Asia is reaping the rewards of the changes in economic policies and of the transformation of many Asian economies in the aftermath of the region's own financial crisis at the turn of the century. Fiscal discipline has been established, financial sector regulation and supervision strengthened, and mismatches in companies' balance sheets have been removed. Currency regimes have become more flexible and reserves have been bolstered, arguably, in some cases to an extent that has actually become problematic for the global economy. In any event, Asian countries benefit from closer integration and more open trade within the region as well as from increasingly autonomous domestic growth dynamics in several, though not all countries.
Another factor in these growth dynamics is demographics. While most Western societies have already started to age, which reduces their trend growth rate, most Asian countries will see another decade or two of expanding workforces, which will provide a natural underpinning for growth. To be sure, several Asian countries, above all China, will soon be facing serious demographic problems themselves, but for now, Asian countries in general are in a far more favourable position and the optimism is persistent all over this continent. Finance has a huge potential if you look for example at China where only less than 1% of Agricultural Bank of China's retail customers have mortgages. The financial crisis has increased the feeling that Asia's time has come (again) and made continuous high growth even more sustainable.
The same holds true for another structural factor, government budgets -- and, of course, there is a link between demographics and deficits. Many countries in the West have lived beyond their means for years, if not decades. They have shied away from consolidation, not least because an aging electorate is less inclined to support cuts in expenditures for social welfare and prefers stability over innovation, even if it may generate higher growth rates. As a result, substantial debt levels have accumulated -- in both the public and the private sectors -- which have come back to haunt governments during this period of severe crisis. To be fair, during an era of cheap credit, the financial markets did make it easy for countries to accumulate debt at favourable conditions -- the proverbial "bond market vigilantes" were fast asleep!
It is no exaggeration to say that the financial crisis marks a turning point in the history of the global economy. Those of us who were close to the events will never forget the tensions, the drama, and the anxiety we shared. The repercussions of the crisis are still being felt, and a new landscape is emerging, in which Asia stands even taller than ever before. The crisis has shown that we're living in a highly interconnected world. Only a joint effort will therefore ensure a satisfactory outcome for all stakeholders.