Globalization generally implies decentralization and denationalization. But in international financial markets, something quite different is happening. Although market activity is spreading to new corners of the world, a powerful process of centralization is reinforcing the traditional dominance of financial capitals, led by London and New York. Battered by the Asian economic crisis, Tokyo and Hong Kong could become leading financial centers again if they open up to the world and continue to let investors snap up Asian assets at bargain prices. Even after globalization, markets will still be based in cities, not computers.
The transformation of global capital markets into a new supranational order is continuing apace despite the current market crisis. Nationally based financial operations are shrinking and internationally oriented operations are taking their place. Globalization usually implies decentralization. But while the international network of financial centers is indeed expanding, a leaner system dominated by a handful of strategic cities is evolving. As financial operations disperse around the world, only a few cities will have the resources to be dominant. First among them are London and New York, with their enormous concentrations of resources and talent. These two will conduct the most critical and complex financial operations of the future. A secondary network of smaller economic capitals will be headed by Frankfurt, boosted by Europe's economic and monetary union. The ultimate status of battered Hong Kong and Tokyo remains murky as markets wait to see what will be left in the wake of the Asian crisis. Although Singapore and Sydney are strengthening their positions, it is difficult to imagine them replacing Tokyo's resources and Hong Kong's expertise.
The emerging financial system will sharply differ from earlier versions, which were strings of closed domestic markets with a few scattered global centers such as the offshore markets and Swiss international banking. Traditionally, each national center duplicated all financial functions for its own economy, and collaboration between national markets was crude and rare. Today, however, cooperation is on the rise. Leading financial services firms are now setting up operations across the globe while traditional national centers are becoming home to foreign firms with global operations. Leading cities like London and New York are executing complex operations for firms and governments from myriad countries, packaging capital in innovative ways while working with secondary cities through affiliates and direct exports of financial services. In contrast, other cities in the global network are playing "gateway" roles, such as monitoring capital flows or issuing bonds. One example is Argentina's $1 billion government bond in November, the largest emerging market bond since the market turmoil last August. Although the bond was issued in Argentina, its lead managers were J. P. Morgan and Germany's Deutsche Bank and most of its buyers were U.S. institutional investors.
What turns an ordinary city into a 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 equity holdings. In the past, a nation's financial activity was often scattered among several major cities; today, most countries have one dominant national center of operations. Today, a city lacking a major stock exchange can participate in the global market if it has banks and investment houses holding significant amounts of equity. Second, new financial capitals have appeared in emerging markets that have taken the plunge into market liberalization -- a trend that will continue despite the current financial turmoil.
The emerging financial system will sharply differ from earlier versions, which were strings of closed domestic markets with a few scattered global centers such as the offshore markets and Swiss international banking. Traditionally, each national center duplicated all financial functions for its own economy, and collaboration between national markets was crude and rare. Today, however, cooperation is on the rise. Leading financial services firms are now setting up operations across the globe while traditional national centers are becoming home to foreign firms with global operations. Leading cities like London and New York are executing complex operations for firms and governments from myriad countries, packaging capital in innovative ways while working with secondary cities through affiliates and direct exports of financial services. In contrast, other cities in the global network are playing "gateway" roles, such as monitoring capital flows or issuing bonds. One example is Argentina's $1 billion government bond in November, the largest emerging market bond since the market turmoil last August. Although the bond was issued in Argentina, its lead managers were J. P. Morgan and Germany's Deutsche Bank and most of its buyers were U.S. institutional investors.
What turns an ordinary city into a 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 equity holdings. In the past, a nation's financial activity was often scattered among several major cities; today, most countries have one dominant national center of operations. Today, a city lacking a major stock exchange can participate in the global market if it has banks and investment houses holding significant amounts of equity. Second, new financial capitals have appeared in emerging markets that have taken the plunge into market liberalization -- a trend that will continue despite the current financial turmoil.
