Why do we need to be a financial hub?A new catchphrase in the business world is “financial hub.” The literal meaning of the word “hub” is the center of a wheel. Thus, a financial hub would be the center of the financial industry, the market where investors and companies from around the world gather to trade stocks, bonds and currencies.
London has recently established itself as a financial hub, 20 years after it underwent a financial reform dubbed the “Big Bang.” Since the Korean government has set out to become the financial hub of Northeast Asia, the news of London’s success is of significant interest.
In fact, Korea is not the only nation dreaming of becoming a financial hub. New York and Chicago in the United States, plus China, Singapore, Hong Kong, Australia and Bahrain have all said at one point or another they would like to become the financial hub in their respective regions. For instance, Malaysia, thanks to increasing profits from its oil production, has begun issuing sukuk, Islamic Bonds, and claims itself to be the connecting hub between Asia and the Middle East.
So why do so many nations want to become a financial hub? It is because they feel that economic growth based on manufacturing would only take them so far, and that they would need to promote the service industry, especially the financial sector, as the new-generation growth engine for the future.
Compared to manufacturing, the financial industry is more profitable and creates more jobs. It also doesn’t cause as much pollution. For Korea, the service industry, including the finance sector, accounted for 53 percent of gross domestic product in 2001, which trailed Hong Kong’s 86 percent, the United States’ 73 percent and Japan’s 67 percent.
It seems a little odd, doesn’t it, that at a time when economic globalization calls for expansion of businesses around the globe, the financial industry has to be concentrated in a small region.
One important thing to recognize is that the financial industry is different from a traditional type of economy that involves production and trading of goods because it requires advanced systems and trained experts to run. That’s why the so-called hubs are likely to be formed around a specific region; moreover, huge sums of money change hands, are invested and made in these places.
The largest financial hubs are New York, home of Wall Street, and London. Almost all kinds of financial services are offered in these cities. London has grown rapidly over the last 10 years because its markets are less regulated than the United States, and it is closer to the Middle East and Russia, two emerging markets. In terms of foreign currency trading, national bonds, marine and aviation insurance, and offshore loans, London is ahead of New York.
Among the smaller hubs are Hong Kong, Singapore and Dubai. These are places where regional headquarters of well-known financial companies are located.
There are also more hubs that take on more specific functions. For example, Zurich in Switzerland is strong in private banking, Boston is famous for asset management, and Chicago is the place to be for trading in futures.
This is the type of a regional financial hub that Korea aims to become. Located next to China’s booming economy, Korea hopes to make the most of its geographic advantage. China tops the world in foreign currency reserves with more than $1 trillion, and overall, more than 60 percent of all foreign reserves in the world are held in Northeast Asia. This presents a huge opportunity for Korea.
For now, though, when it comes to the strength of the financial industry, Korea has enormous room for improvement. Compared to other countries, it lacks competitiveness. Most global corporations have their Asian headquarters in Hong Kong or Singapore. Among Korea’s weaknesses are tight regulations that restrict what financial companies can do, an inflexible labor market and a lack of English-language skills.
So what should we do to become the financial hub in the region? We need to nurture our own specialized sectors ― for instance, the asset management business, which manages the assets of individuals and companies and helps them grow their wealth by investing the money into stocks or bonds. In Korea, there is a wealth of pension funds, and its foreign currency reserves are the fifth largest in the world. And so there is a large potential demand here for asset management. The government, meanwhile, is trying to promote the bond and derivatives markets, as well as private equity funds.
Many still argue that our goal of becoming a hub is not realistic, but there is a general consensus on the importance of becoming one. When Australia announced in 1999 that Sydney would grow into a financial hub in the Asia Pacific, it was widely considered a pipe dream. But after it adopted retirement annuities, its asset management market grew, and by hosting a slew of foreign financial companies, the Australian financial market is now considered to be among the world’s top five in terms of competitiveness. Its financial sector accounts for 8.5 percent of its GDP. This illustrates the importance of becoming a financial hub.
Essentially, becoming a financial hub would mean having financial companies that are known worldwide, the way that Samsung Electronics and Hyundai Motor are globally recognized in their sectors.
Korea’s leading financial companies such as Kookmin Bank and Samsung Securities are not as globally renowned. When Korean companies look to issue shares or bonds, they need assistance from global investment banks like Goldman Sachs.
Many say Korea should have its own representative bank for mergers and acquisitions. In the global financial market, comprehensive investment banks such as Merrill Lynch and Morgan Stanley, or those that focus on corporate banking, such as Deutsche Bank, JP Morgan, and UBS, are the dominant forces. Macquarie Bank of Australia attacked niche markets with funds that invest in infrastructure, and is now one of the biggest investment banks in Asia.
Private equity funds are still at an infant stage in Korea, and they need to be promoted further. These funds gather capital from individuals and companies, take over companies and pick up profits from the transactions. The private equity funds are considered the new face of modern capitalism. Some of the major mergers and acquisition deals in the U.S. this year were led by private equity funds such as Kohlberg Kravis Roberts, Carlyle, and Blackstone.
In Korea, some banks were sold to private equity funds. However, Korean private equity funds have struggled to raise their capital pool, and those that have assets at their disposal have yet to make major investments.
by Yoon Chang-hee, Kim Joon-sool