Depending on your viewpoint, London is either booming, or completely falling apart. After the Diamond Jubilee and the Olympics, London’s reputation as a party town has never been higher. In stark contrast, its reputation as a financial centre has never been lower.
This Janus-faced dichotomy is accepted by all who work in the UK financial services sector. But to outsiders it is a cause of concern. And now, Asian companies and governments are hesitating before engaging with the financial system in London. The scandals engulfing many of the world's biggest banks have a worrying tendency to start in London. The rise of banker bashing and political pressure on finance seems to have its zenith in the city. These negatives are compounded in Asian minds by London being very much a part of Europe, despite the strenuous denials of most British inhabitants.
Most importantly, the rise of huge pools of capital in their own markets mean that the one thing Asian issuers used to need from the UK — capital — is now abundantly available on their own doorsteps. As large institutional investors now invest in Asia from their offices in Hong Kong and Singapore, there is no longer a need to get on a plane to sell a deal into the UK market.
And yet, strategically London is fighting back. The mantra is now co-operation, not competition with Asia's financial centres and the market has moved on from the battle to win the big listings. Where London used to import business, it is now exporting its way of doing business. What made London work as a financial centre in the past — language, time zone, people and capital — are no longer as relevant as they once were. What were historical advantages were largely the physical advantages that came from being an entrepot on the edge of the Atlantic Ocean. Now what London is aspiring to achieve in the future is a role akin to a global financial platform: accessible from anywhere, with a distinct set of protocols and systems.
In the financial space, this is more than about raising finance. It is about creating a legal system that can be used anywhere. It is about using price discovery techniques that will deter- mine values around the world. It is about establishing networks of people — mobile, educated and ambitious — who have the imprimatur of the city embedded in their cortex.
This reflects a shift from historical to modern competitive advantages, argued Chris Cumming, CEO of TheCityUK — a body representing the interests of financial services companies in the UK. And that is a shift that is not without difficulties. “For me it is about attitude,” he said. “You need to be in a place that gets things done.” Many of the modern advantages that London has are to do with openness: it is unlikely a yoghurt manufacturer would be declared a strategic industry. However, the attitude of openness and deep commitment to free trade is under threat. “Our leading export is pessimism, but we do need to do a much better job of being business friendly, especially around tax and regulations,” says Cumming, whose organisation is now working in collaboration with many other aspiring financial centres around the world as they seek to establish themselves.
“TheCityUK has a strategy to help other countries to develop their own financial centres,” he says. “This means that the world remains close to the language, law and regulatory system that we use here.”
Equity shift
When people traditionally thought of international financial centres, they looked at how many foreign companies were listed on the local stock market. In this race, London stood out. Indeed, there are still 231 Asian companies, funds and trusts listed on the London Stock Exchange, according to figures provided by the exchange. These include some of Asia’s finest companies: Sinopec, Air China, Sony, Toshiba, SBI, Tata Steel and LG Electronics, to name a few household names.
But in recent years, the number of Asian companies seeking a new listing in London has shrunk. Indeed, many companies operating in London’s hinterland, especially European luxury goods companies, are looking to list in Asia. "Big Asian companies no longer need to come to London or New York to raise equity finance," said Richard Gnodde, co-CEO of Goldman Sachs International in London, who used to run Goldman's Asian business.
While the trend of Asian companies seeking a primary listing in London may have passed, there is still resonance in seeking a lesser listing, especially through global depositary receipts (GDRs). "Even though DRs coming to London have been few and far between in the past 18 months, we continue to promote the value of a London listing," said Michael Cole-Fontayn, chairman of Europe, the Middle East and Africa and CEO for depositary receipts at BNY Mellon in London. He points to markets such as India and Taiwan. They still have caps on their equity markets, which allow the GDRs of those companies listed in London to act as proxy primary shares. As a result, you could say the tail is wagging the dog.
Away from fund raising, Asian companies have long used London as a source of non-financial markets. Many financial transactions in Asia are conducted under UK law. Many of their risks are offset through insurance bought through the Lloyd’s insurance market. The cost of bulk shipping Asian exports has been decided on the floor of the Baltic Exchange. And the price of metals that have yet to be dug out of the ground in Asia have been determined through the open-outcry of trades conducted on the London Metal Exchange (LME).
And on July 25, the shareholders of the LME approved the sale of their exchange to the Hong Kong Exchanges and Clearing (HKEx), in a deal that underlines the export of London financial markets into Asia. At the time the deal was announced in June, Martin Abbott, the chief executive of the LME, spoke of the opportunities for Asian companies looking to tap into the platform provided by a market such as LME. “The LME’s global benchmarks plus HKEx’s pre-eminent market position in Asia, its IT and trading resources and clearing expertise will cement the LME’s position as the world’s foremost base metals trading venue.” Echoing the sense of partnership is Charles Li, CEO of HKEx who said: “the acquisition of LME Holdings represents a unique opportunity for us to acquire in one stroke a position of global leadership in the commodities market. HKEx brings a unique ability to help the LME grow its business in Asia and, particularly, China...”
The deal is being structured so that LME’s open outcry system of price discovery — as well as the trading floor on which it will be conducted — will be maintained in London. However, much of the expansion of the exchange’s membership and its warehouses for physical delivery of metals will occur in Asia.
Perhaps the one area where London is collaborating most with developments in the Asian capital markets is in the trading of offshore renminbi (Rmb) bonds. In January this year, UK chancellor George Osborne announced that London had signed an agreement with the Chinese authorities to become a hub for the trading of offshore renminbi (also referred to as CNH) foreign exchange and bonds.
"The role of London is to extend the time zone and client base of the CNH, even though settlements still take place using Hong Kong's infrastructure," said Philippe Lintern, regional head of global markets Europe at Standard Chartered in London. "Lots of companies in Europe trade with China and they need renminbi settlement and fund raising services in their time zone."
In many ways London is trying to leapfrog out of the confines of its geography. In seeking to export its prowess to new corners of the world, it is seeking to distance itself from the ongoing mess in the eurozone. The relationship between London and the rest of Europe is multifaceted and incredibly complex. On the one hand, London is the main financial centre in the eurozone. But it can only thrive when it is not encumbered by European practices.
Those in the market report that Asian perceptions of London as a financial partner are suffering due to the ongoing problems in Europe. "The wider economic uncertainty in Europe means that Asian companies are worried about listing in London," said Cumming. "It is a perception of contamination that we are trying hard to dispel. We also have to work much harder explaining to people in Europe why having a global financial centre within Europe is a good thing."
Leading bankers agree with this assessment. "There is no question that the perception of London is impacted due to its proximity to Europe," said John Hourican, CEO of markets and international banking at RBS in London. "Its reputation or its sense of strength is impacted because its neighbours are suffering a prolonged period of political and economic uncertainty. There is a natural wariness from not just Asian corporates but all corporates as to what is going on in Europe."
Gnodde at Goldman Sachs agrees that London's role in the future will be set by what happens in Europe, rather than being benchmarked on how many Asia IPOs it can attract. But this could turn out to be a positive. "When the rest of the world looks at Europe they see the world's biggest economy, a massive, wealthy population and companies that are well run with good technology and great products," he said. "It is a big mistake to write off Europe. When it recovers, there will be huge opportunities to help refinance it, and London is very well positioned to take advantage of this."
The key to London maintaining its position as Europe's preeminent global financial centre will be based on these two factors: the extent to which London can play a part in helping Europe recover; and the extent to which the various companies, bodies, exchanges and systems that make up London's financial centre can start to fully expand around the world, especially in Asia. In an ideal world both these two factors will be intertwined for instance with large scale European privatisations being undertaken by teams from London and sold out to the rest of the world.
But in the meantime, London is in for a rocky ride. A cultural change is needed to clear up the stains of scandal. And that is a pre-requisite for it to regain its old standing. A key way for London to make that change is to engage much more with the rest of the world, not to just expect the rest of the world to keep coming to London.
This is a slightly compressed version of a story that appeared in the August issue of FinanceAsia magazine.
