Revelation ∣ The battle between the “kings” of London and New York’s financial center

Every reporter, Yang Xiaofei, every edited by Chen Junjie

Standing on the Douglas Island in London, the row of office buildings in Canary Wharf is shocking: the three tallest buildings in the UK stand here, sketching the development of London's second financial district – including HSBC, Citi, Internationally renowned banks such as Barclays and Standard Chartered are witnessing hundreds of millions of cash flows every day. But you may not imagine that 50 years ago, it was just a dilapidated waste terminal.

The financial industry has not only made Canary Wharf quickly reinvented, but also brought London's location to the world again. In March of this year, the 21st report of the Global Financial Center Index (GFCI), which is widely recognized in the industry, was released. London was once again ranked No. one. It is worth noting that this is also the first two of them with New York in the 10 years of the report.

London has always occupied a high position in the world financial landscape, and as a rising star, New York has been catching up. The history of these two global financial centers is a major line of world financial history.

In the post-financial crisis era, the world financial landscape is welcoming the opportunity for change. How do the countries and cities need to seize this opportunity and set the tide? Looking back at the history of the financial development of the two cities, you may find something to learn from. Among them, the concept of regulatory innovation and globalization is the key to solving the problem.

The top two cities

Since the first issue of the GFCI index in March 2007, it has been more than 10 years, and the financial center cities around the world have also ushered in a 10-year test of data evaluation. Although the list has changed a lot, in the past 10 years, the first and second places on the list have been occupied by two cities, London and New York.

Rome was built as a non-day work. In fact, the development of the financial industry in these two cities and the competition for financial centers are beyond the reach of 10 years. As early as the 18th century, high-quality shipping conditions became a prerequisite for the financial start of the two cities: the North American colonial economy led trade in port cities such as New York, local currency credit relations developed deeply; while the British industry in the same period, the industrial revolution was in the ascendant, a large number of industries The output demand of the products not only promotes the global expansion of the UK, but also the developed maritime trade brings various financial formats such as lending (usury and bank loans), trust stock trading, trust investment and insurance.

As Fernan Braudell, a famous French historian, said, “One of the advantages of such long-distance trade is that it allows for concentrated trade, which is a huge driving force for capital circulation and capital accumulation.”

But the question is, why are these two cities? Wu Cong, deputy dean of the National Development and Strategy Research Institute of Renmin University of China, once quoted the "big finance" theory, pointing out that the financial rise of big countries is always achieved in parallel with its economic rise. Consistent with this, the development of the financial industry in London and New York coincides with the two periods of “Pax Britannica” and “Pax Americana”. Looking at the development of the two cities, the government's series of top-down policies aimed at promoting the redistribution of capital around the world can often ignite the "first fire" for its financial center.

Take London as an example. In order to solve the huge shortage of funds brought about by scientific research and development and military construction, the British government approved the establishment of the Bank of England in 1694. By raising funds to government loans and issuing government bonds, the Bank of England has made London a world trading center. At the same time, in the issue of issuing national debt, setting up modern enterprises and so on, the financial revolution finally began in the UK.

Two modes of financial regulatory innovation

Although London and New York have been in the global financial center for hundreds of years, when it comes to finance, more people think of Wall Street, where investment banks are crowded and financial information is frequent. An example is that companies launching IPOs are more inclined to the New York market. According to the British "Financial Times" news, in 2016, New York ranked first in the global city IPO transaction rankings, reaching $24.6 billion; while London was only ranked eighth with $5.5 billion.

Why is the US attraction so great? Previously, a number of listed company executives have mentioned "the liquidity of the US market is very deep", "the flexibility of corporate governance provisions" and "the overall reputation of the US capital market" and other positives. More companies are eager to see the Nasdaq Stock Exchange, which is known for its low threshold and active trading. According to its official website, 73% of the IPOs launched in the United States in 2016 were listed on the Nasdaq, of which 87%, 72% and 91% of the national high-tech, financial and medical sectors respectively.

In fact, as the world's first OTC market electronic quotation system, Nasdaq was born with innovation. In the face of a large number of listed companies with small market capitalization and the risk of market prices being manipulated, Nasdaq has established a groundbreaking market maker system: according to the Securities Times, Stocks listed on Stark must have more than two “market makers” for their quotations. The larger scales often reach 40 to 50, with an average of 12.

The constantly improving regulatory system has always been considered an important reason for the development of the US financial industry. Tian Zhongjing, an associate professor at the School of Economics and Management of Jilin University, pointed out that the United States has the world's richest legal system for securities investment management, which has promoted Nasdaq's success. In New York, effective policy intervention has spawned a modern service industry cluster dominated by the financial industry. In 2010, New York's service industry accounted for more than 90% of GDP, and the financial industry accounted for about 40%. The role of the “government hand” cannot be ignored.

It is worth noting that regulatory innovation is also the reason why London is welcoming the new development of the financial industry. In 1986, the United Kingdom launched the "Big Bang", targeting London, which had since retired to New York. This reform not only removes a large number of existing financial controls, but also allows foreign companies and institutions to enter the UK market in large quantities. According to the reforms, all institutions entering the UK need only “principle supervision”, which has led to the development of two different regulatory models in the UK and the US financial industry: the UK is more lenient and the US is relatively more stringent.

This kind of “Leather-light touch” regulatory approach “flattening” the international market has also ushered in a new upsurge in international development. According to The Economist, in 2006, the UK ranked first in the world in cross-border loans, foreign equity transactions, international exchange transactions, and international bonds.

London is eating "lunch" in New York?

After two “financial explosions” in 1986 and 1995, London has become one of the largest offshore financial centers in the world. According to the Financial Times, nowadays, London not only has the most active US dollar trading market, but its US dollar trading volume even exceeds that of the US, and its interbank offered rate has become the benchmark interest rate for offshore financial markets.

A large number of international transactions have "moved" to London. According to The New York Times, in 2012, all assets owned by Bank of America accounted for about 85% of its national GDP, while in the same year the United Kingdom, this figure has reached a staggering 500%.

In this case, London once again became a strong contender for New York, and the New York Times also warned that London is consuming the “lunch” of New York.

Is this really the case? Looking back at the financial development history of the two cities, one phenomenon should not be ignored: their development is always accompanied by mutual cooperation and mutual promotion. The rise of a city's financial industry is also inseparable from the support of another city. The "competition" relationship between the two is also called "New York-London" (NY-LON) by the academic community.

For example, at the beginning of the development of New York, the entry of British commercial banks contributed to the improvement of its financial industry status. At the time of the British pound crisis in 1957, the British government banned British banks from lending money to third-party trade in order to curb speculative pressure on the pound. This in turn prompted the dollar to be traded in London, which ultimately led to the London financial industry. The development has new exports – it is the earliest and most important offshore dollar market.

“Capital flows across regions. Therefore, financial cooperation between regions seems very necessary.” In an interview with the reporter of “Daily Economic News”, Guan Qingyou, chief economist of Minsheng Financial Think Tank, pointed out.

Next, how will the financial dispute between the two cities develop? According to Wang Xiaoyang, Ph.D. in Economic Geography at Oxford University, “integration” is the general trend. “With the integration of the two financial centers in commonality and complementarity, they will also deepen their connections in the global urban and financial systems and continue to evolve as a top center.”