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For all the success of the emerging markets, the developed world still calls the shots in the world of financial services.
The recent move by regulators to reform the global banking system is a prime example of how the developed world shapes the financial services sector. The package of guidelines from the Basel Committee on Banking Supervision in effect triples the size of the capital reserves that the world’s banks must hold against losses – and is a direct response to the financial crisis in the west.
These reforms are to a large degree not relevant in the emerging world where, in the main, banks have stable balance sheets and low levels of leverage, and are not in danger of imploding under a mountain of toxic assets.
Yet, strategists and commentators say the influence of the emerging world on the financial sector must grow as these economies expand and their political systems mature.
Already the influence of the developing world on the political stage can be seen in the emergence of the Group of 20, which includes countries such as China and Brazil, as it overshadows the Group of Seven rich nations.
In the markets, China’s power to dictate direction is greater than ever, while in the industrial world, companies such as India’s Tata have increased their presence in the developed world with acquisitions.
In short, it will not be long before they start to flex their muscles in the financial world.
Nigel Rendell, senior emerging-market strategist at RBC Capital Markets, says: “Emerging-market companies already operate on the world stage in many forms. The banks look set to follow the same path over the coming years. The question of Chinese or emerging-market banks getting involved in the western world is when, not if.”
Bhanu Baweja, global head of emerging market fixed income and foreign exchange strategy at UBS, adds: “The emerging markets are a growing force in the world, and this will result in them taking a more active role in influencing regulation and financial services.
“The big emerging markets, in particular China, are increasingly a key influence on the markets and the global economy, so it makes sense for these countries to have a say in the way the financial world is shaped.”
However, even the influence of China will remain limited while these markets’ banking systems and economies are still relatively immature. They have to grow and develop domestically before they can have a say internationally.
Although emerging markets’ financial sectors are generally in better shape than those of the developed world, no one really knows the true state of the banking systems in many of these economies.
For example, the health of the Chinese banking sector is difficult to gauge. The state has obliged its banks to make large loans to keep economic growth strong, but whether any of these loans will go bad is anybody’s guess. Elsewhere, from Latin America to Russia and central and eastern Europe, the banking systems are still evolving.
The banking sectors of many of these economies can be compared to those of countries such as Spain 25 years ago.
In the 1980s and 1990s, Santander was hardly known outside its own borders. Now Spain’s biggest bank is one of the largest in the world. Most analysts say there is no reason why China’s strongest banks cannot emerge in a similar fashion, although any emerging bank should take note of the experience of some of Madrid’s weaker banks that were too aggressive in building up exposure to the country’s ailing property sector.
For banks in China and other emerging markets, a combination of good management and a focused expansion plan, as witnessed at Santander, should lead to growth and, therefore, more international influence.
Some commentators even suggest the world may end up being run by the Group of Two – the US and China – on everything from trade and exchange rate policy to financial reform.
Specifically on banking reforms, China has clearly remained on the sidelines, but at some point it will want more say over such things as bank capital adequacy ratios – especially if, as predicted by some analysts, its banks start looking to acquire western institutions.
However, there are hurdles. Policymakers in the US and Europe will want China to show more flexibility over its exchange rate before they accede to Beijing in other areas. Broadly, in the eyes of many western policymakers, China and other emerging economies need to do more to generate domestic demand rather than rely on underpriced exports that undermine the US and other western economies.
Developing domestic demand in a sense goes hand in hand with the creation of a more sophisticated banking sector, which would be essential for a growing and maturing economy.
Mr Rendell says: “The emerging markets should have more influence in all areas of policy, including regulation and financial services.
“Some of the world’s largest banks are based in China, so it is to everyone’s advantage that Beijing becomes more involved in how the financial services industry is shaped.
“It is better to have the involvement of all countries rather than just the US, Europe and Japan. However, the emerging-market economies do need to mature, or western policymakers will continue to dominate the debate.”
Fund managers are also keen to see emerging markets take a more proactive stand in the evolution of the financial services sector. This is because they are increasingly putting money into emerging markets, through buying equities, bonds and foreign exchange.
Even retail investors are likely to have money, savings or part of their pension invested in some type of emerging-market fund, underlining further the importance of the developing world engaging and being involved with reforms in financial services.
In particular, analysts say it is in the interests of everyone that emerging markets are properly regulated and alert to the pitfalls that led to the financial crisis in the industrialised world.
“It is hoped that the world and the emerging markets have learned something from the recent crisis – proper financial regulation and the monitoring of the banking system being the most important lessons,” says Mr Baweja.
Global banking reforms, such as those being drawn up in Basel, and financial services in general can only benefit from closer links between the developed and the developing world, he insists.
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