Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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New York, not necessarily the world’s leading financial center

by Brad Setser
November 27, 2006

Lots of folks on Wall Street think they know why New York doesn’t dominate the IPO league tables anymore.   Sarbox.   It is undermining the “competitiveness” of US capital markets.   Or so the argument goes. 

I am a bit suspicious.   Sarbox may be driving some business abroad. But lots of folks on the Street never liked Sarbox to begin with, and are more than willing to blame Sarbox for a lot of other trends.  

John Gapper highlights four potential reasons why lots of IPOs are now being done outside of New York.

1.   The big money is no longer just in the US.  

The biggest foreign companies used to come to Wall Street because that was where the money was. They could tap into the US institutional and retail savings pool, and gain the attention of many New York-based hedge funds, only by obtaining a listing on the NYSE or Nasdaq … This is no longer true. More money is managed in other financial centres, particularly London.

2. US investors are now quite comfortable buying the stock of firms listed on foreign markets.   Just look at comparative returns on US and non-US equities.

3. Wall Street has exported its “technology” to the rest of the world, so I-bankers in London (and Hong Kong) now deliver much the same product as I-bankers in New York.

4.  New York firms are trying to charge more than the IPO market will bear.    

London has been able to pick the best aspects of US practice and discard others. Underwriting fees for international IPOs remain much lower in London: they average 3.5 per cent on the LSE, compared with 7 per cent on Nasdaq and 5.6 per cent on the NYSE, according to Oxera. 

I would add three more.

1. The US doesn’t have big state owned firms to privatize.   China does.   And China clearly doesn’t need to list its banks in New York to attract plenty of interest from US fund managers.  US firms are so eager to invest in China that that they are, in general, willing to accept China’s terms. 

2. The US doesn’t have any spare saving to invest in the rest of the world.  It is a net borrower to the tune of $900b.   Sure, the existing stock of US financial assets is huge, and convincing US investors to shift a bit of that stock into a new issue is one way to raise money.  But right now, the big pools of savings – at least savings from current income – are found in the world’s oil exporters, in China and in Japan.   The US, in some sense, is looking to raise money from the rest of the world.   That means that foreigners looking to raise money won’t necessarily knock on the United States door.   Rather, they will try to convince the oil exporters and Asian savers to invest in their firms rather than buy yet more US debt.

3. New York is in the wrong time zone to intermediate Asian, Russian and Middle Eastern savings.   Even if it was easier to get in and out of the US – and even if JFK was a modern, efficient airport connected seamlessly to downtown Manhattan – New York is still asleep when China and the Middle East are awake.    Hong Kong and London are not.   Sometimes, geography is destiny.

New York still dominates the business of repacking US mortgages into securities that appeal to Asian central banks.    And it probably will for a long-time.   But New York may have to work harder to keep its current position in other lines of international financial business.  It isn’t the only game in town.

The US doesn’t (yet) have the mentality of a debtor that has to scour the world to attract the funds it needs to cover its big deficits.   It still has the mentality of a creditor country, one that has the savings other countries need to develop.   But that isn’t the case any more.

I think Gillian Tett is on to something important.   She write specifically about Lone Star’s difficulties in Korea – and Lone Star’s implicit assumption that it knows what should happen in Korea better than the Koreans.   

For what buy-out firms are doing in places such as South Korea is not just implementing corporate restructurings. They are taking calculated bets about how the political and regulatory system will develop, often when this system is in flux …

For buy-out participants generally operate in a milieu where the US way of capitalism is considered self-evidently right. Moreover, these American men – for they are mostly men and often American – usually assume that the rest of the world should become capitalist too.  … Many economists would argue that this mindset is perfectly valid. Perhaps so.  … But in practical terms it makes it hard for private equity players to show humility, or understand cultural risk.

But her basic insight seem more broadly applicable.   US financial market participants  have long assumed that the other financial markets will evolve over time to mirror US markets – and that US rules will become global rules, with a lag.

Those assumptions may need to be reevaluated.    Debtors do not usually set the rules of the (financial) game. 

There is a deep reason why the dollar bonds of Chinese state banks trade a lower spread that the bonds of private US banks – and Chinese state banks presumably could raise long-term funds more cheaply than private US banks  …

Remember, the US isn’t financing its US equity investment abroad with its own savings.  It is financing both new investment in the US and equity investment abroad with savings borrowed from the rest of the world.   Over time, that may change the rules of global finance in ways that the US doesn’t expect.  


  • Posted by Dave Chiang

    I would add one more issue to your list. Since 9-11, the US has pulled the welcome mat from foreign visitors and businessmen especially Asian, Russian and Middle East citizens on national security concerns. Recently, Chinese personnel in the aerospace industry have been denied visitor entry visas to an US trade convention. Middle East citizens can expect 6 month delays for obtaining visitor visas. By contrast, Europe now has an open visa policy with China that only requires that Chinese travel together in a designated and registered group. With the increasing difficulties for even obtaining an entry visa, foreigners can’t even step foot on US soil, let alone conduct IPO business on Wall Street.

  • Posted by Guest

    Hey, in the not too distant future, don’t be surprised to discover US Corporations listing their IPO’s in Hong Kong or Shanghai.

    West must prepare for Chinese, Indian dominance: Wolfensohn
    Sun Nov 26, 5:32 AM ET

    Western nations must prepare for a future dominated by China and India, whose rapid economic rise will soon fundamentally alter the balance of power, former World Bank chief James Wolfensohn has warned.

    Wealthy countries were failing to understand the impact of the invevitable growth of the two Asian powerhouses, Wolfensohn said in the 2006 Wallace Wurth Memorial Lecture at the University of New South Wales at the weekend.

    “It’s a world that is going to be in the hands of these countries which we now call developing,” said Australian-born Wolfensohn, who held the top job at the global development bank for a decade until last year.

  • Posted by Guest

    Wall Street is not able to maintain its position because many play complex games that do no create value. These deals have always been and will always be about who you know with the money. Wall Street no longer holds this title. They will shrink and Asian markets will grow.

  • Posted by Guest

    Yep. Money is flowing East and new exchanges are emerging where the money is: Shanghai Oil Exchange, Iran Oil Bourse, Dubai Financial Exchange.

  • Posted by PC

    Maybe there is a simpler answer as to why New York’s is not necessarily the world’s financial center – that the US is also no longer the center of world domination and is slowly and steadily ceding its position to other competitors.

    Just as the Britain entered slow decline and ceded their world domination position to the US over a long period, the same may be happening to the US.

  • Posted by Guest

    Since 9-11, the US has pulled the welcome mat from foreign visitors and businessmen

    A point made by Clay Risen in the New Republic – why would people set up in New York, when they know that their foreign hires will suffer hours of questioning at the airport? Why not pick London or HK instead?

    Linked here…

  • Posted by Guest

    The US is one of the few countries in the world that is suffering from a excessive influx of foreigners rather than a massive exodus and decline of its own population. And many of those foreigners seem to settle in well enough to send many billions of USD to friends and relatives ‘back home’ – some of them while publicly threatening and slandering their host. Anyone care to estimate the value of remittances sent from the US – just to China/Asia – annually?

    Britain and the NYC/Chicago hubs are declining?

    “…For the Hong Kong Monetary Authority to try to remove the source of this psychological distress – by scrapping its 23- year-old policy of keeping its currency fixed at 7.8 to the U.S. dollar and moving instead to a peg to the yuan – would be disastrous… The U.S. dollar – and not the yuan – is the appropriate anchor for the city, the Hong Kong monetary chief said on Sept. 21. Currency stability is crucial, he said this month. Is Yam trying to make the market look the other way while he quietly works out a new currency anchor? I don’t think so. In choosing to keep its capital market fully open to the world and its currency tied to the dollar, Hong Kong has selected a regime that has cemented its reputation as a financial hub. The peg survived… the Tiananmen Square massacre of 1989 as well as the 1991 run on Hong Kong banks… It coped well with the Tequila crisis and remained unbroken during the Asian currency contagion…”

    “…China’s rickety financial system, speculation in its asset markets and worsening pollution should worry investors around the globe…”

  • Posted by Joseph Wang

    Two other very big reasons that I’ve heard mentioned as to why people want to IPO in Hong Kong. The big reasons are 1) people don’t want to be associated with Enron and Worldcomm and 2) there is a huge amount of unclear regulation and frivilous securities lawsuits.

    Big Chinese companies don’t need to list in NYC for the interest, but they do need to list somewhere where they can get access to Western currency and more importantly somewhere where the regulators are trusted. It’s hard to understate the damage that Enron and Worldcomm did to the IPO industry because your average Chinese company is trying to do everything it can to convince people that they aren’t a bunch of fly-by-night crooks.

    Time zones in particular don’t matter. People can and do adjust their sleep/work schedules to fit the time zones.
    Net savings also isn’t that important. Since capital can move from point A to B via computer and since the US doesn’t have capital restrictions, you can intermediate things in NYC.

    One final thing, it’s not an either/or business. It’s actually not much more expensive to do a dual listing than it is to do a single listing. What NYC needs to be worried about is the fact that people are choosing Shanghai/HK rather than Shanghai/NYC.

  • Posted by Joseph Wang

    The reason people on Wall Street know, is that when someone lists in HK rather than on NYC, you go to the person that made the decision and ask him/her, why?

    Sarbox is a big reason. Wall Street types don’t like it, and the people making the IPO decisions are Wall Street types.

    Also, I-bankers in HK (much less Shanghai) is still not at the level of NYC and London. Technology is made up of human beings and social networks, and those are surprisingly difficult to transfer. If you could easily move things to HK, you might as well save even more money and move them to Costa Rica. It’s actually much easier and cheaper to move the people to NYC than move the technology away from NYC (which then gets you into the “welcome mat” problem).

    The other problem with the idea that the world will mirror the United States is that the United States is a moving target. The basic structure of the US markets which we now associate with US capitalism only started in the 1980s. Things change very dramatically over the course of a decade or two.

    The “welcome mat” issue is a very real problem. A long wait at JFK followed by a humilating search will kill your appetite for investing. The “fee” problem is also real.

  • Posted by Joseph Wang

    One other point. ICBC was the last of the super-big Chinese firm IPO’s. The next round of business will be smaller (not small but smaller) companies at which HK will have even more advantage than NYC.

    IMHO, the really big money in Chinese companies is brokering mergers and accquistions between Chinese companies and starting fund management businesses. Those are also businesses at which NYC doesn’t have a huge advantage.

  • Posted by Guest

    Joseph – appreciate everything you’re saying, and don’t know where or how much you’ve traveled, but depending on your surname, accent, occupation and physical features, you can also be subjected to humiliating searches as well as various types of extortion and surveillance when traveling outside the US. People are aware of US security checks because so many visit and try to live and work there – creating the need for security.

    Might the Shanghai/HK rather than Shanghai/NYC choice be at least in part representative of China’s desire to keep foreign investors out?

  • Posted by Guest

    or a perceived lack of interest in NYSE/NASDAQ listed Chinese firms, given the track records and lack of transparency of those currently on offer…

  • Posted by Joseph Wang

    ::Might the Shanghai/HK rather than Shanghai/NYC choice be at least in part representative of China’s desire to keep foreign investors out?

    I don’t think China is trying to keep foreign investors out. Tying HK closer to the “motherland” is however a factor, although I don’t see it as a crucial one.

    ::a perceived lack of interest in NYSE/NASDAQ listed Chinese firms, given the track records and lack of transparency of those currently on offer…

    If you get listed on NYSE (or in Hong Kong) then you need to be as transparent as any American corporation to get the approval of the securities regulators.

  • Posted by DOR

    Since we’re adding to the list, here’s my nominee for the list of reasons why Wall St is losing market share:

    ==> Very few Americans are literate in Chinese

    * * * *

    => Guest on 2006-11-27 18:27:13, Shanghai? Why not Mumbai or Hanoi?

    => Joseph Wang, let’s not forget HK’s liquidity (and the fact that tens of thousands of retail investors will suck up any IPO going.

    As for HK i-bankers, they are exactly the same people as NYC i-bankers and London i-bankers, just temporarily located where the action is. Not a shred of difference in sophistication, social networks or technology.

    * * * *

    “Might the Shanghai/HK rather than Shanghai/NYC choice be at least in part representative of China’s desire to keep foreign investors out? by Guest on 2006-11-28 12:36:38”

    China doesn’t have any say in who invests in IPOs in HK, none at all. Listing in HK does nothing to change the local/foreign mix, except to make it more difficult for Mainland-based investors to get a piece of the action. In other words, the exact opposite of what you suggest.

    * * * *

    Guest on 2006-11-28 05:41:37, the only reason Bloomberg et al are writing about the HK$ peg is because of a coincidental exchange rate cross-over between the Rmb and US$.

    There is no chance that the HK$ peg will break, despite best efforts by speculators to wreck the economy.

  • Posted by Joseph Wang

    ==> Very few Americans are literate in Chinese

    Oh yes, this is a huge problem. You just pull up the standard web sites, and there is tons of information about what is going on, and none of it makes it into English.