WALL STREET OR GREAT WALL?

THE CHALLENGE TO MAINTAIN DOMINANCE IN THE GLOBAL FINANCIAL MARKETS

On September 29, 2008, the American equities markets lost an estimated $1. 2 trillion in market capitalization. This astonishing figure represents the single biggest one-day loss in the history of the country. The major market index, the Dow Jones Industrial Average, lost 777 points, representing its largest single-day decline. The incredible drop in the equities market was believed to be caused by the failure of the United States' Congress to enact legislation which would support the ailing financial sector. While the market made an impressive rebound on September 30, the lingering problems of the financial sector have caused some to wonder if the United States will be able to maintain its dominance in the global financial markets.

The New York Stock Exchange (NYSE), or Big Board, is the largest stock exchange in the world in terms of market capitalization. The United States has maintained its dominant position through its strong economy and its financial and political stability. The financial centers of London and Frankfurt (also major players) have also been shaken by the troubles in the United States. The traditionally strong economies of the West are facing new challenges. Increased oil prices have poured enormous amounts of capital into oil-rich economies, such as those of the Gulf States, and some of these countries are using this money to develop their financial industries.

Dubai, for example, hopes to become the center of Islamic finance and challenge Wall Street in that increasingly important niche market. With increased oil revenue, Russia could also become a more significant player in the market, especially for the emerging economies of Eastern Europe. Even sub-Saharan Africa, not often thought of when discussing rising capital markets, has over 500 companies listed with a market capitalization in excess of $100 billion on its dynamic stock exchanges.

While Dubai and Moscow, and perhaps Africa, may be of some concern, the greatest threat to dominance of the financial sector comes from Asia.

In recent years the world has seen the development and growth of financial markets in emerging economies such as China, India, and other Asian countries. The Bombay Stock Exchange is the oldest in Asia and has grown as the Indian economy has advanced. The greatest concern, however, is China. China has two mainland stock exchanges-the Shanghai Stock Exchange and the Shenzhen Stock Exchange. With the return of Hong Kong, China also has a larger exchange in the Special Administrative Region (Hong Kong), the Hong Kong Exchange.

Although the Chinese exchanges have experienced a significant correction recently (after a period of rapid increase), given China's continuing economic growth some feel that Shanghai will replace Wall Street as the world's main financial center. According to Fan Dizhao, an investment manager at Guotai Asset Management, it is only a matter of time before China dominates the global capital markets. According to Fan, "It is inevitable that we will take the US's place as the world leader. " China is aggressively recruiting financial specialists from the United States to help the country build its financial institutions. China has the money to attract such talent, and to offer opportunities that many feel have been lost in the United States.

With the failure of banks, brokerage firms, and insurance companies, surplus talent in the US may find the lure of large salaries, education stipends, and personal tax exemptions tempting enough to relocate to China to help build its financial services industry. With the world's fastest growing economy, China is in a good position to challenge the United States and Europe for the dominant position in the global equities markets. Growing companies need capital, and the rising incomes of the Chinese now make it possible for individuals to invest. The troubled economy of the United States, coupled with the increased cost to companies to be listed on an American stock exchange due to the Sarbanes-Oxley Act, may make US equity markets less desirable.

After passage of the Act, foreign listings on American exchanges began to decline. Increased costs, greater financial uncertainty, and decreased liquidity put Wall Street at a competitive disadvantage in the global market. At the same time, China has some significant disadvantages of its own, including government-mandated capital controls, concerns about the integrity of the Chinese legal system, and a less developed financial structure. The tendency of the authoritative Chinese government to quickly change investment rules also causes concern among investors and companies, such as the recent decision by China's Securities Regulatory Commission to require a greater dividend payout for listed companies.

Recently, however, China has begun to relax some of its restrictions on foreign ownership of Chinese class A shares, which previously could only be owned by Chinese citizens. With China rising and Wall Street stumbling, the competition is on for dominance in the global capital markets.

CASE DISCUSSION
1. From your understanding of the Sarbanes-Oxley Act, explain how you feel it may negatively affect America's stock exchanges.

2. What advantages would China offer foreign companies to list on its exchanges? Are these advantages greater than the disadvantages? Explain.

3. Do you feel that China will eventually control the world's financial industry? Explain your answer.