New centers of global finance

The United States (US) capital markets, since 1945, have been the most important component of the global capital markets, playing a central role in shaping and developing the international financial system. In Appendix B, the structure of the US debt markets is briefly reviewed.

The US is losing its pre-eminent position in the global capital markets due to the following reasons: (a) massive financial losses caused by the 2008 economic meltdown - in the US stock market, for example stocks on the Dow Jones lost 34% of their value in 2008 (the largest drop since 1931), and in the bankruptcy of major US financial institutions; (b) the rise of other capital markets and centers of wealth. The year 2007 saw a sea change in the distribution of global wealth. Largely due to the rise of China and India and investments by oil and gas producing countries, for the first time since the Second World War (1945) London displaced New York to become the center of the global capital markets. Over 40% of the world's foreign equities were traded in London, more than New York. Over 30% of the world's foreign currency trading took place in London, being larger than New York and Tokyo combined.

The US capital markets, in 2007, were worth US$42 trillion of which US$7.3 trillion was owned by foreigners, namely 17%, who also held 44% of the US national debt. In contrast to both New York and Tokyo, which depend largely on their domestic and East Asian markets, 80% of London's business comes from international sources, spread widely over many regions and countries.

The shift away from a US-centered global financial system can also be seen in the emergence of the Euro as an international reserve currency, as can be seen from Table 2.1. The Euro was introduced in 1999 and by 2008 had appreciated over 50% against the US Dollar. International reserves are now held in both the US Dollar and the Euro, with estimates that by 2010 about 34% will be held in Euro and 54% in the US Dollar, in contrast to 2000 when 71% of world reserves were held in

Table 2.1 International reserve in Euros and US Dollars, and the projected currency distribution of these reserves by the year 2010.

Currency of international reserve

2000 2007

2010 (projected)

US Dollar $

71% 63%

54%

Euro€

18% 26%

34%

US Dollars. Some economists have predicted that, by as early as 2015, the Euro may overtake the US Dollar as the main international reserve currency provided two conditions hold: (a) more countries, including the UK, join the Eurozone countries and (b) the 2008 US economic crisis causes a deterioration in the value of the US Dollar.

With the increasing pace of globalization, one can expect the emergence of new international centers of finance in Shanghai, Hong Kong, Singapore, Mumbai, Dubai, Sao Paolo, and so on.

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