As a Melbournian, the fact that Sydney is failing to deliver as a regional financial centre admittedly triggers a little schadenfreude. After all, they did steal the Olympics.
"Is being a 'regional financial centre' any better than being a gourmet capital or world’s most liveable city?"
Andrew Cornell, Managing Editor, BlueNotes
The latest Global Financial Centres Index by Z/Yen Group, the most in depth of the surveys of global financial centres, shows the inexorable decline of Sydney’s rank as a financial centre has continued. The New South Wales capital has fallen from nine in the first survey in 2007 to 23 in the September 2014 survey.
Sydney’s index rating of 682 is down from 690 six months ago – although financial centres broadly in Asia Pacific lost points. Hong Kong, ranked three, dropped five points, as did fourth-ranked Singapore. Sixth-ranked Tokyo dropped four points.
However Melbourne, I note with due reserve, rose 13 places and 11 points and now sits behind Sydney in 24th. Bling City, watch out.
Bernard Salt, KPMG’s celebrity demographer, argues the Olympics was actually Sydney’s version of the Dutch Disease, a resources curse or a South-Sea Bubble, at least. Everything happened in expectation, little since.
But the more profound issue is whether all this matters. Is being a 'regional financial centre' any better than being a gourmet capital or world’s most liveable city? (Of course, Melbourne tops Sydney in both categories.)
Salt reckons there are some notable disadvantages. By definition, financial centres attract expatriates from the finance sector who tend to be paid large salaries. These people congregate in the inner city and dress circle suburbs, drive up property prices and have a ripple effect which makes a city less affordable for other workers like nurses or teachers.
London and Manhattan both suffer this property effect.
The advantages, however, include the greater likelihood children will stay at home (not literally in the home, that of course would be another disadvantage. But in the same city.)
“This is something which comes up very often when you are in Adelaide or Auckland,” Salt says. “Families have to come to grips with the idea that talented children, if they want to strive to be at the highest level, are probably going to leave town when they are 25. But if you are a global centre, particularly if you are in London or New York or Paris, you can be at the highest level in your home town.”
This is the underlying argument, both cultural and economic, behind the financial centre idea: such centres will attract the best brains, be they in banking or associated services like insurance, funds management, the law or accounting.
In so doing – and in paying the salaries for those people – these cities in turn become richer, in both financial and cultural terms.
Mark Johnson, eminent company director and chairman of the Australian Financial Centre Forum, certainly believes in the value a financial centre creates, notably in building the export potential of financial services – that is, foreign agents paying to use Australian financial expertise.
When it was established in 2008, the AFCF said “the initiative is seeking to capitalise on Australia's competitive advantages in the financial sector and exploit opportunities in the region to increase cross-border trade and investment in financial services.
"The end goal is to enhance the sector's contribution to domestic economic growth. The growth and development of the region presents Australia with significant opportunities to supply financial services internationally.”
The final report of the forum, published in November 2009, however noted “yet our exports and imports of financial services are low by international standards. Our funds-management sector, one of the largest and most sophisticated in the world, manages only a small volume of funds sourced from offshore”.
This was despite Australia being situated close to the fastest-growing region in the world, where the need for ongoing development and liberalisation of financial markets in many countries is opening up enormous opportunities.
A range of recommendations were made in that report and Johnson says by and large they hold true today – which of course says not much has happened.
“I think, to an extent, it is understandable with a new government, there has been the budget issue, the whole G20 organisation – but I do think once that is past there is a very urgent need to get a move on,” he says.
“The issue is not so much Australia has lost out but that other centres – obviously Singapore and Hong Kong – have pushed ahead. Seoul is another centre where the Korean government has seen building a financial centre as a priority and devoted considerable resources to it.”
He might have added Shanghai, with its Free-Trade Zone, or even the aspirations of Kuala Lumpur or any number of regional Chinese cities.
None are standing back. Even Singapore’s regulators see their role as part marketing.
Singapore's financial centre continues to perform well. Financial and insurance services grew by 10.8 per cent last year,” said Ravi Menon, managing director of the Monetary Authority of Singapore in the regulator’s recent annual report – just the latest of regular missives from MAS promoting not just Singapore’s existing strengths, but how policy is being aligned with market demands.
Johnson identifies three key issues which remain critical obstacles in Australia. The first is taxation. Every report into the potential for an Australian centre has been critical of not just the tax regime applying to offshore clients but the volatility of rulings. This, Johnson says, fits into the “sovereign risk” category.
“Organisations require long term certainty as much as they require an internationally competitive system,” he says.
The second issue is policy clarity and the AFCF and others have argued for an Investment Manager Regime which is transparent and simple.
The third, related challenge is the historical legacy of Australia’s investment trust structures for collective investments. The “trust” structure itself is simply not well understood in Asia.
“The structures need to be simplified and not based on trusts,” he says.
There has been action at least on one front, with the creation of the Asia Region Funds Passport, slated to kick off at the start of 2016, which is aimed at supporting free trade in funds management services.
However, Johnson says if the government doesn’t move on other fronts Australia risks missing the opportunity of the “deepening” of financial systems in Asia. Behind the Korean push is the recognition its financial system has not developed the sophistication of its industrial base.
Indeed, this theme is also central to ANZ insight 5 “Caged Tiger: The Transformation of the Asian Financial System”.
Caged Tiger suggests the Asian financial system is on track to be bigger than the US and Europe combined by 2030. Asia’s financial institutions will become increasingly important and Asia will become home to many of the world’s largest financial centres. Bond and equity markets in the region (excluding Japan) are expected to grow around six fold in that time.
With that deepening and diversification, Caged Tiger is careful to note that no one financial centre is likely to dominate in Asia and indeed, specialist centres are more likely.
“Shanghai will rival New York as a financial centre for a large domestic economy as well as an international hub," the insight report said. "Singapore is likely to increase its importance given its critical role in South-East Asia. Second-tier centres will emerge; Hong Kong and Tokyo will remain important while Seoul, Mumbai and Sydney will grow strongly.”
That scenario remains possible, even probable, but it is noteworthy the AFCF is now on care and maintenance, the recommendations of its 'Australia as a Financial Centre: Building on our Strengths' report largely on the shelf. Critically, one recommendation ignored was the need for an ongoing body to champion the concept.
Now, it may be that there are greater disadvantages to being a regional financial centre than advantages, but that isn’t a case made widely. Cities in the region are pushing ahead with planning and policy. Australia isn’t. Even Melbourne, which has risen up the ranks, seems to be most valued by respondents to the Z/Yen survey for its stability.