At a SunGard conference in New Orleans a bunch of years ago, an executive from a Chinese bank – it may have been Citic – explained that they were buying Panorama for risk management so they could learn how western banks did risk.

A week or two ago the International Herald Tribune carried a front page story saying Chinese banks were no longer using American firms as mentors. Hmm, wonder why.

The ostensible value of capital markets, as practitioners drone on and one about, is to provide funds to make a society more productive. Although as Carlota Perez notes in her fascinating book “Technological Revolutions and Financial Capital,” during bubbles speculative finance runs the show and after the bubble bursts it is a real struggle for new regulation that will supplant it with production capital. Looks like we are going through that now and so far the status quo – speculative finance, seems to be winning. I’ve been talking to experts in London and New York on what happens to tech infrastructure if banks are broken up by regulators – look for the story in the upcoming issue of Banking Technology (it’s in the investment banking supplement coming out with the June issue next week -Ed.).

Jeffrey Garten, the Yale management prof, wondered in the FT earlier this month if London and New York aren’t likely to be replaced as financial hubs by Shangkong – a new financial center of Shanghai and Hong Kong. China will be the world’s biggest creditor and a shift to creditor status is what helped the US leap ahead of Brtain.

“China lacks the sophistication of Wall Street or the City, but given the mess that complex and opaque securities have caused, a simpler system has its virtues.”
When reading about Chinese leaders who talk about finance, it strike me that they have pretty deep knowledge, while American and British politicians for the most part seem pretty much lost when talking about anything as complex as derivatives. Smart regulators, piles of cash, a fast-growing economy – what more could you want? Oh right, political stability. That could still be a problem for China.

Garten’s conclusion is a little light weight compared to his analysis. He warns against populist moves that would discourage the most talented people from working in finance. The industry needs intelligent regulation, it certainly needs to grapple with the issues of derivatives and how to manage them, and both the US and UK should look at what role they want finance to play in the larger economy and then address how to achieve that.

I’ve reviewed the Perez book recently (see below) – it is compelling reading and offers a lot more prescriptive depth than Garten even approaches.

Filed under: Technology