Portal de Periódicos da CAPES

New Capitols of Capital

2011; SAGE Publishing; Volume: 28; Issue: 1 Linguagem: Inglês

10.1177/0740277511402793

1936-0924

Andrew Galbraith, Miriam Eldar, Jeb Blount,

Since the beginning of the global trade in securities, bonds and currencies, three cities have emerged as the world's preeminent money centers: New York (Wall Street), London (The City) and Tokyo. They exert enormous influence on the world's economic agenda, and their cultures subtly shape the world of finance. But today, with the emergence of dynamic economies and societies in the developing world, there has emerged a host of new potential global financial centers. The list is long: Mumbai, Singapore, Hong Kong, Seoul, Dubai, Lagos, Johannesburg. None yet rivals the current triumvirate. But three—Shanghai, Moscow and São Paulo—are particularly interesting prospects.If you came to Shanghai in the summer of 2010, you would have found a city awash in smiling blue faces. Haibao (“sea treasure”) the Gumby-like official mascot of the 2010 Shanghai World Expo, was everywhere. His image was beamed onto giant video screens, stood sentry at intersections, greeted passengers in subway stations, and gazed upon the public from shop windows and the sides of buses.Haibao's ubiquity was not matched by a sense of cultural sensitivity. On the road to the city's Hongqiao Airport stood a “Scottish” Haibao playing bagpipes; a “Latino” Haibao sporting a sombrero, maracas, and wildly rolling eyes; a “Cowboy” Haibao in jeans, boots and a Stetson; and a dazed-looking “Indian” Haibao, a yogi in loincloth and turban. Earlier in the year, Haibao showed up at Hillary Clinton's visit to the groundbreaking of the U.S. Expo pavilion. “I'm originally from Maryland,” he said. (The State Department officer hidden inside the mascot costume was feeling chatty.)Expo organizers helpfully explained the symbolism behind each of Haibao's physical traits. His blue body, shaped like the Chinese character for “person,” represented imagination, China's rise, and its potential. (And, rather opaquely, “latitude.”) His face showed his confidence and friendliness, his big, round eyes projecting anticipation. His wave-like pompadour showed openness. His hands, clenched into a permanent thumbs-up, showed appreciation and warmth. He was slightly chubby—“lovely and cute,” the official description put it—signifying prosperity. And finally, he had big feet, suggesting stability.This is the image that Shanghai wanted to promote—friendly, innovative, confident, stable and international. Yet it was an image that didn't project far beyond China's shores—quite intentionally. Much like the Expo itself, Haibao's intended audience, in all his stereotypical forms, was domestic. In an increasingly confident China, the criteria for success held by the rest of the world are increasingly irrelevant. What matters is what's happening here.What's happening, headlines imply, is Shanghai's imminent coronation as the world's next financial and cultural capital. It's not clear yet whether a financial king will really emerge from this process—but there is already quite a bit of crown.The city's Lujiazui district, home to two—and soon three—of the world's tallest buildings, is presented as a temple of finance. When viewed at night from the Bund, the string of historical buildings flanked by a promenade on the western bank of the Huangpu River, it's easy to get caught up in the enthusiasm. Blinding light displays cover entire buildings and flash advertisements, propaganda and self-congratulatory messages. “I Love Shanghai,” one states simply.It's not the first time the world has seen Shanghai rising. Among the foreign community, there is a tendency to draw comparisons with the city's legendary heyday in the 1920s and 1930s. Certainly, the hedonism and anything-goes mentality of that earlier era are alive and well. The city comes to life at night, and one of the best views of Lujiazui can be had, champagne flute in hand, from the rooftop Jacuzzi at the Hyatt on the Bund's Vue bar (bikinis available on the menu). The Bund itself, stretching south along the Huangpu from Suzhou Creek, has been given over to five-star hotels, luxury boutiques, banks and high-end restaurants.But the Shanghai of the 1920s and 1930s was a Chinese city in geography only. The 1842 Treaty of Nanking forced the opening of Chinese ports, including Shanghai, and paved the way for carving up the city into international concessions. A colonial attitude dominated. The final chapter of Shanghai: High Lights, Low Lights, Tael Lights, a tongue-in-cheek guidebook written by two whiskey-sodden expatriates in the 1930s, is entitled, “There Are Also Some Chinese in Shanghai.”Today, Shanghai is indisputably Chinese. In 2009, foreigners—most of whom work in foreign-backed enterprises—made up less than one percent of a population of more than 19 million. The city's wealthy elite are not the foreign traders who dominated in the past, but local property tycoons, financiers and government officials.The explosion of local wealth was made possible by economic and financial changes dating back to 1978. That year, the Communist Party, under Deng Xiaoping, began a program of “Reform and Opening,” an attempt to piece back together an economy ripped apart by the chaos of collectivization, the Great Leap Forward, and the Cultural Revolution. Deng's successors in the 1990s—President Jiang Zemin and Premier Zhu Rongji—accelerated reforms, particularly with a massive restructuring of the country's moribund banking sector. Their goal was not just to improve China's economy, but to strengthen the Party's hold over the country's economic and political infrastructure.Jiang and Zhu were part of the “Shanghai clique,” a powerful Party faction with roots in the city. They made Shanghai the poster child for their reforms, and during their tenures, Shanghai's profile began to rise. Its property and stock markets boomed, creating fortunes for men like Xu Rongmao, the founder and chairman of Shimao Property, one of Shanghai's largest developers. By 2010, according to the annual Rich List publisehd by Hurun Report, Xu was China's 10th-richest man, worth $4.9 billion. Stocks and property were also kind to Zhou Zhengyi, a restaurateur-turned real estate tycoon who by some measures became Shanghai's wealthiest citizen. Lured by the promise of what looked like guaranteed profits, retail investors poured money into the market. Neither a 1999 slump in property prices, nor a four-year correction in the stock market from 2001 to 2005, was able to dissuade them.The rise of President Hu Jintao, whose base resides in the powerful Communist Youth League, took some of the shine out of Shanghai and its clique. Prominent clique member and former Shanghai mayor Chen Liangyu, a rival to Hu, was targeted in a corruption probe in 2006 that also took down Zhou Zhengyi. But even before Hu came on the scene, the city's economic boom was misleading. Throughout the period of reform and opening, Shanghai's economy was driven not by free-wheeling entrepreneurs, but by massive state-owned enterprises, or soes. The Lujiazui skyline, often interpreted as a symbol of the triumph of capitalism, is nothing of the sort. The most prominent skyscrapers, including the upcoming 128-story Shanghai Tower, were all developed by soes. If anything, they are gaudy reminders of the heavy dependence—even by Chinese standards—of Shanghai's economy on state-sponsored investment.Yasheng Huang, a professor of political economy and international management at MIT, has calculated that by 2002, soes accounted for nearly 40 percent of the city's industrial output value, compared with 13.6 percent in neighboring Zhejiang province. Extrapolating from this figure, he noted that private income contributes a smaller share of GDP in Shanghai than in Zhejiang, despite the city having a significantly higher per-capita GDP. The result? “Shanghai is rich,” Huang writes, “but the average Shanghainese is not.”This may matter little in Shanghai's eventual elevation into the global financial pantheon. London and New York were not made financial centers on account of the net worths of their average residents. But the state-driven economy may continue to be an area of concern for foreign financial institutions. Despite reforms, large parts of the domestic banking system are still worryingly opaque, and difficulties with market access—consistently one of the major complaints of foreign firms hoping to expand their markets into China—will continue as long as the Party stacks the deck in favor of home-grown companies.If anything, state dominance has increased since 2002. The present administration of President Hu Jintao and Premier Wen Jiabao has been characterized by an emphasis on the building of a “harmonious society” under the Party's leadership. Rather than pursuing GDP growth at all costs, Hu and Wen have underscored the need for addressing China's growing wealth gap, a potential source of social and political unrest.The desire to simultaneously maintain social stability and preserve the Party's hold on power is the motivating force behind government policies to limit the growth of bubble-like property prices across the country, and to keep consumer prices under control. It also helps explain Beijing's reluctance to open its financial markets and allow a freely convertible currency, frequently cited as the largest obstacle to Shanghai's emergence as a global financial center. Foreigners remain largely barred from Shanghai's equity market, and attempts to move money in and out of the country are still encumbered by strict regulations. This remains the case in spite of recent developments like the first new approvals in six years for foreign firms to set up securities joint ventures on the mainland, and Shanghai's introduction of a program to allow qualified foreign investors to make private equity investments in China.If Beijing decides to loosen its grip on China's financial markets, it will do so at its own pace and at its own convenience. Central planners have cared little about the priorities and timelines of the rest of the world, especially since the global financial meltdown lent support to China's economic model. They will pursue convertibility of the yuan—an essential step if Shanghai is to be a truly competitive global money center—only to the degree that it benefits domestic, largely state-owned companies, and to the degree that it helps maintain good relations with major trading partners like the United States.This is why Shanghai could take a long time becoming a New York, London or Tokyo. Like Haibao and the World Expo, and like the country's financial reforms, Shanghai's focus will remain inward—a symbol for the country's citizens of the economic benevolence of the Party.But that doesn't mean we should count Shanghai out of the global big leagues. Like the rest of China, Shanghai is supremely confident that the future belongs to it. Shanghai will be a world financial center, but not by emulating the already-established troika. Rather than adapting to the rest of the world, Shanghai—like China— will become a financial heavyweight by persuading the rest of the world to adapt to it.The skyscrapers of Moskva-Citi loom over Soviet-era Moscow like gleaming beacons beckoning a new era. The cluster of high-rises, Moscow's answer to La Defense or Canary Wharf, was born of the pre-financial crisis oil boom, when Russia was keen to use its newfound wealth to catapult itself to the forefront of the global economy. Times have changed, but Moscow's ambitions have not. Dmitry Medvedev, the soft-spoken president who has sought to make subtle liberalization the hallmark of his presidency, first seized upon the idea of transforming the Russian capital into a global financial center two years ago. In recent months, the effort has taken center stage.“Major changes have taken place in Russian society and the Russian economy,” Medvedev said in Davos earlier this year, pitching his idea of Moscow as the newest global financial capital to the World Economic Forum. “We are developing and we are moving ahead.”Moscow's rapid transformation from the starved center of Soviet demise to the bustling capital of uber-capitalist Russia has produced a sort of urban shock. The gridlocked roadways, the overstuffed metro, and the glut of over-priced goods and real estate all testify to Moscow's newfound status as an emerging-market darling. Underlying it all, however, there remains a bureaucracy tainted by widespread corruption and endless red tape—systemic flaws in Russian society that all the conspicuous consumption, daring architecture, and lofty rhetoric in the world cannot hide.Since formally announcing his intention to build Moscow into an international financial center, Medvedev—in good bureaucracy-loving tradition—has created a presidential commission to oversee the task. Visa requirements for foreign investors and bankers have been eased. The country's two stock exchanges, RTS and micex, announced a long-awaited merger, creating a single platform to encourage international and domestic listings. In January, after years of discussion, the nation's parliament (the Duma) finally enacted Russia's first law banning insider trading. And Russia seems closer than ever to achieving its nearly two-decade-old goal of joining the World Trade Organization.Despite these steps, Moscow was ranked 68th out of 75 cities in the March 2010 Global Financial Centers Index commissioned by the City of London. The city was included because of substantial investor interest, but received a low ranking because it “does not yet have sufficient depth or breadth as a financial center,” the report said. It's certainly true that some essential financial infrastructure is still lacking. But Russian officials are aware of those gaps and have set about addressing them. High on the list of priorities are the creation of a central depository—a register of securities trade records—and a planned strengthening of property rights.Still, what investors seek in a financial center is more than just growth opportunities and financial know-how. They also want rule of law and predictability— commodities that are not particularly abundant in Russia. The country's ranking in Transparency International's corruption index slips every year. In 2010, it was ranked 154th out of 178 countries—below Zimbabwe, Nicaragua and Nigeria, and well below any other G-20 nation, including Argentina (105) and Indonesia (110). Medvedev himself has identified corruption as Russia's biggest problem. But he lacks the power—or perhaps the ability or will—to reduce it. He has announced countless initiatives to crack down on corrupt officials, and every month or two sees a new sweep of firings. Yet, according to Transparency International, corruption has only grown under Medvedev, infecting every level of Russian governance—from lowly traffic cops to senior Kremlin officials.Adding to the problem is endless red tape. It takes hundreds of documents and inspections by various agencies to set up a business in Russia. That, in turn, creates opportunities for graft. It's much easier to pay off a few officials than to spend years following proper procedures—without any guarantee of success. Many firms, including foreign investors, set aside funds precisely for the purpose of bribery, according to sources at Western consultancies. Patience is beginning to wear thin. In 2009, the Swedish furniture giant IKEA announced it was halting expansion in Russia, one of its most lucrative markets, to protest what it politely termed the “unpredictability of administrative processes.”Still, Russia remains an attractive market, even if its recovery from the global financial crisis has paled in comparison to the other so-called bric nations: Brazil, India, and China. “It's certainly come a long way from 20 years ago,” says Peter Derby, a longtime Russia investor, recalling images of Moscow in the early 1990s, when pensioners would arrive by the trainload in the dead of winter, eager to trade in privatization vouchers at makeshift street stalls. “Russia is progressive when it comes to taxation. But I do not see the bang-for-the-buck, with corporations going in and taking advantage of that. Probably, there's a rule of law question.”In discussions of doing business in Russia, the name Mikhail Khodorkovsky inevitably comes up. The former head of Yukos, once Russia's largest oil company, was recently sentenced to a second jail term, ensuring he will remain in prison until 2017. Once Russia's richest man and now its most famous prisoner, the fallen oligarch fell victim to a case of selective justice, compounded by judicial absurdities. His case might be the most famous, but it is far from the only one. Medvedev, a former lawyer, has vowed to reform Russia's justice system, but whatever efforts he has made haven't produced any tangible results. In 2009 and 2010, just 0.7 percent of all trials ended in acquittals, according to the nation's Supreme Court. Research recently released by VTSIOM, an independent pollster, found that just 25 percent of Russians trust their country's justice system.In addition to improving infrastructure, transparency, and rule of law, Russia needs to focus on boosting its human capital, investors say. Russia lost some of its best minds in the wake of the Soviet Union's collapse, as its scientists and researchers sought greener pastures abroad. The oil boom of the last decade did much to halt—even reverse—that trend. Since the financial crisis, though, Russia has once again suffered from high levels of emigration. The recent opening of Skolkovo, Russia's attempt to create a world-class business school, was blessed by both Putin and Medvedev. Yet the education system at large has been plagued with the criticism so often leveled at other parts of Russian society—corruption, inefficiency, declining quality.Medvedev has admitted that Russia has “a long way to go” before it reaches a global financial status on par with London and New York, or even Hong Kong and Singapore. Part of the problem is that Moscow simply isn't as nice to live in as those cities. Traffic is a horror; the Finance Ministry estimates it wipes out 3 percent of GDP annually. Housing prices are as high as London and New York, but the quality of real estate is lower. The average price of rental office space is the highest in the world. Then there's the problem of safety. Two days before Medvedev addressed the World Economic Forum in Davos, a suicide bomber stormed the international-arrivals hall of Moscow's busiest airport, killing 36 people and exposing a myriad of security lapses.Roland Nash, senior partner at Verno Capital and a longtime investor in Russia, thinks Moscow is right to dream of becoming a financial center, but perhaps it should dream more realistically and focus first on its own neighborhood, attracting investment and capital from the ex-Soviet states that surround it. “The Western financial centers have demonstrated very graphically that they are not reliable suppliers of capital and the ex-Soviet countries have really recognized that,” he says. “They were suddenly cut off from Western finance for a significant amount of time. Because the West is more unattractive, it's a big opportunity for Russia to take a big leap forward.” Russia's attempts at boosting economic integration with those countries— including a newly formed customs union with Belarus and Kazakhstan—should help that move forward.“Irrespective of whether they get to be a global or regional financial center, just the efforts to get there can improve the financial environment in Russia,” concludes Nash. “It is really a patriotic goal that allows the reformers to get quite a lot done, even if they know it will be a long time before Russia really arrives.”Luiz Inacio Lula da Silva spent eight years confounding expectations as the president of Brazil. Perhaps no moment better exemplified Lula's ability to defy easy categorization than his appearance last September at the Bovespa, São Paulo's stock exchange. Lula—a gruff, bearded, working-class leader—was there to celebrate history's biggest-ever sale of stock, a $68 billion offer to government and private investors of new shares in the oil company Petroleo Brasileiro SA, usually known as Petrobras. The sale made Lula—critic of capitalism and champion of the poor — the head of the world's fourth-largest company by market value, a corporate titan nearly the size of ExxonMobil. Even Lula, who was three months from leaving office, seemed surprised by the situation.“Ten years ago I came here and people shook with fear to see me, this devourer of capitalism,” Lula told the bankers, brokers and government officials gathered on the floor of the exchange. “Well, this devourer of capitalism is leaving office having honorably participated in the most auspicious moment in the history of capitalism. For some this means little, for some nothing. For me, it means everything that this is happening—not in Frankfurt, not in London, not in New York, but in São Paulo. It's on our Bovespa that we have consecrated the greatest capitalization in the history of world capitalism.”Surprising or not, the Petrobras sale and Lula's place at center stage were emblematic of São Paulo's rise to prominence as an international financial center and the country's new confidence after decades of debt, stagnation, inflation, political turmoil and social unrest. For one of the few times in Brazil's history, it seemed like the country's poor—the key to its potential—might be able to get their cut of the nation's undeniable wealth and power. It seems as if the place once ridiculed by Charles de Gaulle as “not a serious country” might finally get its due.Brazil owes its economic ascendance in large measure to São Paulo. Home to 20 million people, it is the third largest metropolitan area in the Americas after Mexico City and New York. To a first-time visitor arriving by air, the sight of the city is always a surprise. São Paulo is an almost endless expanse of white concrete buildings rising out of green jungles and rugged mountains. Unlike Manhattan, there is no shiny, metallic up-thrust between the river and sea.While just about anything seems to grow in São Paulo's fertile soil, its residents have found it more convenient and profitable to pave over and build on every inch of space, turning the city into the quintessential concrete jungle. The stench of a thick ooze in the rivers that run past the city can burn your eyes, irritate your lungs, make your skin greasy and sap your strength.While the city has hills and other landmarks, you can't see them or much else from the street. Many visitors become utterly lost if they wander away from the Avenida Paulista, the wide, ridge-top street that was once lined with the mansions of coffee barons and is now home to banks, museums, and soaring radio towers lit with advertisements. There is no real downtown. The city center is still active, but there are illegal squats and crack dens not far from its remaining banks and businesses. The stock market is there, but no longer hosts any floor trading. Most big companies moved to the Avenida Paulista decades ago. Many have since moved from the Paulista to the Faria Lima district, then further still, to the Marginal Pinheiros, and finally even beyond the shantytowns, where land is cheap, building codes lax and real-estate fashions more up to date.With the largest population of Brazil's 27 states, São Paulo is responsible for about 40 percent of the economic output in the country, which has the world's eighth largest economy. If the state of São Paulo were a country, its economy would be the world's 16th largest. São Paulo boasts an economy larger than any Latin American country, except Mexico and Brazil, and about as big as South Korea. Metropolitan São Paulo is the center of a Brazilian auto industry that is the world's fifth largest; the São Paulo region alone produces about as many cars as Mexico or Canada. Fiat makes more cars in Brazil than in Italy.In 2009, the Bovespa, the world's 11th largest stock exchange by value, ranked third in initial publics offerings. In the last eight years the Bovespa's overall valuation has jumped almost six-fold. São Paulo's BM&FB ovespa commodities exchange is the locus of Brazil's agriculture sector—the world's largest producer of coffee, sugar, and orange juice, the second-largest producer of soybeans and ethanol, and the third-largest producer of corn. As the nexus of Brazilian finance, industry, and agriculture, São Paulo is South America's New York, Chicago, and Detroit—all rolled into one.Owing in great part to the economic vitality of São Paulo, the Brazilian economy is now growing at more than five percent a year for the first time in four decades. Its foreign debt is negligible; in 2008, the country briefly became an international net creditor.Lula, who lives in São Paulo, likes to claim responsibility for his hometown's success. But the city's rise has depended on a force far beyond his control—in a word, China. Historically, foreign trade has made up a smaller percentage of Brazil's economy than many other developing countries. São Paulo's prosperity has relied on the huge Brazilian domestic market, made up of almost 200 million people spread out over a territory bigger than the United States (minus Alaska). But the city's economic explosion during the past decade or so is linked to Brazil's growing commodity exports, primarily to China, and the revenue and investment such trade brings, according to Tony Volpon, a São Paulo native and chief Latin America economist at Nomura Securities in New York.“São Paulo is an increasingly important financial capital because China wants and needs everything Brazil has to sell, and São Paulo is the financial capital of Brazil,” says Volpon, adding that São Paulo's rise can be attributed to soybeans and iron ore, which alone make up more than a fifth of Brazil's exports. São Paulo's banks are recording record profits helping finance soybean production in Brazil's Mato Grosso, chicken production in the southern state of Santa Catarina, iron-ore mines in Minas Gerais, and oil rigs off the coast of Rio de Janeiro.But Volpon warns that if Brazil fails to use this natural-resources boom, especially “the one-time gift of elevated Chinese demand,” to fix the nation's serious education, infrastructure, and technology problems, São Paulo's importance will begin to fade when the Chinese surge slows down. If it invests wisely, however, São Paulo could become one of the major money centers of the 21st century.To do so, the city will have to overcome some serious weaknesses: pollution, violent crime, traffic congestion, stifling bureaucracy, widespread poverty and low education levels. “São Paulo is our most important city, but while it contains much of what is best in Brazil, it also contains much of what is worst,” says Adriano Pires, director of the Centro Brasileiro de Infra Estrutura. “São Paulo has the money and the talent and the skills, but it is still a dysfunctional city in many ways.”The Petrobras event at the stock exchange may have prompted Lula to ecstasies of patriotic feeling and an unexpected paean to capitalism, but the global financial community largely gave the sale a thumbs-down, despite its size. Most of the stock, $48 billion, was purchased by the government or state-led companies, banks and pension funds, and most of that went right back to the government as Petrobras used it to buy five billion barrels of unproven offshore oil reserves. Private investors, who still own more than half of Petrobras's stock—though only a minority of its voting shares—were so down on the deal that two months after the sale, the company, despite raising $68 billion, was worth about the same as it was a year earlier—a decidedly unspectacular result for a spectacular sale.Despite the mixed message of the Petrobras sale, São Paulo has the chance to become an important world financial center, a possibility that even skeptics like Volpon and Pires concede. They believe, though, that it will only happen if fully private companies take the lead— not just state-led firms like Petrobras. Brazilian companies will need to expand into foreign markets, instead of going abroad only when inflation, economic slowdown, or government bankruptcy makes it hard to earn easy money behind high tariff walls.This traditional timidity may be ending. São Paulo-based JBS, the world's largest beef producer, now slaughters much of the meat sold in the United States. The Chinese are buying soy-fed chickens from São Paulo-based Brasil Foods, the world's largest processed-meats exporter. Embraer, the world's third-largest jet-aircraft manufacturer, based just outside São Paulo, supplies a large portion of the regional jets that carry passengers to hubs in the United States, Europe, and China, and has sold fighter aircraft to the Colombian and British air forces. Brazilian banks— made nimble by years of managing inflation, exchange rate volatility, and debt—are expanding into Chile and Argentina. Brazilian mining companies are battling the Chinese for space in Africa.Despite Lula's bragging, it's these private companies, and not Petrobras—which is based in Rio de Janeiro anyway—that will give São Paulo its shot at real international financial power. If they succeed, São Paulo just might convert its Brazilian dominance into a place among the world's most powerful financial centers.