Ask five people to name the three most important financial centers in the world and you will probably get five different answers. Most will likely have New York, London, and Hong Kong on their list? Others may include Hong Kong, Tokyo, or Singapore.

What if this question was asked in 2007? Now it is 2011 and we are about 3 years removed from the early stages of the Global Financial Crisis. New York and London are still suffering from the fallout after being the undeniable world financial leaders for the past century. Hong Kong and Singapore are growing again after some pain from the crisis. Tokyo used to be a sure entrant in this list, but has been having financial issues during most of the last 20 years. Singapore does very well and ranks #1 for ease of doing business, but is held back by being a small city/state that depends on immigrants to fill all of its export dependant jobs.

That leaves Hong Kong, the former British colony that is now part of China. It ranks at #2 for ease of doing business, allows international listings on its stock exchange, currently has more luxury brand IPOs than New York, and borders China (the 2nd largest economy in the world). All of this leads to a sense that money is flowing in to the region via Hong Kong. So, the top three world financial centers may be New York, London, and Hong Kong. That covers North America, Europe, and Asia well as well as the three largest economic areas (European Union, United States, and China). Are New York and London still the top two? Could Hong Kong or another city supplant them?



China wants to make Shanghai a world financial center. Can it be done? Since economic reforms in China started really taking off 20 years ago, China has rocketed onto the world stage and accomplished many impressive feats including hosting of the 2008 Summer Olympics and 2010 World Expo. Hong Kong has been part of China for nearly 15 years, but still operates as it did under Britain. China has a model in Hong Kong to look at for Shanghai, but Shanghai and China (#79) are far from being as open as Hong Kong (#2). However, I would never count current China from accomplishing something it wants.

This is a good time for up and coming financial centers to challenge the dominance of New York and London. They are both badly bruised for trading in financial products that led to the Global Financial Crisis. Will Shanghai join the top three or make it the top four? I think Shanghai’s emergence would come at the expense of New York and London. Instead of two clear dominating financial centers in New York and London, we could have four equally important world financial centers with two being in Asia. That would be quite a coup for China, if it can move Shanghai from being China’s financial capital to a world financial capital while also keeping Hong Kong up there as well.

M.F.




Data/Information Links:
Shanghai - World Financial Center?
http://business.globaltimes.cn/china-economy/2011-01/613118.html
Hong Kong - Luxury Brand IPOs
http://www.businessweek.com/magazine/content/11_23/b4231046042769.htm
Ease of Doing Business
http://www.doingbusiness.org/rankings

In the last posting I gave an example of how buying a bottle of Coke in the United States costs about 3 times more than it does in China just using the current exchange rate between the USD and the Chinese RMB. However, purchasing power goes much deeper than a simple exchange rate equation. This post will look at Purchase Power Parity (PPP), a possibly better way to get a true picture of cost differences because it looks at living standards when compared to straight GDP.

The exchange rate between the USD and Chinese RMB is about 6.50 and 44.91 for the Indian Rupee, meaning $1USD buys 6.50RMB or 44.91Rupees. World lists of GDP are calculated in the USD to normalize the results. China and India’s currency values are much lower than the USD, so China and India have a total GDP much lower than the world leading United States.



PPP is another way of analyzing the total value of a country’s economic output. Some economists believe PPP is better because living standards and other economic factors are taken into the equation before being normalized to the USD for ease of comparison. Downsides do exist in that the factors used may be different in each country and some parts of the formula may be estimated.



There are many interesting facts found when comparing these two charts. Canada is number 9 in GDP, but falls out of the top 10 to number 15 when looking at PPP. Canada’s PPP is calculated a little lower than its GDP value at $1,335,000. Replacing Canada in the PPP top 10 at number 6 is Russia, which was number 11 in GDP with a nearly 50% lower value of $1,465,079. Next, the total economic GDP output of the European Union countries is close to 15% more than the United States. Yet, the PPP number for the European Union is only a scant 1.5% higher than the United States. Also, the European Union, United States, Japan, Germany, UK, France, and Italy all have a lower PPP values while the BRIC countries (Brazil, Russia, India, and China) all have higher PPP values when compared to GDP values. Lastly, the United States has a GDP nearly 150% higher than number 2 China. The United States is still leading number 2 China in PPP, but its lead is cut to just over 50%.

A look at the BRIC countries shows that Brazil’s increase is very small (nearly +5%). However, the Asian part of BRIC in Russia (nearly+ 50%), India (nearly +240%), and China (nearly +60%) are markedly higher. You can invest more in Russia, India, and China with less money. At the same time your investments will not go as far in the higher cost countries of the United States, Japan, Germany, UK, France, and Italy.

Over the past few weeks I have found that World GDP growth favors emerging Asian economies, new billionaires are also in Asia’s emerging economies, and that PPP values show that investments will go markedly further in these Asian emerging economies.

by M.F.

Sources
Data/Information Links:
PPP Definition
World GDP Rankings (via IMF query)
World PPP Rankings

Forbes Magazine released its annual list of billionaire’s recently. The list had 1,210 billionaires listed from all over the world. Not shockingly, the USA leads the way on number of billionaires and has half of the top 10. However, a gentleman from Mexico’s telecom industry tops the list and people from India and Brazil take up another 3 spots in the top 10. An analysis of the data adds more credence to Asia being the best place to invest or start a company.



The BRIC countries of Brazil, Russia, India, and China are represented. In fact, China doubled its number of billionaires over last year. Asian countries now make up half of the top ten in number of billionaires. The numbers of billionaires increasing in Asia is good for Asian businesses in terms of possible investors from Asia and the world. Because increasing wealth in Asia fits the narrative of it being a good place to invest your earnings. However, numbers are good, but money is the key.



The United States still leads by quite a large margin, but Asia with Russia, India, China, and Hong Kong also holds a large amount of wealth. Mexico and France join this list with only having 11 and 14 listed billionaires. The upper reaches of wealth are heavily concentrated in these countries. Together Germany and India have 106 billionaires to China’s 115, yet China trails both Germany and India in net worth by about 15 billion USD. China’s wealth is more spread out among its billionaires, so watch for China’s billionaire net worth to move up the rankings. Each Chinese billionaire represents a different industry as well.



This list and all lists like it are always reflected in USD because the USD is the world’s default currency. The 230.4 and 246.5 USD in net worth for China and India’s billionaires will go much further in their countries and other lower cost Asian countries than it would in the United States or Europe where costs are markedly higher.

Purchasing power in Asia and especially in India and China is much higher than in the United States or Europe. Meaning that money goes a lot further in these countries because costs are much lower. The current exchange rate for the Chinese RMB and Indian Rupee to the USD is 6.50 and 44.91. A quick example with a bottle of Coke, it costs $1.50 USD in the United States and 3 RMB in China. When converted to USD the 3 RMB coke becomes $.46 USD. The bottle of Coke in the United States costs 3 times more than it does in China. There are other things to look at as well. Next week I will post an analysis of Purchasing Power Parity to explain this concept in more detail.

A couple of weeks ago, I looked at recent World GDP figures and found that Asian countries were leading the way with growth in the world and no were longer as dependent on the United States and Europe for their growth. This data gives more reasons for why Asia is the place to be for investment in new or existing businesses right now.

M.F.

Sources, Data/Information Links:

Forbes 2011 List of Billionaires
http://www.forbes.com/wealth/billionaires/list?country=&industry=-1&state=

Top 10 Billionaire Count by Country
Top 10 Billionaire Net Worth by Country
http://www.areppim.com/stats/stats_richxgdp_11.htm

China's Billionaire Club
http://www.allvoices.com/contributed-news/8427071-forbes-2011-list-forbes-2011-billionaire-list-2011-forbes-list-of-billionaire

Currency Exchange Rates
http://www.xe.com/

Last Thursday the price of Benchmark West Texas Intermediate (WTI) crude oil for June delivery dropped to $99.80 USD per barrel. That was the first time below $100 USD since March 16. During this recent six week period above $100 USD, the price had steadily escalated to $113.39 at the end of April. Oil is used for most transportation and just about all international shipping, since it utilizes ships and airplanes. It is also used in many production processes.

Oil prices rises can be a one two punch to businesses. First, business costs rise through transportation and many productions of goods. Then, the consumer of your goods has to pay more for transportation and goods. This second punch leaves the consumer with less money to purchase your goods and or services. Since 2005 WTI has primarily stayed above $40 USD per barrel. It briefly dropped to $30 USD in 2008 during the Global Financial Crisis.

Looking at this historical chart going back to 1986 shows that WTI stayed in a narrow range of $12 USD to $20 USD primarily from 1986 to 1999 except for one brief flare up in 1990 just before the Gulf War in Kuwait. From the end of 1999 to 2004 WTI steadily floated between $20 USD and $40 USD except for briefly dropping after 9/11 in 2001. After 2004 WTI has steadily been on a march upwards, fluctuating and rising more than ever in the last 20 plus years.

Oil prices are affected by many issues around the world. Supply and demand were the main long term drivers for many years. Unrest and political issues act more like a tax, only existing as long as the unrest tampers with oil supplies. In recent years the USD has fluctuated wildly. The USD weakened against major currencies from 2005 to 2008 while WTI raced to $145.16 USD per barrel on July 14, 2008 and then strengthened while WTI dropped very quickly to $30.28 USD per barrel on December 23, 2008. The recent rise in WTI also corresponded with a weakening dollar and the drop in WTI last week coincided with an increase of the USD value against major currencies. This relatively new linkage of the USD and WTI is because investors are moving their USD to oil when the dollar is weakening to protect their investment value. Then investors are moving it back to the USD when the dollar strengthens, thus weakening WTI.

For many years WTI was stable and that was great for business because it removed uncertainty from a major input of costs. Demand has increased mightily with the development of China and India in recent years. At the same time supply has remained pretty steady. So, an increase in WTI makes sense. For about a year before the recent run up WTI stayed in a range of about $70 to $80 USD per barrel. It looks like that may be the true supply and demand range. You should look at unrest in oil producing countries and which way the USD is moving to gage oil related costs above this range.

M.F.

Sources used:

http://www.exchange-rates.org/history/USD/EUR/T

http://www.eia.doe.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=D

Two years ago most countries in the world were reporting negative GDP in the wake of the Global Financial Crisis. Countries that still had positive GDP growth were seeing it cut dramatically. For example, The United States 2009 Q1 GDP was -4.90 and China’s was +6.20 down from +9.0% in 2008 Q3. 2009 Q1 was the low point for worldwide economic growth in the crisis. After that most countries around the globe started growing. Now, two years later Asia is growing faster than other regions in the world with the exception being Japan.

Recent Asia GDP Figures:

Singapore 23.50%
Philippines 9.80%
China 9.70%
India 8.20%
Taiwan 6.90%
Indonesia 6.60%
Vietnam 5.43%
*Russia 4.50%
Malaysia 1.50%
Hong Kong 1.50%
South Korea 1.40%
Thailand 1.20%
Japan -0.30%

*Russia lies in both Asia & Europe

Large economic regions are also growing, but at lower rates than the Asian region except for Africa. The Euro Area, United States, UK, Australia, and Canada are growing very slowly in a range from +0.3% to +1.8%. Latin America is growing with all countries reporting GDP under +2.5% except for Peru, which is growing very fast at +9.2%. Central and Eastern European countries have GDP growing from +.02% to +3%. Pre spring revolution GDP showed African countries rowing from +.80% to +10% with most at +4% and higher. The recent revolutions may impact GDP negatively in Egypt, Tunisia, and Libya.

Another look at this shows exporting countries like the Asian region growing well with the import countries in the Euro Area, UK, and US growing slowly. These slow growth economies are among the largest in the world, but are underperforming. That means the Asian region is growing without much help from three of the world’s biggest economies. It helps of course that China and India are in Asia and are exporters of many goods and services.

Singapore’s fast growth is great to see because Singapore is the world’s 2nd biggest container port. Many Asian exports from China going to Europe and Africa pass through Singapore. The Singapore container port used to be the world’s biggest, but was recently passed by Shanghai adding to China’s regionally and worldwide important economy. Again Shanghai’s ascension to 1st means that China is also exporting many goods without much help from The Euro Area, UK, or US.

What about future GDP growth? Well, if the Euro Area, UK, and/or US see GDP growth accelerate, they will be importing more goods from Asian exporting countries. So, better growth in the underperforming economies will add GDP to already well performing Asian exporting economies. Also, Japan should start growing again with reconstruction starting after its recent terrible disasters. Japan will need to import raw materials for its reconstruction, which should benefit Russia and China.

Prior to the Global Financial Crisis, growth in the Euro Area, UK and US was very important to growth in the Asia region. Post crisis, the Asia region is less dependent on the Euro Area, UK and US. That is a positive thing, but any sharp downturn in the Euro Area, UK, and/or US could still have a negative impact on the Asia region.

M.F.

Sources used:
World GDP Charts
http://www.tradingeconomics.com/World-Economy/GDP-Growth-Rates.aspx
Shanghai: World's Busiest Container Port
http://www.chinadaily.com.cn/china/2011-01/08/content_11813033.htm