Posted by: Competing In A Borderless World | October 30, 2011

Emerging Market Panel: Changing Dynamics in Emerging Markets

Another full house in the Murray Suite for the Emerging Market Panel on the topic of “Changing Dynamics in Emerging Markets.” The moderator, Rajiv Basu introduced the panelists: Alice Young, Partner & Chair of the Asia Pacific Practice, Kay Scholer LLP; Punit Arora, Partner, PWC.; and Jennifer Yi Qin, Partner, Deloitte.

Alice Young described a “tremendous opportunity” in the emerging markets. She noted the U.S. recovery has been “unbelievably slow but compared to Japan, it looks pretty good.” And now, “with Europe on the ropes, who would have thought China would come to its rescue – first with its bail out the U.S., and now the bailout of Europe.” She added that Beijing has “learned some lessons” from the U.S. bailout, “and now they have some conditions for the European bailout!” She commented, “I think we are seeing tremendous, dynamic change, and frankly I am guardedly optimistic,” as “we have seen this roller coaster before,” and going forward, she added, “We’re going to have to have more of a global collaboration.”

Next up, Punit Arora noted that in the emerging markets, “it has been quite dramatic what has happened the last few years,” and noted that “while we tend to refer to a lot of these as ’emerging markets’, I refer to them as growth markets” as they are the “only ones showing consistent growth.” With so much volatility in world markets, he finds these growth markets “provide consistent stability” with markets like China, India and a number of smaller markets like Indonesia, whose “growth rate is much higher than India and China,” providing an important engine of growth to the world economy. He noted how “this past week was one of the best weeks in a quarter of a century for the stock markets,” adding “this one week along took back all the losses of one whole quarter.” He reflected on this, he said if we “look at that” we can “say where is this is going to take us,” as “these markets are really growth markets.” Arora observed that the “integration within these markets is so significant” and noted there are “more China RMB funds than any other country-specific funds,” with a “large appetite for more investments there.” He expects that the U.S. “will remain a very, very significant market. But where is the growth for that market going to sustain itself from?” He expects this growth will be fueled by markets in “Africa, Latin America, the Middle East as well – that’s going to drive growth into the next ten, twenty years.”

Jennifer Yi Qin next spoke, addressing a question posed by the moderator: whether Shanghai might become tomorrow’s Tokyo or Hong Kong, and will Singapore survive as a financial center? She noted that “Shanghai wants to be a financial center, and has a vision for 2020” and added that “financial markets in China have reached the size to become capable of a lot of things globally.” But she added it’s “not only the size of the markets matter” and that there are three other “important factors: infrastructure, currency, and the regulatory environment.” For China, she asked, “what’s the matter for RMB? The Chinese government has put into place steps for the RMB to be internationalized, to become a significant player in the global economic environment.” But she noted, from that perspective, there remains steps still to be taken toward that.” From the financial markets perspective ,” she noted, “recently in China there has been a trend regarding what’s considered a Fortune 500 company – is it size? Is it presence in the global arena? For Chinese companies not to be satisfied with the local market but who step out and take a significant role in the global stage, we will see continuing opportunities.” This involves the big banks, and we will “see next a wave of transformation of securities firms in China. With all the new found money the brokerage firms will have, the ambition will be there to expand globally.” In the next seven to eight years, she believes, “we will see if it develops in a way to match Hong Kong and Singapore.” She noted that “Singapore has most lenient tax regime in Asia area” and that Singapore “has a better tax treaty with China than Hong Kong.” For such a tax incentives to register in Singapore, “that’s something of a double sided blade as government relies on tax revenues. But to grab the practice by changing the tax code, it can reach that level.”

Alice Young also discussed Singapore, noting it’s “like a little Switzerland” and “provides the clear legal protections, the secrecy but with the strong government oversight. They can pretty much run it the way they want to because of the government – unlike India or China which have a much bigger locomotive to run. Singapore only has 4 million people.” Further, China and India have “currency restrictions, a lack of exchange flexibility” and as a result, “Hong Kong will therefore continue to be window into China, into Asia.” She commented that “the piece no one has mentioned, London and NY are not going to be the centers – already they are seeing a tremendous fall off” and this will “result in types of regulations that are very restrictive for fast movement” and which will continue to “push toward the Pacific.”

Punit Arora addressed Mumbai, observing some significant differences from Singapore, noting “how quickly large multinationals will be going outbound. That part of the growth is still somewhat untapped” so there remains “significant growth capability in the next couple of years.” He noted that while in “Singapore, Hong Kong, there’s a stable regulatory regime,” that “a different dynamic plays out compared to Mumbai. There’s lot at stake for Mumbai, but it is moving slowly with regard to regulatory regime.” But Arora noted “they take great pride in moving slowly” as this “has helped their banks” by insulating them from some of the recent volatility. He noted that we’re “starting to see firms go out; India is pitching to China to get outsourcing into India” as “China attracts initially” but will “rely on India to further develop” and as a consequence, “their fortunes are aligned” and “their growth is similar.” With regard to Singapore, he noted “the country is really run like a corporation. They are very very focused on what is it that business needs. In my view, Singapore will continue to play a very major role.” He noted a lot of Indian IPOs are out of Singapore, as “the capital market development has been much faster there than anywhere else in the region. Singapore is the place they are looking at for setting up the entities, competing directly with Hong Kong. And its tax treaties are better developed than Hong Kong.” All this bodes well for Singapore’s continued importance.

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