Keynote speaker: French president Nicolas Sarkozy talked of the 'crisis of globalisation' at Davos

While debt and regulation loomed over this year's World Economic Forum, global representatives from the banking sector were also encouraged by the emerging shape of the post-crisis world. Writer Brian Caplen

The post-crisis world is beginning to take shape. New economic blocs are building, with China at the centre and trade flowing to the rising consumers in the emerging markets. This should ensure that growth continues in key emerging markets, even if the US and large parts of Europe remain fairly moribund.

But the transition to this new structure is unlikely to be painless. The burden of sovereign indebtedness in Europe and the US may impede recovery and the rebalancing of the world economy is going to be a very slow process. State intervention, or dirigisme to use its French name, is back in favour and bankers are preparing themselves for intrusive and uneven regulation.

These were some of the key themes dominating this year's annual meeting of the World Economic Forum held in Davos at the end of January. While banks with a strong presence across Asia, Africa and Latin America, such as HSBC, Standard Chartered and Standard Bank, along with banks from within these regions, are emphasising the opportunities of the new multipolar world, analysts are also warning of the 'three Ds' - debt, deficit and dollar - as a negative combination that could cause many problems.

There is a seismic shift in economic power taking place but no one can be sure exactly where the fault lines lie. HSBC's group chief economist, Stephen King, in answer to a question about the US dollar's continuing position as the world's reserve currency - given the changing dimensions of the global economy - described the disruption that this might involve.

"You can't easily replace a reserve currency but what can happen is that you lose faith in the existing world currency," said Mr King. "You then inevitably go through a period of tremendous financial instability and uncertainty because of the loss of a nominal anchor for global trade and global financial markets and then, after things settle down, which could be years or decades, you might then see the emergence of a new reserve currency."

Te debt threat

Ibrahim Dabdoub, chief executive of National Bank of Kuwait, said: "The most important issue is the global debt threat. Debt to gross domestic product [GDP] in the US has become ridiculous and then we have the global external imbalances. Somehow things are going in the wrong direction. The relationship between China and the US, the relationship between the Gulf exporting countries and the US [is uneven]. You have on the one hand countries which save, on the other hand countries that spend at the cost of borrowing from other countries. The trend is not so impressive." (See The Banker's podcast with Mr Dabdoub at http://online.thebanker.com/davos-2010.)

These huge divisions in the world were reflected in the keynote speeches at the meeting. French president Nicolas Sarkozy made an impassioned attack on the status quo and said that "this crisis is not just a global crisis, it is not a crisis in globalisation, this crisis is a crisis of globalisation".

He continued: "It first took the form of globalisation of savings. This gave rise to a world in which everything was given to financial capital and almost nothing to labour, in which the entrepreneur gave way to the speculator, in which those who lived on unearned income left the workers behind. In which the use of leverage to a disproportionate extent created a form of capitalism in which taking risks with other peoples' money was the norm, allowing quick and easy profits, but all too often without creating either prosperity or jobs."

President Sarkozy also attacked the concept of "monetary dumping" that commentators read as an oblique reference to China's policy of keeping the renminbi undervalued.

Ironically, it is this anti-globalisation speech with its calls for a new Bretton Woods and tighter banking restrictions that is coming from the leader of a western European country, while the keynote speech from vice-premier Li Keqiang of China, with its state-directed economy, committed the country to market-oriented reform.

"Reform and opening up provides the driving force and effective guarantee of China's long-term, steady and fast economic growth," said Mr Li. "We need to unswervingly advance institutional innovation and stay committed to market-oriented reform. We will press ahead with reforms in pricing, fiscal, taxation, finance, investment and other areas and allow the market to better play a primary role in allocating resources. We will further shift functions of the government. We will deepen reform of state-owned enterprises, break monopolies and encourage competition. We will promote development of the non-public sector of the economy to strengthen the inherent dynamism of economic growth."

Mr Li emphasised how China is restructuring by boosting domestic demand and investing in welfare and health systems that should bring down the country's very high savings rate. But he said nothing about the chief object of Western ire - the exchange rate. However not all economists think that revaluing the renminbi is the automatic panacea to the trade imbalances that many proclaim.

HSBC's chief executive of global banking and markets and asset management, Stuart Gulliver, made the comparison with the experience in Japan. "The theory is that if the renminbi appreciates enormously, that helps address the global imbalances and China would go from having a current account surplus to a current account deficit, which would also have some significant consequences on the internal value of its $2500bn worth of reserves. But, actually, if you look at Japan, the yen started at 380 [to the dollar] and got to about 85. When it was 380, Japan's current account surplus was about half a percent [of GDP] and now it's 3%. So maybe the currency isn't quite such a big thing. It's actually about competitiveness and productivity. It's rather simplistic to assume that the renminbi somehow changes everything. The yen didn't."

New economic bloc

Meanwhile, the structure of world trade is changing anyway, with China at the centre of a new area encompassing Asia, the Middle East, Africa and Latin America, according to the HSBC executives. This bloc contains enormous sums of investable capital from sovereign wealth funds, huge natural resource deposits, manufacturing capability and a growing consumer market.

Mr Gulliver said: "We think the next stage of emerging market growth will be what the World Bank has termed 'south-south' - or emerging market to emerging market - and while there will still be a significant amount of US to emerging market and EU to emerging market, [the emerging markets] are not dependent for their continued growth on the EU and the US recovering.

"What a lot of people expected is that the emerging markets will stutter and be unable to continue because they are entirely based on making consumer goods for the US and the US consumer has been the consumer of last resort. [This leads to questions such as] will the Chinese consumer replace [the US consumer] and will China become a large domestic economy? While all of those things may take place, the broader solution is that there is another economic bloc starting to emerge which has China as its centre."

For Peter Ghavami, head of global markets at the Russian investment bank Troika Dialog, the important developing trade corridor is the one connecting Russia, Africa and China. Troika is one-third held by Standard Bank, with its dominant position in Africa, which in turn is 20% owned by Industrial and Commercial Bank of China (ICBC), making it well positioned to exploit these linkages.

"Ruben's vision [Ruben Vardanyan, the main owner of Troika] was to see that we were becoming a much more multipolar world, meaning that the traditional centres in the West, such as New York or London that were the hubs of a hub and spoke system, were no longer going to be the means by which trade and investment banking services were going to get delivered. The partnership with Standard Bank was to make sure that Troika was uniquely positioned along the Africa-Russia-China axis," said Mr Ghavami.

Mr Ghavami is one of the commentators worried about the three Ds. He said: "I think [the threat of] protectionism is overplayed. We are way smarter than we were in the 1930s. But the regulatory threat [to banking] is absolutely real and there is a huge possibility that policy mistakes will be made."

Te G7 to €7 phenomenon

Mr Ghavami also referred to the G7 to €7 phenomenon - the idea that growth and profits in the G7 (US, Japan, Germany, UK, France, Italy and Canada) will be less than in the €7 (China, India, Brazil, Russia, Indonesia, Mexico and Turkey) in the years ahead.

But not all emerging markets are massive traders, so much of their growth will be driven by domestic demand. This is the case for both India and Brazil. Uday Kotak, vice-chairman and managing director of Kotak Mahindra Bank, said: "India will grow this year somewhere between 7% and 7.5%, and 8% next year. The bulk of GDP in India is made up of domestic demand and domestic consumption. India has a domestic savings rate of more than 35%, therefore the engine of India's growth is very much domestic.

"On trade flows, India has a 15% export connection with the rest of the world, which is relatively small as percentage of GDP. If there is a slowdown again, India will be less affected than the rest of the world and on capital flows exactly the opposite is happening. The US and European central banks are likely to keep liquidity easy and interest rates low for the first half of 2010, which means investors will look for growth in places such as India. So they will attract capital rather than the other way around. A sluggish world economy, with easy monetary policy and slow growth, works to India's advantage."

Mr Kotak claimed that the West and the emerging markets are moving closer together on regulation. Countries such as India have strict regimes and came through the crisis in rather better shape than developed countries such as the UK and the US, which have been deregulating for the past couple of decades.

The big question is what comes out of the current regulatory debate - some at Davos feared too much regulation, others too little.

Regulation: hopes and fears

John Griffith-Jones, chairman of KPMG's Europe, Middle East and Africa operations, said: "We have all the issues on the table - systemic risk, pay, liquidity, capital, you name it we've got it - but the solution seems to be elusive. There are plenty of expert bankers making cases as to why individual solutions will not work and you feel, every time you hear them, they are almost certainly right but no one has come up with the five-point plan that gets us to at least a degree of consensus."

Mr Griffith-Jones added that efforts to create a global standard in other areas such as accounting have proven elusive. "If you look at the efforts to achieve rather simpler things [than international banking regulation] such as IFRS [International Financial Reporting Standards] being reconciled with US GAAP [Generally Accepted Accounting Principles], the accounting debate has been going on for 10 years and it's unsolved even now."

Steve Pratt, chief executive of Infosys Consulting, also claimed that there is a failure to really get a grip on regulation. "The real failure is a systemic failure in understanding risk. The concern is that we all got together and said 'we need some fundamental changes' but as the economy recovers there is no learning event. There has been no Bretton Woods," he said.

Obama support

While international bankers have attacked the narrow banking idea proposed by US president Barack Obama, some bankers feel it is the right approach.

NBK's Mr Dabdoub said: "There is a lot of truth in the [Obama] approach, it is not just a reaction to populist pressure. The mess originated from the whizzkids in the investment banking world, complicated products that they came up with that could not be properly regulated. We have been talking about regulating the hedge funds for the past 10 years and as long as we don't understand the products how can you regulate it.

"We should have a Glass Steagall act again and there should be differentiation between investment banking and commercial banking," he continued. "It will be difficult to separate proprietary trading from market making, which is one of the main jobs of banks. It's tough and it's going to be tough if implemented but there is so much anti-banking feeling these days that it could pass. We need a Bretton Woods 2 and we need a new innovative Glass Steagall."

Alan Gemes, global practice leader financial services with the consultant Booz & Co, said the crucial component is getting the relationship between risk, capital and compensation and he thinks the insurance industry may have some of the answers. "The moment an insurance policy is sold the company has to put capital aside," he said. "They are out of the money for the five to seven years life of the policy. We need the same kind of connection in banking."

While the regulatory debate goes on, the post-crisis world on the macroeconomic front, with new trade flows and new markets, is slowly taking shape.

Cultural Exchange points way forward

India and China are two enormous economies growing at a furious pace but with little else in common - at least that was what some Standard Chartered executives believed until they introduced an exchange programme for young executives.

With India now contributing 19% to the bank's profits and with Asia in total making up 70%, it's clear that Asian regional trade and business is the way forward for the group. But while Indian executives often work abroad - there are 2000 employed outside India by the group - Chinese executives mostly stay at home.

Mindful of the need to develop working relationships between two key parts of the business, the bank set up a 90-day programme for young managers from both China and India to work in each others' countries. Working on the basis that a bank - like an army - marches on its stomach, both groups were accompanied by their own chef.

The Chinese group were excited by the spirituality of India and the Indians liked Chinese roads, but the most striking outcome was the amount they found in common. "Both groups were surprised at how similar the countries were in terms of cultural values such as the family and marriage, and in terms of their long histories," says Mr Neeraj Swaroop, Standard Chartered's regional CEO for south Asia.

The programme is being repeated and runs alongside smaller exchanges between India and other countries such as Taiwan, South Korea, Hong Kong, Bangladesh, Sri Lanka, Nepal and Bangladesh.

Mr Swaroop says that the China business is the fastest growing trade corridor for India and already the Hong Kong/China business combined is greater than that done with either Europe or the US.

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