The US remains the dominant force in financial services and is a leader in virtually every area of financing, from venture capital and private equity to banking and asset management. The liquidity and size of the US financial markets support the dollar’s primacy, allowing Americans to pay less for foreign goods and finance US government spending. However, the US financial leadership position is increasingly challenged by fierce competition from abroad and by short-sighted and counterproductive domestic policies. Maintaining the financial superiority of the United States should be a priority for the Biden administration.
Traditionally, the challenges for American leadership come from established financial centres such as London, Hong Kong and Tokyo. But mainland China will be an increasingly impressive candidate for financial services in the coming years.
The cancellation at the last moment of the planned IPO of the Group Ant last month, which would have been the largest in history with about 34 billion dollars, reminded many investors of the risks in the Chinese market. However, the scope of the agreement has also demonstrated China’s ability to raise huge amounts of capital. Despite this stumbling block, intra-Chinese trade has good prospects for the future.
China lags behind developed financial centres, but has slowly opened up and attracted the best foreign financial institutions in its class. Markets face management and accounting problems, but Beijing is working to improve its regulatory framework to meet international standards and to ensure greater transparency and better enforcement. China’s relatively rapid recovery from the Kovida 19 pandemic, without major financial incentives, has also allowed it to maintain higher interest rates and a stronger currency. This attracts large flows of investments in Chinese equities and other securities. In terms of the number of IPOs and capital raised in the first nine months of 2020, Shanghai ranks first on the world’s stock exchanges. These IPOs show that large fundraising events can take place outside the US financial ecosystem.
At the same time, China is trying to attract capital worldwide, while the United States is moving in the opposite direction. Ultimately, the strength of US financial markets depends on the credibility of a country’s stable macroeconomic and fiscal policies and the sustainability of its open political system.
The U.S. government has undermined this confidence by short-sighted actions and long-term fiscal neglect. Efforts to remove legitimate Chinese companies from US stock exchanges are good policy, but they involve serious and underestimated risks. These efforts came at exactly the wrong time because they reduced Chinese demand for dollars at a time when the United States is heavily in debt. Let us hope that China will not reconsider the wisdom of its treasures.
While investors around the world benefit from investments in China, Washington makes it harder for US investors. These risks should be avoided. But unless things change fundamentally, China will remain the fastest growing major economy in the world in the near future, even ahead of the United States in terms of size. There are already more Fortune Global 500 companies based in China than in the United States. Other financial centers such as Hong Kong, London, Tokyo and even Shanghai will compete for the Chinese stock exchanges that the United States currently does not approve.
A more fundamental threat is the lack of political will to address America’s long-term structural deficit, undermining confidence in the US economy and the dollar. Interest rates are at historically low levels and public debt represents a larger share of the economy than at any time since the end of the Second World War. This debt will continue to grow as Washington finances the economic stimulus and reconstruction measures needed in connection with the pandemic. However, as the debt level rises, the attractiveness of the US debt will gradually decrease. A world-class financial system cannot exist in a country that is unable to maintain its credit quality. Once the pandemic is over, it is essential to reverse the path of public debt growth. Otherwise, the dollar will eventually depreciate in value. Washington can’t pay its bills.
U.S. leadership in financial services is one of the main strengths of the U.S. economy. But this leadership cloak is not predetermined. To survive, America must build on the strengths that have made its capital markets the envy of the world. At the same time, it should develop a more intelligent approach to China’s problems, avoiding unnecessary conflicts and exploiting existing opportunities to attract more capital.
In 2006-2009, Mr Paulson was Secretary of the Treasury and Chairman of the Paulson Institute.
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