Why Western Finance Will Continue to Dominate the Stock Markets

Exclusive conversation with prof. Alessandro Pansa, Finance Professor at LUISS Guido Carli University, Rome and former CEO of Finmeccanica Group (now Leonardo SpA) the ninth-largest defence contractor in the world.

Recently the Shanghai-Hong Kong trade link has been signed, who will benefit the most from this agreement?

It’s an attempt to integrate more and more Hong Kong into the Chinese financial system, so at the moment I can not say who between the two cities will have the greatest benefit.

It is well known that when a territory is financially integrated it can also obtain a political homogenization, something that Hong Kong tends to reject in alternating phases. So it's hard to say who will receive more benefits. It will benefit for sure China, which will control two financial centers of huge importance that in the end will tend to be integrated with each other to present a single financial center, which is now possible through the use of information technology.

Among the three financial centers of Shanghai, Hong Kong and Singapore, which of them will prevail among the others in the medium and short term?

Nowadays I should say Singapore, since it contains all the good factors in terms of stability, regulation, independence and the absence of a strong political authority, but all of this depends on the evolution of the chinese financial system, which is much less modernized than we think.

Today about 50% of global financial assets is held by 45 banks, 42 of which are Western, and only three are Chinese, but the chinese banks find a place in this ranking only because of the chinese companies being extremely indebted, so these banks have obviously large credits. From the point of view of financial technology China is still quite underdeveloped, you can not see these large Chinese banks as heads of international placements or financial consortium, even Singapore today represents an advantage thanks to its independence and neutrality and legal certainty system that goes around.

In your last article on Limes you wrote that: "The financial technology controlled by major Western intermediaries, prevails on the capital. The latter - whose accumulation is now concentrated in developing countries - has lost importance and became a kind of "raw material". It is not worth much because freedom of movement makes it virtually infinite, and it becomes relevant only when, to generate an adequate return, is structured by banks that incorporate it in financial assets to be placed on the markets. All of this makes western banks ver powerful ". My question is: what is this financial technology you are referring to and how is capital structured?

Let’s start from an assumption: Western countries have historically operated as great capital accumulators and exporters; just to give an idea at the end of nineteenth century when Britain was dominating the financial markets in the world, it was a capital exporter for about 80% of the capital that was being produced at home. Today on the contrary western countries are capital importers. Most of the capital production is taking place: in the Middle East, from oil-producing countries and in the Far East. All of this is combined with the freedom of capital movements wanted in particular by US and British governments since the second half of the ’80, that has slowly been spreading around the world.

In a rational world who governs the financial markets? Those who accumulate capital, so it should be the emerging countries whether they are oil producers or countries with higher rates, except that the capital of companies has become practically infinite. In a world where capital movements are free, the need for companies to be financed is a very small percentage of the total world financial assets, that today are about 770 trillion dollars which is considerable amount. Except that capital, if you think about it, at the actual moment is available for each company so it is a good of scarce value unless it is turned into an asset that generates returns. The liberalization of capital movements involved that inactive capitals can not exist anymore.

So in which way you transform capital into an asset that creates returns? Through the financial technology, in other words through what is called financial innovation: the ability to do three things:

1. Building products, such as derivatives,

2. Placing them on the market through the placing power, or the ability to locate financial products; 3. Knowing how to invest properly in them, typical behavior of institutional investors which, by using algorithmic models and artificial intelligence, control a very high proportion of the assets.

Who has this technology? Western countries. They have it, because they are the ones who have historically guided the markets evolution and thanks to that they slowly have taken advantage on the rest of the world.

Regarding the topic of regulation. Why UK has always been a big financial center? Because it found itself to have a friendly financial regulation and legislative system, able thanks to the common law system to adapt the legislation to the needs of capital lenders or borrowers. So now the financial technology is something very expensive. The development of the algorithms and passive trading systems, the so called robotic ones, can be achieved only by the largest banks because they are able to used them by spreading on the huge amount of financial asset the investments, the people and the software to develop this technology.

So here they are those who are now in position to dominate the financial market because they have: competences in terms of financial innovation, placing power that no one has and relationships with institutional investors. I must say that now what really counts is the ability to work the capital.

Think about the Islamic world, if it was different, Islamic finance should prevail, but actually Islamic finance has remained a small segment after all.

By now the technological gap is much wider in terms of years needed by the rest of the world to be able to achieve the level of skills, placing power, credibility and authority of the major Western banks, which control the market.

What were in your career the most difficult moments and how you managed to overcome them?

The most difficult time was exactly when I became CEO of Finmeccanica, because the day before they arrested my President and CEO while I was general manager. Overnight I found myself in charge of a company under investigation by four different prosecutors accused, in my opinion incorrectly, for international corruption in an Italian political system between 2012/2013 not able to adequately protect state enterprises.

On one hand we had to rebuild the international credibility of the group, on the other we had to keep it from bankruptcy by immediately introducing a series of ethical standards that until then were not been adequately developed.

So I assure you that the first few months the only strength I had was in the fact that I had nothing to hide, I was not afraid of anything because I had nothing to fear, this gave me the opportunity to work seriously.


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