The COVID-19 outbreak could permanently change the ranking of global financial centers as businesses experiment with teleworking and governments adopt a "wartime economy" approach to finance, Z/Yen Group said.
The think tank, in cooperation with the China Development Institute, compiles a ranking of the leading global financial centers, which is released twice a year, in March and September. The latest index, its 27th installment, released March 26, shows Hong Kong dropping from third place to sixth and being replaced by Tokyo. New York and London retained first and second, while Shanghai and Singapore were fourth and fifth.
All five leading global financial centers posted double-digit drops in their ranking since the September 2019 installment of the index. The change in the latest index, GFCI27, has been "tremendous" and bigger than ever seen before, Michael Mainelli, executive chairman of Z/Yen Group said at the presentation of the results.
Change is inevitable
"I am going to speculate and suggest that change is going to continue," he said, referring to the global COVID-19 pandemic. The lockdowns forced by the new coronavirus outbreak have led businesses to experiment with teleworking "like never before" and this may result in a permanent change in the global financial center ranking as the importance of geographic clusters lessens, Mainelli said.
Z/Yen's five criteria for a financial center's strength include the number of internationals living in a city, the number of successful entrepreneurs, the size of cosmopolitan areas and financial clusters, good reputation and trust. The COVID-19 lockdowns have the potential to disrupt the importance of clusters in terms of geographic location in particular, according to Mainelli.
The biggest potential disruption to the status quo is the economic impact of the coronavirus crisis, he said. "Governments seem to be moving back to centralized command and control" and the financial services sector has a relatively small role to play, he said. As governments adopt a "wartime economy" approach in directing financial resources, they take away part of the role that finance is supposed to play, he said.
If finance "is seen as a less important way of solving society's problems," London and Tokyo look most exposed to the effects of COVID-19 among the current top five global financial centers, Mainelli said.
London's slide continues
London's rating has already been under pressure over the past 12 months due to Britain's exit from the European Union. The city has recorded another steep rating drop of 31 points to 742 since September 2019 despite keeping its second place in the global ranking.
This rating decline is "quite dramatic" and given how quickly other financial centers in Western Europe are moving up, if London's rating continues on its current trajectory it might be lower than that of Geneva, Frankfurt, Zurich, and Paris within 12 months, Mike Wardle, head of indices at Z/Yen Group said. "The challenge from these centers is very strong," he said.
Despite a 22-point decline in rating, London moved up two spots, to fourth from sixth, in Z/Yen Group's financial technology center ranking, replacing the Chinese city Guangzhou.