Emerging Financial Centres in Asia: A Comparative Analysis of Mumbai and Shanghai

The dramatic growth in recent decades of international trade and investment flows has precipitated a massive increase in the demand for financial intermediaries and markets to facilitate and manage this process. This rising demand, combined with non-linearities in financial services supply, such as scale and agglomeration economies, has seen a tendency for the booming financial services industry to concentrate in particular geographical centres. Using a conceptual model drawn from the International Financial Centre (IFC) literature, this paper analyses the development of two cities in Asia with stated IFC intentions: Mumbai, India and Shanghai, China. The comparison shows that common strengths include high rates of current income growth, real sectors that are linked to international markets and financial sectors that are large even by established IFC standards. Weaknesses include the microeconomic business environment, the prudential framework surrounding firms and financial markets and the overwhelming domestic focus of their sizeable financial sectors. In terms of the potential to emerge as Asia's next IFC, it is noted that while each city may have specific competitive advantages, the common challenge for both cities will be to secure the commitment of policy-makers at the national government level towards greater levels of external financial liberalization.