Will Asian financial centers overtake Wall Street?

Hong Kong is rising fast thanks to the growth of China. It passed New York as the biggest issuer of initial public offerings in 2006.

Is Hong Kong really a financial rival to New York?

In 2006, it surpassed Wall Street in initial public offerings (IPOs).

And one morning last June, Hong Kong's Financial Services Secretary K.C. Chan made a rare trip to Moscow. Addressing an audience of Russian government officials and businessmen, he made a blunt pitch.

"Hong Kong is your best partner in reaching out to the international market," he insisted. "Hong Kong possesses strong credentials to provide quality services."

That Mr. Chan believes he can lure Russian investors away from London or New York is an indication of how Wall Street's Asian rivals have been gaining ground for some time now. As the current credit crisis brings America's and Britain's most storied financial institutions to their knees, some analysts see Asia poised to grab the influence that Wall Street is losing.

"The crisis has clearly undermined a lot of global confidence in the US as a financial center and people will begin looking elsewhere," predicts Zachary Karabell, a financial analyst and an associate fellow of the Asia Society in New York. "There has been a significant shift in mentality at the end of a period when there has already been a shift in the locus of capital and economic activity" toward Asia, he adds.

That view is not universally shared. Markets of the size and sophistication that New York and London can boast "build up over time and there is a huge network and agglomeration effect," says Edwin Truman, a former assistant US Treasury secretary.

"Hong Kong, Shanghai, Singapore, and Tokyo are more important than they were 20 years ago," he adds. "But will they reach London and New York's dominance in another 20 years? I suspect not."

New signs of Asia's burgeoning role in international finance came in the past two weeks, when the Japanese bank Nomura snapped up the Asian and European operations of Lehman Brothers, which went bankrupt last month. And when Hong Kong overtook New York for the first time in the value of IPOs launched, that was evidence of a shift.

US financiers have been complaining for several years that Wall Street's dominance has been eroded by regulations such as the Sarbanes-Oxley antifraud legislation that complicates listing on the New York stock exchanges. And most international derivatives trading is now done in London.

But the sort of business that the current crisis has destroyed on Wall Street will not necessarily move to Asia, nor to any other financial center.

Wall Street's appetite for credit risk – which fueled the freewheeling boom years until it brought the whole edifice of credit down – will not travel, says Brad Setser, an economics fellow at the Council on Foreign Relations in New York. "Asia won't become Wall Street because it won't have the same risk-taking culture. That Wall Street culture will disappear and the ecosystem of risk-taking, highly leveraged institutions that populated Wall Street will not migrate."

"The investment banking industry has disappeared" over the past few weeks, adds Charles Colomiris, professor of financial institutions at Columbia Business School in New York. Since that sector was a key source of US innovation and advantage in financial markets, "this sets us up for a much more challenging future" in the face of foreign competition, he says.

He is dubious, though, that any other emerging financial hub, such as Dubai or Hong Kong, can replace New York as a center of innovation. "Money [alone] does not make financial leadership," Professor Colomiris says.

Asia's claim to a larger role in the international financial system rests to a large degree on the fact that – led by China – it is now the world's creditor, with the largest reserves of savings seeking an investment home.

But a financial hub needs more than just a large amount of money: among other essential attributes are a reliable legal framework, a skilled workforce, good regulators, a convertible currency, and a sizable real economy behind the financial facade.

Singapore is making a bid for a global role and has carved out a niche for itself in the currency and oil sectors. But the city-state with a population of just 4 million, and small neighbors in South East Asia, is too minuscule to dream of rivaling New York or London.

Tokyo, the capital of the second-largest economy in the world where financial skills are plentiful, has become strangely "invisible" in Mr. Karabell's words. "The IPO market in Japan is dead because there are not many good issues and equity finance in general is also dead here," laments Mikihide Katsumata, head of New Frontier Capital Management in Tokyo.

Hong Kong may have leapt to the forefront of the IPO market, but offers little in the way of bond, foreign exchange, or commodities trading, which are critical to the success of New York and London.

Nearly half of Hong Kong's Hang Seng market capitalization is made up of mainland Chinese companies, reinforcing Hong Kong's regional, rather than global, role.

Some Chinese firms have launched simultaneously in Hong Kong and Shanghai, which has grand ambitions.

"Shanghai will … complete the goal of establishing an international financial center by 2020," the city's mayor, Han Zheng, declared last November.

But it's hard to see how the city will achieve that goal. China's currency, the RMB, is not fully convertible and will not be for at least a decade according to government advisers; market regulators are beholden to their political masters; international capital flows are subject to government control; and the Shanghai stock market is among the most volatile in the world, gaining 82 percent last year and shedding more than 60 percent so far this year.

Though the government has reform plans, "the decisionmakers who set policy for the financial sector have been excessively cautious," complained Wu Xiaoling, vice chairwoman of the Finance and Economy Committee of the National People's Congress, the Chinese parliament, in a recent interview with the business magazine Caijing.

"China's financial services sector lags far behind the relatively sound system in the United States," she added.

"It will take 10 years for the Chinese government to fully relax capital controls," says He Fan, a finance expert at the China Academy of Social Sciences, a government-backed think tank. "It would take several decades to build an international financial center here."

• Simon Montlake in Bangkok, Thailand, contributed to this story.