Turmoil is a real test for the new world order

Henry Kissinger picked up on the political implications. The challenge to the world, he said, was handling the structural changes taking place - the transfer of economic power from America to the Pacific, the shortages of water and energy and the threat of climate change, which require global not national solutions. Economics may be global but politics is local, and the world needs to find a way to integrate the two. The difficulty in achieving even the most modest transfers of power from member states to the European Union shows how hard this will be.

Citigroup head of markets Michael Klein dug a bit deeper, saying the past few years have seen the globalisation of regulation, followed by the globalisation of technology and since 2002 the globalisation of capital markets. This last innovation means that capital now flows freely in 95% of the world economy.

This has equalised the cost of capital around the world and removed the final walls between economies so their natural advantages - people and raw materials - become the main drivers of growth, he added. The result is a mass transfer of jobs to emerging countries and of wealth to the producers of oil and commodities. These are the major secular trends, said Klein.

Most people know that intuitively, but it is still a shock to learn the US has lost 22% of its manufacturing jobs since 2000. The market turmoil, coupled with the pressure on politicians and the authorities to find a response without lapsing into protectionism is, as PepsiCo head Indra Nooyi said, the first real test of globalisation.

HISTORY may not repeat itself but, as Mark Twain said, it does rhyme. Financial centres have always grown up on the back of economic and political power.

The dominance of a country in international trade creates a need for banking and insurance services, and throws off financial surpluses and a demand for the currency that becomes the raw material of a financial services sector.

What makes the City of London unique is that it did not decline as Britain's economic power did in the period after the Second World War. No other financial centre had managed to float free before and separate its prosperity from that of its host nation.

There were several factors in the City's success. Things often cited now, such as the use of English as the world's business language, and the importance of being in a time zone that allowed contact with Japan at the beginning of the day and the US at the end, came later.

At that time, the enlightened approach to supervision of the Bank of England and the open door to overseas banks wishing to set up here mattered more, but the main factor was the willingness of banks in London to use other countries' currency when sterling was no longer sought after. Dollars came first, then the Deutschmark and yen, and now of course the euro.

Citigroup's Michael Klein produced a new twist on this in Davos when he said the investment by foreign wealth funds in the leading US banks was one of the great guarantees of the future of the Western financial system, a comment that is counter-intuitive given the speculation about the dark motives some of these buyers might have.

Finance always follows wealth, he said, and therefore in time one would expect the heart of the world's banking and financial markets system to migrate to Asia as that region displaces the US and Europe as the dominant economic powers in the world.

It was hard to disagree with his additional observation that this potential shift was far more important than our recent parochial spats about whether London was displacing New York as the leading international financial centre.

His view is that the investment by sovereign wealth funds in Western financial institutions reflects their understanding that, in the modern globalised world, you no longer need physically to migrate a bank or an exchange to where the wealth is located.

The system can be grown to be global and to meet the needs of all the world's new leading players without having to re-create it as a physical presence locally. But if the Chinese or others are willing to use and develop the West's financial architecture, they not unreasonably expect to be allowed to own a slice of it.

For that reason, if for no other, the financial and political communities should welcome the investment by sovereign wealth funds.