Shanghai's New Impetus towards China's Wall Street
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While the global financial crisis is restructuring the global financial order, Chinese government is looking to a more important role in the global financial arena to match its strengthening economy.
Shanghai has been one of the most important meeting places of the Chinese and foreign networks of capital in Asia in the late 19th century. The city government launched its effort to regain its position as an international financial centre in 1992. Shanghai has gained basic elements to be a national financial hub, yet, is still distance away from leading international financial centers in terms of market openness, capital liberalization, and the variety and sophistication of products available.
The nation's drive blueprint
In April this year, Chinese Cabinet government unveiled a national strategic plan for establishing Shanghai as an international financial and shipping hub by 2020. The blueprint includes the following:
Table 1: The Framework for Developing Shanghai into an International Financial Centre
1. Establishing Shanghai, by 2020, as an international financial centre compatible with the country's economic strength and the RMB's international status
2. By 2020, Shanghai should have
- a multi-functional and highly internationalized financial market system
- a pool of internationally competitive financial institutions
- a pool of financial professionals
- a compatible system of taxation, credit, regulation and law
Source: Cabinet Guidance Plan, Xinhuanet; Hang Seng Bank
According to the plan, new financial institutions, services and products will be developed, financial market will be further opened and foreign firms will be listed on the Shanghai Stock Exchange. As the first step of the RMB internationalization, Shanghai is also launching use of the RMB to settle international trade. (Appendix I)
City's new initiatives
Shanghai is seizing the opportunity to catch up with established financial centers. In line with the Cabinet's guidance policy, the first city regulation on Promoting the Building of International Financial Centre was put into effect on 1st August, 2009, in an effort to create an internationally competitive financial environment.
Driven by the national strategy, Shanghai's regional regulation seeks to join hands with state financial administrative departments to optimize the composition of financial market players and establish different types of institutional investors. Although detailed descriptions are still missing, a set of promoting measures were promulgated:
1. Market mechanism to attract financial professionals:
- housing construction for financial professionals
- subsidies to ease the impact of the tax rate, which is higher than other Asian financial centers
- simplifying procedures for obtaining residence cards and permanent residence
- preferential policies for health-care and children's education
2. Finance Development Fund to attract financial institutions
- one-time funds to overseas institutions that want to locally-incorporate their subsidiaries
- one-time capital incentives to financial institutions to set up headquarters in Shanghai
- follow-up funds to institutions that exhibit outstanding performance in Shanghai within five years of their operations.
3. Innovation Award
- to nurture financial innovation in areas including product design, operating techniques, provision of services and corporate management
- the winners will be selected and decided by a committee of experts
4. Reform of state-owned financial assets
- strengthen the competitiveness of the state-owned financial assets. Shanghai has unveiled a five-year plan to reform its local state-owned financial companies and turn them into leading national enterprises. The reform process will cover 16 local state-owned financial companies with total assets of RMB 2.45 trillion
- reforms on recruitment procedures in line with best market practices
- encourage leading financial companies to set up business in the city through mergers or acquisitions.
1. Relatively complete financial system
By most measures, Shanghai has already been the national financial hub in mainland China. It's already home to the country's biggest stock exchange (which has been up 90% this year), its sole gold bourse, its major futures exchange market, its inter-bank loan centre, and its foreign-exchange market. (Appendix II). The 2nd headquarter of People's Bank of China was also opened in August 2005, moving the market-related functions of the central bank to Shanghai, while Beijing focusing on macro-control functions.
2. Strong economic growth of China and the Yangtze Delta Region
The gravity of the world economy is shifting to the east and China is still one of the fastest-growing economies in the world, while the Shanghai led Yangtze Delta Region serve as the locomotive of its growth. Strong back up of the real economy provide substantial development potentials for financial industry.
3. The internationalization of the Chinese RMB and the decline of the US dollar will offer a great opportunity for Shanghai to become an international-level finance hub.
4. Abundant human resources from both home and abroad
1. Convertibility of the currency and capital control
Shanghai won't rival other global centers until there is more scope for capital to easily move in and out of China. That essentially would require that the RMB becomes a convertible currency. Shanghai has started to use RMB in cross-border trade settlement and China has signed bilateral currency swap deals with several countries and regions around the world since December 2008, in order to accelerate the process of internationalization of its currency.
2. Administrative authorities
Although the People's Bank of China has set up a 2nd headquarter in Shanghai, the watchdogs, CSRC, CIRC and CBRC1 as well as China's Big Four publicly listed banks are all headquartered in Beijing. Lacking of administrative authorities, Shanghai used to focus its efforts on attracting foreign institutions and professionals, but restricted on financial innovation and mixed operation management.
3. Legal system and soft infrastructure
A sound legal regime to support free information flow and transparency, in order to ensure the financial resources could be allocated efficiently or fairly, which is an essential requirement for an international financial centre.
4. Professional talents
It is reported that Shanghai's financial sector only has about 100,000 professionals, compared with some 400,000 on Wall Street and more than 250,000 in London. Large number of the practitioners are merely at the operation level, the city is in thirsty of technical backbones and senior management professionals. On the other side, it is exactly the lacking of financial innovation and inadequate variety of products that makes talents derelicts.
Shanghai's rivalries, old and new
While Shanghai spends a huge amount of resources on building an international financial centre, many regions and cities in China are making similar efforts to boost their financial sector. Apart from Tianjin and Shenzhen, which previously received green light from Beijing to grow their financial sector, Fujian province is benefiting from the closer trade exchanges with Taiwan, and the city of Chongqing and Xi'an in the west part of China are competing for the title as a regional financial service centre to support the development of the West.
With the preferential policy from the central government, Shanghai opts for China's financial top spot; it has yet to gain a more substantial position to close the gap with the established world financial centers. It ranks 35th on the Global Financial Centers Index put out by the London based ZYen Group, while Hong Kong, its traditional competitor in Asia, ranks fourth, after London, New York and Singapore. In the foreseeable future, it will also not be able to undermine Hong Kong's status in the region, in terms of legal and regulatory system, variety and sophistication of products, available talents, and international business process.
However, about 60% of the market capitalization of the Hong Kong Stock Exchange and more than 70% of its daily trading is in shares of Chinese mainland firms. Many of these are large state-owned enterprises – and some are already preparing to move back to Shanghai. By the end of last year, six major commercial banks from Mainland have hold 20% of Hong Kong's capital assts (USD 245 billion) through merge and acquisition. The integration and co-operation between Shanghai and Hong Kong will surely get closer and in longer run, Hong Kong could perhaps act as a provider of consulting services to Chinese businesses and clearance centre.
Swiss financial presence
Swiss major financial institutions have been one of the trailblazers in China. Through their branches and joint ventures, they are playing an active role in China fast-growing but restrictive market. Apart from the UBS branch present in Beijing and Credit Suisse's branch in Shanghai, the two Swiss banks have also representative offices in major cities of China and both have granted approval for domestic joint ventures. Currently they are among the handful of foreign investment banks with joint ventures in the Chinese market, together with Goldman Sachs. With these presence, they provide a full range of financial service.
As main business of the Swiss banks don't focus on retail banking, currently none of them has locally-incorporated, but they indicate that they remain committed to Chinese market with long term strategy and plan expansion to capture more businesses.
Shanghai's outlook for foreign financial institutions
For the last years, there was a concentration of foreign financial institutions for investment banking businesses in Beijing and commercial banking businesses in Shanghai. The proximity to the centre of political power as well as the IPO of an important number of large state-owned enterprises, have attracted foreign investment bankers to Beijing. In the meantime, the Shanghai coastal region, which is home to majority of China's rising middle class and private business people, provide business opportunities to foreign banks commercial involvement.
This situation, however, might change soon with the ending of IPO of major large state-owned enterprises. The next trend of IPO would be the list of private enterprises and the new Growth Enterprise Market. With its proximity to these enterprises, the Yangtze Delta Region could offer more opportunities to foreign players.
In short, Shanghai's emergence as a global financial centre is closely related with the country's overall economic strength. A regulatory regime will be decisive to realizing Shanghai's ambition and all in all, an international financial centre can only be forged by the market.
Head of Economic Section
Consulate General of Switzerland in Shanghai
Appendix I building up a multi-functional and internationalised financial system
New market instruments and measures to be developed or taken in establishing a multi-functional and internationalised financial system:
- Develop corporate bonds, asset backed securities, foreign currency bonds, etc
- Develop derivative products based on stock indices, FX, interest rates, stocks, bonds, bank loans, etc
- Introduce commodity futures trading for energy and metals
- Expand the industry coverage and scale of listed companies
- Nurture all kinds of institutional investors such as securities investment funds and insurance funds
- Allow, gradually, foreign investors to participate in Shanghai's financial market, expand the issuance of
- RMB-denominated bonds by international development organisations, and allow foreign companies to
- issue RMB-denominated bonds
- Develop a reinsurance market. Domestic and joint venture reinsurance companies will be introduced;
- international reinsurance companies will be encouraged to open business in Shanghai, and the
- possibility of opening offshore reinsurance business will be studied
- Strengthen financial cooperation between the Mainland and Hong Kong
Financial institutions and business systems to be developed
- Various kinds of financial institutions, particularly investment banks, fund and asset management companies, money brokerages, leasing and financing companies, etc
- Various kinds of equity investment funds, venture capital funds, etc
- Private banking business, offshore finance, trust and financing business, car loans, etc
- Commercial bank financing for merger and acquisitions
- Bigger opening of the financial market
Source: Cabinet to Promote Shanghai as International and Shipping Centre, Xinhuanet; Hang Seng Bank
Appendix II Major financial institutions in Shanghai
The 2nd Headquarters of the People's Bank of China
The Shanghai Stock Exchange
The National Foreign Exchange Trading Centre
The National Interbank Borrowing Centre
The National Bond Trading Centre
The Gold Exchange
The Petroleum Futures Exchange
The China Financial Futures Exchange
The Credit Reference Centre of the People's Bank of China
Sources: “Building Shanghai international financial centre: strategic target, challenges and opportunities”, Xu Mingqi, Shanghai, Academy of Social Science, 2007; Hang Seng Bank.
China's Securities Regulatory Commission, China's Bank Regulatory Commission, China Insurance Regulatory Commission
General of Switzerland
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