A tale of two cities and their abiding suspicions

The Hong Kong-Shanghai relationship has always been handshakes and smiles in public and back-stabbing in private. This week there were more public embraces, and with an intensity that we haven't seen before. On Tuesday, to the surprise of many, a Shanghai official delegation arrived in Hong Kong to sign a memorandum of understanding with Hong Kong pledging co-operation on all financial fronts. At the ceremony, Shanghai deputy mayor Tu Guangshao said: 'Shanghai cannot prosper without Hong Kong's mentoring.' The day after, at the Asian Financial Forum attended by hundreds of foreigners, he spoke for the first time about the strategic importance of Hong Kong-Shanghai co-operation in the world's new financial order. 'This is no zero-sum game,' he said at the conclusion of his 15-minute talk. Less than 24 hours later, at the same forum, the president of the Shanghai Stock Exchange, Zhang Yujun, told how much they had learned from Hong Kong. 'Market practitioners are a bit worried' [about the building of Shanghai into a financial centre], he said. 'That is unnecessary. Hong Kong has always been our model and benchmark.' In the evening came the signing of an accord between the Hong Kong and Shanghai bourses, promising more collaboration on product and technology development as well as exchanges of talent. In a rare press conference that followed, Zhang answered questions about the controversial plan to list international corporates in Shanghai. 'You should not be scared,' he said. 'The number [of foreign issuers] will be small. Our focus is always domestic corporate ... There are more than enough to be listed [both in Hong Kong and Shanghai] till the retirement of me and [HKEx chief executive Li] Xiaojia.' Then came the champagne toast led by deputy mayor Tu, who described the accord as 'a very important consensus on very important issues reached by two very important institutions at a very important time'. 'Co-operation will be the loudest key melody between Hong Kong and Shanghai in the time to come,' Tu said. Overwhelming, isn't it? Yet none of these speeches or agreements had been planned until late last month, according to various sources. 'There have been lots of undercurrents in the past few months ... There is an urgent need to do something about [the animosity between Hong Kong and Shanghai],' one insider said. The rivalry between the two cities is nothing new. The tension, at least on the Hong Kong side, rose to a new level last spring when the State Council committed in a policy paper to make Shanghai a financial centre by 2020. Two letters from the office of the Hong Kong chief executive subsequently arrived at the State Council, in September and November. They expressed grave concern about the plan to allow the listing of international companies such as HSBC and NYSE Euronext in Shanghai, according to two informed sources. The letters said Shanghai's so-called international board would compete against the Hong Kong bourse, the success of which was vital to the prosperity and stability of the city. This is not the first time the Hong Kong government has complained. In 2007 a similar petition was made against the listing of Hong Kong-listed red chips on the mainland market. But the times are different now. The 2008 financial crisis exposed the weakness of United States-dominated financial mechanisms. It accelerated the rise of China and increased the country's determination to play a leading role in creating a new order. And this required the existence of a 'national' financial industry that is vibrant, safe and sophisticated. Just imagine the introduction of the yuan as a reserve currency or China having an important role in the international financial community without a mature onshore and offshore yuan market. While the rest of the world will do their best to delay this process, internal bickering between Hong Kong and Shanghai is the last thing Beijing wants to see. For Shanghai, the need to befriend Hong Kong - a city of huge political importance in the eyes of Beijing - is also getting obvious. The complaints from Hong Kong put a brake on the listing of international firms and red chips. Therefore, in Tu's words, 'with the will of the central government, the support of relevant central departments and the effort of both Hong Kong and Shanghai, we have improved our communication'. The result is this week's all-out campaign to woo Hong Kong, the pledge by the Shanghai bourse to encourage more locally listed firms to come, and the first open support of the international board by the Hong Kong exchange. Yet response from the local community remains cold. The accords made no splash in newspapers. Some even called the effort 'sleeping with the enemy'. That is not difficult to understand. First, the accords are no more than a collection of projects that have already been going on. Second, Hongkongers have seen similar initiatives many times before. There was the 1994 initiative proposed by then-Shanghai mayor Xu Kuangdi. There was the 2003 initiative signed by then-Hong Kong chief executive Tung Chee-hwa and former Shanghai party boss Chen Liangyu, with the encouragement of state leader Zeng Qinghong. Tung even assigned the financial secretary to head a joint working group with his Shanghai counterpart, giving it more significance than the current one, which is to be headed by the minister for financial services and the treasury. Yet none of the past initiatives produced any results. In fact, no meeting was held after the 2003 inauguration. 'There's no incentive to push forward,' a source involved in the 2003 initiative said. The intention of state leaders to bring the two sides together should not be doubted. However, the suspicion between the two cities is simply too deeply rooted to be removed by a piece of official paper. 'There is an urgency to make it real this time,' the insider said. Let us hope so.