Banking & Finance

Shanghai widens financial hub lead over Hong Kong as it closes in on Vision 2020 targets

PUBLISHED : Sunday, 20 December, 2015, 7:40pm
UPDATED : Sunday, 20 December, 2015, 7:40pm

Anyone who still thinks Hong Kong is guaranteed a role as China’s offshore financial hub better think again. The competitive threat from Shanghai’s rapidly developing financial sector is no longer a distant, futuristic threat.

As the year draws to a close, figures show Hong Kong falling further behind Shanghai, with more financing arranged through the mainland city. That threatens to derail the financial hub growth theme Hong Kong has ridden since the first wave of major H-share listings in the ’90s.

Shanghai’s “2020 Vision” to transform itself into an international financial hub, first unveiled in 2009, has been reaffirmed in the next five-year plan, for 2016 to 2020. The central and city governments want to make Shanghai a hub able to meet the funding needs of the Chinese economy and match the new global financing role accorded an internationalised yuan.

The central government wants to transform the domestic markets by cutting the red tape involved in domestic equity and debt financing, bolstering the percentage of funds raised through the equity and debt capital markets, and weaning China of its heavy reliance on bank financing.

Zheng Yang, the director in charge of the Shanghai Municipal Government Office for Financial Services, the city regulator cum policy think-tank tasked with propelling Shanghai to international financial hub status, says that at the current rate of development the city is on track to deliver by 2020.

“We have basically finished building the ecosystem needed,” Zheng said.

Statistics compiled by the office show there are now some 1,200 trillion yuan worth of financial transactions made via the city a year, up 120 per cent year on year. The number of financial institutions operating through Shanghai has jumped to 1,448, from just 400 five years ago.

Concurrent with the rise of Shanghai is Hong Kong’s relative decline. High global regulatory and capital costs have seen a number of major US and European dealers pull back from the city as they shrink their presence in the region. And as they go, domestic mainland players have stepped up aggressively to fill their place.

As international players pull out, Hong Kong may be shooting itself in the foot, with more investors surveyed by Greenwich Associates reporting the level of service they receive is dropping. Up to 30 per cent of fixed income investors, for example, now report they are looking to reallocate business from one or more of their dealers.

“Deep reductions in sell-side inventory and the exit of some dealers from the market altogether have made it harder for investors to execute trades and are contributing to the overall slowdown in institutional Asian fixed-income trading volume,” the latest industry-wide survey by Greenwich Associates said.

Greenwich Associates consultant Jim Borger added: “The reality is that many institutions feel they have no choice but to consolidate trading business … in order to become important clients deemed worthy of consistent coverage and capital commitments.”

As a result, in the Asia-Pacific regional league tables across the equity, debt and loan financing spectrum, there are now more mainland names than American, European and Swiss houses.

In equity financing, a traditional strength in which Hong Kong boasts a specialist role, eight of the 10 strongest players in the region are now mainland houses.

In the local Asian currency debt market, too, where Chinese companies account for more than 50 per cent of regional demand, international dealer names have all but completely disappeared from the league table.

With Beijing liberalising the mainland’s domestic debt environment this year, Hong Kong recorded a 79 per cent drop in yuan bond issuance, as the mainland bourses chalked up a 400 per cent increase. Across the Asia excluding-Japan region, sweeping from Australia to India, all 10 of the biggest houses for local currency debt capital markets issuance are now from the mainland.

On both sides of the transaction – both for the corporate users of capital and the investors who provide it – the time has come for Hong Kong to revisit its business model and the value it adds, as more mainland corporations choose to finance their needs in Shanghai.

“Hong Kong’s role as a Chinese investment proxy is gradually subsiding,” Hao Hong, chief strategist for China at Bank of Communications noted.

Terry Pan, chairman of the Hong Kong Investment Funds Association, said: “Hong Kong will not be the exclusive entry point into mainland China five years from now. People might go straight there.

“If we want to maintain our position there are a lot of things that need to go right.”

In the absence of strong new growth drivers, Hong Kong needs better house-keeping to defend its remaining niches. Hong Kong Monetary Authority chief executive Norman Chan says the way forward may be just to stay a step ahead of the curve, advising the industry to lift its game in financial market infrastructure, talent and products.