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  • Updated: 1:39pm

Li Keqiang

Li Keqiang, born in 1955, became China's premier in March 2013. Like ex-president Hu Jintao, his power base lies with the Communist Youth League, where he was a member of the secretariat of the league’s central committee in the 1980s and later in the 1990s the secretariat’s first secretary. His regional governance experience includes a period as vice party boss, governor and party boss of Henan province between 1998 and 2003 and party boss of Liaoning province beginning in 2004. He became vice premier in 2008. Li graduated from Peking University with a degree in economics. 

CommentInsight & Opinion

Free trade zone fits into Shanghai's financial ambition

Woo Jun Jie says plans for a free trade zone in Shanghai will give a major boost to the city's ambition to thrive as a global financial centre, because where trade goes, finance follows

PUBLISHED : Saturday, 20 July, 2013, 12:00am
UPDATED : Saturday, 20 July, 2013, 3:17am

Championed by Premier Li Keqiang, plans to establish a free trade zone in Shanghai have now been approved by the State Council. Combining three areas in the Pudong district, it will allow the Chinese government to experiment with economic liberalisation and renminbi convertibility.

More importantly, it will bring Shanghai closer to its goal of becoming a fully fledged international financial centre by 2020. Given the close linkages between trade and finance, Shanghai's development as a financial centre hinges on its success as a port city. The free trade zone is thus one step along the path that Shanghai needs to follow to establish its credentials as a financial centre.

History has shown that trade is the lifeblood of finance. Hong Kong's current success as a leading financial centre was predicated upon its beginnings as an entrepot, engaged in free trade with other Commonwealth nations under Britain's sterling area. It was only with the onset of the second world war that finance became delineated from trade. Nonetheless, Hong Kong's financial services sector continues to be involved in trade settlement and financing activities.

Similarly, Singapore's thriving banking sector first emerged during its time as a British colony, for the sole purpose of serving British trading activities. Its insurance industry was similarly established with its founding as a British trading post. While post-independence Singapore has focused on finance as a growth sector in its own right, trade finance and maritime insurance remain major components of its financial services industry.

Shanghai needs to take a leaf out of the books of its two regional rivals. First and foremost, trade activities need boosting and the free trade zone is obviously a step in the right direction. Integrating Shanghai into the global supply chain and increasing the amount of trade flowing through its ports will naturally create a demand for related financial services like trade financing and maritime insurance. While the free trade zone will attract the expertise and capital base of foreign financial firms and insurers, this demand will also encourage the development of local financial expertise.

More specifically, the free trade zone will stimulate what economists call "agglomeration" or clustering effects. Foreign financial institutions will be attracted to Shanghai while domestic financial institutions will benefit from the increased capital flows. This will spark a virtuous circle. Related industries, such as accountancy and legal services, will also thrive on the increased activity.

This trade-driven accumulation of financial capital will then provide a base on which other financial services such as securities and debt markets can be established. The government's intent to experiment with renminbi convertibility in Shanghai also bodes well for the development of a foreign exchange market.

Furthermore, plans to establish futures warehousing facilities will allow the city to strengthen its market for futures and commodities. In short, the promotion of free trade will spark a chain effect, leading to the development of a financial centre.

Yet, this does not mean the process is entirely organic. The government will have a key role to play throughout the process. In particular, Shanghai needs to strengthen its regulatory and legal framework.

The continued success of Hong Kong and Singapore as international financial centres is based on the robust regulatory infrastructure and a strong rule of law. To foster greater confidence in its financial services sector and attract foreign institutions, Shanghai needs to ensure a strong rule of law is established and enforced within its jurisdictions.

The government will have a key role to play ... Shanghai needs to strengthen its legal framework

Its financial regulatory agencies will also need to join hands and establish a robust and transparent regulatory infrastructure. Given that financial regulation in both Hong Kong and Singapore is carried out by a single chief regulator (the Hong Kong Monetary Authority and Monetary Authority of Singapore), Beijing should consider establishing a lead agency that co-ordinates all regulatory activities. Foreign financial institutions will find greater assurance within a more stable regulatory environment.

A final point to note is that China's plans to groom Shanghai into a major financial centre will have a significant impact on its regional rivals. Already, there are concerns that Shanghai will pose a threat to Hong Kong's future prospects. However, this may be premature and exaggerated. There remains scope for co-operation, and the burgeoning Asian markets will allow all three centres to thrive and even complement one another.

Hong Kong retains key strengths in its banking sector and loan syndication industry, while Singapore will continue to leverage on its capital markets, asset management industry and proximity to Southeast Asian economies.

There is little doubt Shanghai will siphon off some mainland financing opportunities, but both Hong Kong and Singapore can still rely on their existing comparative advantages and carve out individual niches in regional markets.

Rather than seeing each other as competitors, Shanghai, Hong Kong and Singapore should work with each other by developing complementary financial sector expertise and capabilities. This will require greater inter-government and inter-agency co-operation and dialogue.

Woo Jun Jie is a PhD candidate at the Lee Kuan Yew School of Public Policy, National University of Singapore

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This article is now closed to comments

SpeakFreely
I still see people are still quoting rule of law as a key, a very outdated theory. As said many times before, yes china has no rule of law, but the DFI pouring in from USA, Japan etc are much much bigger than going into HK. If u look at VC, there is virtually no money goes into HK, despite we are ranked high on innovation recently, a joke. All major VC are putting money in China. That's why u see there are over 100 ADR china listed firms vs in hK only the big old company do a dual listing in America. Not a true ADR IPO.
So if people are so worry about rule of law, why this is happening Mr. Academic? The explanation is simple, the risk is being factored in.
JJW
Improving the legal and regulatory infrastructure can potentially help Shanghai move into markets in which other centres are leading. It can also prevent the excesses of 2008 which we saw in the US, and act as a backstop to capital back-flow during crises.
SpeakFreely
Sounds really academic to me. I've seen in real world there is a real collaboration in a competitive market, particularly in finance.
JJW
Yes, collaboration does take place in the private market. But the collaboration mentioned here is inter-governmental. E.g. regulatory policy harmonization, information sharing, currency swap agreements, etc. All of which takes place at informal bilateral levels between regulatory agencies (e.g. HKMA and MAS collaborations) but which remain insufficiently institutionalized (barring the Chiang Mai Initiative Multilateral framework).
lucifer
Only a Mainlander with a propganda filled brain would believe this nonsense.
I have some news for you and the planners in Beijing. Without the rule of law and the free flow of ALL information, along with a convertable currency, there will never be an international financial centre established in China - anywhere. How is it that you cannot understand this?
babyhenry
Love it when Jpinst insecurity gets a hold of it's British laptop ego.
And when is HK ever a "International" financial centre? Its nothing more than a Chinese financial centre with a **** property led economy. Take China out of the equation most of the investments will leave HK in a blink of an eye and land themselves in true international financial center like Singapore & London.
Ooo BTW start saying some BS enough times it will become truth I see. Rule of Law for financial institutions? ARE YOU KIDDING ME? If anything was learnt in 2008, that was there is no such thing as a RULE OF LAW FOR FINANCIAL INSTITUTIONS. They are literally untouchables, you know like the Princelings of the CCP. Put a princeling on the board of those Financial institutions - there your beloved RULE OF LAW.
JJW
This is already covered in paragraphs 10 and 11 on establishing rule of law and a robust regulatory framework as pre-requisites for Shanghai to become a successful international financial centre. Au contraire, Shanghai is already an international financial centre by most measures. The question that remains is: how will it match up with the global top four of London, New York, Hong Kong, and Singapore?
SpeakFreely
Hk is only big in IPO because of china stocks. But the trading volume in Hk is too small as a financial centre. hK trades avg Hk$40 to 80B a day, just one Apple stock in US already this size in a avg day. London bond trades are in T$, Hk bond is nothing.
lucifer
Oh, so China just writes down in a plan they intedn to have rule of law and then its done? How many times have we heard that over the last two decades? How is that going to work, there is rule of law in Shanghai but nowhere else? This is wishful thinking at best.
JJW
As opposed to the alternative of not planning to do anything?

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