Shanghai can be made a global financial hub – if China fixes some fixable problems

With one year to go before the deadline, Shanghai still doesn’t have what it takes to be a global trading centre. China’s plans for Shanghai are going the way of its other promises: it talks about being open but keeps markets controlled

Kerr Gibbs

Published: 9:00am, 25 Apr 2019

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American companies had high expectations when China announced in 2009 its plan to transform Shanghai into an international financial centre by 2020. It wouldn’t be easy. While centres like London, New York and Tokyo have the infrastructure and legal environment needed for traders, asset managers and global banks to execute transactions, China had a non-convertible currency, a closed internet and other characteristics inconsistent with a global trading centre.

Still, there was cause for optimism. Although China had been dragging its feet on commitments made during its accession to the World Trade Organisation, in many ways the economy was moving steadily in a more liberal direction, with increasing levels of integration with the rest of the world. With less than a year left before the 2020 deadline, the American Chamber of Commerce in Shanghai polled members to measure China’s progress. While all surveyed agreed that China had made great strides in elevating Shanghai, the vast majority did not believe that the city would be a global financial hub by 2020.

Asked to rank factors that could thwart the plan, respondents first cited capital controls. The unfettered movement of capital is fundamental to any international financial centre. But also notable was a litany of other concerns that executives cited as barriers to China’s 2020 ambition. Many of these misgivings echo those of businesses operating in other industries.

A hurdle second only to capital controls is arbitrary government intervention in China’s stock markets, the most egregious and recent example being the government’s intercession during the stock market meltdown of 2015-2016. Measures included instructing state-backed institutions to buy shares and forbidding major investors to sell shares for six months.

Other factors impeding China’s progress towards its Shanghai 2020 goal include a lack of consistent and transparent application of laws. Indeed, when asked about the Chinese mechanisms for handling commercial disputes, half the respondents described them as neither fair nor transparent.

The fear that regulators’ decisions are subordinated to political expediency does little to boost Shanghai’s credentials. Nor does political opacity help, be it around judicial decisions or the practice of “window guidance” – unofficial instructions Chinese banks receive sooner than their Western peers.

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Chinese internet restrictions continue to be a source of complaints from financial services and other firms. Properly functioning financial markets need a free and uninterrupted flow of information. Unless internet restrictions are lifted, the world’s banks and trading houses will never view Shanghai as an equal of London or New York.

Some progress has been made. Financial services executives and lawyers acknowledge substantial improvements in Chinese company law since the 1990s; the country’s tax system has become more efficient and transparent, and progress has been made in some areas of licensing. Yet there are brazen examples of China’s unwillingness to open its financial sector, including its failure to comply with a 2012 WTO ruling that allowed American credit card companies to establish businesses in China.

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Sadly, China seems to be turning away from integration with the rest of the world and pursuing a more authoritarian model. Shanghai will continue to be disconnected from other international financial centres both in terms of currency markets and data flows. Without reforms, China will continue to be closed off, operating by its own set of rules and norms.

In many ways, the Shanghai 2020 plans are indicative of China’s other promises and pronouncements. The ongoing trade negotiations between Washington and Beijing could lead to a positive outcome, but Beijing will need to address the issue of promise fatigue. Enforcement mechanisms need to be linked to measurable progress on specific reforms. China cannot continue to talk about being open and global while keeping markets closed and tightly controlled.

Shanghai could easily become an international financial centre, but only if the country addresses long-standing issues. First, China should pursue a policy of openness and integration with the global financial system. Second, it must improve rule of law and work towards achieving a truly independent judiciary. Third, the country should embrace openness and transparency and lift internet restrictions. These are fixable problems.

Kerr Gibbs is president of the American Chamber of Commerce in Shanghai

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