Shanghai’s quest to be global financial centre gains impetus from Hong Kong troubles but big obstacles remain
- Hong Kong’s role as an offshore money centre for China may decline if Beijing further tightens its grip on the city
- China has long wanted Shanghai to become the country’s premier finance hub, but capital controls and its legal system remain obstacles
China’s decades-old quest to make Shanghai an international financial hub has gained a bit of momentum as Washington mulls tightening China’s access to US capital markets and the future of Hong Kong is clouded by Beijing’s imposition of a national security law.
However, a heavily restricted capital account and the absence of a legal system favoured by international business are still huge obstacles for the mainland city to compete with the likes of New York or London, even though Hong Kong’s role as a global money hub could decline, analysts said.
Investors in the city can trade equities, bonds, futures, foreign exchange, gold, insurance and trust. However, even though the market size in Shanghai may be big, trading is limited by capital account controls, with only a few official openings such as the Stock Connect with Hong Kong.
The relative rise of Shanghai is not because it did so well, but the downfall of Hong Kong
“The relative rise of Shanghai is not because it did so well, but the downfall of Hong Kong,” said Chen Zhiwu, director of the Asia Global Institute at the University of Hong Kong.
There is no guarantee, however, that the relative decline of Hong Kong would be a direct benefit for Shanghai.
S&P just affirmed its sovereign credit rating for Hong Kong on June 23, saying that it did not expect the imposition of a new national security law to affect the city’s autonomy in setting economic policies or any changes in US and Hong Kong trade relations because of the law to “seriously jeopardise the territory’s financial sector development and economic growth.”
Skyscrapers mushroomed in Shanghai throughout the 1990s and 2000s, providing it with a glittering skyline that rivalled New York, London and Hong Kong.
02:13
Beijing’s passage of national security law for Hong Kong draws international criticism
Early ambitions for the city gathered steam – and official state endorsement – after the global financial crisis in 2008-09.
In 2009, Zhou Xiaochuan, the then-Chinese central bank governor, told the Lujiazui Forum that China “needs an international financial centre” to match its rising influence in global finance and Shanghai was the best bet.
“Our wish is to build up an open socialist economy and make Shanghai an international financial centre, but current measures in this regard are insufficient,” said Zhou, at the same annual forum last month.
Ronald W. Anderson, an emeritus finance professor at the London School of Economics and Political Sciences, said Hong Kong’s long-term advantage was a common law legal system that Shanghai would find hard to match.
I am sure many players in Shanghai would love to provide the same degree of legal certainty as Hong Kong, but I doubt that this is achievable any time soon
“I am sure many players in Shanghai would love to provide the same degree of legal certainty as Hong Kong, but I doubt that this is achievable any time soon,” he said.
Mike Wardle, head of indices at Z/Yen Group, which compiled the Global Financial Centres Index, said “it remains to be seen how well prepared Hong Kong’s financial institutions are to adjust to the new reality”.
But Shanghai’s future as a global finance hub was doubtful if the yuan cannot be freely exchanged and capital flows were not free, Wardle added.
Liu Shengjun, director of the China Financial Reform Research Institute in Shanghai, said the city’s priority for now was to serve the financial needs of the domestic economy.
The city booms on China’s economic development and financial opening and is restricted by the country’s legal environment and yuan’s international status
“The city booms on China’s economic development and financial opening and is restricted by the country’s legal environment and yuan’s international status. It’s still a long way to build up an international financial centre,” he said.
Under an ideal scenario, Hong Kong and Shanghai would continue to serve different roles for China’s economy.
“China’s consumption and investment will keep expanding, and it means greater potential for financial development,” said Liu Xuezhi, a senior researcher with the Bank of Communications. “The two cities are complementary to each other, not a trade-off.”
Vice-Premier Liu He, an economic aide to President Xi Jinping, said in a speech last June that Beijing would continue to support Hong Kong as an international financial centre. Shanghai, meanwhile, would become “a new commanding height for financial opening”.
