Shanghai as Global Financial Center: Another Seoul, Tokyo or London?

China banking center

Excellent and thought-provoking article at Knowledge@Wharton, entitled, Turning Shanghai into a Global Financial Hub: So Much to Do, So Little Time. The article focuses on Shanghai’s public plans to become an International Financial Center by 2020 and debates whether that is going to happen:

While Shanghai might be big, can it be international? A new Goldman Sachs report titled, “Shanghai in 2020: Asia’s Financial Centre,” argues that although the city will gain in importance, it is more likely to “become a large domestic market rather than a broader regional market.”

But that’s not what city officials have in mind. They don’t want Shanghai to be like Tokyo or Seoul, both of which are impressive and vibrant cities at the hearts of their respective nations but aren’t — as Shanghai wants to be — at the absolute center of the global economy, whether in capital markets, trade or commerce.

For that to happen, Shanghai needs two things from the central government: The full convertibility of the RMB and the relaxation of controls allowing the free flow of currencies in and out of the country.

What do you think? Me, I don’t see Shanghai becoming a major financial center soon, nor even by 2020.

29 responses to “Shanghai as Global Financial Center: Another Seoul, Tokyo or London?”

  1. I absolutely agree with those two reasons. It will be a very VERY long time until either situation happens, and they are not likely to happen until China’s political landscape is that of multi-party leadership. All one needs to do is spend all of one day in Hong Kong and you’ll know that Shanghai has light years to go. Even Taipei has a better chance.

  2. As I believe you stated in a post you did on this many months ago, it’s all about the rule of law.

  3. Shanghai is not going to be an international finance center by 2020. Full stop.
    China already has an international finance center in Hong Kong, and I don’t see any reason why the Chinese central government wants to change that, and I don’t see any sign that they are planning to change that. Shanghai is likely to be the main financial center for domestic Chinese finance, but international transactions are going to be routed through Hong Kong.
    Hong Kong has advantages that Shanghai can’t touch. Maybe someday someone with a choice will prefer to have a complex legal case decided in Shanghai rather than in HK, but I doubt it’s going happen in my lifetime, and it’s certainly not going to happen by 2020. But that’s not a big problem since you have the deal happen in Shanghai and then make it subject to HK law and dispute resolution.
    Shanghai has some advantages that Hong Kong can’t touch. Rather than try to have one copy the other, the general strategy has been to mesh the two systems into something that’s worked quite well, and I don’t see any reason for changing it by 2020. One thing that two systems let’s China do is to participate fully in international markets without forcing full convertibility.
    The big fight isn’t between Shanghai and Hong Kong. The big fight is between Hong Kong and Singapore.

  4. Also I wish that these sorts of articles would have web links to original documents. I’d actually like to read what the State Council actually said, since everything that I’ve see suggests that this article vastly misquotes and misunderstands what the real situation is.
    Googling for Shanghai and “international finance center” I’ve found some press articles which I think the writer of the article has completely misinterpreted.

  5. Ask me again when I can get a paper copy of the current WSJ or FT in Shanghai by noon on the day of publication. Ditto for unblocked Internet.

  6. There is no “absolute center of the global economy.” London and New York are sort of close, but they are really just the largest nodes in a global financial network that has an increasing number of key regional centers (think Tokyo, Hong Kong, Dubai) and industry/product-specific centers (think Chicago, Houston, the Bay Area).
    Overall, the playing field seems to be leveling as time goes on. It is not really that Shanghai is rising to the level of the “big boys,” but rather that the big boys are yielding ground to provinces. There is no need for finance to be centralized any more because just about everything can be done remotely. This is true for lawyers too: you guys do China practice from Seattle, while I do US and UK practice from Tokyo.
    From this perspective, relaxing currency controls would probably hurt Shanghai as it would remove the practical necessity to base many Chinese operations within the PRC. Shanghai could easily end up losing ground to Hong Kong, Singapore or other regional business centers that are more liberalized and accessible to foreigners.

  7. Couldn’t agree more. Shanghai will only become a major international financial centre when the RMB is convertible, but also more importantly when the government feels relaxed enough to let go of its tight rein on financial sector innovation. No sign of that yet, and without it you’ll continue to see the market overwhelmingly dominated by pure deposit/lending activities, which are much easier to control.

  8. I find your headline a bit of a put-down on Tokyo.
    “Just another Tokyo”? As if Tokyo is some bit player? People forget that poor old sinking Japan is still the largest economy in Asia. (Well, at least for now).
    Tokyo has many of the attributes cited above: It’s a free society, with free access to financial information, no Communist Party disruptions and a freely floating currency. (Which, incidentally, is still the third-most traded foreign currency in the world, after the USD and the Euro.) It’s also more friendly for foreigners, at least in terms of expat life.
    Maybe a better questions is — when will Shanghai get to be like Tokyo?
    P.S. Straight for the horse’s mouth. (Actually, The People’s Daily)
    “China’s State Council said on March 25 that Shanghai will be built into an international financial center and a global shipping hub by 2020.”

  9. Global shipping hub? Sure, I thought it was that already… But a financial hub?
    Financial is what? Banks? Insurance? We’ve had AIG, Lehman, Icesave, Greece, and bleep knows what else. Financials require trust and honesty (mine do, anyway) and having lived here in China for several years now, trust and honesty are not the first qualifiers that spring to mind when I think of China in general and Shanghai in particular. Singapore maybe, but Shanghai? Nah…!
    On the other hand, by 2020 there no doubt will be some metric that shows that Shanghai is the financial center of the universe, just like China Telecom or Baidu are quoted as being world leaders, because, well, they’re big.

  10. @ Chip,
    I tend to agree that it will take quite a while for Shanghai to satisfy those two conditions and I also think those two conditions are going to be critical.

  11. @ Twofish,
    I agree with all that you say, except for the idea that China is satisfied with HK being the financial center, and not Shanghai. Do you think it just a joke that Beijing issues announcements regarding the need to make Shanghai an international financial center by 2020?

  12. @ TwoFish,
    I too wish the article had linked to the Goldman White Paper and I tried to find that White Paper on the web, but could not. If someone finds it, I’d be happy to link to it.

  13. @ Joe Jones,
    I both agree and disagree with you. There is no absolute center, but I would bet that a huge percentage of the big IPOs happen in either London, NYC, or Hong Kong and to me that (and a whole host of other things) makes those three the centers.

  14. Beijing has issued absolutely no announcements that they want Shanghai to be an global financial center instead of Hong Kong. You have some Shanghai municipal officials engaged in semi-wishful thinking, and you have business analysts that don’t understand how the Chinese press works.
    Just because something appears in the People’s Daily doesn’t mean that it’s any sort of official policy statement. In most cases, the role of the Chinese government is to tell newspapers what not to print, and when a Chinese newspaper prints something, they often get it wrong for the same reasons that a US reporter gets things wrong. The Chinese government will on occasion order newspapers to print something, but it’s usually obvious when that is happening, because you’ll have all of the major newspapers in China print the same headline.
    If you want an official statement of the Chinese government, you can go to the various official websites of Chinese ministry. Some random article by a semi-clueless reporter in the People’s Daily just will not do.
    Also, I have a copy of the Goldman-Sachs report (you can google for it and it’s not hard to find), and the gist of the report is that Shanghai *WON’T* be an international financial center in the way that the Wharton report indicates it is.

  15. To do international finance, you need three major financial centers. One in the Americas (NYC). One in Europe (London). One in Asia. You need this because people don’t like to work at 2 a.m., so you need three centers so that people can do work at business hours.
    Right now there is this tremendous battle between Hong Kong and Singapore over the Asia center. Shanghai is not in the running because, the RMB is not convertible, and even if the Chinese government wanted to make it convertible it would take a decade.
    Also Hong Kong has some big advantages in that it is neutral ground. Suppose you are an American company that wanted to do a deal with a Japanese company. If you had a choice to resolve a contract dispute, would you rather do it in Tokyo or in Hong Kong? If you wanted to do something with a Korean firm, would you want to do it in Seoul or in Hong Kong? Now if you want to do a complex deal with five different companies from five different places, where is the logical place to do it?
    The other thing is that technology actually is causing finance to be more and more centralized. There are times when you just have to be there. Yes, you can practice US, English, or HK law anywhere, but there are times when you just have to send someone to the court house to file an petition for an emergency injunction or to quash one, and it’s useful to be able to call everyone at 2 a.m. and tell everyone to be at the courthouse at 9. Also, at some point all your financial transactions have to go through some computer, and sometimes you just have to have someone stand right next to the computer to replace a hard disk or set up network cables.
    I do think it is odd that people keep forgetting that Hong Kong is an integral part of the People’s Republic of China, and Hong Kong is an integral part of the Chinese central government’s economic planning and strategy. People in Beijing *know* that you are just not going to have the trust in the courts or institutions in Shanghai for decades if ever, and you aren’t going to the basis for “financial innovation’ which is why these things have been and will continue to be routed through Hong Kong for at least the next generation.
    Finally as far as Tokyo goes, as far as most people in finance are concerned, Tokyo is already a financial backwater. Operations in Tokyo are confined to Japanese operations, and financial companies are just do not put their Asia-Pacific headquarters there. It’s HK or Singapore.

  16. Just think about it.
    Hong Kong doesn’t pay taxes to CCP because of SAR status and “One Country, Two System.”
    It wants to develop Shanghai as a cash cow, much to it’s detriment because taxes in Shanghai are 40%, deterring bankers from relocating to China’s strategic heartland.
    By 2047, 50 years after HK’s Basic Law expires, it will have to merge with Shenzhen.
    Hong Kong-Shenzhen merger will create a mega city on the size of 20 million people (equal to Shanghai’s metro population), with unrivalled infrastructure, world class international experitise, and connectivity.
    Hong Kong-Shenzhen merger will guarantee it the status of NYC of China, with Shanghai as financial backwaters fodder (akin to LA or Chicago status in the US)

  17. Shanghai doesn’t just have “provincial” figures running around saying “Intl. financial hub! Intl. financial hub!” There are some very experienced players down there who have worked in places like Tokyo, the WTO, Europe, America, etc. These guys are implementing some major reforms in the capital markets at the behest of the State Council, and a lot of times in conjunction with them. To make the RMB more convertible, QFII(institutions) and mini- QFII(Hong Kong) schemes to invest in China’s A-shares market are starting to be implemented, and are starting to take off…..running! In addition, direct credit swaps to settle cross boarder trade are starting to pick up and will accelerate in the the next few years. This is not empty rhetoric, its real.
    Dagong challenging the dominance of Moody’s, S&P’s, and Fitch Ratings Ltd. in sovereign wealth credit analysis is another piece of the jigsaw Beijing is using to de-claw the west’s hold on financial power. Although Dagong has a ways to go to gain credibility, and Fitch’s report about Chinese banks re-packaging bad credit smells like “Lehman Brothers times 1000” (timed to directly undermine Dagong’s ratings service), are you really telling me that BRIC countries plus Indonesia, South Africa, and others aren’t applauding this move? One has to ask how long the west can keep borrowing money and missing one financial mess after the other and still retain its stranglehold on financial decision making?
    Nevertheless, the timetable is probably unreachable, but serious big boys from NASDAQ, NYSE, and others are frequent visitors to the SCI and are helping to internationalize it. A fully convertible RMB, unrestricted currency movements, AND the rule of law are all important. But in a debt laden west, where higher taxes on financial centers to help fill coffers is a strong possibility in the near to medium future, Hong Kong, Singapore, AND Shanghai could all benefit…..

  18. When I was working for an French investment bank, bringing US clients over to tour factories and meet managements, we always stopped at our big, glitzy ‘China HQ’ in Shanghai’s Lujiazui financial center. It was very impressive — buzzing with young analysts and traders. But if anyone wanted to meet the bank’s Country Head (Managing Director in Anglo terms) we had to go to Beijing where he and a few key people were installed in lower-key offices. Clients invariable asked why he wasn’t with the rest of his team in Shanghai. He answered, “Because whenever we want to do a deal or participate in a consortium, I have to spend days in Beijing seeking official approval. It’s easier and more efficient to base myself here and go to Shanghai once every week or so.”
    Years later, my understanding is that the situation hasn’t changed. “Shanghai as international finance center” looks great on the real estate brochures, but I don’t know a single investment banker or trader who lives there. A few fund managers, maybe, but that’s more of a lifestyle decision. The professional money is in HK, the bureaucratic approval is in Beijing. No one I know expects it to change any time soon — there’s just no impetus to disrupt the status quo. Things are working fine.

  19. Andrew: There are some very experienced players down there who have worked in places like Tokyo, the WTO, Europe, America, etc. These guys are implementing some major reforms in the capital markets at the behest of the State Council, and a lot of times in conjunction with them.
    Yes. I’ve talked to them, and they are very sharp people.
    The thing about the central government officials is that they are thinking very strategically. This is why you can’t talk about the role of Shanghai without also talking about how Shanghai, Hong Kong, and Beijing fit together. It’s one big system and you simply cannot look at one piece in isolation.
    A few other things…..
    “rule of law” – I very much dislike when people talk about “rule of law” because like “democracy” and “socialism” people use it to mean fifty different things and using that term is a sign of “fuzzy thinking.” The problem with Shanghai as far as complex financial deals is not corruption or political influence. Those are not factors when you have large companies because the people involves all have large amounts of political influence and so things are evenly matched. The problem is that judges and lawyers in HK have decades of experience dealing with complex financial transactions and the law there has gone through decades and perhaps centuries of trial and error. You are not going to get that in Shanghai for at least another few decades, and it’s possible that you will never get it (since Paris, Frankfurt, and Tokyo also don’t have the level of legal expertise that Hong Kong, NYC, or London have).
    So the logical thing to do when Chinese companies want to do a complex international deal is that they all do them in Hong Kong. Now there are things that you *can’t* do in Hong Kong. If you want to open a factory with large numbers of semi-skilled people from the interior, forget it.

  20. I agree with Andrew and Twofish as the Chinese government doesn’t want Shanghai to be the financial center of Asia, rather have Hong Kong to take the role. I think the Chinese government takes the security of RMB as a national issue and doesn’t want t to be convertible. If they have a lehman Bros and Bear Stearns in China it could’ve affect China’s economy and stability. They just need Hong Kong to represent China as a buffer for Shanghai’s financial activities to other foreign countries.

  21. The big fight is not Shanghai-Hong Kong. The big fights are HK-Singapore and to some extent HK-NYC. And in the HK/NYC fight, NYC has some big problems. In 1995, if you were a major Chinese company, you would want to dual-list in New York City/Shanghai. Today, you would be insane to want to list in NYC, because you don’t want to be associated with Enron, Lehman, and Madoff.
    One thing that HK and to some extent Shanghai has going for it is that right now the Mainland and HK securities regulators have a *LOT* better reputation than the SEC does.
    “Sovereign credit rating” analysis is a big joke. No one in the business really takes anything that Moody’s or Fitch or S&P says seriously. This analysis are generally written by junior level people that can be amazingly clueless sometimes. Anything public that gets written is basically a sales brochure. Something to think about, but its the start of your own research rather than a finished product.
    Also, I don’t think that too many people in the Chinese government impressed by “big boys” from NYSE and NASDAQ. It’s not 1985, and there is a lot of internal expertise within the Chinese government, and someone from NYSE that comes to China is likely to talk to someone within the government that has more experience in international markets than they do. The Chinese government has been very ***heavily*** recruiting on Wall Street, and given the bad shape of the US economy, they’ve been able to get people with really impressive credentials.

  22. Andrew: Years later, my understanding is that the situation hasn’t changed. “Shanghai as international finance center” looks great on the real estate brochures, but I don’t know a single investment banker or trader who lives there.
    Neither do I.
    Andrew: The professional money is in HK, the bureaucratic approval is in Beijing. No one I know expects it to change any time soon — there’s just no impetus to disrupt the status quo. Things are working fine.
    The status quo was carefully thought through. Shanghai does have some things going for it. It will be the center for Chinese domestic finance, and I personally think that in 10 years Shanghai is going to be bigger than Hong Kong because the volume of internal Chinese finance is going to be higher than international finance.
    Being physically close to government ministries can be a good thing sometimes. It can be a bad thing sometimes. That’s why it makes sense to have multiple centers.
    Also, be careful about talking in terms of models. Shanghai is not going to turn into NYC, London, Tokyo, or anything else. Shanghai is Shanghai. If you think in terms of models you are limited in what already exists, and you miss things that are new and different (like Communist Party officials doing heavy recruiting of Wall Street investment bankers).
    There is one thing that concerns me as far as the future of the US goes. One reason finance people are ending up in Asia is that Americans hate investment bankers. Chinese don’t. People figure out where they are wanted and where they aren’t, and so there is a bit of a brain drain going on.

  23. I recall a friend who came from Hong Kong came by to visit and the first thing they wanted to see is Lehman Bros building. I showed them what used to be the Lehman Bros building and I asked him why. He told me about the mini-bonds scandal from Lehman Bros which burned many investors. I’m sure that if Goldman, Morgan Stanley, or Barclays want to do business in China, they will have a very uphill battle before they can gain some creditability in China.

  24. Until the RMB becomes freely convertible and until the government consitently enforces its laws, Shanghai will be lucky to get even close to being a Seoul or a Tokyo in financial prowess.

  25. The logic is simple.
    For Shanghai to rival HK, Shanghai needs better financial instruments, regulation, transparency, free flow of information, and better judiciary protection or rule of law.
    The more access to “HK-like characteristics” that Shanghai acquires, the more likely she will overtake HK based on Beijing mandate, geographic proximity, and market access alone.
    However….if Shanghai acquires better financial conditions that are conducive for making IFC, so will Shenzhen!
    HK takes priority above Shanghai in terms of IFC because “One country, two systems” expires in 2047.
    Thus, forcing Shanghai to become IFC by 2020 is merely expediting Shenzhen’s march towards better rule of law, better financial regulation, better “HK-like characteristics.”
    Thus, Beijing wants Shenzhen (through Shanghai) to become more HK-like, which further facilitates the rise of Shanghai and HK-Shenzhen metropolis.
    Who wins? Shanghai and HK-Shenzhen wins. It’s not a zero sum game.

  26. Hong Kong and Shanghai basically complement each other more than being rivals. Basically Hong Kong is increasingly more similar to London while Shanghai could become like New York or Tokyo. Technically, one can describe the difference between a “global financial center” (more offshore focused activities) and an “international financial center” (onshore domestic focused). Even when the RMB opens up, there will be more than enough room for both cities to prosper as neither Shanghai or HK alone would have the capacity to become both onshore and offshore. 
    If we take Tokyo, for example, it’s primary a market place for domestic participants to which foreign players are granted access to Japan. Whereas London is characterized by foreigners trading with each other. With New York, it has both largely because the importance of the USD and the US economy, but it is relatively much more domestic (a byproduct of the sheer size of the US domestic market). Hong Kong is moving towards the London model while Shanghai will end up being more like New York and Tokyo.

Leave a Reply

Your email address will not be published. Required fields are marked *