January 27,2008

Shanghai Re-Sparks Dreams of an International Financial Center

By Ma Wenluo
 

After several years?suspension of the development of Shanghai as an international financial center, the city has finally taken another step towards achieving its goal.

Credit Reference Center

The Credit Reference Center (CRC) of the People’s Bank of China (PBOC) has been registered in Shanghai. It is responsible for the construction and operation of the credit information system for all Chinese firms and for individuals. CRC, the first national credit center built upon the Credit Reference Department of PBOC and Shanghai Individual Credit Center, has formally begun its business operations. The foundation of CRC may help Shanghai become China’s financial information center, and then gradually, the Asia-Pacific headquarters for many multi-national financial institutions.

The merging of the credit reference system of PBOC with the Shanghai credit system reflects the fact that local financial institutions in Shanghai are actively cooperating with central government financial regulators to serve firms nation-wide. Shanghai has been a pioneer in China for setting up a credit reporting system. The Credit Information Department at PBOC was founded in 2003, and filed their residency in Shanghai a year ago. They rely on financial institutions nation-wide for information. The Shanghai credit system, on the other hand, has experience collecting non-financial information. The Central Bank and the Shanghai government, after a year of negotiations, have finally decided to consolidate their credit reference systems.

Not taking being the financial center for granted  

Shanghai’s dream of becoming an international financial center very much depends on Beijing’s attitude. The largest Chinese city was positioned to become China’s international financial center in February 1991 when Deng Xiaoping, the former Chinese leader, proposed a plan to build such a center in Shanghai. In February 2001, the State council approved an urban development plan for Shanghai, which included an international financial center as one of its highlights.

The central government has since then greatly supported the development of Shanghai. Capital operations, paper operations, and bankcard business, together with the data centers of major Chinese banks were relocated to Shanghai. Also, many foreign banks have set up their offices in Shanghai. Moreover, the Shenzhen Stock Exchange was suspended from listing more companies, leaving the Shanghai Stock Exchange as the only Mainland exchange with IPOs. On the 10th August 2005, PBOC’s Shanghai headquarters formally set up shop, transferring its inter-bank market business and credit information center to its new home. The relationship between Shanghai and Beijing was likened very much as that between New York and Washington DC.

Many consider Shanghai as the municipality with the most competent civil service workforce among China’s local governments. But as these officials are Shanghainese, they are likely to take local interests as a top priority. Developing Shanghai as the international financial center largely benefits the city’s real estate and financial service industry. In recent years, the large amount of Chinese capital flowing into Shanghai has greatly benefited the city.

Regarding the construction of an international financial center in Shanghai, neighboring cities have had a lot to say, and not all of it good. The central government was also unhappy that the Shanghai government overstressed its local colors. During the period of Chen Liangyu, the former party secretary of Shanghai, Beijing was disappointed with Shanghai’s behavior over macroeconomic adjustment and real estate price control, and therefore virtually stopped its support of the development of Shanghai’s international financial center. For instance, the central government set up the experimental unit of the Through Train to Hong Kong in Tianjin, a northern port city. Shanghai has been competing with Hong Kong for many years to become a world financial center.

The financial service sector in Shanghai, however, is not yet complete. As a result of high operation costs, some small size securities companies have relocated their headquarters away from Shanghai. It is worth noting that the capital operations center of China Construction Bank again returned to Beijing. "Currently, Shanghai has encountered a regime problem. And it does not even have a roadmap to a financial center" says Professor Pan Yingli, head of the International Finance Research Center of Shanghai Communication University.

New faces in Shanghai

A month ago, Tu Guangshao, former vice-chairman of the China Securities Regulatory Commission, was appointed as the vice-mayor of Shanghai and is expected to take charge of the city’s financial affairs soon. Also, Fang Xinghai, former deputy general manager of the Shanghai Stock Exchange, was appointed as the head of the Financial Service Office of the Shanghai Government. These personnel changes imply that the central government now is willing to support Shanghai in moving towards becoming an international financial center.

Yu Zhengsheng, current Shanghai secretary of the Communist Party, is now bringing about a new strategy for developing the financial center. Tu Guangshao and Fang Xinghai are determined to reform Shanghai’s financial regime. Attracting more financial institutions will no longer remain the key goal that it has been previously. The Shanghai government has gradually realized that Shanghai has the best hardware facilities and, that in terms of software, they will have to focus more on cooperation with the Central government and should gain better support from its financial regulators. Shanghai should reach out to other Chinese financial centers as complements to building up its core position. In September 2007, the so called "Leadership Team to Promote the Development of the International Financial Center" was formed in the municipal government.

With 2008 well underway, the pace of constructing the financial center has picked up. On the 9th January, China’s gold futures were formally introduced into the Shanghai Futures Exchange. Industry insiders think that Shanghai, London, and New York will be the three biggest gold trading floors in the world. While Hong Kong is building itself up as the assets and wealth management center of Asia, Shanghai has also been working hard towards this goal. Feng Guoqin, the vice-mayor of Shanghai, suggested that "building up the capital and assets management center is the key for promoting Shanghai to become the world’s international financial center."

The situation, however, is always changing and therefore challenging. Since RMB cannot be freely traded, this means that Shanghai can at most be a one-sided domestic market. Currently, Shanghai is working hard on promoting financial innovation, and introducing a non-RMB foreign exchange trading system and financial derivatives business. When Donald Tseng, chief executive of the Hong Kong Special Administrative Region, proposed the plan to develop Hong Kong as a world-class financial center, Shanghai instead planned to become the bridge of cooperation between China and other countries, providing the best financial services for foreign companies that want to enter China, and for Chinese companies looking to venture overseas.

 

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