By Jeremy Morris, Associate Editor, US Daily Review.
Shanghai is on track to become an international financial center (IFC), an objective declared by China’s State Council in March of 2009, but faces challenges to achieving this goal by 2020, finds a report issued this week by The American Chamber of Commerce in Shanghai (AmCham Shanghai) and the Brookings Institution titled, “Achieving 2020: An assessment of Shanghai’s plan to become an international financial center by 2020.”
“Achieving 2020” is a culmination of research, presentations and round-table discussions with the AmCham Shanghai Financial Services Committee and other Chamber members in the tax and legal professions, plus key findings from a white paper written by Douglas Elliott, a Fellow in Economic Studies at the Brookings Institution in Washington, D.C., on how Shanghai would establish itself as one of the world’s preeminent international financial centers by 2020.
Brenda Foster, president of AmCham Shanghai, said at this week’s launch, “AmCham Shanghai strongly supports Shanghai’s 2020 plan to establish itself as an IFC. We hope that this report offers Shanghai officials useful input and that we can work together moving forward to achieve this ambitious and worthwhile goal.”
Achieving 2020 defines a financial center as a location where a substantial amount of financial business is conducted. An international financial center is a location where the scale of activity and the business that is done there are primarily global in nature. Today, there are two broadly recognized IFCs: London and New York.
The report identified four conditions as requirements for Shanghai to become an IFC:
- A well defined, highly intermediated market and the ability to create financial products and services
- Depth in both the number and competitiveness of market participants, both in terms of financial institutions and investors
- A deep reservoir of knowledgeable and talented financial service professionals
- Appropriate financial infrastructure and regulatory parameters that foster and facilitate the previous three requirements. These include legal, tax, regulatory, settlement and others.
Achieving 2020 did not concentrate on the obvious requirements of a convertible currency and other issues that have been well covered in the past. Instead, the report focused on the first priority listed above: having a well defined, highly intermediated financial market, the ability to create and deliver products and services inside this market and on the market mechanics within the debt, equity and derivatives markets.
“It would be a mistake to conclude that the glass here is ‘half empty’,” said Ben Kinnas, AmCham Shanghai’s Financial Services Committee Chair and Senior Vice President & General Manager, Wells Fargo Bank, Shanghai Branch. “But there are several challenges consistent in all three markets and number one is regulatory transparency and a challenging approval process for financial service providers. This is a recurring theme and one that if addressed, will go a long way in helping Shanghai achieve its objectives.”
Tim Huang, Chief Operating Officer for Bank of America Merrill Lynch China, said, “I think Shanghai has the resources, has the economy behind it to become a financial center, it being regional or international.” Huang continued, “I think the regulators and the government do need to look at opening up more on the market side, and there is plenty for both domestic and foreign players to gain in this market and everybody wins if you really open it up.”
In the report, Brookings’ Doug Elliott compared Shanghai to other cities that have tried and failed to become IFCs or are in the process of attempting to develop one. According to Elliott, advantages held by Shanghai include access to a huge and growing Chinese market, strong support of national and local governments, existence of futures and options markets, progress developing its “hard” infrastructure and the vibrancy of Shanghai itself. Top concerns: opaque political decision processes and political favoritism.
Stated Elliott, “Shanghai has an excellent chance of becoming a true Global Financial Center, if China remains fully committed to this very difficult task for years to come. However, it must avoid the mistakes that Tokyo, Frankfurt, Paris, and others have made which prevented their achieving this same goal. Tokyo, for example, focused too much on preserving the advantages of its existing financial elites, allowed too much political interference in market mechanisms, and failed to accommodate the legal and language needs of the rest of the world.”
At the event, Kinnas echoed Elliot’s point. “I don’t think we’re going to see a carbon copy of London or New York. We’re going to see Shanghai, and that’s what we want to see. But we want certainly a Shanghai that works for everybody,” he said.
In regards to the role of foreign financial institutions in supporting Shanghai’s objectives, Kinnas focused on what they bring to the market. “We offer know-how, which is what we’ve offered in the past. We offer capital, which is what we’ve offered in the past. With capital, we offer liquidity in the market, which is what we’ve offered in the past. And we offer customers to come into this market and to trade and do business with Chinese companies.”
The report also concluded that several recommendations may be suitable for pilot programs limited at first to Shanghai and the Yangtze River Delta, a process which China has followed in the past.