Hong Kong’s role as a financial centre role is being challenged by Shanghai and yuan-based financing. Can the cities work together?
Shen Hu, Caijing 10 April 2009
Shanghai recently scored an edge over other Chinese cities by winning central government approval and policy support for a plan to promote the city as an international hub for financial services.
Shanghai’s advantage through its so-called “two centres” project also put pressure on Hong Kong, a long-time hub for financing which, like Shanghai, hopes to benefit from a push to expand the influence of the Chinese yuan as a currency for international trade.
Is Hong Kong worried? Probably not.
According to the city’s financial secretary, Tsang Chun-wah, the central government has often cited the need for Hong Kong to consolidate its international financial industry. Moreover, he said, the demand for services tailored to specific regions means more than one city can function as an international centre of finance.
The door is open for the two cities to work together. “The Hong Kong government will cooperate with the Shanghai government to better serve China,” Tsang pledged.
And no matter which city has more advantages, both will likely benefit in the future from the yuan’s rising status as a currency for international trade.
Yuan-based financing was a key issue March 25 when the State Council backed the Shanghai government’s two centres plan for establishing an international finance centre by virtue of city’s position as a major global port.
The plan calls for strengthening coordination and mutual support between Shanghai and other major cities, including communities in the Yangtze Delta. It would strengthen complementary and strategic cooperation, and promote mutual development through the market.
Shanghai Financial Service Office Director Fang Xinghai said the first step in building Shanghai as an international financial hub will be to confirm Shanghai as a yuan-based centre. That means the city would be a base for important, yuan-based operations involving pricing, trading and clearance-related financial products and services. Once the yuan becomes convertible, Shanghai would in fact emerge as an international financial centre.
Shanghai has already paved a way to reach this goal. For example, the 11th Five Year Plan in 2006 called for creating an international financial centre in Shanghai. It said the city would “try to have a pilot program of yuan-based international clearance and set up pilot institutions for small, foreign currency exchanges.”
“Shanghai will research the yuan’s development trend as a reserve currency that circulates in nearby countries over the next five years (and) explore how to circulate and manage the yuan worldwide,” the plan said. “Shanghai will promote a liquidation system through China’s foreign exchange trading system” and “take steps to develop Shanghai into a yuan-based center of financial product creativity, trading, pricing and clearance.
One expert who helped draft the plan said Shanghai’s success will largely depend on the yuan’s internationalization, which in turn will be tied to the currency’s convertibility and the opening of capital accounts.
Hong Kong now covets the opportunities made available to Shanghai through the State Council’s latest decision.
Since 2007, Hong Kong Chief Executive Donald Tsang and Hong Kong Monetary Authority President Joseph Yam have said they expect the yuan to become an international currency, and the government’s schedules have included related policies such as the Hong Kong Share Express. The leaders say the city’s status as an international finance centre would strengthen if it can play a pilot role in the yuan’s internationalization.
Hong Kong’s hopes rose recently when four nearby cities were among five chosen by the central government for a pilot program of yuan-based international clearance. Guangzhou, Shenzhen, Zhuhai and Dongguan – all in Guangdong Province next door to Hong Kong – were picked with Shanghai for the project, which is considered a first step toward the yuan’s acceptance as an international currency.
“I assume each of these cities has a possibility to conduct yuan business,” said Yang Jianwen, deputy director of the Shanghai Academy of Social Sciences Institute.
For clearance needs, the pilot program allows overseas representatives to set up yuan-based bank accounts, accumulate yuan reserves, create investment demand, and eventually enter one of the major markets for yuan and yuan-based products – either Shanghai or Hong Kong.
In addition to policy support, Shanghai’s advantages stem from its ties to China’s inland economic growth. But Hong Kong’s advantages are tied to its legal system and regulatory structure.
Each city can offer services based on unique advantages. Shanghai deals with yuan products, mainly on the spot market, while Hong Kong mainly deals in U.S. dollars, euros and derivatives.
A speed-up in mutual penetration and market networking between the finance industries in Shanghai and Hong Kong will help Shanghai learn from Hong Kong, while giving Hong Kong more opportunities on the mainland.
Pan Yingli, a professor at Shanghai Jiaotong University, said Hong Kong will have a better chance at boosting its financial centre status if Shanghai cannot move fast enough to accommodate the development of yuan capital accounts. But if the yuan develops slowly, Shanghai will have time to join Hong Kong as a finance powerhouse, giving China – like the United States-- two urban hubs for financial services.
“As a super economy, China has the ability to operate two financial centres,” Pan said, “just as the United States has New York and Chicago.”
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China’s Dual – or Duelling – Finance Hubs
Hong Kong’s role as a financial centre role is being challenged by Shanghai and yuan-based financing. Can the cities work together?
Shen Hu, Caijing
10 April 2009
Shanghai recently scored an edge over other Chinese cities by winning central government approval and policy support for a plan to promote the city as an international hub for financial services.
Shanghai’s advantage through its so-called “two centres” project also put pressure on Hong Kong, a long-time hub for financing which, like Shanghai, hopes to benefit from a push to expand the influence of the Chinese yuan as a currency for international trade.
Is Hong Kong worried? Probably not.
According to the city’s financial secretary, Tsang Chun-wah, the central government has often cited the need for Hong Kong to consolidate its international financial industry. Moreover, he said, the demand for services tailored to specific regions means more than one city can function as an international centre of finance.
The door is open for the two cities to work together. “The Hong Kong government will cooperate with the Shanghai government to better serve China,” Tsang pledged.
And no matter which city has more advantages, both will likely benefit in the future from the yuan’s rising status as a currency for international trade.
Yuan-based financing was a key issue March 25 when the State Council backed the Shanghai government’s two centres plan for establishing an international finance centre by virtue of city’s position as a major global port.
The plan calls for strengthening coordination and mutual support between Shanghai and other major cities, including communities in the Yangtze Delta. It would strengthen complementary and strategic cooperation, and promote mutual development through the market.
Shanghai Financial Service Office Director Fang Xinghai said the first step in building Shanghai as an international financial hub will be to confirm Shanghai as a yuan-based centre. That means the city would be a base for important, yuan-based operations involving pricing, trading and clearance-related financial products and services. Once the yuan becomes convertible, Shanghai would in fact emerge as an international financial centre.
Shanghai has already paved a way to reach this goal. For example, the 11th Five Year Plan in 2006 called for creating an international financial centre in Shanghai. It said the city would “try to have a pilot program of yuan-based international clearance and set up pilot institutions for small, foreign currency exchanges.”
“Shanghai will research the yuan’s development trend as a reserve currency that circulates in nearby countries over the next five years (and) explore how to circulate and manage the yuan worldwide,” the plan said. “Shanghai will promote a liquidation system through China’s foreign exchange trading system” and “take steps to develop Shanghai into a yuan-based center of financial product creativity, trading, pricing and clearance.
One expert who helped draft the plan said Shanghai’s success will largely depend on the yuan’s internationalization, which in turn will be tied to the currency’s convertibility and the opening of capital accounts.
Hong Kong now covets the opportunities made available to Shanghai through the State Council’s latest decision.
Since 2007, Hong Kong Chief Executive Donald Tsang and Hong Kong Monetary Authority President Joseph Yam have said they expect the yuan to become an international currency, and the government’s schedules have included related policies such as the Hong Kong Share Express. The leaders say the city’s status as an international finance centre would strengthen if it can play a pilot role in the yuan’s internationalization.
Hong Kong’s hopes rose recently when four nearby cities were among five chosen by the central government for a pilot program of yuan-based international clearance. Guangzhou, Shenzhen, Zhuhai and Dongguan – all in Guangdong Province next door to Hong Kong – were picked with Shanghai for the project, which is considered a first step toward the yuan’s acceptance as an international currency.
“I assume each of these cities has a possibility to conduct yuan business,” said Yang Jianwen, deputy director of the Shanghai Academy of Social Sciences Institute.
For clearance needs, the pilot program allows overseas representatives to set up yuan-based bank accounts, accumulate yuan reserves, create investment demand, and eventually enter one of the major markets for yuan and yuan-based products – either Shanghai or Hong Kong.
In addition to policy support, Shanghai’s advantages stem from its ties to China’s inland economic growth. But Hong Kong’s advantages are tied to its legal system and regulatory structure.
Each city can offer services based on unique advantages. Shanghai deals with yuan products, mainly on the spot market, while Hong Kong mainly deals in U.S. dollars, euros and derivatives.
A speed-up in mutual penetration and market networking between the finance industries in Shanghai and Hong Kong will help Shanghai learn from Hong Kong, while giving Hong Kong more opportunities on the mainland.
Pan Yingli, a professor at Shanghai Jiaotong University, said Hong Kong will have a better chance at boosting its financial centre status if Shanghai cannot move fast enough to accommodate the development of yuan capital accounts. But if the yuan develops slowly, Shanghai will have time to join Hong Kong as a finance powerhouse, giving China – like the United States-- two urban hubs for financial services.
“As a super economy, China has the ability to operate two financial centres,” Pan said, “just as the United States has New York and Chicago.”
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