Through its international shipping port, Shanghai may have found a way to build a global hub for the financial services industry.
Shen Hu, Chenzhong Xiaolu and Zhao Hejuan 4 April 2009
(Caijing Magazine) It’s been 18 years since China’s former premier Deng Xiaoping wrote a preface to the still-unfinished story of Shanghai’s rise to global financial prominence.
“If we want to have a say in world finance, we need to rely on Shanghai,” the late Deng declared.
Now, a new chapter for the unfolding story has opened following a March 25 decision by the State Council’s Standing Committee, which approved a Shanghai government plan for transforming the city into a hub for international finance.
The so-called “two centres” plan calls for linking an expansion in the financial services industry to the city’s massive international shipping sector, with added support for the services sector and manufacturing.
The latest decision complements an official Shanghai goal to become an established international finance centre by 2010 – a target deemed reachable based on China’s growing economic clout and the rising status of the yuan.
But questions have been raised over the effectiveness of preferential policy decisions by the government. Some wonder whether tax breaks and other incentives are the best way to help Shanghai reach its goals.
A key issue is whether Shanghai can become a world-class finance centre by virtue of China’s economic development and the yuan’s place as a settlement currency for international trade.
No one doubts, meanwhile, that the city faces enormous challenges tied to current economic conditions and industrial transformation. It also faces competition for financial sector business from other cities including Beijing and Tianjin.
But Shanghai enjoys several unique advantages, including its status as a major shipping port, that officials think give it an extra edge to become a magnet for financial services.
Slow Start
Deng’s remarks in 1991 were followed a year later by a report on Shanghai’s future penned by then-president Jiang Zeming. His report to the 14th National Congress of the Communist Party of China outlined a goal to “build Shanghai into one of the world’s centres for economic, finance and trade.”
Years later, during a trip to the city in 2004, President Hu Jintao repeated the government’s interest in making Shanghai an international financial hub.
The latest Shanghai government plan modifies the course backed by top government officials over the past 18 years by adding a new element designed to boost shipping as well as build a financial hub.
Experts inside Shanghai’s financial circle and at its universities have high expectations for the two centres policy as a breakthrough for city development.
Until now, Shanghai Academy of Social Sciences’ Institute of National Economy Deputy Director Yang Jianwen said, the government’s policy “limited Shanghai’s development to becoming a world financial centre.” The latest plan is designed to meet financial industry requirements and give Shanghai priority in competing for business in the sector against other Chinese cities.
For starters, the plan calls for promoting and giving priority to the financial services industry by supporting Shanghai-based joint-venture securities companies and funds in step with financial market development.
Shanghai’s financial industry would receive several practical advantages, such as an opportunity to expand the scale of yuan-denominated bonds used by international financial institutions. Foreign companies with long-term operations in China would be allowed to issue yuan-denominated bonds, and qualified foreign enterprises would get permission to raise money through yuan-based stock.
The plan also calls for giving corporate income tax breaks to Shanghai-based banks with foreign investors, at least on an interim basis, as well as introducing a pilot program to attract foreign-owned credit rating institutions.
Other aspects of the plan call for import tax advantages for shippers who use the port in Yangshan, south of Shanghai, luring internationally competitive financial holdings groups, and encouraging a wide range of financial service businesses.
Urban Rivalry
To meet the goals, Shanghai has to become a domestic financial centre – a status the city cannot expect to achieve without building good relations with policymakers, the People’s Bank of China, China Securities Regulatory Commission, China Insurance Regulatory Commission and China Banking Regulatory Commission.
Moreover, Shanghai needs good relations with rival cities including Tianjin, Beijing, Chongqing and Shenzhen, which also in recent years have worked hard to attract financial services.
Consider Tianjin which, thanks to policy support, now poses a serious challenge to Shanghai. Its city government has been working to make Tianjin a financial centre since former central bank president Dai Xianglong became mayor in 2003 and, three years later, the State Council approved Tianjin’s Binhai New District as an experimental zone for financial reform.
“Important reforms for financial enterprises, financial businesses, financial markets and financial opening may first undergo trials in the Tianjin Binhai New District,” the State Council said. The decision triggered the launch of the 20 billion yuan Bohai industrial investment fund.
Beijing presents an even greater challenge with its headquarters for party committees, financial supervisors and most big banks. The capital city is in a strong position for businesses seeking to lobby for policy support, investors and talent.
Beijing’s shift to financial service began in 2003, when a former financial sector expert Wang Qishan took office as mayor. Two years later, the city government announced plans to promote financial services, offering subsidies of 10 million yuan to new, Beijing-based financial companies that registered with more than 1 billion yuan.
Beijing has overshadowed Shanghai in its ability to promote mergers and acquisitions among financial institutions, while introducing foreign strategic investors. In 2005 alone, for example, Huaxia Securities Co. merged with Beijing Securities Co., the Bank of Beijing and Huaxia Bank introduced foreign investors, and Beijing Rural Commercial Bank opened.
Beijing also gave tax breaks to Beijing-based financial institutions and their staff. The city offered employee currency and housing subsidies, Beijing residency and support for staff members’ children.
Trade Advantages
But Shanghai has received policy support as well, and is now one of the world’s most intense financial trading centres, with active markets for stock trading, inter-bank loans, bonds, foreign exchange, commodity futures, financial futures and gold. Some 395 foreign financial institutions have offices in Shanghai – more than any other Chinese city.
This development followed the path promoted by Li Yang, director of the Institute of Finance & Banking at the Chinese Academy of Social Sciences, and a member of the city’s international financial centre construction expert committee. In 2007, Li said the city should base its financial development on the market, not central government decisions. He said central government support cannot give Shanghai anything unique, so the city should develop its uniqueness as a financial centre based on market principles.
Today, the government sees merit in building on the city’s dual roles in international finance and shipping. Shanghai has long worked toward becoming a centre for international finance, trade and shipping.
Such development would follow in the footsteps of financial centres such as London, where shipping-related financial services through banks, trusts, insurance, leasing and funds have contributed to its rise as a financial hub, said Yan Qingmin, director of the Shanghai Banking Regulatory Bureau.
Indeed, a State Council meeting in Shanghai in 1996 focused on building an international shipping centre. Since then, the port’s capacity has grown to 28 million TEUs, or shipping containers, from about 1.5 million TEUs, making Shanghai the largest cargo port and the second largest container port in the world. The next step, experts say, is for the city to develop shipping services by attracting management talent and establishing a legal system.
Shipping is a capital-intensive industry that requires supplementary financial services. A single ship involves high levels of investment, risk, insurance and services.
“Big shipping enterprises in China all insure through foreign insurance institutions” which are expansive and require high taxes, said a shipping industry source. “Without the financial support from shipping insurance and related shipping financial services, Shanghai cannot be called an international shipping centre.”
But policy support can promote Shanghai’s status as a centre of financial services for shipping, such as insurance, leasing and trusts, according to a source close to financial supervisors.
One prominent aspect of the latest plan is “to build a comprehensive, experimental area for international shipping development” that includes offshore finance, sales tax exemptions for international shipping enterprises, registrations for overseas accounts, and developing offshore finance and international clearing,” said Xu Peixing, office director of the city government’s shipping centre.
Shanghai Deputy Mayor Tu Guangshao said developing a shipping trade market and financial services will play an important role in Shanghai’s development as a financial centre.
But Shanghai is one of several Chinese cities vying for shipping finance business. Its port Yangshan became the country’s first free trade zone port in 2005. Tianjin, Dalian and Yangpu followed suit. That means policy support will be needed if Shanghai hopes to rise above the rest.
Talent, Legal Obstacles
Shanghai also faces hurdles in transforming its industrial sector to high-tech, modern services and advanced manufacturing. Already, many of the city’s manufacturing industries have been transferred to Jiangsu Province and other regions nearby.
So far, Shanghai has failed to develop high-end services. An expert close to Shanghai decision-makers said the problem is that services firms, except those in finance, mainly serve local entities.
China’s official newspaper The People’s Daily recently said Shanghai needs to change its economic development and speed up the readjustment of its industrial structure, upgrading for further development. The city government’s latest plan is designed to do that and provide opportunities for sustainable development.
On the other hand, Shanghai suffers from a talent deficit and cumbersome legal environment. New York’s Wall Street employs 400,000 professionals, while the financial sector in London has up to 300,000. Shanghai has more than 100,000 financial staffers yet lags in professional quality, Liu Mingkang, chairman of the China Banking Regulatory Commission said at a May 2008 forum.
Tu agrees that talent will be needed to build an international financial centre in Shanghai. To attract global professionals, the city hopes to build a talent-recruitment mechanism. It’s reforming a government-managed financial talent system, which has become more market-oriented since the vice president of Shanghai Pudong Development Bank was hired in December by a board of directors rather than the city government.
Shanghai also hopes to reform its state-owned asset management system, following Beijing’s example in promoting marketization and opening doors wider.
Another obstacle facing Shanghai is the legal environment. “Many standards and regulations in Shanghai cannot be integrated with international standards and regulations,” a foreign bank official told Caijing.
Tu agreed, saying Shanghai needs international standards if it wants to be an international financial centre with global recognition.
But acquiring worldwide recognition is hard for a city that does not follow the Anglo-American legal system for international shipping, said Zhao Yifei, an expert at Shanghai Jiao Tong University. On the other hand, the ports of London, New York, Hong Kong and Singapore follow the centuries-old system through which they draw up shipping documents and contracts.
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Shanghai’s New Route to Financial Prestige
Through its international shipping port, Shanghai may have found a way to build a global hub for the financial services industry.
Shen Hu, Chenzhong Xiaolu and Zhao Hejuan
4 April 2009
(Caijing Magazine) It’s been 18 years since China’s former premier Deng Xiaoping wrote a preface to the still-unfinished story of Shanghai’s rise to global financial prominence.
“If we want to have a say in world finance, we need to rely on Shanghai,” the late Deng declared.
Now, a new chapter for the unfolding story has opened following a March 25 decision by the State Council’s Standing Committee, which approved a Shanghai government plan for transforming the city into a hub for international finance.
The so-called “two centres” plan calls for linking an expansion in the financial services industry to the city’s massive international shipping sector, with added support for the services sector and manufacturing.
The latest decision complements an official Shanghai goal to become an established international finance centre by 2010 – a target deemed reachable based on China’s growing economic clout and the rising status of the yuan.
But questions have been raised over the effectiveness of preferential policy decisions by the government. Some wonder whether tax breaks and other incentives are the best way to help Shanghai reach its goals.
A key issue is whether Shanghai can become a world-class finance centre by virtue of China’s economic development and the yuan’s place as a settlement currency for international trade.
No one doubts, meanwhile, that the city faces enormous challenges tied to current economic conditions and industrial transformation. It also faces competition for financial sector business from other cities including Beijing and Tianjin.
But Shanghai enjoys several unique advantages, including its status as a major shipping port, that officials think give it an extra edge to become a magnet for financial services.
Slow Start
Deng’s remarks in 1991 were followed a year later by a report on Shanghai’s future penned by then-president Jiang Zeming. His report to the 14th National Congress of the Communist Party of China outlined a goal to “build Shanghai into one of the world’s centres for economic, finance and trade.”
Years later, during a trip to the city in 2004, President Hu Jintao repeated the government’s interest in making Shanghai an international financial hub.
The latest Shanghai government plan modifies the course backed by top government officials over the past 18 years by adding a new element designed to boost shipping as well as build a financial hub.
Experts inside Shanghai’s financial circle and at its universities have high expectations for the two centres policy as a breakthrough for city development.
Until now, Shanghai Academy of Social Sciences’ Institute of National Economy Deputy Director Yang Jianwen said, the government’s policy “limited Shanghai’s development to becoming a world financial centre.” The latest plan is designed to meet financial industry requirements and give Shanghai priority in competing for business in the sector against other Chinese cities.
For starters, the plan calls for promoting and giving priority to the financial services industry by supporting Shanghai-based joint-venture securities companies and funds in step with financial market development.
Shanghai’s financial industry would receive several practical advantages, such as an opportunity to expand the scale of yuan-denominated bonds used by international financial institutions. Foreign companies with long-term operations in China would be allowed to issue yuan-denominated bonds, and qualified foreign enterprises would get permission to raise money through yuan-based stock.
The plan also calls for giving corporate income tax breaks to Shanghai-based banks with foreign investors, at least on an interim basis, as well as introducing a pilot program to attract foreign-owned credit rating institutions.
Other aspects of the plan call for import tax advantages for shippers who use the port in Yangshan, south of Shanghai, luring internationally competitive financial holdings groups, and encouraging a wide range of financial service businesses.
Urban Rivalry
To meet the goals, Shanghai has to become a domestic financial centre – a status the city cannot expect to achieve without building good relations with policymakers, the People’s Bank of China, China Securities Regulatory Commission, China Insurance Regulatory Commission and China Banking Regulatory Commission.
Moreover, Shanghai needs good relations with rival cities including Tianjin, Beijing, Chongqing and Shenzhen, which also in recent years have worked hard to attract financial services.
Consider Tianjin which, thanks to policy support, now poses a serious challenge to Shanghai. Its city government has been working to make Tianjin a financial centre since former central bank president Dai Xianglong became mayor in 2003 and, three years later, the State Council approved Tianjin’s Binhai New District as an experimental zone for financial reform.
“Important reforms for financial enterprises, financial businesses, financial markets and financial opening may first undergo trials in the Tianjin Binhai New District,” the State Council said. The decision triggered the launch of the 20 billion yuan Bohai industrial investment fund.
Beijing presents an even greater challenge with its headquarters for party committees, financial supervisors and most big banks. The capital city is in a strong position for businesses seeking to lobby for policy support, investors and talent.
Beijing’s shift to financial service began in 2003, when a former financial sector expert Wang Qishan took office as mayor. Two years later, the city government announced plans to promote financial services, offering subsidies of 10 million yuan to new, Beijing-based financial companies that registered with more than 1 billion yuan.
Beijing has overshadowed Shanghai in its ability to promote mergers and acquisitions among financial institutions, while introducing foreign strategic investors. In 2005 alone, for example, Huaxia Securities Co. merged with Beijing Securities Co., the Bank of Beijing and Huaxia Bank introduced foreign investors, and Beijing Rural Commercial Bank opened.
Beijing also gave tax breaks to Beijing-based financial institutions and their staff. The city offered employee currency and housing subsidies, Beijing residency and support for staff members’ children.
Trade Advantages
But Shanghai has received policy support as well, and is now one of the world’s most intense financial trading centres, with active markets for stock trading, inter-bank loans, bonds, foreign exchange, commodity futures, financial futures and gold. Some 395 foreign financial institutions have offices in Shanghai – more than any other Chinese city.
This development followed the path promoted by Li Yang, director of the Institute of Finance & Banking at the Chinese Academy of Social Sciences, and a member of the city’s international financial centre construction expert committee. In 2007, Li said the city should base its financial development on the market, not central government decisions. He said central government support cannot give Shanghai anything unique, so the city should develop its uniqueness as a financial centre based on market principles.
Today, the government sees merit in building on the city’s dual roles in international finance and shipping. Shanghai has long worked toward becoming a centre for international finance, trade and shipping.
Such development would follow in the footsteps of financial centres such as London, where shipping-related financial services through banks, trusts, insurance, leasing and funds have contributed to its rise as a financial hub, said Yan Qingmin, director of the Shanghai Banking Regulatory Bureau.
Indeed, a State Council meeting in Shanghai in 1996 focused on building an international shipping centre. Since then, the port’s capacity has grown to 28 million TEUs, or shipping containers, from about 1.5 million TEUs, making Shanghai the largest cargo port and the second largest container port in the world. The next step, experts say, is for the city to develop shipping services by attracting management talent and establishing a legal system.
Shipping is a capital-intensive industry that requires supplementary financial services. A single ship involves high levels of investment, risk, insurance and services.
“Big shipping enterprises in China all insure through foreign insurance institutions” which are expansive and require high taxes, said a shipping industry source. “Without the financial support from shipping insurance and related shipping financial services, Shanghai cannot be called an international shipping centre.”
But policy support can promote Shanghai’s status as a centre of financial services for shipping, such as insurance, leasing and trusts, according to a source close to financial supervisors.
One prominent aspect of the latest plan is “to build a comprehensive, experimental area for international shipping development” that includes offshore finance, sales tax exemptions for international shipping enterprises, registrations for overseas accounts, and developing offshore finance and international clearing,” said Xu Peixing, office director of the city government’s shipping centre.
Shanghai Deputy Mayor Tu Guangshao said developing a shipping trade market and financial services will play an important role in Shanghai’s development as a financial centre.
But Shanghai is one of several Chinese cities vying for shipping finance business. Its port Yangshan became the country’s first free trade zone port in 2005. Tianjin, Dalian and Yangpu followed suit. That means policy support will be needed if Shanghai hopes to rise above the rest.
Talent, Legal Obstacles
Shanghai also faces hurdles in transforming its industrial sector to high-tech, modern services and advanced manufacturing. Already, many of the city’s manufacturing industries have been transferred to Jiangsu Province and other regions nearby.
So far, Shanghai has failed to develop high-end services. An expert close to Shanghai decision-makers said the problem is that services firms, except those in finance, mainly serve local entities.
China’s official newspaper The People’s Daily recently said Shanghai needs to change its economic development and speed up the readjustment of its industrial structure, upgrading for further development. The city government’s latest plan is designed to do that and provide opportunities for sustainable development.
On the other hand, Shanghai suffers from a talent deficit and cumbersome legal environment. New York’s Wall Street employs 400,000 professionals, while the financial sector in London has up to 300,000. Shanghai has more than 100,000 financial staffers yet lags in professional quality, Liu Mingkang, chairman of the China Banking Regulatory Commission said at a May 2008 forum.
Tu agrees that talent will be needed to build an international financial centre in Shanghai. To attract global professionals, the city hopes to build a talent-recruitment mechanism. It’s reforming a government-managed financial talent system, which has become more market-oriented since the vice president of Shanghai Pudong Development Bank was hired in December by a board of directors rather than the city government.
Shanghai also hopes to reform its state-owned asset management system, following Beijing’s example in promoting marketization and opening doors wider.
Another obstacle facing Shanghai is the legal environment. “Many standards and regulations in Shanghai cannot be integrated with international standards and regulations,” a foreign bank official told Caijing.
Tu agreed, saying Shanghai needs international standards if it wants to be an international financial centre with global recognition.
But acquiring worldwide recognition is hard for a city that does not follow the Anglo-American legal system for international shipping, said Zhao Yifei, an expert at Shanghai Jiao Tong University. On the other hand, the ports of London, New York, Hong Kong and Singapore follow the centuries-old system through which they draw up shipping documents and contracts.
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