A TALE OF TWO CITIES SHANGHAI HONG KONG

A TALE OF TWO CITIES ——SHANGHAI & HONG KONG AS INTERNATIONAL FINANCIAL CENTRES By Yim, Hosea Zhang, Herbert

Shanghai’s successful bid for the 2010 World Expo Hong Kong’s failure to get host of 2006 Asian Games Shanghai announced in April 1990 its plan to develop the Pudong New Area, and its ambition to re-emerge as a major international financial, commercial and shipping centre by the first decade of 21 Century. VS Since Hong Kong was handed back to China in 1997, it has suffered something of an identity crisis. Apparently, Hong Kong was in a dither.

Shanghai Financial: Lujiazui Financial District in Pudong New Area In 2005 the State Council reaffirmed the positioning of the 31. 78 km² Lujiazui area, as the only finance and trade zone among the 185 state-level development zones in mainland China. Shanghai’s GDP of Finance: More than 10% of total, March 2009: Growth Rate: 26% Commercial: Shanghai's commercial sector saw rapid growth in 2007, with total commodity sales amounting to Rmb 2, 040. 1 billion, an increase of 31. 6% over 2006. Wholesales showed a year-on-year growth of 35. 8% while retail sales were up by 14. 5%. Shipping: Yangshan deep-water port: The third phase will be completed by 2010 with seven berths, When fully completed in 2012, the port will have four phases in operation with 30 berths capable of handling 15 million Twenty Equivalent Units annually (Largest in the world) US$ 12 Billion

Typologies of Financial Centre Teleological Perspective Functional Center Paper Center Geographical Perspective National or Domestic Centre Historical Perspective International Centre Traditional Centre Integrated Centre Segregated Centre Hong Kong Shanghai Financial Entrepôt Offshore Banking Centre

Typologies of Financial Centre Paper Center A location for recording financial transactions only, but little or no actual banking or financial business is carried out there. Many transnational financial institutions find it convenient, for example, to keep “shell” offices in jurisdictions where taxes and prudential regulations are nonexistent or nominal, in order to minimize their overall costs. Integrated Centre Refers to one in which no artificial barriers exist between onshore and offshore markets, so that once a financial institution is established, it can engage in both onshore and offshore business, whether denominated in home or foreign currencies, without restriction. Segregated Centre One in which the authorities make clear distinctions between onshore and offshore markets, or between domestic- currency-denominated and foreign-currencydenominated businesses. A segregated centre is more often called an offshore financial centre (OFC). The term offshore banking centre is also used, implying that only the banking sector is internationalized. Financial Entrepôt. It is defined as a centre that offers the services of its domestic financial institutions, money markets, and securities markets to both domestic and foreign residents.

Typologies of Financial Centre What Makes an IFC? What are the significant characteristics, in quantitative terms, of an IFC? What are the necessary conditions, or prerequisites, for a city to become a genuine IFC?

Shanghai and Hong Kong: Macroeconomic and Financial Center Profiles Population GDP (RMB billion)(2009) GDP per capita (ratio) 2009 2001 Average annual real GDP growth 2009 Exports of Goods &Service Average annual growth rate (last decade of 20 Century) Imports of Goods &Services Average annual growth rate (last decade of 20 Century) Shanghai 13, 270, 000 1, 490 1 1 8. 2% Hong Kong 6, 759, 500 1, 433 2. 7 5 -2. 7% 141. 91 20. 6% 457. 6 (including Transshipment) 8. 0% 135. 82 17. 8% 434. 21 8. 5%

Shanghai and Hong Kong: Macroeconomic and Financial Center Profiles Banking Sector Shanghai Hong Kong Deposits (US$ billion) 135. 8 436. 73 Foreign currency deposits (US$ billion) 18. 92 198. 96 Loans (US$ billion) 103. 2 280. 13 Foreign currency loans (US$ billion) 12. 87 68. 88 Loans Abroad (US$ billion) n. a. 39. 69 Balances due to banks abroad (US$ billion) n. a. 187. 03 Balances due from banks abroad (US$ billion) n. a. 276. 87 Clearing House daily turnover (US$ billion) n. a. 45. 15 Interbank market daily turnover (US$ billion) 23. 44 26. 42

Shanghai and Hong Kong: Macroeconomic and Financial Center Profiles No. of banks and depository institutions: Shanghai Hong Kong Domestic 18 46 Foreign 53 204 Insurance No. of insurance companies: Domestic 18 100 Foreign 14 106 Premium income (US$ billion) 2. 2 2. 5 Registered intermediaries n. a. 33, 187 Fund Management No. of unit trusts or mutual funds: Domestic 23 90 Foreign n. a. 1, 800

Historical Overview: Shanghai Modern Western-style banking and finance was introduced into the two cities at approximately the same time after the end of the First Opium War 鴉片戰爭 1936, 47 foreign banks Head Offices in Shanghai. Chinese Banks Yearbook, in 1936, of the 164 domestic banks in China, 6 government owned banks. 72 traditional Qianzhuang, 40% national deposit Shanghai was also the place where modern financial markets were concentrated Insurance Center: 166 foreign insurance companies and 48 domestic insurance companies

Historical Overview: Shanghai “Shanghai at that time was not only the largest financial centre inside China, but was also an international financial centre in the Far East”. Economics historians Hong and Zhang Japan’s aggression against China was the immediate and most important cause of Shanghai’s decline as a financial centre. Bund, Shanghai

Historical Overview: Hong Kong 1941 - 45 when Japan occupied H. K. Victoria Harbor 1946 After WWII, H. K. enjoyed prolong peace 1966 after banking crisis Late 60’s Mid 1970’s ready to issue new bank licences 1982 take off interest withholding tax on foreign currency 1989 abolish all form of tax on interest

Strength and Weakness H. K. ’s Number of regional headquarters and regional offices are much greater than Shanghai’s

Strength and Weakness Shanghai does not have full capital mobility since there are extensive controls over capital movement in China Also RMB is not full convertible, it would take some time to do so On the other hand, H. K. has long history of full convertibility and capital mobility

Strength and Weakness The banking system is crippled by non-performing loans (NPL) Official figures: about 24% and in the private sector is more then 40% In economic advance regions such as Shanghai, Jiangsu, and Zhejiang provinces had avg. of 7%~12% Basel Accord require minimum of 8% capital adequacy ratio (CAR)

Strength and Weakness Compared to Hong Kong who have CAR of 16% which is one of the highest in the world A NPL ratio of 5. 05%, which is much lower default loans compare to Shanghai.

Strength and Weakness Free flow of information still remains a problem in Shanghai. Central Government censors sensitive political and social news still exist. After all the Central Government own all mass media in China Hong Kong has much higher free flow of information since media are privately owned.

Strength and Weakness Main issue in Hong Kong is the growth rate trend. It drop from 9% to 2% from 1960 to 2008 Shanghai's GDP for 2008 hit a 16 -year low at 9. 7 percent year-on-year Hong Kong Annual GDP Growth Rate 1960 -2008, World Bank Group

Strength and Weakness Shanghai have a much larger bond and commodity market. Its national financial center is unchallenged. They monopolized the foreign exchange market and interbank market 2009: 1% of China population accounted for 9. 1% of total bank deposit Thus making Shanghai a huge magnet for FDI and domestic direct investment 10% of China's contracted FDI, 13% of China's Imports

Strength and Weakness Have well-diversified industrial structure Larger science and technology talents R&D also much better compared to H. K. 2001: Shanghai science and tech score was 3. 294 compared to H. K. ’s 3. 226 Experiencing much higher GDP and foreign trade growth. Catches up/ supass Hong Kong in no time.

Conclusion 2008 Shanghai Municipal Government promulgate some policies to encourage MNCs to establish RHQs They provide incentives such ass cash allowance and awards, financing management support, simplified entry-exit formalities for staff, and customs clearance In 2008 Shanghai has 626 headquarter-type foreign-invested enterprises have been approved

Conclusion In 2009 introduced new policy to encourage private equity / venture capital in Pudong. PE/VC that establish since 2008 have paid-up registered capital of RMB 500 million will grant a lump sum of RMB 5 million. Partnership PE/VC that raised funds reach RMB 1 Billion will grant RMB 5 million Up to 40% tax rebate, senior management may also entitle house allowance up to RMB 200, 000 / person

Conclusion 2007 China’s capital controls remain substantially binding. Thus, China does not have full capital mobility yet. Full convertibility of RMB is not achieve yet.

Conclusion In 2010 Shanghai’s CAR is reach up to 10. 16%, which is well above 8% minimum requirement by Basel Accord. China also require banks to maintain CAR of at least 10% up from 8% and Shanghai Pudong Development Bank to keep their core CAR at 7% from 4%.