Thu, Jan 18, 2007 - Page 9 News List

Hong Kong and Shanghai duel

Boasting a clear endorsement by the Chinese government, Shanghai has become an increasingly formidable rival to the financial giant

By Keith Bradsher and David Barboza  /  NY TIMES NEWS SERVICE , HONG KONG

But the most intense rivalry is between Hong Kong and Shanghai. Each strives to impress businesses and regulators that it is the best place for Chinese businesses to raise money and investors to give it to them.

It is one of the oldest rivalries in Asia, dating back more than a century. The Hongkong and Shanghai Banking Corporation, these days HSBC, was started in Hong Kong on March 3, 1865, and opened for business in Shanghai a month later.

While Shanghai overshadowed Hong Kong in many ways before World War II, Hong Kong regained leadership after the Communist Party takeover in 1949, and benefited from the emigration of thousands of Shanghai businesspeople. But in the 1990s, the rise of a Shanghai faction of politicians in China, including then president Jiang Zemin (江澤民), resulted in many policies that favored their city.

Since taking China's top jobs in late 2002 and 2003, President Hu Jintao (胡錦濤) has tried to limit Shanghai's influence.

With the city mired in a corruption scandal, Hong Kong is trying to seize the initiative again. As Hong Kong's leaders repeated again and again on Monday, Hong Kong has advantages now that include rule of law, extensive financial expertise, a tradition of strong corporate governance, widespread knowledge of English and close ties to global markets.

As a result of listings by big Chinese banks and other institutions, Hong Kong's main stock exchange had a greater volume of initial public offerings last year -- valued at US$41.22 billion -- than any other stock exchange, although more money was raised in London overall.

But while Hong Kong aspires to be an international financial center, it is sometimes derided in Asia as a "one-legged stool" -- a powerhouse in equities trading, including a doubling of trading in stocks and derivative warrants last year, but without another leg to stand on.

Close to 200 bond issues are listed in Hong Kong, but local banks and insurance companies tend to buy them up when issued and then sit on them for years, with minimal trading. The local government runs a budget surplus, and while it has issued a small volume of bonds to help create a market, these also trade in very low volume.

While corporate bond trading is still in its infancy in Shanghai as well, the trading of government debt securities there has picked up. The Chinese central bank has had to issue tens of billions of US dollars in notes to sop up the enormous amounts in yuan it is pushing into the market to prevent China's currency from appreciating in value against other currencies.

Hong Kong business leaders are dismissive of Shanghai's stock market. Hong Kong exchange chief executive Paul Chow (周文耀) said in an interview on Friday that it "is predominantly a retail market, Hong Kong is not."

But although Shanghai's stock market is still considerably smaller than Hong Kong's, it is also rising faster and was the world's top performer last year, up 130 percent.

Shanghai has lost a couple rounds lately. The government authorized Hong Kong last Wednesday to begin trading bonds denominated in yuan, and has selected Tianjin, a big port near Beijing, not Shanghai, for an experiment with limited convertibility of the yuan.

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