Hong Kong and Shanghai are locked in an increasingly public struggle to become China's main financial center as a top-level committee in Beijing prepares to meet later this month to map out a national financial regulatory strategy.
On Monday, Hong Kong's highest government leaders and best-known business tycoons made the city's case at a series of televised conferences and briefings.
They called for China to continue letting the biggest state-owned companies make their initial public offerings in Hong Kong, allow the yuan to circulate more widely and dismantle many remaining financial barriers.
Shanghai's efforts have been less public. They have also been harmed by a spreading corruption scandal that has led to the arrest of the city's top Communist Party official and a growing number of business leaders.
But as the traditional center of Chinese business life, Shanghai still has many allies in the capital. It has also emerged as the center of Chinese bond trading and as a favorite headquarters for Chinese and foreign companies.
The jostling between the two cities is coming close to name-calling. Ronald Arculli, chairman of the company that runs Hong Kong's stock exchanges, said that just as New York is the main financial center for the Americas even though Chicago or Toronto may not like it, Hong Kong is poised to become the main international financial center for Asia.
Asked if he was suggesting that Hong Kong was becoming like New York and Shanghai like Chicago, Arculli said twice that this was his goal, adding: "We stand a decent shot of making it there."
That is hardly the view from Shanghai. City leaders and academics point out their biggest advantage: The currency circulating in the streets and markets is the yuan, which foreigners can buy and sell only with difficulty.
Hong Kong has its own currency, the Hong Kong dollar, which is linked to the US dollar. The Hong Kong dollar is internationally convertible but cannot be easily exchanged for yuan on the mainland because of China's capital controls.
"The independent monetary system restricts Hong Kong's ambition to become the financial capital of the country," said Pan Yingli (
In back-to-back ceremonies and briefings on Monday at the main government offices in Hong Kong and at the convention center, Hong Kong officials tried to exploit Shanghai's temporary political weakness and push Beijing into making Hong Kong the primary financial center of China.
"If we do not act now," Bank of East Asia chairman David Li (
Hong Kong and Shanghai are not just competing with each other -- they are also vying with Tokyo and Singapore to become the most important financial center in Asia. Each wants to be the place where investment banks, hedge funds, insurance companies and other big investors send their best and brightest to oversee trading during the hours after the sun sets in New York and before it rises in London.
Each city has its strengths. Tokyo has the region's largest stock and bond markets, although they have attracted less attention lately because they lack the appeal of the Chinese economic boom. Singapore is the main center for trading oil and other energy products and is an important hub for currency trading.
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 (
Since taking China's top jobs in late 2002 and 2003, President Hu Jintao (
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 (
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.
Hong Kong also plans to start trading nondeliverable futures contracts on the yuan this summer, Chow said. And while officials directed General Motors in 1997 to open its initial Chinese car assembly plant in Shanghai, it steered Airbus last year to select Tianjin for an aircraft assembly plant.
But Shanghai is becoming an important center of commodities trading. It has just passed Tokyo as the biggest market for trading natural rubber, testimony to the buying power of Chinese industrial companies.
Hong Kong has very little commodities trading, losing much of its former role in international gold markets. Hong Kong gold prices were quoted around the world in the 1980s, but have become much less important as the handful of local gold traders continue to do business exclusively in Chinese and have not welcomed international banks and trading houses.
Mainland China still has many restrictions on the private ownership of gold, slowing but not preventing the creation of a modern gold market in Shanghai with ambitions to become an important force in global trading. Shanghai is also setting up futures markets to allow Chinese traders to place bets on the direction of the country's interest rates.
Experts said that Shanghai was likely to become an increasingly formidable competitor in years to come and expressed doubt that Hong Kong leaders would succeed in persuading the Chinese government to give their city clear regulatory preference over its rival to the north. Beijing officials are still more likely to think of Shanghai than Hong Kong as a domestic financial market entitled to regulatory favors.
"Shanghai is in a temporary eclipse because of these political factors," said Jack Lange, a partner in the Hong Kong office of the law firm Paul, Weiss. "But Shanghai is where it's happening -- if there is going to be a domestic financial center that gives Hong Kong a run for its money, it's going to be Shanghai."
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