From building the world’s biggest dam to engineering blue skies for the Olympics, China’s leaders have earned a reputation for achieving improbable goals.
So when the Chinese government declared last April that it wanted to make Shanghai an international financial center by 2020, the news sent a ripple of anxiety through Hong Kong.
The authorities were anointing Shanghai as the country’s financial center and Hong Kong, the financial metropolis on China’s southern coast, seemed sure to lose out.
T.C. Chan (陳子政), a well-known Hong Kong banker, captured the mood.
“Will Hong Kong become a Boston?” he asked.
“If you can be a New York, you don’t want to be Boston or Chicago,” he added, referring to two cities that have long lived in the shadow of the US’ main financial and cultural center.
Shanghai is indeed working hard to transform itself into the region’s New York. New skyscrapers continue to rise, including the 101-story Shanghai World Finance Center, meant to be the Asian headquarters for international banks. The city is expanding its subway system in preparation for the 2010 World Expo.
And financial reforms are on the table again.
“A number of long-anticipated capital markets initiatives that were put on the backburner in late 2007 are now returning to the forefront,” said Jing Ulrich (李晶), chairman of China equities and commodities for JPMorgan.
Those include index-tracking exchange-traded funds, a program to allow foreign companies to list on local exchanges and long-awaited financial and commodity futures.
But the outcome of the Shanghai-Hong Kong rivalry is not clear. In many respects, Hong Kong has an edge. While Shanghai’s market capitalization is larger, the Hong Kong Exchange (HKEx) boasts more listed companies: 1,297 compared with 869 in Shanghai. Hong Kong has also emerged as the world’s most popular venue for initial public offerings this year.
Hong Kong, a city where US$300,000 Ferraris were common even at the peak of the crisis, enjoys certain first-mover advantages. It has accumulated not just an enviable collection of regional headquarters for major banks — the likes of Goldman Sachs, JP Morgan and Morgan Stanley — but also a supporting ecosystem of accountants, lawyers and consultants.
And for all its determination, Shanghai faces high hurdles. First, China’s strict capital controls, though gradually loosening, make the city less attractive to global investors.
Similarly, although the pace of financial reform is set to quicken, it has proven unpredictable. Three years ago, the city prepared to launch a new financial derivatives exchange, only to shelve the plans because of regulators’ worries — the fully staffed exchange has yet to trade a single product.
Finally, foreign bankers are not keen to move there — yet. One reason: Hong Kong’s personal income tax is a flat 15 percent, but in Shanghai the limit is 45 percent. A new tax incentive for bankers will cut the top rate to 25 percent, still higher than in Hong Kong.
“It’s not enough,” said Poling Cheung (張寶玲), China head of business development for KCS, a consultancy spin-off of KPMG.
“Usually at a foreign bank, only eight or nine staffers like CEO or CFO level can be considered by the government as senior executives for the tax rebate benefits so far,” Cheung said.
But many bankers agree that sooner or later Shanghai will become a global financial center. A recent Reuters poll of analysts found that most believe the yuan will be mostly convertible by 2020. And if China’s economic growth continues to outpace other major economies the pull for banks will be irresistible.
“Even before the [yuan] becomes fully convertible, Shanghai may still become a major financial hub simply by virtue of the scale of financial services required to serve the growth of Chinese enterprises and capital markets,” Ulrich said.
In one sign of the shifting currents, Credit Suisse’s Hong Kong office party has a new theme this year, according to bankers: “Shanghai Dreams.”
What will happen to Hong Kong? One scenario is a prosperous coexistence.
“This is an issue of the pie getting bigger rather than a zero-sum game,” said Ronald Arculli, the 70-year-old chairman of the HKEx, saying that Hong Kong’s advantages will help it grab a large piece of mainland-related fund flows.
“Today you have a market that is restricted in mainland China. But when everything is open it is just like us competing with New York and London over the past 10 years,” he said.
Arculli did not rule out a future tie-up between HKEx and either the Shanghai or Shenzhen exchanges, however.
A second scenario is that Shanghai will become a big, mostly domestic market, leaving Hong Kong as the preferred route to overseas capital.
Tjun Tang (鄧俊豪), a partner with Boston Consulting Group, said that in the medium-term Shanghai could be handling China’s yuan trade and investment flows while Hong Kong would focus on regional markets.
“The parallel is London and Frankfurt,” he said. “When the euro zone came in, people said that financial markets would decamp from London to Frankfurt. Well, that didn’t happen. But Frankfurt did rise and filled another important role in the market.”
Arthur Kroeber, managing director at Beijing-based research firm Dragonomics, said that in any case Beijing appeared more interested in bolstering domestic capital markets than in competing internationally.
“This has nothing to do with creating an international financial center,” Kroeber said, referring to the 2020 target. “This gives Shanghai a license to be aggressive in building a domestics capital markets infrastructure.”
There is, of course, another possibility: second-tier status for Hong Kong.
“If our markets are liberalized, it will be easy for Shanghai to surpass other markets,” said a senior Shanghai Stock Exchange official who wasn’t authorized to speak with the media. “We can be bigger than Hong Kong. Even bigger than New York.”
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