Economy, Talking Point

2020 vision

Shanghai could soon see multinationals listing on its bourse

2020 vision

Some way off, but getting clearer? Shanghai maps out its financial future

The architecture of the Bund says Shanghai has been here before. The city’s most popular tourist attraction runs along the western bank of the Huangpu River, with dozens of buildings that once housed the banks and trading houses of a vibrant (and largely foreign) financial community.

Now it wants to return to its former financial prowess, albeit in newer accommodation and under largely local ownership. And it will do so by 2020, says Liu Tienan, deputy director general of the National Development and Reform Commission, with a financial industry “appropriate to China’s economic power”.

More immediate milestones were outlined too. Regulators hope that exchange traded funds for the Shanghai and Shenzhen boards will be developed this year and, more dramatically, there are plans to allow foreign companies to list on Shanghai’s stock exchange, as well as issue yuan-denominated bonds.

Hasn’t all this been talked about before?

Shanghai’s aspirations for financial hub status are not new, and have drawn sniffy responses from its southerly cousin Hong Kong in the past.

The former British colony doubts the Shanghainese are made of the right stuff as far as attracting international capital and demonstrating financial expertise is concerned (although is careful not to say so explicitly).

But, as the Bund waterfront indicates, Shanghai did once serve as the financial entrepot for the region. Chinese and foreign investors traded in stocks, debentures and government bonds from the late 1860s up until the Second World War.

After a brief reopening at the end of hostilities, the Communists pulled the plug in 1949 and the Shanghai market was not to open again for a further four decades.

Turnover at the Shanghai bourse last year, however, was the world’s seventh largest.

So why is Shanghai upping the ante?

One view is that China feels in a position of relative strength – and such are the best times to act. Some remember how China used the the aftermath of the 1997 Asian financial crisis to push through a number of trade reforms leading up to WTO entry.

Buoyed by its international creditor status, as well as one of the few economies still showing growth, China is plotting a course towards a more liberal financial infrastructure. But one in which it will play an increasingly dominant regional role. All of this can be best achieved whilst its western peers remain distracted and low in confidence in the wake of the credit crunch.

The second perspective is less buoyant. It suggests that the state-driven growth model that has served the country so well over the last two decades is now nearing the end of its useful life. The channelling of low-cost loans into large state investment projects and low tech export capacity will not continue to deliver the same returns, experts say.

So Beijing is laying the ground for the next phase of economic development, one in which a wider range of equity and debt market alternatives will not only provide new access to capital but also allocate it more efficiently.

Which view holds up best?

China’s newfound confidence in international financial debate is real, from the call of Zhou Xiaochuan, governor of China’s central bank, for discussion of a new global super currency to Chinese policymakers assurances that the country will avoid the mistakes of the Wall Street model.

But the bleaker prognosis holds some truth too, and the China Securities Journal recognises that the heavy reliance on bank financing has often led to inefficient and unproductive borrowing.

As reported in WiC13, it is now widely agreed that most bank financing is failing to reach the small and medium-sized enterprises that make up the majority of China’s private sector (and which accounts for over two-thirds of national economic output).

But can the city live up to its new billing?

Whichever viewpoint you take, Shanghai’s anointing as the heart of the country’s financial future does imply that major reform is afoot. And foreign firms are already making the right noises as far as a local listing is concerned. The South China Morning Post reported this week on interested parties – they include the Bank of East Asia from Hong Kong, DBS Group from Singapore and even Anglo-Dutch giant Unilever. The China Daily reports that Coca-Cola and Siemens are keen too.

Peter Wong, executive director of HSBC’s Asia-Pacific unit also admitted interest, saying the bank would like to be among the first to raise capital on the Shanghai bourse. He even mulled two possibilities: whether HSBC Group itself would list, or perhaps a spin-off of the bank’s China business. Not that he sees either happening immediately – he predicted it was likely to happen “within a two to three year timeframe.”

Foreign companies in general are attracted by access to a huge potential investor base, and the opportunity to cement relationships with local consumers. If the first group of overseas firms is successful in raising cash through the mainland’s equity and debt capital markets, many others are likely to want to follow.

But others wonder if talk of rivalling New York and London is realistic.

Lu Hongjun, president of the Shanghai Institute of International Finance, points out that both financial centres rose to prominence on the strengths of their respective currencies. Without a freer convertibility of the renminbi, Shanghai will struggle to repeat their experience.

Lu also wonders about the city’s “soft” infrastructure and questions whether a “lack of supporting talents” makes a rapid rise unlikely.

This, of course, is the common retort of Hongkongers to news of Shanghai’s frequent statements of intent. We won’t be losing much sleep, they say, until we see more evidence of reliable accounting systems, solid regulatory oversight, tested legal structures, and the legion of trained professionals necessary to staff the industry.

And this is all still some way off?

Shanghai does still need to develop much of the capacity that Hong Kong alludes to but how does it get to this point without beginning on the path to reform?

Albert Keidel at the Carnegie Endowment expects it to make the journey in a pragmatic way – trying new things out, ascertaining where the problems are, then pulling back and fixing them before trying again. So no big bang moment – just not the Chinese way – but a less dramatic, more piecemeal approach.

In a similar vein, Beijing is beginning to trial wider international access to the yuan. It has signed currency swap agreements with six countries – including Hong Kong – and has also announced a pilot programme in which six Chinese cities – including Shanghai – will be allowed to offer international trade settlement in the Chinese currency.

Experts suggest that these are the first, cautious steps on the road to fuller convertibility; with the endgame of becoming one of the world’s reserve currencies.

With an eye to the future, Shanghai is building the country’s tallest skyscraper – due to be completed in 2014 and set to tower over the Liujiazui financial district in Pudong at 632 metres. Pudong – across the river from the Bund – is already six times the size of Manhattan and generates a GDP equivalent to Uruguay. All that was there in 1992? Empty fields.

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