SHANGHAI'S ambition to turn itself into a global financial hub doesn't stop with the world of money. The city also wants to leverage its emerging financial clout across other spectrums to transform the economy to meet the needs of the 21st century.

Guidelines issued in August outline incentives and other investment support to propel development in industries the city considers part of its growth strategy. It is targeting sectors such as green technology, auto making and other high-value manufacturing, information and communications technology and innovative smaller businesses that have traditionally had trouble getting bank loans.

The city is trying to steer its economy away from past over-dependence on heavy, dirty manufacturing and exports. It wants to develop a modern services industry and manufacturing that stands at the forefront of advanced technologies.

"The financial industry doesn't stand alone," said Shanghai Mayor Han Zheng. "That sector has a key role to play in helping Shanghai speed up its industry upgrading."

New rules

In the first mandate focusing on "financial leverage economic upgrading" in China, the Shanghai government makes it clear for the first time that districts may treat private-equity or venture capital companies as quasi-financial players. Such companies are presently excluded from the definition of "financial institutions" in national regulations.

Shanghai is also encouraging local companies to invest in private-equity funds and attract the best fund management companies they can.

Private equity and venture capital are growing rapidly as investment tools in China because they are a major source of money for smaller private companies.

Biochemical, information technology and retail sectors, which the city is trying to upgrade, are also among the segments favored by private-equity and venture capital investors.

The city is already becoming a major base for these new investment avenues. So far, 101 private-equity management companies have been set up in Shanghai.

Burgeoning small private businesses in Shanghai, such as 9diamond.com, have been able to expand because of capital provided by venture capitalists.

Small businesses often lack the collateral to secure loans from banks. The city is now encouraging smaller credit agencies to set up shop to provide more "minor-league" loans needed by smaller businesses to expand.

As of the end of June, 50 small-credit companies were approved to operate in the city. Of those, 43 have already started lending, providing a pool of more than 10 billion yuan (US$1.5 billion) to smaller companies.

To push banks to lend more to small businesses, Shanghai also is encouraging more government-backed financial guarantee companies to help small companies secure loans.

The government-supported companies can offer guarantees to commercial banks, making loans to small business more attractive.

Such guarantee quangos have in the past been too conservative in offering loan guarantees or collateral for bank loans, city officials said.

"A new incentive mechanism will be thrashed out not only to review the ability of guarantee companies to secure capital but also their ability to leverage loans," said Fang Xinghai, director of Shanghai Financial Services Office.

The city aims to almost double its funds for financial guarantees to small companies to 2 billion yuan by 2012.

More initiatives are in the pipeline.

The Shanghai Financial Services Office said the innovations relate to products, management, services and systems and all are key to boosting economic restructuring.

Banks are also being called on to be more innovative in lending criteria.

Shanghai Dongsheng New Material, a private company focusing on the development of new materials, is among the companies already benefiting from the new initiative. The company, whose fixed assets were already tied up as collateral for bank loans, needed new investment for growth.

The company managed to secure 3 million yuan from the Bank of China, with its patent related to calcium carbonate backing the loan. Using intellectual property as a repayment guarantee is an example of new thinking embodied in the government's strategy.

Tu Guangshao, the city's vice mayor in charge of the financial industry, has devised a road map for the "finance leverage industry" program.

New markets

Shanghai already provides companies seeking capital with the benefits of the Shanghai Stock Exchange, China's largest bourse.

New auxiliary markets are now being set up as part of plans to expand investment opportunities.

Against that backdrop, the first over-the-counter equity exchange in the Yangtze River Delta region was set up in Shanghai in late July.

The OTC exchange is in Zhangjiang Hi-Tech Park in Pudong New Area and will initially help start-up firms in Shanghai and other cities in the Yangtze River Delta region to raise money.

The bourse will be gradually expanded to become a national exchange to promote high-tech firms and increase industry upgrading.

"What counts most is to let the market play its role," Tu said.

"The main board, the small and medium company board, the Nasdaq-style ChiNext board and the OTC market together create a multi-layered market system to meet the demands of varying companies."

The "finance leverage economic upgrade" program is not merely government hype, but rather a necessity if the city is to retool its growth engine.

In the first half of this year, fixed-assets investment inched up 2.2 percent, compared with growth of 9.6 percent a year earlier.

"As a Chinese saying goes: The duck is the first to feel warmer water when spring comes," said Ma Hong, a deputy director of the Shanghai finance office.

"The financial industry," he added, "has already felt the pulse and the necessity of economic upgrading as growth in investment loans slipped during the economic slowdown."

Shanghai is expected to post economic growth of about 10 percent this year as the city walks a fine line between growth and the need for economic stability, Mayor Han said earlier.

The city's gross domestic product increased 12.7 percent in the first half, after surging 15 percent in the first three months.

Shanghai, often called "the Paris of the East," once reigned supreme in Asia as a city of progressive enterprise and high-quality manufacturing.

The potential to fully regain its former grandeur is not lost.

Indeed, the city dares to embrace bigger dreams. Shanghai's goal to become a global financial hub by 2020, which is part of a national Chinese strategy, depends on its ability to cast off low-value and polluting factories and emerge with an efficient, modern and forward-looking industrial base.

That thrust cannot succeed without participation by financial institutions.