On Shanghai’s strength & weakness

The financial industry in Shanghai has so far developed very well. I think the Shanghai government has taken a rather open approach in the financial sector.

We’ve seen the opening-up of the banking sector. Foreign commercial banks are able to incorporate local subsidiaries, which allow us to expand our activities in China.

Of course, there are still areas that can be improved, such as product innovation. There’s a difference between what can be offered onshore and what banks can offer offshore. We understand it’s a step-by-step approach, and it cannot happen over the night. However, product innovation is what it will take for Shanghai to be more competitive versus the other international financial centers in the next few years.

The government needs to provide the framework. We’ve already seen a lot of reforms over the past 18 months in areas like yuan internationalization, where the Shanghai government has taken a very proactive approach. For example, documentation, checking and submission have been simplified for us to do cross-border trade transactions. That’s a big step forward to provide a better framework under which foreign banks can further develop products.

In certain areas, banks obtained licenses to transact and operate in different activities. I think the number of players in the market is rather limited. For the actual volume of the activities to pick up, you need more market players to join. A bigger group of players in the market will provide more depth and enhance liquidity.

The market volume for cross-border yuan has been increased substantially, such as yuan-denominated letter-of-credit transactions. There is more talk about areas like cash management, especially offshore cash pooling. This is very critical for future development because a rising number of companies are accumulating yuan in China. We’ve seen very successful companies generating quite substantial cash flows year-to-year. It is through the recycling of this cash that some of the multinational companies can make the funds flow between offshore and onshore in a more effective way. A lot has been done in this area. We have been working within the framework to innovate and to come up with new products to service our clients.

On yuan convertibility

The financial industry in Shanghai has grown a lot since China joined the World Trade Organization. A lot of institutions are coming in, not only to set up offices here but also to become locally incorporated banks like us.

I think yuan internationalization is the area that banks will be pushing very hard. As a main player in global capital markets, we are very keen to participate in the development of the capital markets, especially the debt market in China. China is the fourth-biggest bond market after US, Japan and France. It provides a different mechanism for companies to raise money. The percentage of contribution from China business is getting larger for multinational companies. The need for these companies to tap the local capital market to raise financing for future investment is critical.

There are a lot of companies in the world that have succeeded in product innovation, but, more importantly, they have succeeded in finding a good mechanism to raise funds for local expansion. If foreign companies are allowed to tap the local capital market in China, it will give them another avenue to further develop their business onshore.

The full convertibility of the yuan means a lot to our business here. I was very happy and encouraged to see the announcement of the pilot free trade zone in Shanghai. One of the items mentioned in the outline was the convertibility of the yuan. I think this is one of the major elements to enable Shanghai to become an international financial center.

In general, the ability for companies and financial institutions to flourish in a closed economy could be limited. For China to take the next step to allow full convertibility of yuan, it means we are in the position to assist companies to hedge both foreign exchange and interest rate exposures.

On free trade zone

I’m optimistic about the outlines that government has issued for the zone. I believe there will be a lot more guidelines to be released in the future. I’m very encouraged by the first step that the government has taken. I welcome future reforms in the zone. It’s definitely moving the right direction.

On economic reforms

We are locally incorporated and headquartered in Shanghai. Being right next to the free trade zone, and maybe able to operate in the zone in the future, is obviously advantageous to us.

I think tax incentives will attract more multinational corporations to invest in Shanghai. We will bring added value when our clients from Europe and North America come to China with large investments.

Other advice

 I think Shanghai has done a lot in the last few years. My personal observations in a few areas might further assist Shanghai’s development into an international financial center.

One is that legal reform will continue to be very important. We’ve seen a lot of reforms in the legal space over the time, for example, the bankruptcy law. I think Shanghai could take the lead in developing a better legal system, which is very important for companies when they look at additional investment in the country.

The second thing is attracting, training and retaining talent. The ability to bring people with different skill set to Shanghai is important. If you look at the international financial markets in the world, such as Hong Kong, Singapore, London and New York, each of them has developed very differently. The experiences gathered from different financial markets can contribute to the future development of Shanghai.

The other thing is to attract Chinese overseas students to come back and utilize what they’ve learned abroad in their home country. The government could assist in this process by providing some incentives to attract these students to return.

Training is also very important. This is an industry that attracts a lot of people. The demand and supply situation is still imbalanced. Because the growth of the financial sector in Shanghai is so fast, the supply of good people has been inadequate. There are a lot of opportunities in different organizations that they may find themselves attracted to.

It’s important that financial institutions provide good in-house training programs for them to grow with the organization and feel they are part of it.

An open insurance market leads to strengthened institutional capacity, high quality regulation, sound supervision and transparency.