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Tony Cheung - Partner, KPMG China
Print Edition
On Shanghai’s strength & weakness
Undoubtedly, Shanghai is the key financial center domestically for China’s capital, currency, interest rate, commodity, financial derivatives, gold and insurance markets. To foreign financial institutions, Shanghai is also seen as the destination of choice for setting up a presence in China.
Shanghai is on the right trajectory, and, as its legal system and talent pool develops, it will find itself in an increasingly strong position as China’s international financial centre. Yet, consolidating Shanghai’s position as a global financial and services center will face certain obstacles and will need implementation of a gradual process that involves interest rate liberalization and yuan convertibility, relaxing limitations on foreign financial institution operations while at the same time building up confidence in its legal framework.
On yuan convertibility
Full liberalization of the capital market will be a tremendous development for foreign investors, the importance of which cannot be understated. Being able to readily convert between the yuan and foreign currencies gives a great deal of flexibility in investments and assets allocation. For financial institutions, this could also lead to growth in yuan trading and settlement volumes, bringing up fee and commission income as new products and risk management solutions are rolled out while benefiting from a more flexible regulatory environment.
On free trade zone
The establishment of the China (Shanghai) Pilot Free Trade Zone will lead the way for innovation in China’s trade supervision model. In the free trade zone, supervision of the state border will focus mainly on passengers, while goods will be subject to centralised, categorized and electronic supervision and will be able to flow efficiently and swiftly within the zone. These reforms will effectively enhance the development of modern service industries in the free trade zone, such as trade and shipping, leading to the formation of an attractive and competitive international logistics center.
The pilot content of the zone will gradually extend to the free exchange of the yuan and the liberalization of interest rates, which will promote the capital turnover of enterprises and bring about the formation of a new northeastern Asian, or even Asia-Pacific level, offshore financial center.
On economic reforms
Shanghai was the first city in China to implement the value added tax (VAT) reforms in January 2012.
Those reforms helped to reduce the tax burden on businesses because they allowed businesses in the services sector to claim VAT credits for the goods, fixed assets and services they consume. The VAT reforms have also assisted the development of Shanghai’s services industry internationally because they allow businesses to zero rate or exempt services that they provide to overseas parties. This means that when R&D services, transportation and logistics services, IT services and consulting services are provided to overseas companies and consumers, no VAT is payable. This compares very favorably with the previous system, under which the 5 percent business tax was payable.
The Chinese government is planning to expand the VAT reform in 2014 to other industries such as financial services and insurance, real estate and construction. Given the importance of these industries to Shanghai’s economy, such a development will be awaited with interest.
Other advice
For any organization, having greater access to global markets, a wider range of financial instruments, a sound regulatory environment, a more transparent legal system, a larger talent pool and reduced transaction costs means enormous opportunities.
As the city moves toward its goal of a world-class financial center, companies will not just view Shanghai as the potential place for their head offices in China, but also for their regional head office in Asia.
The most fundamental issue is the creation and cultivation of an environment that draws the best and brightest, not just country-wide but globally. Shanghai needs to address issues around food safety, healthcare resources, air quality, traffic congestion, education and income taxes in order for the city to attract and retain the best.
We see substantial opportunity for Fidelity to participate in the free trade zone and play a leading role.
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