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What Shanghai must do to become a real player
00:00 UTC+8 July 15, 2010
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WHILE Shanghai might be big, can it be international?
A Goldman Sachs report titled "Shanghai in 2020: Asia's Financial Centre" argues that although the city will gain in importance, it is likely to "become a large domestic market rather than a broader regional market."
But that's not what city officials have in mind. They don't want Shanghai to be like Tokyo or Seoul, both of which are impressive and vibrant cities at the hearts of their respective nations but aren't - as Shanghai wants to be - at the absolute center of the global economy, whether in capital markets, trade or commerce.
For that to happen, Shanghai needs two things from the central government: the full convertibility of the yuan and the relaxation of controls allowing the free flow of currencies in and out of the country.
Fang Xinghai, director general of the Shanghai's Financial Services Office, noted in a recent television interview: "The currency will go global and foreigners will hold renminbi (yuan) assets. But where will these assets be created? They will be created in this onshore financial center. So, first of all, Shanghai has to be open to let the assets go out and outside investment to come in. For that to happen, the capability of creating these assets has to be greatly expanded."
The central government has said it wants to make the yuan fully convertible, although it has yet to provide a timetable for that. In a positive step, however, the People's Bank of China (PBOC), the central bank, announced in June that it will allow a strengthening of the yuan.
For now, the government has allowed a limited amount of foreign investment in local markets through its Qualified Domestic Institutional Investor program and has permitted external flows through its Qualified Foreign Institutional Investor program.
It also says it will allow foreign corporate entities to sell equities and bonds in Shanghai.
"Right now, we're waiting for the first international share listings, which will be a milestone for Shanghai becoming an international financial center," says Manop Sangiambut, head of yuan-denominated A-share research at brokerage house CLSA in Shanghai.
He predicts that many of China's "red chips" - Hong Kong-listed and -incorporated mainland companies, such as China Mobile - will be interested in seeking listings in Shanghai, as will multinationals like Coca-Cola and HSBC.
Unlike in the past, government authorities will be encouraging such listings. Still, there's catching up to do. Goldman Sachs bluntly refers to China's onshore capital markets as "relatively immature."
CLSA's Sangiambut adds that many products that are common in other financial centers are lacking or underdeveloped in Shanghai.
For example, margin trading - buying stocks borrowed from a broker - was only introduced on a limited scale this year.
Also, in spite of the growth in both value and volume, the depth of Shanghai's market is limited, having the lowest level of foreign investment and the smallest free float of shares among regional peers.
What do two other Asian financial centers - Hong Kong and Singapore - have that Shanghai doesn't? A flexible regulatory regime.
While these centers might not be able to match their rival's size - according to the World Federation of Exchanges, average daily equity market turnover in 2009 in Shanghai was US$21 billion, in Hong Kong US$6 billion and in Singapore US$970 million - they are seen as fast moving, transparently regulated and investor friendly.
Helping Hong Kong and Singapore are their highly centralized regulatory overseers. Chinese mainland, in contrast, has a regulatory structure that often seems to encourage inertia.
Bond issuance, for instance, falls under the authority of the PBOC, the China Securities Regulatory Commission, the National Development and Reform Commission, and in some cases, the China Banking Regulatory Commission, the State-owned Assets Supervision and Administration Commission or the China Insurance Regulatory Commission.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. All rights reserved. Shanghai Daily condensed the article.)
A Goldman Sachs report titled "Shanghai in 2020: Asia's Financial Centre" argues that although the city will gain in importance, it is likely to "become a large domestic market rather than a broader regional market."
But that's not what city officials have in mind. They don't want Shanghai to be like Tokyo or Seoul, both of which are impressive and vibrant cities at the hearts of their respective nations but aren't - as Shanghai wants to be - at the absolute center of the global economy, whether in capital markets, trade or commerce.
For that to happen, Shanghai needs two things from the central government: the full convertibility of the yuan and the relaxation of controls allowing the free flow of currencies in and out of the country.
Fang Xinghai, director general of the Shanghai's Financial Services Office, noted in a recent television interview: "The currency will go global and foreigners will hold renminbi (yuan) assets. But where will these assets be created? They will be created in this onshore financial center. So, first of all, Shanghai has to be open to let the assets go out and outside investment to come in. For that to happen, the capability of creating these assets has to be greatly expanded."
The central government has said it wants to make the yuan fully convertible, although it has yet to provide a timetable for that. In a positive step, however, the People's Bank of China (PBOC), the central bank, announced in June that it will allow a strengthening of the yuan.
For now, the government has allowed a limited amount of foreign investment in local markets through its Qualified Domestic Institutional Investor program and has permitted external flows through its Qualified Foreign Institutional Investor program.
It also says it will allow foreign corporate entities to sell equities and bonds in Shanghai.
"Right now, we're waiting for the first international share listings, which will be a milestone for Shanghai becoming an international financial center," says Manop Sangiambut, head of yuan-denominated A-share research at brokerage house CLSA in Shanghai.
He predicts that many of China's "red chips" - Hong Kong-listed and -incorporated mainland companies, such as China Mobile - will be interested in seeking listings in Shanghai, as will multinationals like Coca-Cola and HSBC.
Unlike in the past, government authorities will be encouraging such listings. Still, there's catching up to do. Goldman Sachs bluntly refers to China's onshore capital markets as "relatively immature."
CLSA's Sangiambut adds that many products that are common in other financial centers are lacking or underdeveloped in Shanghai.
For example, margin trading - buying stocks borrowed from a broker - was only introduced on a limited scale this year.
Also, in spite of the growth in both value and volume, the depth of Shanghai's market is limited, having the lowest level of foreign investment and the smallest free float of shares among regional peers.
What do two other Asian financial centers - Hong Kong and Singapore - have that Shanghai doesn't? A flexible regulatory regime.
While these centers might not be able to match their rival's size - according to the World Federation of Exchanges, average daily equity market turnover in 2009 in Shanghai was US$21 billion, in Hong Kong US$6 billion and in Singapore US$970 million - they are seen as fast moving, transparently regulated and investor friendly.
Helping Hong Kong and Singapore are their highly centralized regulatory overseers. Chinese mainland, in contrast, has a regulatory structure that often seems to encourage inertia.
Bond issuance, for instance, falls under the authority of the PBOC, the China Securities Regulatory Commission, the National Development and Reform Commission, and in some cases, the China Banking Regulatory Commission, the State-owned Assets Supervision and Administration Commission or the China Insurance Regulatory Commission.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. All rights reserved. Shanghai Daily condensed the article.)
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