City attracts major names from Wall Street
Shanghai has strengthened its position as one of the world's leading financial centers and is attracting some of Wall Street's biggest names despite trade tensions and the coronavirus pandemic, according to experts.
At the end of September, the city overtook Tokyo as the third-ranked financial center, after New York and London, in the latest Global Financial Centres Index.
The index is published jointly by the Z/Yen Group, a leading commercial think tank based in London, and the China Development Institute, a think tank in Shenzhen, Guangdong province.
China's increasing financial liberalization has also seen major outlays in Shanghai by United States investment banks JP Morgan and Morgan Stanley, along with other key institutions such as Blackrock, the global investment company.
At the end of last year, trading volumes in Shanghai's financial markets stood at 1,934 trillion yuan ($288 trillion), nearly eight times the level a decade ago, according to the CEIBS Lujiazui Institute of International Finance, part of the China Europe International Business School, which is based in Shanghai.
The number of licensed financial operations in the city during this period rose from 986 to 1,646.
Mike Wardle, head of indices at Z/Yen Group, said China's strong economy is providing a major boost for Shanghai.
"Shanghai is seen as a place where the real economy supports a thriving financial-sector market," he said.
In the Global Financial Centres Index, Shanghai had a rating of 748, behind first-placed New York's 770 and London's 766 in second place, and just ahead of Tokyo on 747.
The ratings take into account a number of broad criteria, such as the overall business environment, human capital available, infrastructure quality, financial-sector development, and reputation.
"Shanghai has increased its relative ranking in the instrumental factors－the quantitative measures－that underlie the index. It has also had consistently high ratings from financial professionals around the world, who assess the competitiveness of financial centers," Wardle added.
Zhu Ning, a leading expert on the Chinese financial system and professor of finance at the Shanghai Advanced Institute of Finance, said the city is re-establishing its position as Asia's premier financial center, which it lost during the War of Resistance Against Japanese Aggression (1931-45).
"It is being driven first and foremost by the rise of China's economy and the wealth creation that is derived from that. The Shanghai government has also played a role in its endeavor to grow the city as a financial center. You cannot ignore the importance also of China's ongoing reform of the financial services sector, which has attracted capital and talent from all over the world," he said.
Douglas McWilliams, deputy chairman and founder of the Centre for Economics and Business Research, a consultancy based in London, said it had been obvious for a while that Shanghai would surpass Tokyo.
"China overtook Japan as the world's second-largest economy in 2010. It was only a matter of time before one of the Chinese financial centers overtook Tokyo," he said.
This year, the startling development has been the arrival of major Wall Street players against the backdrop of increasing trade tensions between the US and China. Their arrival has been facilitated by bold steps taken by the Chinese government to liberalize financial markets.
In April, the China Banking and Insurance Regulatory Commission brought forward by a year the revocation of laws preventing foreign companies from taking full ownership of those operating in a number of areas, including fund management, futures trading and insurance.
JP Morgan is in the process of completing a $1 billion buyout of its joint venture partner to take full control of fund manager China International Fund Management, while Blackrock, the global fund manager based in New York, was given approval in August to operate a wholly-owned fund management business.
Morgan Stanley, another US investment bank, announced earlier this year it had taken control of its securities joint venture.
European companies are also making moves on Shanghai. Mark Tucker, chairman of HSBC Holdings, the global investment bank headquartered in the United Kingdom, said in a speech in Shanghai on Oct 18 the bank was looking at business opportunities in the city.
Dariusz Wojcik, professor of economic geography at Oxford University, said US companies coming to China at a time of trade tensions between Washington and Beijing is not quite the paradox some assume.
"The presence of US and other foreign financial institutions in China is still small, while demand for sophisticated financial services is growing fast and cannot be met by domestic firms. As such, the Chinese government does not fear the presence of foreign financial firms," said Wojcik, co-author with Youssef Cassis of International Financial Centres after the Global Financial Crisis and Brexit.
"For the US government, the expansion of US firms in China is not a big issue either, as it helps these firms financially, without any job losses in the US."
Koh King Kee, president of the Centre For New Inclusive Asia, a think tank based in Kuala Lumpur, the Malaysian capital, said US companies are being lured by the massive opportunities arising from China's recent liberalization.
"China's financial sector has lagged behind in its reform and opening-up compared with other sectors. With a high savings rate, expanding consumer market and a $25 trillion growing economy, the potential for China's retail and investment banking is unbelievably huge," he said.
Koh said Wall Street companies also know they have the expertise that does not yet exist in China, and want to take advantage of it.
"While technological know-how can be obtained through training and education in colleges and universities, experience and networking are more important in the financial world. This is why Wall Street has an edge over China's Main Street," he said.
Zhu, from the Shanghai Advanced Institute of Finance and also the author of China's Guaranteed Bubble, an analysis of the importance of government support in China's financial system, believes the coronavirus pandemic has been a factor in Wall Street's recent China moves.
"It has restricted opportunities in Europe and the US, where governments have struggled to control the virus, whereas China's economy is already making a strong recovery," he said.
"The Chinese economy and financial markets are simply too big to ignore and still provide growth opportunities, particularly in light of the COVID-19 situation."
Sheng Songcheng, executive deputy director of the CEIBS Lujiazui Institute of Finance, agrees that the pandemic has not halted Shanghai's emergence as a financial center.
"The outbreak has not hindered the implementation of measures for financial opening-up in Shanghai," he said.
There has been speculation, particularly in the West, that Shanghai's rise will only result in Hong Kong becoming marginalized as an international financial center.
However, in the recent Z/Yen Group and China Development Institution index, Hong Kong, like Shanghai, also climbed the rankings, overtaking Singapore to claim fifth position with a rating of 743, compared with its regional rival's 742.
Wardle, at Z/Yen Group, said Hong Kong still has a major role to play and that China is big enough to support multiple international financial centers.
He said Hong Kong still holds a major advantage over Shanghai, as money can flow freely in and out and is not subject to capital controls.
"There continues to be advantages in Hong Kong, not least the ability to trade in the US dollar, but also to move money in and out easily," he said.
"Hong Kong also provides access to a very highly skilled workforce and a business environment which remains ahead of centers on the Chinese mainland."
Koh, at the Centre for New Inclusive Asia, believes Hong Kong still has the potential for a strong future even if mainland financial centers continue to prosper.
"Hong Kong is a free port with no exchange controls. The free flow of capital gives it a distinct advantage over Shanghai and Shenzhen as a world financial center. It serves not only the Greater Bay Area of China but also Taiwan and Southeast Asia."
He thinks that in contrast Shanghai and Shenzhen, as mainland financial centers, will perform very different roles.
"The Shanghai Stock Exchange, for example, could play the role of the New York Stock Exchange, and the Shenzhen Stock Exchange could be the Nasdaq of China, in view of Shenzhen's role as China's Silicon Valley and technological hub," he said.
One of the obvious attractions of the Chinese market is the rising wealth of private investors, who are looking for a home for their money.
According to Oliver Wyman, a consultancy, the amount of money available to retail investors is expected to grow from $24 trillion in 2018 to $41 trillion in 2023.
Much of this wealth is lying relatively dormant in bank deposits－albeit those that provide a better interest rate than in many Western countries－rather than in investment assets.
Wojcik, also chair of the Global Network on Financial Geography, an interdisciplinary network, said there is a clear role for foreign financial institutions in China. This is because Chinese investors often lack confidence in risking their money, and is made worse by scandals involving fraudulent internet finance companies in recent years, he said.
"The asset management industry is very underdeveloped in China, so foreign firms could play a major part in this sector," he added.
Wojcik believes there is a real opportunity for overseas financial institutions to partner with China's big technology companies to reach hundreds of millions of savers.
"This would help diversify their investments into international portfolios and would also have major implications for asset prices worldwide," he said.
Zhu also believes this is a major opportunity for foreign financial players, but it will not be straightforward.
"Wealth management is one highly promising field and foreign players certainly have some clear advantages. For them to make a significant impact, they have to localize their ways of doing things and bridge Chinese clients with international financial markets," he said.
One area where Shanghai and China's other financial centers could take a lead is fintech, where the country is using its expertise in digital technology and payment systems.
Five of the top 10 fintech financial centers in the world are Chinese, according to the Z/Yen and CDI index.
The Chinese government is also set to trial a digital currency. On Oct 23, the People's Bank of China, the country's central bank, announced a proposed new banking law that would recognize the yuan in both physical and digital form.
Wardle, at Z/Yen, said this can only strengthen the fintech base of China's financial centers.
"The Chinese government moving toward a central bank digital currency lends support to the development of yet more fintech architecture," he said.
McWilliams, from the Centre for Economics and Business Research, also author of Driving the Silk Road, believes that because financial centers on the Chinese mainland are just emerging on the world stage, they can take the lead in some of the newer technologies.
"The single most important factor identified for determining a country's competitiveness in fintech is big data analytics capability, and China is by some distance now the world leader in this," he said.
Wojcik, from Oxford University, said the risk is that if China's financial centers became known for fintech and wanted to export their services, they could be subject to the same type of pushback that Huawei has encountered in the US and Europe over its 5G technology.
"China can definitely be the world leader of fintech development. Chinese fintech exports and international expansion are likely, however, to encounter problems abroad," he said.
The big question remains whether Shanghai can directly compete against New York or London as a major international financial center until its capital markets are fully open and money can flow freely in and out of the country.
Wojcik recognizes that, despite Shanghai's recent advances, this factor is a barrier.
"Chinese capital markets are growing quickly in size and depth, but their openness lags behind. China, with fully open financial markets, would be one (place) in which the government has much less control over the economy. It may take decades, or never happen," he said.
Zhu said there is the intent to open up further, but the current uncertain international economic environment makes this more difficult.
"China is continuing its push for RMB and capital account liberalization, but it is probably going to be a gradual and lengthy process," he said.
"I certainly do not foresee a fully open capital market in the near future, due partly to the pandemic and capricious international market conditions."
However, Sheng, also adjunct professor of economics and finance at CEIBS, is more bullish. He believes the events of this year and the relative strength of the Chinese economy, compared with many in the West, could prove a turning point for Shanghai.
"In the post-2020 era, Shanghai will march toward even higher goals for building an international financial center," he said.