The competitive position of Shanghai in the Asia-Pacific region: a comparative study

Abstract

This paper looked at 12 International Financial Centers (IFCs) in the Asia-Pacific region by employing hierarchical cluster analysis and principal component analysis and applying them to 10 financial variables. This study has demonstrated that as a result of increased foreign financial institutions’ participation and the expansion of markets’ size, Shanghai is fast closing up the gap with other major IFCs. Shanghai might pose a challenge not only to Hong Kong but also to Tokyo in the next few years if China’s Government further liberalizes its financial markets to foreigners and augments the range of financial instruments.

Keywords:

• International Financial Center
• Shanghai
• Hong Kong
• Asian-Pacific region

JEL Codes:

• G15
• G20

Acknowledgement

The authors thank an anonymous referee and Editor Eden Yu for very useful comments and suggestions, which led to substantial improvement in the paper.

This paper was presented at International Workshop on “Positive and Normative Analysis in International Economics”, held at Aoyama Gakuin University, Tokyo, Japan on March 12, 2010, and “The 18th Annual Conference on Pacific Basin Finance, Economics, Accounting and Management”, held at Graduate University of Chinese Academy of Sciences, Beijing, China on 23-25 July, 2010.

Notes

1. Indeed, good regulatory environment and strong legal protection of investor rights are important factors to determine the competitiveness of an IFC. We owe this point to an anonymous referee.

2. We only present the results in 1995, 2001, and 2007 because Shanghai’s competitive position is still insignificant in 1992. Also, more meaningful data are available from 1995 onwards (Forelisted and Derivative Turnover) and 2001 (Forex turnover). Furthermore there are no significant changes of the IFCs’ status in short-term period between 1995 and 2007.

3. It is regarded that financial development in Shanghai took off since 1992. We made the comparative study in 1992. The result of cluster analysis in 1992 is that: Tokyo forms a cluster on its own while Hong Kong and Singapore together are in the same cluster. All other IFCs in the region are in the third cluster. The result of principal component analysis shows that the ranking of IFCs for Factor 1 is as follows: Tokyo, Hong Kong, Singapore, Taipei, Seoul, Sydney, Bangkok, Kuala Lumpur, Shanghai, Jakarta, Manila, and Wellington. The results are obtained by using twelve variables: FFA, FFL, BANK, FBO, BOND, CAP, the number of large internationally active banks headquartered in the IFC, total value of shares traded in the IFC stock exchange, the number of domestic companies listed on IFC’s stock exchange, foreign exchange reserves of the country, exports from the country, and imports to the country annually.