The Feasibility of Establishing an International Financial Center in Shanghai

Abstract

This article examines the feasibility of establishing an international financial center in Shanghai by 2020. It analyzes the national regulations and incentives that need to be implemented and evaluates whether the financial market liberalization measures undertaken so far by China meet the requirements for the success of this strategy. It concludes that elevating Shanghai to a primary international financial center providing multiple financial services to domestic and foreign clients is decades away under the sequential approach to liberalization. However, in the short run, Shanghai can emerge as a regional financial center catering essentially to the funding needs of Chinese businesses.

Keywords:

• China
• Shanghai
• international financial center
• feasibility

ACKNOWLEDGMENTS

This research was funded in part by a grant from the Professional Staff Congress of the City University of New York. The views expressed in this article are the author's own and do not represent those of the City University of New York.

Notes

1. For the State Council announcement, see news.xinhuanet.com (2009). For China's twin surplus in the current account and the capital account, see SAFE (2009). For “official” estimates of and the “real” size of China's foreign exchange reserves (amounted to $2.5 trillion as of June 2010, according to official estimates), see, respectively, SAFE (n.d.), and Setser and Pandey (n.d.). For a detailed explanation of the reasons behind the high Chinese savings rate amounting to 50 percent of gross domestic product, see Zhou (2009b).

2. Singapore, for example, has gained handsomely from the substantial presence of international banks and other financial institutions on the island. The presence of a large number of international players in Singapore has been conducive to transfer of external skills and has helped induce substantial investments in the island by multinational corporations. But by far the most important contribution made by international financial institutions in Singapore has been in supplying a pool of hard currency funds to local and regional borrowers that have historically been used for development purposes. Aside from trade credit financed by the international banks, local Singaporean and regional Korean and Japanese entities have made extensive use of the longer-term Asian dollar bond market and the secondary market for negotiable certificates of deposit. Thanks largely to the presence of a large number of international players, Singapore today is a leading center for offshore banking, foreign exchange, commodities derivatives, asset management, insurance, and real estate investment trusts. As such, it has also been able to attract a large number of expatriate investment professionals, hedge funds, and private equity funds (Monetary Authority of Singapore, 2008–2009; Monetary Authority of Singapore, 2009a).

3. For an analysis of the informal Chinese credit market, see Cong (2009, pp. 63-88) and C. X. Liu (2007).