The Goal of Shanghai
Chapter 1
The Goal of Shanghai
1. Shanghai’s Former Status as the Financial Center of the Far East
2. The State Strategy to Redevelop Shanghai into an International Financial Center
4. The Future: Plans to Enhance Shanghai’s Status as an International Financial Center
The history of Shanghai, as the most significant financial center in China, is one that reflects the incredible changes China underwent in the 20th century. As early as in the 1930s, Shanghai was already the international financial center in the Far East. At that time, Shanghai boasted a highly developed financial market with not only monetary markets for interbank borrowing, lending, and discounts, but also markets for domestic and foreign exchange. Furthermore, Shanghai also had an established gold and silver market, as well as a securities market, which served as a capital market. The domestic banks that were headquartered in Shanghai accounted for 81% of the members of the bank trade association, and there were numerous foreign financial institutions that had set up their head offices in Shanghai. Thus, for foreign financial institutions seeking to enter China in the early decades of the century, Shanghai was a significant factor to consider.
However, World War II destabilized Shanghai as a base for international financial institutions. The Liberation War (1945–1949) brought about the founding of the People’s Republic of China and foreign financial institutions relocated to Hong Kong. From 1949 through China’s economic reform and opening-up to the outside world in the late 1970s, the financial industry in Shanghai, just like those in other provinces and municipalities across the country, developed very slowly. The financial market was in its infancy with a small number of financial institutions, which were almost exclusively specialized banks with poor managerial structure. Since the financial resources were under the control of the central government, the financial system could barely play a proper role in market financing.
Shanghai has re-established itself as a prominent center for finance in less than 20 years. The economic reforms enacted by Deng Xiaoping in late 1970s and early 1980s ensured that Shanghai would rise again. In 1991, Deng Xiaoping made a historical tour of South China to inspect the region and pave the way for further development. In 1992, a national strategy for developing Shanghai into an international financial center was laid out in a report for the 14th National Congress of the Communist Party of China (CPC). The development of Pudong in Shanghai would be the driving force behind further development of cities along the Yangtze River. As Shanghai would be developed into an international center for trade and finance, the economies of the Yangtze River Delta and the whole Yangtze River Basin would flourish.
In the first decade of the new millennium, a series of major policies were put into effect by the Central Committee of the Communist Party of China and the State Council to implement the development strategy. The Shanghai head office of the People’s Bank of China was set up in Shanghai in 2005, and a prototype development program of the business district of Shanghai in Pudong has set the stage for further redevelopment of Shanghai into a prominent international financial center.
1. Shanghai’s Former Status as the Financial Center of the Far East
Shanghai is the birthplace of China’s modern financial industry, rising from humble beginnings to international prominence. Shanghai has historically been the center for international trade in China, and grew into an unequaled center for international finance in Asia. Despite Shanghai’s decline during World War II, the economic history of Shanghai has laid the foundation for its recent revival.
Shanghai rose to economic significance beginning in the middle period of the Ming dynasty (1368–1664 C.E.). Economic and agricultural improvements in the Yangtze River Delta led to the development of bulk commodity production and trade involving silk, rice, tea, and salt. As Shanghai became a center for trade in the Yangtze River Delta, the rudiments of modern capitalism began to take shape. A financial industry, in the form of money houses, grew gradually and evolved, with the exchange shops in Shanxi, into the backbone of China’s financial industry at that time. The growth of the money house sector continued into the early 20th century, paving the way for the banking industry to take root in Shanghai.
The end of the First Opium War in 1842 was the beginning of the introduction of foreign capital into China’s banking industry. Under the Treaty of Nanking, the British forced the port of Shanghai, and the ports of several other costal cities, to be open for foreign trade with low tariffs. Despite the disparate measures of the Treaty of Nanking, Shanghai managed to flourish by attracting international financial institutions. In 1847, the British Oriental Bank Corporation set up its branch in Shanghai. This was the first foreign bank in Shanghai, and also the first bank ever in the history of Shanghai. The Mercantile Bank Limited and the Bank of France followed suit, and the Hong Kong and Shanghai Banking Corporation set up its branch in Shanghai only one month after it established its head office in Hong Kong in 1865.
The growth of the financial industry of Shanghai accelerated throughout the 19th century. By the 1880s, Shanghai boasted 11 foreign-invested banks, 24 exchange shops from Shanxi, and 62 money houses for remittance and transfer. The increased numbers of financial institutions resulted in vibrant financial operations and a heightened position for the financial industry. But in terms of the extent of financial institutions, the financial market, and foreign financial contacts, Shanghai could not be considered a truly international financial center yet.
It was not until the second half of the 1920s and the early 1930s that Shanghai began to take shape as a financial center. Along with the rapid development of national capitalism in China in the early 20th century and during World War I, the collapse of the whole natural economy, and the upgrading of commodity production in China, Shanghai began to play a core role in commodity production and circulation on the strength of its superior geographical location. The skyrocketing demand for capital circulation and investment created sound business opportunities for the development of the financial industry. As a result, Shanghai’s financial industry made marked progress and its status in China’s financial industry kept rising. Gradually, Shanghai established itself as a famous international financial center in the Far East.
By the mid-1930s, Shanghai was truly the financial center of China. Prior to the outbreak of the Anti-Japanese War in 1937, Shanghai boasted 86 head branches of Chinese banks, 27 branches of foreign banks, 36 insurance companies, six trust investment companies, and 48 money houses. The Siming Bank, the Bank of Shanghai, and the Imperial Bank of China were based in Shanghai from their inception. The “Three Southern Banks” had been joined by other Chinese financial institutions, such as the Bank of China, the Bank of Communications, the Salt Industry Bank, Jincheng Bank, the Continental Bank, and the China Industrial Bank. These banks had relocated from Beijing and Tianjin to Shanghai with large amounts of capital, concentrating a great deal of the country’s money in Shanghai. In 1936, the saving deposit of all Chinese banks totaled 4.5 billion yuan, of which Shanghai banks alone held an estimated 47.8%.
Not only was Shanghai the banking center for Chinese banks, it was also the center for foreign financial institutions based in China. Internationally renowned banks, such as the Hong Kong and Shanghai Banking Corporation, Standard Chartered Bank, Citibank, and Chase Manhattan Bank, opened their head offices in Shanghai. In 1936, there were 32 foreign banks operating in China, 27 of which were in Shanghai whereas Hong Kong hosted only 17.
Shanghai was the largest port in China, in terms of its capacity for handling the import and export of gold and silver. In 1936, Shanghai’s gold market had an annual turnover of 31.16 million bars worth over US$11million (equivalent to over US$160 million today). Although not comparable to the markets in London and New York, the commodity turnover in Shanghai alone still surpassed that of Japan, India, and even France. This extensive international trade in commodities in Shanghai also boosted the foreign exchange industry. With frequent foreign exchange transactions and international payments resulting from large volumes of trade, Shanghai boasted a substantial foreign exchange reserve. This held the majority of China’s foreign currency assets, which had accumulated through Shanghai’s dynamic and lucrative economy. Shanghai’s dynamic financial market was also directly connected with the developed international financial markets of London and New York, and it even outpaced the closed foreign exchange system of Japan, the most modern and developed Asian country at that time. Furthermore, Shanghai’s interest and foreign exchange rates, as well as its market prices of silver and gold, had a direct influence on the various financial markets in the Far East. By the middle of the 1930s, Shanghai had become the international financial center of Asia.
As Shanghai reached its peak as a major international financial center in the 1930s, the seeds of its decline were, however, beginning to take root. During the Kuomintang rule from 1927 to 1937, Shanghai was in constant upheaval. The Japanese even bombed and briefly occupied Shanghai in 1932. Despite the continuously destabilizing political environment, Shanghai still managed to prosper until 1937.
The Anti-Japanese War (1937–1945) signaled the end of Shanghai’s importance as an international financial center. The Japanese took over Shanghai and much of the financial industry’s assets until their surrender in 1945. Europeans and other foreigners were confined to internment camps during the war. Even with the Allied victory and the liberation of Shanghai, foreign financial institutions began to leave Shanghai.
The army led by the Communist Party of China won the victory in the Liberation War in 1949. There was a peaceful takeover due to deals made with Shanghai bankers and merchants, who had been disillusioned with the Kuomintang government. By then, all foreign banks and businesses had relocated to Hong Kong, ensuring Hong Kong’s rise to international economic prominence. Despite the outbreak of the Cultural Revolution, Shanghai managed to remain an industrial center throughout the 1950s and 1960s. Shanghai still demonstrated its economic potential throughout that period as the largest contributor of tax revenue to the central government, setting the stage for its resurrection as a significant player in the world economy by the end of the 20th century.
2. The State Strategy to Redevelop Shanghai into an International Financial Center
The redevelopment of Shanghai into the vibrant international financial center that exists today was the result of economic reforms initiated by the central government in the late 1970s. Since the founding of the People’s Republic of China, the Chinese government has continuously attempted to generate sufficient surpluses to finance the modernization of China and transform the country from an agrarian to an industrial economy. Mao Zedong’s previous attempts at modernization, such as the Great Leap Forward, were not successful. Following the end of the Cultural Revolution, the stage was set for realistic and practical CPC leaders to put in place a series of economic reforms that would transform China’s economy from a planned socialist economy toward a free market system. The history of modernization, from the beginning of the industrial revolution, has shown that the development of a financial industry has a direct influence on economic growth. Furthermore, a strong financial center is necessary for a country to build a prosperous society and compete in an increasingly globalized economy. Due to its historical importance and its existing industrial base, the redevelopment of Shanghai as a financial center has been viewed as essential to the growth of the Chinese economy.
Transforming Shanghai into an international financial center has been a major strategic decision made by the CPC Central Committee and the State Council. Leaders of the Communist Party of China have stressed the importance of Shanghai in the development of China and implemented policies to initiate historical economic changes that have rapidly developed China into a global economic power. Deng Xiaoping initiated the ambitious economic reform and opening-up of the Chinese economy to the outside world. In an inspection tour of Shanghai in 1992, Deng stated, “China’s success in obtaining an international status in finance will first of all depend on Shanghai.” Jiang Zemin, who succeeded Deng Xiaoping, initiated further economic transformations and, at the 16th National Congress of the Communist Party of China in 2002, he proposed to speed up Shanghai’s development into an international financial center in line with established international practices. Finally, the current party secretary, Hu Jintao, stressed during his tour of Shanghai in July 2004 that Shanghai would be fully developed into an international center for trade, shipping, and finance.
The state strategy to redevelop Shanghai into a vibrant financial hub and transform the economy of China began in the late 1970s, after China had began to open up and normalize diplomatic relations with the U.S. Prior to this period, China’s financial system was characterized by having only one bank for the whole country—the People’s Bank of China. This central bank issued currency and conducted credit businesses, which were restricted to the temporary provision of funds for production and circulation. Since 1978, Shanghai has made consistent and innovative efforts in developing itself into an international financial center by building up various financial institutions, setting up and improving the financial factor market, strengthening financial management and supervision, actively opening up financing options, and optimizing the environment for financial development. From these initial efforts, the state developed a strategy to turn Shanghai into a market-orientated financial center. This strategy has been implemented in three stages over the past 20 years, and has transformed China into a global economic power.
Exploring the State Strategy
The first stage of the state strategy, from the mid-1980s to 1992, laid the foundation for the conversion of China from a planned economy to an open market economy. As the principal reformer of the Chinese economy, Deng Xiaoping recognized the need for allowing open market trade of commodities, stocks, and currencies in order for Shanghai to develop into a prominent financial center and modernizing the Chinese economy. In a departure from the Maoist planned economy of post-1949 China, Deng Xiaoping stated, “Shanghai used to be a financial center where currency could be exchanged freely, and it should again develop in this direction in the future.” Deng Xiaoping, other leaders of the Communist Party of China, and those of the Shanghai Municipal Government were able to reach consensus on the plan for Shanghai’s economic redevelopment toward a free market economy in socialist China. Starting in 1984, private companies were finally allowed to issue stock and in 1987, the Bank of Communications became the first commercial bank to issue stock in China since the end of the Liberation War. Furthermore, as part of the government plan, the first stock exchange in China, the Shanghai Stock Exchange, was established in 1990. The Shanghai Metal Exchange was later established in 1992, reinstating Shanghai’s prominence in metal trading.
Laying a Foundation for the State Strategy
The next stage of the state strategy, from 1992 to 2002, consolidated Shanghai’s status as the domestic financial center of China, and paved the way for the further development of Shanghai into an international financial center. Based on a review of the economic and financial development in the first decade since China’s economic reform in 1980s, the Report to the 14th National Congress of Communist Party of China in 1992 explicitly proposed building Shanghai into an international financial center as soon as possible. According to that strategic guideline, Shanghai should initially focus on the goal of becoming a domestic financial center by making strenuous efforts to establish a multidimensional and multilayered financial market system, which would enable Shanghai to further expand into international finance. In 1994, the Chinese Foreign Exchange Transaction Center was founded, establishing a unified national foreign exchange market. Also, in 1996, China’s unified interbank borrowing and lending market was set up, further enhancing the financial capabilities of Shanghai. Finally, with the founding of the Shanghai Gold Exchange in 2002, a comprehensive financial market system was put into place in Shanghai. Within only a decade, Shanghai’s position as a market-oriented domestic financial center was established, laying a solid foundation for Shanghai’s progress toward becoming an international financial center over the next ten years.
Implementing the State Strategy
The third stage of the state strategy, from 2002 to 2005, has launched Shanghai into the vibrant international financial hub that exists today. At the 16th National Congress of Communist Party of China in 2002, Chairman Jiang Zemin proposed that the development of Shanghai into an international financial center should be accelerated in line with international guidelines. This signified a new phase for the project. The financial hub of the Pudong district of Shanghai would undergo further development and in 2005, the People’s Bank of China established its headquarters in Shanghai. Recent developments have further enhanced the status of Shanghai as the domestic financial center and steered it toward international prominence.
3. The Current State of Shanghai as the Financial Center of China and Its Increasing Internationalization
With the reform and opening-up of China’s financial industry, remarkable achievements have been made in turning Shanghai into the domestic financial center of China. The central government’s economic reforms have had a positive effect on Shanghai’s financial industry. The industry has diversified, and has more controls in place to deal with risks. Furthermore, the Shanghai government’s financial services have helped improve the industry’s environment, and ensure the enforcement of financial laws. With these changes in place, Shanghai’s financial industry has further opened up to foreign investment and increased its international prominence. The current state of Shanghai’s financial status is discussed in the following six sections.
The Effects of Economic Reform on Shanghai’s Financial Industry
The central government’s reform of the economy over the past few decades has spurned multiple reforms and improvements in Shanghai’s financial industry. The “Big Four” state-owned banks of China are currently in a transition from government ownership to offering stock to the public. Reform centered on shareholding is being carried out smoothly at the Shanghai branch of the People’s Bank of China, the Shanghai branch of the China Bank of Construction and the Shanghai branch of the Industrial and Commercial Bank of China, with the support from their head offices. These historic reforms will allow for the banks’ stock to be offered to the public, similar to the Bank of Communications, which is headquartered in Shanghai but has been successfully listed on the Hong Kong Stock Exchange.
Driven by the reform of state-owned financial institutions, internal reform has also been stepped up in Shanghai’s municipal financial institutions. The Pudong Development Bank and Bank of Shanghai have undergone historic reform to enhance their performance. The Shanghai Rural Credit Cooperative has been restructured smoothly, becoming the first provincial-level associated cooperative to have been reorganized into a rural commercial bank.
Shanghai currently boasts a very diverse financial industry from its multitude of markets and exchanges. The wide range of Shanghai’s current domestic financial industry was finally achieved with the official launch of the Shanghai Gold Exchange in October 2002. Shanghai now boasts a financial market system made up of currency, capital, foreign exchange, futures, gold, and even property. Among other things unique to Shanghai, the foreign exchange market, the interbank market and the gold market are the only ones in the country.
Continuing Improvement of the Financial Institutional System
Due to improvements in the financial system, many financial institutions continue to flock to Shanghai. A diversified financial institutional system has been gradually formed that comprises both Chinese and overseas banks, securities companies, insurance companies, trust investment companies, fund management companies, financial leasing companies, and futures brokerage firms. A group of new financial institutions including the national commercial bank business operation center, fund management companies, insurance assets management companies, auto financing companies, farming insurance companies, and currency brokerage firms settle down one after another in Shanghai. The large numbers of financial institutions, covering almost all aspects of China’s financial industry, have made Shanghai one of China’s major centers for financial institutions. By the end of 2005, Shanghai had 610 financial institutions, 3.3 times that in 2001. Of these institutions, 231 are banking institutions, 110 are securities institutions, and 269 are insurance companies.
Shanghai has also become the center for financial product innovation in China. On June 30, 2003, the China Bill Network was put into operation. Other financial product innovation, achieved by exchanges and financial institutions, has considerably enhanced the concentration and coverage of the financial market, putting it in a better position to better serve Shanghai and China. Over the past five years, financial markets in Shanghai have successively launched a group of influential products including assignable bonds, buyout back-purchase of treasury bonds, ETFs, certificates of shares, forward bonds, short-term financing notes, World Expo bonds, foreign currency dealings, Renminbi–foreign exchange forwards, fuel oil futures, and platinum. As a result, the domestic market coverage and the resource allocation capacity of Shanghai have been greatly enhanced.
The Financial Market System Improving Rapidly with Enlarged Coverage
The economic reforms of Shanghai have helped speed up the reorganization of securities dealers and insurance companies and foster innovation. Securities companies Shenyin Wanguo and Guotai Jun’an have reorganized their accounting departments. East Securities, Guangda Securities, Haitong Securities, and Guotai Jun’an have produced new securities products and portfolios. Furthermore, Shanghai took the lead in setting up China’s first specialized agricultural insurance company, the Shanghai Anxin Agricultural Insurance Company. At the same time, business cooperation between financial institutions is deepening and a trend of comprehensive operation is emerging in the financial industry.
Shanghai’s position as the domestic and international financial center of China has been further enhanced by its position in determining rates and prices. The interest rates for interbank borrowing and lending, as well as for bond transaction, have been allowed to be based on the market in Shanghai, rather than to be controlled by the state. The foreign exchange market in Shanghai is where the exchange rate of Renminbi is determined. Furthermore, the securities market, as the main-board market across the country, plays a significant role in optimizing the corporate financing structure and improving corporate governance mechanisms.
The high growth rate and expansion of Shanghai’s financial industry have resulted in high amounts of revenue and financial assets. In 2005, the turnover of the financial market in Shanghai totaled RMB 35 trillion, 5.2 times that of 2001. Of this total, the turnover of the gold market totaled RMB 116.8 billion, that of the interbank market amounted to RMB 23.2 trillion, and that of the securities market stood at RMB 5 trillion, accounting for 79% of the total securities market in the country. The total turnover of the futures market came to RMB 6.5 trillion, accounting for 49% of the total futures market in the country. The turnover of the futures market in Shanghai ranks first among the three major futures exchanges in China, enabling it to become one of the international pricing centers for such products as copper and rubber. Another achievement arising from Shanghai has been the ratio of non-performing loans (NPL) for banking institutions, which continues to decrease annually. Based on the five-category classification statistics, as of the end of 2005, the NPL ratio of Chinese and foreign banks in Shanghai stood at a satisfactory 3.03%. Currently, the total assets of financial institutions in Shanghai add up to RMB 3.2 trillion, accounting for some 9% of the total in the country. Shanghai’s financial institutions rank first in China in terms of overall capital strength, operating results, and asset quality.
Improvement of Shanghai’s Financial Stability and Risk Management
The local governments in Shanghai have played an active role in the supervision of the banking industry by establishing and improving the banking supervision system based on a divided management of banks, securities, and insurance companies. Full support and coordination have been given to the state banking regulatory departments to enhance supervision, build a banking safety area, and ameliorate the system and mechanisms. This has resulted in a basic integration of supervision and management. A 3+2 joint meeting system (three banking regulatory departments plus the banking service office and the Shanghai branch of the People’s Bank of China) has been put in place, and a mechanism established for immediate coordination and settlement in case of major events.
In accordance with the Rescue Plan of the State for Emergent Financial Hazards and with the joint participation of financial regulatory departments, the Rescue Plan of Shanghai for Emergent Financial Hazards and its sub plan have been formulated. This plan has formed an emergency response system to deal with financial hazards, with an emphasis on increasing the capacity to jointly supervise, coordinate, and handle risks. Close coordination with the banking regulatory departments has been enhanced, and resolute measures have been taken to handle major banking risks, such as the Nongkai and Inter-Roller cases. As a result, banking risks in Shanghai are brought under control and the interests of depositors and investors safeguarded. In view of the rising fluctuation in some financial markets, risk disclosure and management specified in the rescue plan are conducted promptly in close collaboration with exchanges to ensure financial stability and promote social stability.
Shanghai’s Improved Government Financial Services and the Effect on the Financial Industry
In September 2002, the Shanghai Financial Services Office was established to strengthen cooperation between government departments so as to provide better services for the financial industry. The State Council’s publication, Guidelines for Promoting the Reform, Opening-up, and Steady Growth of the Capital Market, details the rules for financial institutions, and the policies it lists have been widely implemented. The Council’s publication, Policy Guidelines for Supporting the Growth of Financial Institutions in Shanghai, spells out the implementation rules to boost the development of the financial industry. To further enhance Shanghai’s status as a prominent financial center in Asia, a Central Business District (CBD) covering the Lujiazui Finance and Trade Zone and the historical Bund Finance Street have been built.
A leading Shanghai municipal group has been set up for the development of the bankcard industry in Shanghai, and it has set plans to regulate the expanding credit industry. The bankcard industry has been put on the fast track of development when China Union-Pay Company was recently incorporated, the Zhangjiang Bank Card Industry Park was newly established, and the bankcard acceptance environment improved. Shanghai takes the lead in China in establishing the joint individual credit check system, the joint corporate credit check system, and the loan enterprise credit evaluation system. In addition, remarkable achievements have been made in building a system of good faith in credit transactions and payments.
New progress has been made in the building of Shanghai into a financial talent hub. The education in financial laws has been enhanced, resulting in a heightened public awareness of these laws. Stringent efforts have been made to crack down on financial cheating, money laundering, and debt evasion or cancellation, ensuring order in the financial market. More financial industrial associations have been set up to enhance the self-discipline of financial corporations, traders, and brokers. These improvements in the financial industry have helped Shanghai’s financial industry environment rank first in China in a comprehensive evaluation conducted by the Institute of Finance Research of the Chinese Academy of Social Sciences for the People’s Bank of China.
Continued Opening-up and Internationalization of Shanghai’s Banking Sector
The role of Shanghai as an exemplar of financial reform and opening-up in China has been further enhanced as China honors its World Trade Organization (WTO) commitments to open wider to the outside world. Various foreign-funded financial institutions, including banks, securities companies, and insurance groups, have accelerated their pace in entering Shanghai, making Shanghai a bridgehead for foreign financial capital to flow into China. International cooperation is noticeably enhanced within the Shanghai financial industry in capital, management, products, technologies, and talents. By the end of 2005, there were 326 foreign-funded and Sino-foreign joint-venture financial institutions in Shanghai, 76 of which were operating foreign-funded financial institutions, and 100 of which were representative offices.
The status of Shanghai as a prominent center for domestic and foreign financial institutions has been enhanced by the continued expansion of the role of foreign financial institutions in Shanghai’s financial markets. Twenty-eight foreign-funded banks base their lead reporting banks in Shanghai for their business in China, accounting for some 70% of the total foreign-funded banks in China. The assets of foreign-funded banks in Shanghai account for over 50% of the total of such assets in China. The total assets of foreign-funded banks and their loans snatch a market share of over 10% in the city.
Another attraction of Shanghai, for foreign financial institutions, has been a pilot reform program for Shanghai in foreign exchange, covering offshore banking, and non-trade sales and payment of foreign exchange by transnational companies. The QFII (Qualified Foreign Institutional Investor) Program serves as a system for foreign capital to access China’s financial markets. At present, over 70% of QFII custodian services are carried out in Shanghai. As a result, exclusively foreign-owned or joint-venture insurance companies have developed rapidly, and the income of foreign-funded insurance companies from insurance premiums enjoys a market share of 17% in the city.
Meanwhile, more and more foreign-funded financial institutions in China are shifting their business management functions to Shanghai. The number of foreign-funded financial institutions acquiring the equity of Chinese financial institutions continues to rise, and a market pattern of competition and cooperation has gradually taken shape between Chinese and foreign financial institutions. A group of joint-venture securities companies, fund management companies, and insurance companies, has been established, furthering Chinese and foreign cooperation. Furthermore, a major breakthrough has been made in introducing foreign strategic investors to Chinese financial institutions. Global financial institutions, such as Citibank, HSBC, and the Carlyle Group, have become shareholders of the Bank of Communications, the Pudong Development Bank, the Bank of Shanghai, and the Pacific Life Insurance. Each major financial market has started cooperation and information exchange with world-renowned exchanges. Chinese and foreign financial institutions continue to compete and cooperate with each other, contributing to a steady improvement in Shanghai’s financial service and a quickened internationalization process.
4. The Future: Plans to Enhance Shanghai’s Status as an International Financial Center
Developing Shanghai into an international financial center is a revolutionary undertaking for China, as well as a long and complicated process. Since it has become China’s domestic financial center, Shanghai is now striving to become a world financial center. The foundation for the project had been laid in the first five years of the 21st century. The second stage of development will construct a framework for the international financial development of Shanghai during a five-year plan ending in 2010. During this period, four initiatives will be implemented to improve the internationalization process. The third and final stage will stretch from 2010 to 2020, during which Shanghai will be established as an international financial center in the Asia-Pacific region, along with the rising international status of China and the mounting influence of the Renminbi as a significant currency in world markets. At this stage, Shanghai will become a center of international capital and global fund transactions, reclaiming its former status as a prominent international financial center.
In order to plan for the development of Shanghai into an international financial center, the Fifth Plenary Session of the Sixteenth CPC Central Committee compiled and published a document in October 2005 that set guidelines for the development over the next five years. The Proposal by the CPC Central Committee for Formulating the Eleventh Five-Year Plan for National Economic and Social Development was adopted at the Eighth Plenary Session of the Eighth Shanghai Municipal Communist Party Committee. In early 2006, the Municipal People’s Congress and Municipal People’s Political Consultative Conference convened to adopt the plan, which would shape Shanghai’s overall economic and social development for the next five years. The goals set in the Eleventh Five-Year Plan include sharpening the city’s international competitive edge through four initiatives for internationalization, hosting the 2010 World Expo, and achieving rapid and sound socioeconomic development. The overall vision of the Eleventh Five-Year Plan is for Shanghai to strive to transform itself into one of the most influential financial centers in the world, while consolidating its status as China’s domestic financial center.
The goals of the Eleventh Five-Year Plan include the execution of four initiatives necessary for the internationalization of Shanghai’s financial industry. The first initiative plans for the current fast-paced economic development of China to provide momentum in developing Shanghai into an international financial center. During the Eleventh Five-Year Plan period, China’s economy will become more global. Shanghai is currently building on its status as an international shipping center, and plans to host the World Expo in 2010 to showcase China’s economic, industrial, and scientific progress. China’s rapid economic development, its changing growth pattern, its enhanced international competitiveness, and the increased economic cooperation among businesses in the Yangtze River Delta will vigorously boost the financial industry in Shanghai and push Shanghai toward an international financial center.
The second initiative calls for further financial reform so as to create favorable institutional conditions for Shanghai’s financial industry. China’s financial reform will reach a new stage where institutional obstacles will be cleared and deep-seated conflicts among various government and business sectors will be eliminated. The initiative plan also requires for capital markets to be further developed, the ratio of direct fundraising to be raised, and markets for currency, insurance, and futures to be developed steadily. Further reforms designed to deregulate interest rates and make them subject to market forces are to be carried out gradually, and the system of managed floating foreign exchange rate is to be improved. The planned financial reform will stimulate innovation in financial products, promote the concentration and coverage of financial institutions in resource allocation, and raise the position of Shanghai’s financial industry in China’s financial system. These changes will create the favorable institutional conditions for further development of Shanghai into an international financial center
The third initiative plans for the opening up of the banking sector to promote further internationalization. During the Eleventh Five-Year Plan period, China will open more of its financial services sector in line with its WTO commitments and the WTO requirements for socioeconomic development. The Chinese currency, the Renminbi, will become further convertible under capital accounts, and a more open finance sector will accelerate the pace of foreign financial institutions establishing their presence in China. This will promote cooperation between Chinese and foreign financial institutions, and further the integration of the Chinese financial market with its foreign counterparts and the cross-border flow of capital. Meanwhile, with China’s heightened position in international trade, and the greater possibility of the RMB as the settlement currency in regional trade, the international status of the RMB will surely rise. This trend will attract more foreign financial institutions to base their headquarters in Shanghai in order to manage their businesses in China. This will in turn speed up the internationalization of Shanghai’s financial market and financial industry.
The fourth initiative in the Eleventh Five-Year Plan calls for a comprehensive supporting pilot reform in Pudong, and the establishment of the Shanghai headquarters of the People’s Bank of China. The Pudong New Area of Shanghai will undergo a prototype reform program, as approved by the State Council. This reform program will allow for experimentation in such major fields as the factor market, the foreign-related economic management system, the balanced development between urban and rural areas, and the shifting of government functions. This will be conducive to establishing a market-oriented innovation mechanism for financial products in Shanghai. The establishment of the Shanghai head office of the People’s Bank of China will strengthen the regulatory, managerial, and service functions of the central bank, in support of the financial market and the development of financial center. This will not only further consolidate the status of Shanghai as the domestic financial center, but also coordinate the efforts to maximize the central bank’s functions and develop Shanghai into an international financial center.
These initiatives will result in an increase in the turnover and assets of financial institutions. It is estimated that by 2010, the volume of direct financing in Shanghai’s financial market (including stocks, treasury bonds, corporate bonds, and corporate short-term financing notes issued in Shanghai’s financial market) will account for some 25% of the total in China. Also, the total turnover of Shanghai’s financial market will double from 2005 to 2010, rising to about RMB 80 trillion. Additionally, the total assets of financial institutions in Shanghai will account for some 10% of the total in China. Thus, Shanghai will continue to take the lead in China in developing its financial industry into one of international significance.
The overall purpose of the Eleventh Five-Year Plan is to build a framework for the further development of Shanghai into an international financial center. As an essential part of the framework, an initial market system will be established to allow joint participation of domestic and foreign investors. Also, finance industry leaders with global influence will provide the basis for a diversified financial institutional system. Furthermore, an innovation and transaction center of financial products, meeting the needs of China’s economic development, will be put in place basically, and a financial development environment will be created for legal, standardized, and orderly transactions conducted in accordance with international practices.
The final stage of Shanghai’s development into an international financial center will last from 2010 to 2020. During that time, Shanghai will improve its marketization, its internationalization, and its enforcement of financial laws, in order to considerably enhance its status and role within the domestic financial system as well as notably expand its influence in the Asia-Pacific region. As a financial center, Shanghai will continue to serve domestic economic development while at the same time handling international financial resources. Also, by the end of the Eleventh Five-Year Plan period, Shanghai will not only become more attractive for domestic and foreign capital, but will also become a financing market partially opened to those who need international funds. This will allow a certain number of prominent overseas venture capitalists to raise funds in Shanghai, and a limited number of overseas listed companies, bonds, and other financial products will be included in Shanghai’s financial markets. Thus, Shanghai’s financial market operations will exert some influence on the operation of its counterparts in the Asia-Pacific region, and even on the global financial market. Shanghai’s influence will be reflected on the price fluctuations of financial products, the remarkable rise in the transaction volume, and the strategic moves of financial institutions in relation to those in Shanghai.
These developments signify a renaissance for Shanghai. Shanghai’s geographic location has made it a center for trade and finance in China from the Ming dynasty to the turbulent times of the early 20th century. Even though it had lost its prominence as the most vibrant financial center in Asia due to World War II, and the communist victory of the Liberation War, Shanghai still remained a significant factor for China’s economy. Shanghai’s potential as an international financial center became more prominent during the economic reform and opening up of China during the latter decades of the 20th century, as Shanghai became the domestic financial center of China, and began to develop into an international one. Due to its continued success in the first decade of the 21st century, it is apparent that during the second decade of the 21st century, after over 80 years of war, revolution, and reform, Shanghai will once again rise to a prominent and influential position in international finance.