A Tale of Two Cities

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A Tale of Two CitiesShanghai Hong KongAs
INTERNATIONAL FINANCIAL CENTRES
By Yim, Hosea Zhang, Herbert
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Shanghais successful bid for the 2010 World Expo
Hong Kongs failure to get host of 2006 Asian
Games
Shanghai announced in April 1990 its plan to
develop the Pudong New Area, and its ambition to
re-emerge as a major international financial,
commercial and shipping centre by the first
decade of 21 Century. Since Hong Kong was
handed back to China in 1997, it has suffered
something of an identity crisis. Apparently,
Hong Kong was in a dither.
VS
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Shanghai
Financial Lujiazui Financial District in Pudong
New Area In 2005 the State Council reaffirmed
the positioning of the 31.78 km² Lujiazui area,
as the only finance and trade zone among the 185
state-level development zones in mainland China.
Shanghais GDP of Finance More than 10 of
total, March 2009 Growth Rate 26 Commercial
Shanghai's commercial sector saw rapid growth in
2007, with total commodity sales amounting to
Rmb2,040.1 billion, an increase of 31.6 over
2006. Wholesale sales showed a year-on-year
growth of 35.8 while retail sales were up by
14.5. Shipping Yangshan deep-water port The
third phase will be completed by 2010 with seven
berths, When fully completed in 2012, the port
will have four phases in operation with 30 berths
capable of handling 15 million Twenty Equivalent
Units annually (Largest in the world) US 12
Billion
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Typologies of Financial Centre
Teleological Perspective
Geographical Perspective
Historical Perspective
Functional Center
Paper Center
National or Domestic Centre
International Centre
Offshore Banking Centre
Traditional Centre
Financial Entrepôt
Integrated Centre
Segregated Centre
Hong Kong Shanghai
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Typologies of Financial Centre

• Paper Center
• A location for recording financial transactions
  only, but little or no actual banking or
  financial business is carried out there. Many
  transnational financial institutions find it
  convenient, for example, to keep shell offices
  in jurisdictions where taxes and prudential
  regulations are nonexistent or nominal, in order
  to minimize their overall costs.
• Integrated Centre
• Refers to one in which no artificial barriers
  exist between onshore and offshore markets, so
  that once a financial institution is established,
  it can engage in both onshore and offshore
  business, whether denominated in home or foreign
  currencies, without restriction.
• Segregated Centre
• One in which the authorities make clear
  distinctions between onshore and offshore
  markets, or between domestic- currency-denominated
  and foreign-currency-denominated businesses. A
  segregated centre is more often called an
  offshore financial centre (OFC). The term
  offshore banking centre is also used, implying
  that only the banking sector is
  internationalized.
• Financial Entrepôt.
• It is defined as a centre that offers the
  services of its domestic financial institutions,
  money markets, and securities markets to both
  domestic and foreign residents.

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Typologies of Financial Centre

• What Makes an IFC?
• What are the significant characteristics, in
  quantitative terms, of an IFC?
• What are the necessary conditions, or
  prerequisites, for a city to become a genuine
  IFC?

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Shanghai and Hong Kong Macroeconomic and
Financial Center Profiles

• 
  Shanghai Hong Kong
• Population
  13,270,000 6,759,500
• GDP (RMB billion)(2009) 1,490
  1,433
• GDP per capita (ratio) 2009 1
  2.7
• 2001
  1 5
• Average annual real GDP growth 8.2
  -2.7
• 2009
• Exports of Goods Service 141.91
  457.6 (including Transshipment)
• Average annual growth rate 20.6
  8.0
• (last decade of 20 Century)
• Imports of Goods Services 135.82
  434.21
• Average annual growth rate 17.8
  8.5
• (last decade of 20 Century)

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Shanghai and Hong Kong Macroeconomic and
Financial Center Profiles

• Banking Sector
• 
  Shanghai Hong Kong
• Deposits (US billion)
  135.8 436.73
• Foreign currency deposits (US billion)
  18.92 198.96
• Loans (US billion)
  103.2 280.13
• Foreign currency loans (US billion)
  12.87 68.88
• Loans Abroad (US billion)
  n.a. 39.69
• Balances due to banks abroad (US billion) n.a.
  187.03
• Balances due from banks abroad (US billion) n.a.
  276.87
• Clearing House daily turnover (US billion)
  n.a. 45.15
• Interbank market daily turnover (US billion)
  23.44 26.42

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Shanghai and Hong Kong Macroeconomic and
Financial Center Profiles

• No. of banks and depository institutions
  Shanghai Hong Kong
• Domestic
  18 46
• Foreign
  53 204
• Insurance
• No. of insurance companies
• Domestic
  18 100
• Foreign
  14 106
• Premium income (US billion)
  2.2 2.5
• Registered intermediaries
  n.a. 33,187
• Fund Management
• No. of unit trusts or mutual funds
• Domestic
  23 90
• Foreign
  n.a. 1,800

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Historical Overview Shanghai

• Modern Western-style banking and finance was
  introduced into the two cities at approximately
  the same time after the end of the First Opium
  War ????
• 1936, 47 foreign banks
• Head Offices in Shanghai. Chinese Banks Yearbook,
  in 1936, of the 164 domestic banks in China, 6
  government owned banks.
• 72 traditional Qianzhuang, 40 national deposit
• Shanghai was also the place where modern
  financial markets were concentrated
• Insurance Center 166 foreign insurance companies
  and 48 domestic insurance companies

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Historical Overview Shanghai

• Shanghai at that time was not only the largest
  financial centre inside China, but was also an
  international financial centre in the Far East.
• Economics historians Hong and Zhang
• Japans aggression against China was the
  immediate and most important cause of Shanghais
  decline as a financial centre.

Bund, Shanghai
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Historical Overview Hong Kong

• 1941- 45 when Japan occupied H.K.
• After WWII, H.K. enjoyed prolong peace
• 1966 after banking crisis
• Late 60s
• Mid 1970s ready to issue new bank licences
• 1982 take off interest withholding tax on foreign
  currency
• 1989 abolish all form of tax on interest

Victoria Harbor 1946
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Strength and Weakness

• H.K.s Number of regional headquarters and
  regional offices are much greater than Shanghais

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Strength and Weakness

• Shanghai does not have full capital mobility
  since there are extensive controls over capital
  movement in China
• Also RMB is not full convertible, it would take
  some time to do so
• On the other hand, H.K. has long history of full
  convertibility and capital mobility

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Strength and Weakness

• The banking system is crippled by non-performing
  loans (NPL)
• Official figures about 24 and in the private
  sector is more then 40
• In economic advance regions such as Shanghai,
  Jiangsu, and Zhejiang provinces had avg. of
  712
• Basel Accord require minimum of 8 capital
  adequacy ratio (CAR)

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Strength and Weakness

• Compared to Hong Kong who have CAR of 16 which
  is one of the highest in the world
• A NPL ratio of 5.05, which is much lower default
  loans compare to Shanghai.

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Strength and Weakness

• Free flow of information still remains a problem
  in Shanghai. Central Government censors sensitive
  political and social news still exist. After all
  the Central Government own all mass media in
  China
• Hong Kong has much higher free flow of
  information since media are privately owned.

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Strength and Weakness

• Main issue in Hong Kong is the growth rate trend.
• It drop from 9 to 2 from 1960 to 2008
• Shanghai's GDP for 2008 hit a 16-year low at 9.7
  percent year-on-year

Hong Kong Annual GDP Growth Rate 1960-2008, World
Bank Group
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Strength and Weakness

• Shanghai have a much larger bond and commodity
  market.
• Its national financial center is unchallenged.
• They monopolized the foreign exchange market and
  interbank market
• 2009 1 of China population accounted for 9.1
  of total bank deposit
• Thus making Shanghai a huge magnet for FDI and
  domestic direct investment
• 10 of China's contracted FDI, 13 of China's
  Imports

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Strength and Weakness

• Have well-diversified industrial structure
• Larger science and technology talents
• RD also much better compared to H.K.
• 2001 Shanghai science and tech score was 3.294
  compared to H.K.s 3.226
• Experiencing much higher GDP and foreign trade
  growth.
• Catches up/ supass Hong Kong in no time.

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Conclusion

• 2008 Shanghai Municipal Government promulgate
  some policies to encourage MNCs to establish RHQs
• They provide incentives such ass cash allowance
  and awards, financing management support,
  simplified entry-exit formalities for staff, and
  customs clearance
• In 2008 Shanghai has 626 headquarter-type
  foreign-invested enterprises have been approved

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Conclusion

• In 2009 introduced new policy to encourage
  private equity / venture capital in Pudong.
• PE/VC that establish since 2008 have paid-up
  registered capital of RMB500 million will grant a
  lump sum of RMB5 million.
• Partnership PE/VC that raised funds reach RMB1
  Billion will grant RMB5 million
• Up to 40 tax rebate, senior management may also
  entitle house allowance up to RMB200,000 / person

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Conclusion

• 2007 Chinas capital controls remain
  substantially binding. Thus, China does not have
  full capital mobility yet.
• Full convertibility of RMB is not achieve yet.

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Conclusion

• In 2010 Shanghais CAR is reach up to 10.16,
  which is well above 8 minimum requirement by
  Basel Accord.
• China also require banks to maintain CAR of at
  least 10 up from 8 and Shanghai Pudong
  Development Bank to keep their core CAR at 7
  from 4.