China for the first time on April 29 spelled out a specific deadline for a goal that has become more pressing in the wake of the worldwide credit crisis. It said that Shanghai should be transformed into an open, competitive and global financial center by 2020:
--The city will have "an internationally competitive and influential financial center," with the participation of foreign and domestic investors.
--It will develop a multi-functional and multi-layered financial market, introducing more derivatives, futures and other products. There will be derivatives of share indexes, exchange rates, interest rates, stocks and bonds; futures will include products based on energy and major minerals.
--It will gradually increase renminbi-denominated bond issues by international development agencies.
--It will allow foreign firms to list in Shanghai.
--It will cooperate with Hong Kong in developing securities products.
--It will improve the standard of financial services, including registration, clearance, trust business, consultancy, credit rating and accounting.
New order. These objectives are not new, but they have become more important. China has been concerned about the depreciation of its U.S.-dollar assets. It cannot sell down the trillions of dollars it holds without incurring heavy losses. What it can do is to build faster a strong, independent financial system, in order to become less dependent on the United States. Shanghai plays a crucial road in this new national strategy.
Shortcomings. Several shortcomings will have to be overcome:
--Closed stock market. Shanghai's Qualified Foreign Institutional Investor quota given to foreign investors in the stock market is less than $30 billion, a fraction of total market capitalization. This year, the doors are to open wider, allowing foreign companies to list locally, in the form of China depositary receipts or exchange-traded funds. Renminbi-denominated bond issues by multilateral development agencies are to increase.
--Government intervention. The Shanghai market is dominated by large state companies that receive preference for listing; private and foreign companies are viewed differently. Listing for some private firms is slowly being accepted, with mainland-based Taiwanese companies first to benefit.
--Financial products. Shanghai has few financial products other than stocks and bonds. In 2006, an exchange-to-trade stock index futures was set up, but there has been no trading. Last year the Shanghai Stock Exchange announced the introduction of short-selling and margin trading, but this has not happened yet.
--Rule of law. China's legal and regulatory systems do not have the confidence of foreign investors who see them as erratic and sometimes biased against them, although the municipal government said it is working to improve the processing of financial cases.
--Lack of talent. Shanghai has 21 colleges and universities, including some of the most prestigious in China, with a total of more than 300,000 students. However, it does not have enough qualified professionals in finance, investment, accounting, law and other services needed by a global center.
--Currency reform. To be a global financial center, Shanghai needs to have a free flow of capital. At present, the renminbi is convertible on the current but not the capital account.
The global credit crisis has convinced China of the need to develop its financial center faster, to give it more influence in the global market. Shanghai already has the infrastructure and hardware required of a financial hub. However, it now has the more difficult job of meeting a number of challenges before it can be the global player it plans to be by 2020.
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