Beijing has anointed Shenzhen as a “pilot city” to showcase the virtues and achievements of China’s political and economic systems – with the aim of eventually outshining Hong Kong as a world-class city.
But Shanghai is also bidding for the limelight, with a masterplan gazetted by Beijing this week to expand the city’s free-trade zone to eliminate barriers for a free flow of capital.
With significant policy breakthroughs, Beijing wants Shanghai’s FTZ to become a conduit for the unfettered flow of capital raised overseas if it is reinvested to another country, with no restrictions on the convertibility of local and foreign currencies – all of which are the hallmarks of Hong Kong as a financial hub.
Specifically, foreign financial institutions will be given a free hand in their dealings within the FTZ to issue cross-border bonds and debt securities for mergers and acquisitions, merchandising for offshore transactions as well as investment in stocks and insurance products, according to the policy paper.
However, Shanghai’s roadmap to emulate Hong Kong does not provide for the flow of domestic capital into the FTZ and further afield, at least for now.
Shanghai also aims to woo foreign talent in finance, law and design to render services within the FTZ under a liberal visa and licensing regime, on top of a streamlined process for business and company registration.
Foreign investors will also have easier access and less constraints if they pool money to develop integrated circuits, artificial intelligence, biomedicine, aerospace, new energy vehicles etc, with the government’s guarantee to beef up intellectual property and trade secrets protection.
Shanghai’s FTZ will also be a testing bed for pilot programs to separate operation permits from business licenses, one of Beijing’s new initiatives to level the playing field for all market entities.
The FTZ aims to boost its gross domestic product to hit the one trillion yuan (US$141 billion) mark by 2030.
Other than the bustling Lujiazui central business district that is home to some of the world’s tallest skyscrapers, the 240-square-kilometer Shanghai FTZ also covers the five-runway Pudong International Airport, a pre-eminent aviation hub for international routes that serves eastern China, as well as the Yangshan Port, the world’s largest container port built from reclaiming islets in the East China Sea.
Shanghai, China’s largest city economy, booked an overall GDP of 3.27 trillion yuan in 2018, up 6.6% year-on-year as the city rode on the coattails of the Yangtze River Delta’s continued ascent as a trade, consumption and manufacturing dynamo.
Shanghai’s annual economic output is roughly one third larger than that of Hong Kong, whose GDP stood at 2.4 trillion yuan in the same year. The Shanghai Stock Exchange’s total market capitalization is also larger than that of the Hong Kong bourse.
There have been talks by financial analysts in Hong Kong that Beijing has set a tacit timeline for Shanghai and Shenzhen to supersede part of Hong Kong’s function in finance by the mid-2020s, when the renminbi may become more widely used and circulated overseas for trade settlement and as a reserve currency.
“China, in particular top-tier cities like Shanghai and Shenzhen, still reels in foreign capital, and more policies in favor of foreign-invested banking, insurance and other asset management sectors operating in FTZs could be in the making … Foreign capital is lured by profits and prospects, since China’s protection of commercial interests has overall been satisfactory, and international investors do not care too much about the country’s human rights or political reforms,” said one observer.
But the main barrier for Shanghai and Shenzhen to evolve into full-fledged global financial and business hubs is perhaps China’s elusive and sometimes arbitrary legal system, when almost all existing financial centers operate under a common law system.