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SHANGHAI – On the coastal reaches southeast of Shanghai, China’s ambitions to transform its most populous and affluent city into a global financial hub are beginning to take shape on a ring-shaped city reclaimed from the sea.
Beijing is expected to loosen its tight grip on capital flows and the internet within the so-called Lingang free trade zone, a special area to become an advanced industries hub. Lingang was incorporated into the seven-year-old Shanghai free trade zone in 2019.
Apart from lower corporate income taxes and duty-free customs zones, Lingang will allow unfettered access to Google and Twitter and easier international money transfers, freedoms not allowed in mainland China, that Beijing hopes will spur more foreign investment into its commercial and financial capital.
Chinese President Xi Jinping’s plan not only aims for Shanghai to rival New York and London as a global financial hub, it also wants to wrest business away from them, ambitions that have everything to do with Hong Kong’s social and political malaise and the rising geostrategic headwinds now facing the country.
In a policy blueprint first unveiled in 2013 and recently revised with more policy loosening goals, Beijing wants China’s most populous city to become a fully-fledged global financial hub by 2035, with the world’s largest stock market by capitalization, daily turnover and share offerings.
“If Shanghai can surge to the very fore with all metrics reaching the international level, then Chinese firms no longer need to seek to list overseas…Investment flows may even be reversed, with Western firms floating in Shanghai,” read a Xinhua editorial that laid out an expedited vision for the city’s financial hub ambitions.
Shanghai’s prospective economic gain appears to correlate closely with Hong Kong’s socio-political pain as the former British colony reels from the double whammy of Covid-19 and still-simmering protests and societal unease linked to Beijing’s imposition of a draconian national security legislation in June.
While Beijing still values Hong Kong’s role as a conduit for international capital flows, the city’s sustained tumult and US moves to strip its previous trade privileges in response to a crackdown have seen the ruling Chinese Communist Party (CCP) double down on Shanghai as a global business hub of the future.
The timing of Beijing’s reaffirmed support for Shanghai comes as global investors start to ask tougher questions about Hong Kong’s standing as Asia’s preeminent financial hub. Commerce and business in Shanghai and across mainland China, meanwhile, have largely returned to pre-Covid normalcy.
To be sure, the drive to establish Shanghai into a rival financial center are not new. And investor concerns about the rule of law are still pressing, with no signs yet that China intends to create a common law zone or independent arbitration mechanism to handle commercial disputes, as is present in Hong Kong and Singapore.
Beijing first mooted the idea when then national leader Deng Xiaoping toured the city in 1992. Subsequent leaders, from Jiang Zemin to Hu Jintao, both emphasized the city’s potential as they rolled out policies to hasten China’s financial reform and economic opening.
The first concrete plans to shore up Shanghai’s financial hub aspirations were enacted in 2009 with the aim of retaining most – if not all – Chinese characteristics in political and legal affairs, culminating in the establishment of Shanghai’s free trade zone in 2013.
But the stakes have arguably never been higher for China to make good on its oft-touted ambitions.
With an average daily stock market turnover of 400 billion yuan (US$7.51 billion) and a total market capitalization of 35.6 trillion yuan ($679.49 billion), Shanghai still lags Hong Kong.
In August, Hong Kong’s daily average turnover was $17.33 billion, up 56% on the same period last year. Total market capitalization hit $5.46 trillion at the end of the same month, up 42% year on year despite the city’s recent political troubles.
But Shanghai is booming. With 6% gross domestic product (GDP) growth in 2019, equivalent to 3.8 trillion yuan ($556.6 billion), the megacity of more than 25 million leads China’s pack in total annual economic output and regionally is only outranked by neighboring Tokyo and Seoul.
Shanghai’s soaring growth contrasts with Hong Kong’s steady relative decline in economic importance for China, with the former edging past the latter in gross domestic product (GDP) terms way back in 2010.
Hong Kong’s share of Chinese economic activity has diminished since the end of British rule in 1997, when the city accounted for around 23% of China’s GDP. Outflanked by years of explosive growth on the mainland, Hong Kong represented less than 3% of total Chinese GDP in 2019.
The statistical comparison, of course, overlooks the rapid rise of Hong Kong’s neighboring Shenzen City and wider Guangdong, which combined still outrank Shanghai in total economic activity.
It remains to be seen if Beijing’s imperative to turn the city into a more pliant version of Hong Kong, namely by superimposing all the financial, trade and business liberties of a free port and financial center on to China’s restricted political and legal systems, is truly workable.
Shanghai, of course, has long served as a domestic financial center, a veritable mecca for internal fundraising and transactions for China’s massive and expanding economy, noted an international relations professor at the Shanghai-based Fudan University who requested anonymity.
“We have been told to play up a little bit, in our reports submitted to Shanghai and state officials, the city’s competitiveness as a financial center,” said the academic, one of many scholars who provides policy recommendations to city and state officials on key strategic issues.
“Shanghai has built the hardware, pulled down barriers and ticked all the right boxes in the reforms that are within the city’s own purview.
Now the ball is in Beijing’s court to honor its plethora of promises to introduce substantive liberalization on capital flows and market access to unleash Shanghai’s full potential,” the academic said.
“Unless Beijing moves in that direction, Shanghai will still be hamstrung by the policy constraints,” he added.
Observers and investors say that Beijing’s tight capital account controls, the inconvertibility of the renminbi currency, a complex tax regime and fickle, opaque legal and political environments are still barriers to making China’s “capital of capital” into a legitimate global financial market.
Despite official support for the goal, it’s not clear that government policy is moving fast enough to realize the ambition, some observers say. Liu Xiaobo, a former Xinhua reporter and well-known financial news commentator, said recent tumultuous events in Hong Kong have spurred Beijing to expedite Shanghai’s transformation.
“Lingering unrest is still haunting Hong Kong and the global backlash against Beijing’s national security law for the territory has thrown doubt on its sustainability as a financial hub going forward,” he told Asia Times. “Thus, Beijing is pinning hopes on Shanghai, whose residents are far more patriotic and obedient, to be a possible alternative.”
In February 2020, while China faced the height of its Covid-19 outbreak, the Chinese government issued a new directive calling for the acceleration of Shanghai’s transformation and broad liberalization.
That included national plans that could allow foreign investors to set up, control and wholly own securities and fund management companies, liberalizing current shareholding restrictions that bar foreign majority control.
Moreover, Beijing earlier this year vowed to “gradually expand the exchange rate movement range” to facilitate renminbi outflows and convertibility.
But that won’t likely be viable without a relaxation of current information restrictions and news blackouts that impede investor analysis of the Chinese market and companies. Hence the mooted plan to lift internet restrictions within Lingang.
When Shanghai’s newly-installed mayor, Gong Zheng, was recently asked if capital transactions and information flows would be liberalized in the specialized Lingang zone, he told reporters: “You can expect even more.”
If so, Beijing is embarking on a striking departure, raising the prospect that such policies could eventually be implemented in more urban districts like Pudong to help Shanghai come closer to parity with other world cities in finance and trade.
Widely seen as moves to replicate a mini-Hong Kong free marketplace, Lingang, located at the south-eastern tip of Shanghai, is connected to the city’s Yangshan deep water container port, the nation’s freest trade and business zone that enjoys minimal customs interference.
The big question going forward concerns how much is China willing to open its domestic financial sector to foreign capital and investment, as the US and other Western countries have long advocated for.
In June, Deputy Premier Liu He, chief negotiator leading Beijing’s trade Talks with Washington, told the Lujiazui Financial Forum in Shanghai that the city would go as far as adopting principles advocated by the US, including guaranteeing full foreign access to financial and trade sectors unless otherwise specified in a negative list regime.
Washington has long supported the World Trade Organization (WTO) rule that all member countries announce a negative list regime, which specifies sectors with limitations placed on foreign ownership and investment. China is gradually winnowing down that list, with the insurance industry liberalized last year and asset management to be opened this year.
Liu added that with President Xi – a Communist Party chief for Shanghai earlier in his career – pressing ahead with wide-reaching liberalizing reforms, foreign investors could expect the negative list to be trimmed further, with Beijing expected to soon allow foreign banks to offer full services to individual clients in Shanghai.
The latest Global Financial Centers Index Report, a ranking of financial center competitiveness based on over 29,000 criteria, showed Shanghai had leapfrogged Singapore and Hong Kong in its overall global rankings of major financial hubs to the fourth position. Protest-plagued Hong Kong, the index showed, had slipped to the sixth spot from its previous runner-up position.
Jointly published by Z/Yen Partners in the United Kingdom and the state-run China Development Institute, the report weighs the performance of cities in five key areas, including financial sector development, business environment, human capital, infrastructure and reputation.
The recognition came as a certain morale booster for Shanghai, which had been the indisputable commerce center of the so-called Far East in the early 20th century, before Hong Kong and Singapore saw their respective rises.
While Beijing now nominally seeks to re-establish Shanghai’s past commercial glory, many barriers to its re-emergence remain, not least the CCP’s engrained reluctance to truly set the city and its financial flows free.