Will Shanghai replace Hong Kong as an International Financial Center in China? ECON 3350 China, Hong Kong and the World Economy
Prof. Sung Yun-Wing
Teaching Assistant Stanley Ko
A paper written by Alexander Hoss, Thomas van Huijgevoort, Christian Burda, Liu Chun Yi and Hui Wing Kann in November 2011
1. Introduction 2. How can an International Financial Center (IFC) be defined? 3. What are the main differences between the financial sectors of both cities? 3.1 History 3.2 Institutional differences 3.3 Financial market 4. What needs to be changed in Shanghai to become an IFC? 5. Conclusion
According to a statement from Shanghai's mayor in 2002, the goal is to reach IFC status within 10 to 20 years (Laurenceson/Tang, 2005). Considering the situation that Shanghai will reach its ambitious goal the world’s and especially Asian’s existing financial centers will face an emerging and dynamic new competitor which apparently will lead to a change in their business environment. Focusing on China and the Asian-Pacific Region the main question this paper deals with is “Will Shanghai replace Hong Kong as international financial centre in China?” Obviously this issue asks for a detailed analysis on more than one aspect thus we have a look at historical and institutional differences as well as at significant disparities between the financial markets of the two cities.
2. How can an IFC be defined?
In the literature you will find a considerable amount of different definitions for an IFC. In this paper we will focus on typologies of financial center from a geographical perspective as well as on the most important conditions that have to be fulfilled to be called an IFC. In general terms a financial center is simply a location where a substantial amount of financial business is conducted (Douglas, 2011). Jao (2003) divides financial centers in national financial centers and international financial centers. The latter ones can again be divided into regional and global ones. The main criteria the author applies in order to determine the appropriate title for a city is the scope of its activities. Only if the center’s financial business influences significantly the global financial world it can be seen as a global financial center. It works the same way for the other terms respectively. Noteworthy is the fact that both regional and global financial centers are considered as IFC’s meaning that there are within the framework of our analysis.
Speaking about requirements for an IFC you might argue that, due to the rapid development of information and communication, locations of financial centers don’t really matter anymore. However it is still widely acknowledged that the financial system needs basing points to operate from as for example Karreman/van der Knaap state in 2009. One reason which is often given in the literature is the importance of trust and confidence which are way easier created and maintained by physical contact and interaction (Douglas, 2011). Jao (2003) gives a clear overview on prerequisites which promote trust and confidence or are in another way critical for reaching IFC status. From the political perspective there are political and social stability, liberal and non-interventionist policy towards business, free flow of information and a well-established law system which protects the legitimate interests of consumers, depositors and investors. Furthermore “national treatment” to foreign banks and a business friendly taxsystem are advantageous. Besides this it plays an important role that full capital mobility is given as well as a modern financial infrastructure. Lastly you can only attract a large number of international experts, which is essential for becoming an IFC, if you meet there expectations of a convenient business and private environment. This includes a modern infrastructure, widespread use of English and also a good quality of life.
3. What are the main differences...
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