Challenges Hong Kong Faced from Shanghai
as an International Financial Centre
09815346D YUE Pujue (Betty)
The day that Shanghai’s financial system is protected behind the thick walls of a closed account has gone away. When China’s State Council revealed the plan to develop Shanghai into a multi-functional international financial centre by 2020 in the late March 2009, Shanghai rapidly responded to the call by increasing its financial industry output value as a share of Shanghai’s GDP from 10% in 2008 to 12% in 2009. Therefore, whether Hong Kong, as an international financial centre, is able to survive under Shanghai’s further opening and reform financial system arouses hot debate. This paper briefly recounts Hong Kong’s recent development, introduces the challenges from Shanghai, compares Hong Kong’s competitiveness with Shanghai’s, gives insights of Hong Kong’s near future, and at last leads to a conclusion. 1. Recent development of Hong Kong’s financial sector
According to the Global Financial Centres Index 2011, Hong Kong ranked third, exceeding Singapore and only falling behind London and New York. This new achievement not only relies on the recent development of Hong Kong's capital market and securitization business, but also relies on the reforms in its financial system. Over the past 14 years, the development of Hong Kong basically followed the process of gradual relaxation of financial regulations and enhancement of supervision, which led to a more free, open and resilient market. More importantly, these ‘relaxation and enhancement’ reforms further improved financial sector’s capital and operational efficiency, largely because the development of capital markets broadened the corporate financing channels, the abolition of interest rate agreement enabled banks to price their loans and deposits more competitively, benefiting both corporate and individual borrowers; and because the lowering of market entry threshold and improvement of financial infrastructure both lowered transaction cost and risk, while also enhanced market efficiency and transparency. 2. Challenges from Shanghai
Based on the Global Financial Centres Index 2010, Shanghai jumped from the eleventh to the sixth competitive global financial centre in the world. As Shanghai has the unique advantages of being fully integrated into the Mainland economy, business and legal traditions, as well as being the most leading centre in Yangtze River Delta, Shanghai’s catching up with Hong Kong in some areas is without doubt. Domestic stock market capitalization in Shanghai Stock Exchange, for instance, has already overtaken that in Hong Kong Exchanges. In some other areas, such as the amount of domestic bonds outstanding, the size of international reserves, Shanghai has also surpassed those of Hong Kong. 3. Hong Kong versus Shanghai
Referring to Hong Kong Monetary Authority’s working papers, there are five main ingredients in judging an international financial centre’s competitiveness: its regulatory regime, business infrastructure, market access, socio-economic features and tax. The following related discussion will show why Hong Kong is more attractive than Shanghai as an international financial centre. Hong Kong's legal system is a heritage from Britain, and its financial system is similar to that of the Anglo-Saxon's, which is quite different from that in Mainland China. In brief, Hong Kong has an independent legal system and all laws are governed by an autonomous constitution, while in Mainland, the lack of an independent legal system can be a concern for foreign investors in getting a fair hearing. Shanghai's regulator is part of the government's State Council, but in contrast, Hong Kong's financial markets regulator is an independent statutory body. Hong Kong’s sound and effective regulatory system ensures fairness to all market participants. Hong Kong enjoys higher degree of openness than that of Shanghai in areas like...
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