By drawing parallels between the established financial hubs of London and Frankfurt, Prof. Horst Loechel, Director of the German Centre of Banking and Finance at CEIBS, explores whether or not China’s goal is realistic and what it would take to achieve it.
1. Why has China made this goal of transforming Shanghai into a financial centre by 2020 such a priority? What are the advantages that will come with achieving this goal? Are there any downsides?
Horst Loechel: The plan to develop Shanghai into an international financial centre by 2020 is part of China’s overall development plan of as it moves towards becoming an advanced economy. Finance is a very, very important part of this plan – nationally as well as at the international level, because in order to become an advanced or developed economy, you need a full-fledged financial sector. And Shanghai is somehow the frontrunner to develop China’s financial sector into a modern banking and finance system, with sophisticated capital markets and international banks.
In order to develop Shanghai into an international financial centre, first of all you have to make the Chinese currency, the RMB, into an international currency. That means making the RMB convertible and increasing the flexibility of the exchange rate system. Otherwise you cannot have an international centre. That means there’s a lot riding on this development of Shanghai into an international financial centre.
The advantages are clear: a financial centre means higher incomes, more growth, more development, more sophistication, a better life. And also the advantage, for China, is to become an even more important player in the global financial architecture. We can see that after the global financial crisis, the shift from West to East – which was already underway – has become even more advanced now. And so it’s very important to position Shanghai as an international financial centre, as China’s global international flagship.
As always, there are two sides of a coin. For ordinary people living in a city like New York, London or Shanghai, there are also disadvantages, especially with regard to property prices and the overall cost of living. But overall, it’s the right move for China to develop Shanghai into an international financial centre. 2. How realistic is this goal? Can it really be done, and by 2020?
In London, the process took about 25 years, and it took Frankfurt about 30 years. However, given the experience with China’s development in the past – financially and economically – I think their goal is realistic. It may not happen by 2020 – it may be 2023 or 2025. But what matters is the goal, not the exact date when you achieve this goal. Setting a goal is a kind of incentive, a locomotive for further progress with regards to convertibility of the RMB, with regards to opening up of the capital markets, and with regards to lifting the entry restrictions for international banks working in China. This is what matters.
In addition, this decision to transform Shanghai into an international financial centre by 2020 was made by the State Council of China: that means this is a move supported by the central government. The Shanghai government also has its recently-launched “93 Plan”, which describes, in detail, the things that must be done in order to develop Shanghai into a financial centre.
There’s a clear difference between London and Frankfurt – and also between London, Frankfurt and Shanghai. Frankfurt is a regional centre; that means for Continental Europe, Frankfurt is the financial hub. London is a truly global centre, which means for the entire world.
But Shanghai is not only competing with New York and London as a global centre, it is especially in competition – in Asia – with Hong Kong and Singapore. That means, from my point of view, it may be better for Shanghai to, first of all, develop into a regional hub to rival Hong Kong and Singapore (but especially Hong Kong) and then leverage that to become a global financial centre, or make this a parallel process of development. I think Shanghai is now, clearly, a domestic centre. In order to become global, perhaps an intermediate step to become a regional centre for Asia is the right approach..
3. What are China’s strengths and weaknesses, in achieving its goal, as compared to London and Frankfurt?
Shanghai’s most important strength is China: its size, the pace of economic development. You can only become a global financial centre if the economy backing you is important somehow. And there’s probably no economy in the world more important than China right now. So this is Shanghai’s biggest asset: to be the economic and financial centre of the most important economy in the world.
The second strength is China’s unique approach to economic development. What we actually see in China is trial and error. They never put in changes to the entire system in one go; it’s a gradual process of trial and error. And this is the same approach being taken in Shanghai. I like this approach, it’s very successful.
And the third strength is the government. The central government and the local government are supporting this process and political support is vital in China, as it is in Asia and the world.
In terms of weaknesses, the first is its client level. Most of the important financial Chinese authorities like the People’s Bank of China (China’s central bank), and regulators like the China Banking Regulatory Commission, Chinese Securities Regulatory Commission or China Insurance Regulatory Commission, their headquarters are all in Beijing. This is a disadvantage. This is neither the case in Frankfurt nor London.
Also, a lot of Chinese banks, if not almost all of them, are headquartered in Beijing – not Shanghai. In addition, a lot of regional headquarters of international companies do not have their regional headquarters for Asia in Shanghai, but in Hong Kong or Singapore. On a client level, these are things that need to be addressed.
The second weakness is that the banking market and finance markets are still narrow in China. For example, there is only a limited range of products allowed here in China. This is an obstacle for further development. There needs to be a relaxation on new products in order to facilitate further development. But progress is already under way as the recent approval of short-selling deals shows.
Education is the third weakness. There is a clear bottleneck in Shanghai’s development: it's the human resources factor. In today’s global world, it’s not very difficult to find innovation and capital; it’s very simple – you buy it or invent it or copy it. But finding educated people, this is a challenge. Shanghai has already done a lot. All the big universities like Jiaotong, Fudan, SUFE, and CEIBS are making significant progress in human resources, in general business education but also specifically in financial education.
The government has shown its support for institutional efforts to offer the MBA and EMBA in finance and applied research. CEIBS is seeking to launch an MBA in finance, we have the CEIBS-Lujiazui International Finance Research Centre – an intellectual platform for the Chinese and foreign community – and we have just launched the German Centre of Banking and Finance here at CEIBS. So things are under way. But given the task, and the amount to achieve, there are a lot of things still to do – especially with regards to professional and executive education that’s specialised in banking and finance.
For a financial centre, you need an intellectual infrastructure, education and financial research. There are obviously still a lot of things to do in Shanghai. 4. What steps MUST China take in order to achieve its goal?
First, convertibility of the RMB. This is the most important thing to do. Second: improve, upgrade, and leverage financial education, especially with regards to professional and executive education. And third: build up an international competitive environment including a competitive tax environment and a competitive regulatory environment for foreign companies – especially financial MNCs – working in China. I think these are the three most important things. 5. What pitfalls will it have to avoid?
First of all, avoid financial crises; we just had the worst global financial crisis since the 1930s. Opening up the market means more risk; you cannot open up without more risk in the financial system – currency risk, debt risk, default risk. It has to be controlled. And one important point here is education: you need sophisticated risk management. 6. Any final thoughts?
It’s unavoidable that Shanghai will become, sooner or later, a global financial centre (and not only Shanghai but also Mumbai, for example). I don’t know any scenario which, in the medium term, can stop this shift from West to East. Actually I see even more acceleration every day.
There was a questionnaire recently by a well-known research institution in London and they asked executives all over the world their thoughts on who will become the financial centres in the next 10 years. In ranking the top three, New York and Shanghai tied for number one, London was next. That means the executives, you can say the market, is expecting that Shanghai will do it. This is clear. So this development of Shanghai is somehow part of this unavoidable overall global shift from West to East. This is not a matter of discussion; it is a matter of fact.
[Reprinted with permission from The China Europe International Business School.]