How is China turning Shanghai into an international finance center?

The reforms to establish Shanghai as a finance hub are in line with the government’s pursuit of high-quality growth through market reform.

Developing Shanghai into an international financial center is an essential part of China’s economic agenda. It is also central to the prosperity of the Yangtze River Delta, one of three major metropolitan areas visualized as driving China’s future growth. Reinforcing this vision, the recently published 30-point reform guideline aims to strengthen Shanghai’s position as China’s preeminent city for international finance.

The guideline, published on 14 February, reflects the envisioned role of the city in further opening up China’s financial sector to foreign participation, supporting the development of the domestic technology sector, and establishing a more competitive market environment.

Key elements

The vision for Shanghai is ambitious. According to Zheng Yang, Director-General of the Shanghai Municipal Financial Services Office, “Shanghai is striving to become an international financial center [capable of keeping] pace with China’s economic strength and the international status of [the] yuan.” The guideline outlines a number of concrete steps toward its realization. They can be summarized as follows:

• Streamlining capital account convertibility: for qualified foreign investors in Shanghai’s Lingang New Area, the guideline proposes developing an RMB-to-foreign currency capital pool to simplify the allocation and adjustment of an investor’s reserves in RMB and foreign currencies.
  
• Increasing the use of offshore RMB: for entities established in Lingang New Area, the guideline suggests using the trial of cross-border transfer and the use of offshore RMB raised through trade financing, foreign direct investment (FDI), debt financing, and initial public offerings (IPOs).
• Expanding the derivatives market: the guideline advises building up the interest rate derivative market to meet risk-management demands and improve interest rate pricing mechanisms.
• Encouraging the participation of foreign investors: the guideline paves the way for foreign institutional investors and large banks to set up (on a trial basis) wealth-management joint ventures in Shanghai; they will also be able to control securities and fund-management companies in the city.
• Opening up the insurance market: foreign institutional investors are now permitted to create pension-management companies and wholly foreign-owned life insurers in Shanghai, the first time ever in the city.
• Participating in the interbank forex market: qualified non-financial groups are now allowed to set up financial holding companies in Shanghai and participate in the interbank foreign exchange market. This follows in the steps of foreign banks, which have been permitted to do so since January 2005.

These elements aim to make financial conditions more attractive to foreign investors and position Shanghai as a finance-friendly city. This is just one dimension of the reforms while another important aspect deals with supporting the technology sector.

In tech we trust

Shanghai is integral to transforming the Yangtze River Delta into a hub of frontier technology development. Its role as a finance center will support this in two ways.

The first concerns the introduction of existing technology into the financial sector. The guideline indicates support for financial institutions and large technology enterprises to establish FinTech companies in Shanghai’s Lingang New Area. These businesses are envisaged to push the envelope in developing new technologies in the fields of artificial intelligence (AI), big data, cloud computing, and blockchain, which can be used in the financial sector.

The second is providing financing for domestic technology innovation. Financial institutions and insurance companies are to provide funding to technology-related research projects in Shanghai in the form of long-term credit extensions, investment funds, and direct investment. Qualified technology companies will receive support to go public, and foreign investors will be provided with opportunities to participate in Shanghai Stock Exchange’s Science and Technology Innovation Board (the STAR Market). This is to ensure sufficient resources are available for the research and development of new technologies.

China is clear in its priority to make technology a core driver of its future growth^{1 2}. Shanghai, seen as a source of financing for researching new technologies, is being positioned to drive this trend forward.