25 October 2016
Hong Kong's strong global connections and its well-established legal and regulatory regime are something that Shanghai still lacks.
Hong Kong's strong global connections and its well-established legal and regulatory regime are something that Shanghai still lacks.

Why Shanghai will not gain if Hong Kong stumbles

Many mainland Chinese believe that Beijing has spoilt Hong Kong rotten since the 1997 handover.

From supplying safer food to facilitating more tourists and capital flows, the central government has spoon-fed the special administrative region with tailor-made policy blessings, the mainlanders say.

Some have even gone so far as to allege that Beijing’s munificence to Hong Kong has come at the expense of mainland cities and regions.

If the central government had not offered all the concessions to Hong Kong, Shanghai city and Guangdong province, in particular, could have achieved much more in finance and other tertiary sectors, the critics say.

Now, how valid is this claim?

Looking at some data, Shanghai has raced past Hong Kong on a few key parameters, including annual economic output.

Shanghai’s gross domestic product stood at 2.35 trillion yuan in 2014, while that of Hong Kong was at about 1.8 trillion yuan going by current renminbi exchange rate.

When it comes to stock market turnover, it is also Shanghai that has scored, thanks to the runaway bull market there since 2014.

Were it not for Beijing’s largesse to Hong Kong, the “epic fall” of the special administrative region and Shanghai’s rise would have been much greater, mainlanders say.

Taking an objective view when discussing the rivalry between the twin cities and Shanghai’s potential in finance, one must point out that while Shanghai has been China’s top domestic financial and banking center, the city is still far from being an international financial hub in any true sense.

China’s rise as a global powerhouse cannot change the fact that the nation’s capital and financial system still remains largely a fenced one.

Initiatives in recent years like the qualified domestic institutional investor scheme, qualified foreign institutional investor scheme and the cross-border bourse link have merely opened a small gap in the fence, without really throwing it open.

Hong Kong’s success, meanwhile, largely owes to its strong social and legal infrastructure.

Another fact to be borne in mind is that Hong Kong’s financial sector is not so dependent on China, as the city serves and marshals truly globalized transactions and capital flow.

International institutional investors from the United States and Europe are still ruling the roost in the city.

Chinese players and the renminbi have been catching up rapidly in the past decade, but the size of offshore renminbi pool in Hong Kong, the most realistic indicator, is still very small compared to the overall assets being managed in the city.

As the Chinese currency still has a long way to go on the internationalization path and as there is no timetable for free convertibility, Shanghai is still someway off from becoming a truly global financial center that can rival Hong Kong.

Shanghai also lacks some essential nutrition for a financial center, like seamless alignment with other markets.

Thus, even if the renminbi is suddenly allowed to flow freely, Shanghai would still be fettered by many controls: for instance, the lack of sizable and vibrant markets for foreign exchange and futures, and more importantly a sound and stringent legal and institutional system.

All these are aspects that Hong Kong can help with.

Initiatives like the Stock Connect and other liberalization moves in the pipeline aim to assist Shanghai to help the city move closer to the international level by modeling on Hong Kong.

As the US dollar still reins supreme globally, New York, London and Hong Kong will continue to be dominant players on the international financial stage.

London is the world’s largest offshore hub for the US dollar. Meanwhile, the Hong Kong dollar — due to its peg to the greenback — is seen as the shadow US unit, giving the city a key role in 24-hour, nonstop global trading across three time zones.

As China is reluctant to open up its financial market, Shanghai’s prospects are not certain. 

If Hong Kong falters, the real beneficiary will probably be Singapore, not Shanghai.

Also, if Hong Kong falls behind, it is Chinese firms that will suffer as they will lose their single most vital overseas financing platform.

Moreover, in a blow for Beijing, the renminbi internationalization will hit a roadblock.

Given these realities, it is no surprise that top Chinese officials, including Premier Li Keqiang and NDRC director Xu Shaoshi, have made fresh calls to give a greater role to Hong Kong in China’s overall development.

Now, it may be time for the ordinary Chinese citizens to shed their illusions as well. 

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EJ Insight writer

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