Transcript A Tale of Two Cities ——Shanghai & Hong Kong As

By
Yim, Hosea
Zhang, Herbert
Shanghai’s successful bid for the 2010 World Expo
Hong Kong’s failure to get host of 2006 Asian Games
Shanghai announced in April 1990 its plan to develop the Pudong New Area,
and its ambition to re-emerge as a major international financial, commercial
and shipping centre by the first decade of 21 Century.
Since Hong Kong was handed back to China in 1997, it has suffered
something of an identity crisis.
Apparently, Hong Kong was in a dither.
Shanghai
Financial:
Lujiazui Financial District in Pudong New Area
In 2005 the State Council reaffirmed the positioning of the 31.78 km² Lujiazui area, as
the only finance and trade zone among the 185 state-level development zones in
mainland China. Shanghai’s GDP of Finance: More than 10% of total, March 2009:
Growth Rate: 26%
Commercial:
Shanghai's commercial sector saw rapid growth in 2007, with total commodity sales
amounting to Rmb2,040.1 billion, an increase of 31.6% over 2006. Wholesale sales
showed a year-on-year growth of 35.8% while retail sales were up by 14.5%.
Shipping:
Yangshan deep-water port: The third phase will be completed by 2010 with seven berths,
When fully completed in 2012, the port will have four phases in operation with 30 berths
capable of handling 15 million Twenty Equivalent Units annually (Largest in the world)
US$ 12 Billion
Typologies of Financial Centre
Teleological
Perspective
Functional
Center
Paper
Center
Geographical
Perspective
National or
Domestic Centre
Historical
Perspective
International
Centre
Traditional
Centre
Integrated
Centre
Segregated
Centre
Hong Kong
Shanghai
Financial
Entrepôt
Offshore
Banking
Centre
Typologies of Financial Centre
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Paper Center
A location for recording financial transactions only, but little or no actual banking or
financial business is carried out there. Many transnational financial institutions find it
convenient, for example, to keep “shell” offices in jurisdictions where taxes and
prudential regulations are nonexistent or nominal, in order to minimize their overall
costs.
Integrated Centre
Refers to one in which no artificial barriers exist between onshore and offshore markets,
so that once a financial institution is established, it can engage in both onshore and
offshore business, whether denominated in home or foreign currencies, without
restriction.
Segregated Centre
One in which the authorities make clear distinctions between onshore and offshore
markets, or between domestic- currency-denominated and foreign-currencydenominated businesses. A segregated centre is more often called an offshore financial
centre (OFC). The term offshore banking centre is also used, implying that only the
banking sector is internationalized.
Financial Entrepôt.
It is defined as a centre that offers the services of its domestic financial institutions,
money markets, and securities markets to both domestic and foreign residents.
Typologies of Financial Centre
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What Makes an IFC?
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What are the significant characteristics,
in quantitative terms, of an IFC?
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What are the necessary conditions, or
prerequisites, for a city to become a
genuine IFC?
Shanghai and Hong Kong: Macroeconomic and Financial Center Profiles
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Population
GDP (RMB billion)(2009)
GDP per capita (ratio) 2009
2001
Average annual real GDP growth
2009
Exports of Goods &Service
Average annual growth rate
(last decade of 20 Century)
Imports of Goods &Services
Average annual growth rate
(last decade of 20 Century)
Shanghai
13,270,000
1,490
1
1
8.2%
Hong Kong
6,759,500
1,433
2.7
5
-2.7%
141.91
20.6%
457.6 (including Transshipment)
8.0%
135.82
17.8%
434.21
8.5%
Shanghai and Hong Kong: Macroeconomic and Financial Center Profiles
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Banking Sector
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Shanghai Hong Kong
Deposits (US$ billion)
135.8
436.73
Foreign currency deposits (US$ billion)
18.92
198.96
Loans (US$ billion)
103.2
280.13
Foreign currency loans (US$ billion)
12.87
68.88
Loans Abroad (US$ billion)
n.a.
39.69
Balances due to banks abroad (US$ billion) n.a.
187.03
Balances due from banks abroad (US$ billion) n.a.
276.87
Clearing House daily turnover (US$ billion) n.a.
45.15
Interbank market daily turnover (US$ billion) 23.44
26.42
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Shanghai and Hong Kong: Macroeconomic and Financial Center Profiles
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No. of banks and depository institutions: Shanghai Hong Kong
Domestic
18
46
Foreign
53
204
Insurance
No. of insurance companies:
Domestic
18
100
Foreign
14
106
Premium income (US$ billion)
2.2
2.5
Registered intermediaries
n.a.
33,187
Fund Management
No. of unit trusts or mutual funds:
Domestic
23
90
Foreign
n.a.
1,800
Historical Overview: Shanghai
Modern Western-style banking and finance was introduced
into the two cities at approximately the same time after the
end of the First Opium War 鴉片戰爭
 1936, 47 foreign banks
 Head Offices in Shanghai. Chinese Banks Yearbook, in
1936, of the 164 domestic banks in China, 6 government
owned banks.
 72 traditional Qianzhuang, 40% national deposit
 Shanghai was also the place where modern financial
markets were concentrated
 Insurance Center: 166 foreign insurance companies and 48
domestic insurance companies
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Historical Overview: Shanghai
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“Shanghai at that time was not only the largest financial centre inside
China, but was also an international financial centre in the Far East”.
Economics historians Hong and Zhang
Japan’s aggression against China was the immediate and most
important cause of Shanghai’s decline as a financial centre.
Bund, Shanghai
Historical Overview: Hong Kong
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1941- 45 when Japan occupied H.K.
Victoria Harbor 1946
After WWII, H.K. enjoyed prolong peace
1966 after banking crisis
Late 60’s
Mid 1970’s ready to issue new bank licences
1982 take off interest withholding tax on foreign
currency
1989 abolish all form of tax on interest
Strength and Weakness
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H.K.’s Number of regional headquarters
and regional offices are much greater
than Shanghai’s
Strength and Weakness
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Shanghai does not have full capital mobility
since there are extensive controls over
capital movement in China
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Also RMB is not full convertible, it would
take some time to do so
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On the other hand, H.K. has long history of
full convertibility and capital mobility
Strength and Weakness
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The banking system is crippled by non-performing
loans (NPL)
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Official figures: about 24% and in the private
sector is more then 40%
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In economic advance regions such as Shanghai,
Jiangsu, and Zhejiang provinces had avg. of
7%~12%
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Basel Accord require minimum of 8% capital
adequacy ratio (CAR)
Strength and Weakness
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Compared to Hong Kong who have CAR of
16% which is one of the highest in the world
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A NPL ratio of 5.05%, which is much lower
default loans compare to Shanghai.
Strength and Weakness
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Free flow of information still remains a
problem in Shanghai. Central Government
censors sensitive political and social news
still exist. After all the Central Government
own all mass media in China
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Hong Kong has much higher free flow of
information since media are privately owned.
Strength and Weakness
Main issue in Hong Kong is the growth rate trend.
 It drop from 9% to 2% from 1960 to 2008
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Shanghai's GDP for 2008 hit a 16-year low at 9.7
percent year-on-year
Hong Kong Annual GDP Growth Rate 1960-2008, World Bank Group
Strength and Weakness
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Shanghai have a much larger bond and
commodity market.
Its national financial center is unchallenged.
They monopolized the foreign exchange
market and interbank market
2009: 1% of China population accounted for
9.1% of total bank deposit
Thus making Shanghai a huge magnet for
FDI and domestic direct investment
10% of China's contracted FDI, 13% of
China's Imports
Strength and Weakness
Have well-diversified industrial structure
 Larger science and technology talents
 R&D also much better compared to H.K.
 2001: Shanghai science and tech score
was 3.294 compared to H.K.’s 3.226
 Experiencing much higher GDP and
foreign trade growth.
 Catches up/ supass Hong Kong in no time.
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Conclusion
2008 Shanghai Municipal Government
promulgate some policies to encourage MNCs
to establish RHQs
 They provide incentives such ass cash
allowance and awards, financing management
support, simplified entry-exit formalities for staff,
and customs clearance
 In 2008 Shanghai has 626 headquarter-type
foreign-invested enterprises have been
approved
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Conclusion
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In 2009 introduced new policy to encourage
private equity / venture capital in Pudong.
 PE/VC that establish since 2008 have paid-up
registered capital of RMB500 million will grant a
lump sum of RMB5 million.
 Partnership PE/VC that raised funds reach
RMB1 Billion will grant RMB5 million
 Up to 40% tax rebate, senior management may
also entitle house allowance up to RMB200,000 /
person
Conclusion
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2007 China’s capital controls remain
substantially binding. Thus, China does not
have full capital mobility yet.
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Full convertibility of RMB is not achieve yet.
Conclusion
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In 2010 Shanghai’s CAR is reach up to
10.16%, which is well above 8% minimum
requirement by Basel Accord.
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China also require banks to maintain CAR of
at least 10% up from 8% and Shanghai
Pudong Development Bank to keep their
core CAR at 7% from 4%.