Zhenyi Tang, Chairman, CLSA, was a panellist at the WFE’s Fostering Growth in Global Capital Markets symposium in Shanghai. Here he writes about one of the key issues discussed at the event: building Shanghai as an international finance centre.
What are the key drivers in Shanghai becoming an international finance centre, and why is it an important part of the continuing success of China and its capital market?
Shanghai becoming a global financial centre will bring substantial economic gains, increased 'soft' geopolitical power, and a large pool of lucrative jobs. The key drivers are not just from the growth of a narrowly defined financial industry, but also from a wide range of positive spill-over effects: the creation, or sharp growth, of a number of related industries that are interconnected with finance.
The key factors in achieving this goal can be summed up in three parts. Firstly, the 'Reform and Opening-up policy', and the development of China’s economy, provide a foundation for Shanghai to meet the market demand for financial services now, and in the future. Strategically located at the mouth of the Yangtze River, Shanghai is situated close to key cities in China and North Asia, and has the world's busiest port. In addition, manufacturing and logistics industries, and a budding entrepreneurial culture in neighbouring Jiangsu and Zhejiang provinces, and greater Shanghai (the Yangtze River Delta Economic Region), account for a respectable share of China’s GDP, exports, and foreign investment. New economic unicorns - such as Alibaba and JD - are also located in the economic region, as well as many Chinese headquarters of international conglomerates.
Secondly, Shanghai’s government significantly invests in developing the city's financial industry. The city hosts the mainland’s key trading markets for futures, gold, and foreign exchange, and has implemented many preferential policies to attract domestic and international financial institutions: from tax exemptions, to the upper limit of foreign ownership in joint ventures. Moreover, the city's environment and infrastructure is constantly improving in order to attract professionals from all over the world. The numbers tell the story: there are more than 1,500 licenced financial institutions in Shanghai, which account for nearly one third of China's securities and futures institutions.
Finally, the Shanghai Stock Exchange (SSE) plays an important role in developing the city as an international financial centre. As a comprehensive, open, and service-oriented exchange with a complete market structure, it provides various products: stocks, bonds, funds, and derivatives. The SSE Main Board Market is also widely regarded as the blue-chip market of China, attracting a number of industry giants with high growth rates, stable performance, and solid profitability. The Shanghai-Hong Kong Stock Connect launched in 2014, interconnecting the stock markets of Shanghai and Hong Kong, contributes to the two-way access of China’s capital markets, the internationalisation of the Renminbi (RMB), and the development of Shanghai as an international financial centre.
Shanghai has significantly improved in the areas necessary to becoming a global financial centre: business environment, human capital, infrastructure, financial sector development, and reputation.
One of Shanghai’s biggest regulatory hurdles is the conflict between the pace and the demand of China opening up its capital markets. Take the internationalisation of RMB as an example. Chinese investors have few options when investing in Chinese companies (as Alibaba, Tencent and other new economy unicorns listed abroad) and foreign investors can only buy shares on the Shanghai and Shenzhen stock markets through a few constrained channels: as a qualified foreign institutional investor, an RMB qualified foreign institutional investor, or through Stock Connect. Even as these channels are gradually 'widening', China is still a long way from having a competitive financial market that is comparable to other top global financial centres.
The good news is that the government is piloting programmes to internationalise the RMB through currency swaps with other national central banks, and settling trade deals with Chinese money (instead of dollars or euros). Moreover, the regulator is introducing new products to make Chinese capital markets more open to international markets with a wide array of financial and futures contracts. Shanghai is on the right track, bringing the most innovative companies to its markets and creating a friendly environment for foreign institutions. In doing this, Shanghai is becoming an increasingly competitive centre for international finance.
If opening up is the main policy challenge, then the next leap forward is establishing credible market rules to create open and fair market access, as well as protecting the interests of both domestic and foreign investors. Shanghai takes enforcement seriously and it's having a positive effect. Also, it's notable that MSCI listed 234 Chinese stocks on its index in June.
Please can you tell us how your business is helping to foster growth in both global, and Chinese, capital markets?
CLSA has positioned itself as a conduit to facilitate capital market flows between China and the rest of the world. This is backed by our comprehensive product and service capabilities in research, investment banking, equities, derivatives, fixed income, and asset management. Together with our parent company CITIC Securities, we have unparalleled knowledge of China’s markets, rules, and regulations. We have the ability to access all corners of China’s economy, and engage with influential investors from around the world, to enable significant cross-border deals.
CLSA provides capital markets participants with unrivalled insights, liquidity and capital. As the international flagship of CITIC Securities, China’s top ranked investment bank and capital market intermediary, CLSA will continue to dedicate its resources and experience in developing global and Chinese capital markets.