Thoughts on Strengthening Financial Cooperation between Shanghai and China's...
Title:Thoughts on Strengthening Financial Cooperation between Shanghai and China's Hong Kong in the New Era
According to the Global Financial Centres Index 29 released in March 2021 jointly by China Development Institute and the British think tank Z/Yen，Shanghai and Hong Kong ranked third and fourth respectively among the global financial centers. The construction of Shanghai into an international financial center has almost been completed. So China have two major international financial centers – China's Hong Kong and Shanghai at the moment when China is entering the “14th Five-Year Plan” period and embarking on a new journey towards a socialist modern country. The coordinated and integrated development of the two major international financial centers will not only help consolidate their respective positions in the global financial world，but also support the modernization of China in the new era.
General information of the two major international financial centers
Remarkable results have been achieved in the construction of Shanghai as an international financial center. Through 30 years of unremitting efforts，The construction of Shanghai as an international financial center has achieved rapid development and the strategic goal of Shanghai “becoming an international financial center commensurate with the economic strength of China and the international status of the renminbi by 2020” has been successfully achieved. So far，a multi-level financial market and financial institution system has almost taken shape in Shanghai，and in terms of scale，multiple key financial markets rank among the top in the world. As of the end of 2019，there had been 1,646 licensed financial institutions in Shanghai，of which 517 were foreign-funded ones，accounting for 31%. In 2020，the market value of all shares and the funds raised in IPOs on the Shanghai Stock Exchange both ranked third in the world，making it the third largest stock exchange. The scale of custody in the Chinese bond market ranks second in the world，and the Shanghai Stock Exchange is the world’s largest exchange bond market. The Shanghai Futures Exchange ranks first in the world in trading volumes of multiple products，and the crude oil futures market ranks third in the world. The spot gold trading volume on the Shanghai Gold Exchange retains first place in the world.
As a mature international financial center，China's Hong Kong(hereinafter referred to as “Hong Kong”)，has been an important window and hub for China to connect with the international market for many years and has an important global influence. Currently，Hong Kong is the third largest banking center in the world，with 78 of the world’s top 100 leading banks having branches there. In 2020，the market value of Hong Kong Stock Exchange ranked fifth in the world and third in Asia，and the funds raised in IPOs ranked second in the world. Hong Kong is also the world’s largest offshore renminbi business center，which has the largest renminbi fund pool outside of Mainland China. It is an important hub for global renminbi trade and banking services，financing，asset management and settlement. According to the triennial survey conducted by the Bank for International Settlements，Hong Kong was the fourth largest foreign exchange market in the world and the second largest in Asia in 2019. It is also the world’s leading asset management center，where there are nearly 1,800 asset management companies，with assets exceeding US$3 trillion.
However，Shanghai and Hong Kong are very different international financial centers. The biggest difference lies in the operating systems. Firstly，Shanghai is an international financial center under the socialist market economy system and governed by the national statute law system，while Hong Kong is one implementing the capitalist economy system under the “one country，two systems” policy and governed by the common law system under the Hong Kong Basic Law framework of the Constitution. Secondly，Shanghai uses the national currency，the renminbi，so the financial market is mainly affected by the economic fundamentals and policies of the mainland of China，while Hong Kong uses Hong Kong dollars in accordance with the Basic Law and implements the pegged exchange rate system，which is clearly linked to the monetary policy of the United States，and thus is more directly affected by global market fluctuations. Thirdly，the financial market in Shanghai focuses on serving the mainland. Foreign investors invest in Shanghai’s financial market mainly through QFII，RQFII，Shanghai-Hong Kong Stock Connect，Bond Connect and Wealth Management Connect. Hong Kong，on the other hand，allows free conversion of currencies and free flow of funds，and is completely open to international investors.
Competition and Cooperation
Both being international financial centers，Shanghai and Hong Kong are naturally competitive in some areas. Firstly，they are competing for the position as the regional financial center in Asia. At present，New York and London are respectively the core of the American market and the European one. Similarly，Asia，i.e. the GMT+8 Time Zone，will also need an international financial center of the same level. Both Shanghai and Hong Kong have what it takes to compete with Singapore and Tokyo for this position. Secondly，they are competing for corporate headquarters. The number of large companies，especially multinational companies，based in an international financial center，is an important indicator of its strength and influence. As of the end of 2020，there had been 763 regional headquarters of multinational companies and 477 foreign-funded R&D centers in Shanghai; while there had been 1,504 regional headquarters and 2,479 regional offices of international companies in Hong Kong. Therefore，attracting large companies，especially multinational companies，will be one of the main priorities in the Shanghai-Hong Kong competition. Thirdly，the two places are competing for financial and other professional talents. Financial professionals and high-end professional service talents in law，accounting and consulting are the key to consolidating and enhancing the competitiveness of an international financial center. At the end of 2018，there were more than 360,000 financial professionals in Shanghai，accounting for 3% of the employed population in this place; in the same period，there were 263,000 financial professionals in Hong Kong，accounting for 6.8% of the total employed population there. Attracting financial and other related professionals，especially overseas talents，will also be one of the priorities in the competition between Shanghai and Hong Kong. In addition，with the development of the offshore renminbi business in Shanghai，there is likely to be some competition between Shanghai and Hong Kong in this area.
With a large economy and a vast market，China has a great demand for financial services in its economic and social development and thus can fully accommodate，satisfy and support the simultaneous development of two major international financial centers. In recent years，China has been actively promoting the financial cooperation between Shanghai and Hong Kong. In the Outline of the 13th Five-Year Plan (2016)，it is proposed that “efforts should be made to deepen the financial cooperation between the mainland and Hong Kong，and accelerate the interconnection of the two markets.” In March 2017，it is put forward in