A Proposal for Enhancing the Bond between Shanghai and Hong Kong: Two Peaks...
Title: A Proposal for Enhancing the Bond between Shanghai and Hong Kong: Two Peaks of Financial Exploration
Author: HE Haifeng and YANG Yujia
The Resolution of the Central Committee of the Communist Party of China on Further Deepening Reform Comprehensively to Advance Chinese Modernization (hereinafter referred to as "Resolution"), which was adopted at the third plenary session of the 20th Central Committee of the Communist Party of China, highlighted the need to move faster to build Shanghai into an international financial center and to work to consolidate and enhance the status of China's Hong Kong (hereinafter referred to as Hong Kong) as an international financial, shipping, and trade center. The Central Financial Work Conference underlined the need to accelerate the building of a nation with a strong financial sector, advocating for equal emphasis on "bringing in" and "going global", and steadily expanding institutional opening up in the financial sector. At the opening ceremony of the study session on promoting high-quality financial development, attended by provincial and ministerial-level leading officials, General Secretary Xi Jinping emphasized that a nation with a strong financial sector should have a strong economic foundation, as well as a series of key core financial elements, such as strong international financial centers. Shanghai and Hong Kong, both international metropolises, stand as international financial centers, hosting major global financial markets. They not only serve as the physical space and urban carriers for building a robust financial sector, but also act as key drivers and fundamental pillars for the evolution of financial elements and industry markets. Shanghai and Hong Kong can fully leverage their respective advantages, enhance cooperation, and promote coordinated development. By harmonizing the opening up and security of the financial sector, they can jointly contribute to bolstering China's core competitiveness in the financial sector.
Three Major Advantages of Shanghai as An International Financial Center
In 1992, the building of Shanghai into an international financial center was officially designated as a national strategy. After more than 30 years of development, Shanghai has largely positioned itself as an international financial center that aligns with China's economic strength and the international status of the RMB. Shanghai is now advancing towards Version 3.0 of its comprehensive capacity enhancement. During his inspection tour in Shanghai, General Secretary Xi Jinping emphasized that the goal of building Shanghai as an international financial center is correct, the progress is steady, and the prospects are promising.
First, the ever-improving structure of its financial market. Shanghai has developed a comprehensive financial market encompassingstocks, bonds, currencies, foreign exchange, commodity futures, financial futures, gold, insurance, notes, and trusts. It has attracted key clearing institutions such as the Cross-Border Interbank Payment System (CIPS) and the Global Association of Central Counterparties (CCP12) to establish their presence in the municipality. As an international financial center and global onshore center for the RMB, Shanghai continuously enriches market components like financial products and infrastructure, and constantly enhances its market functions such as pricing, payment, and risk management.
Second, the synergistic effect of being both a financial center and a center for scientific and technological innovation. The 14th Five-Year Plan of Shanghai Municipality noted that during the 13th Five-Year Plan period, Shanghai established a basic framework for building a global influential scientific and technological innovation center. The Shanghai Stock Exchange launched the science and technology innovation board (SSE STAR Market) and the pilot registration-based IPO system, which significantly boosted financial support for key industries, as well as micro, small, and medium-sized businesses, and promoted regional integrated development. Shanghai’s strong scientific and technological innovation base resonates with its functions as an international financial center to foster joint development.
Third, pilot financial innovation in the Shanghai Free Trade Zone (SHFTZ). Since its establishment in 2013, the SHFTZ has introduced eleven batches totaling 160 financial innovation cases. In recent years, the SHFTZ has demonstrated the pilot effects of opening up the financial sector and driving innovation, particularly through the creation of a free trade account system and initiatives like macro-prudential management of cross-border financing and facilitating cross-border RMB settlements for high-quality enterprises. These efforts further reinforce Shanghai's position as a key hub and gateway for the financial sector's liberalization.
On June 19, 2024, the International Monetary Fund (IMF) Regional Center in Shanghai was officially inaugurated. The center will offer more opportunities for Shanghai to develop its functions and enhance its soft power as an international financial center.
Three Major Advantages of Hong Kong as An International Financial Center
As one of the world's leading international financial centers, Hong Kong is not only the preferred location for financial services but also the home to numerous financial institutions. Hong Kong’s financial market in operates under efficient, transparent regulation that is aligned with international standards. Over the past two decades since its return to the motherland, Hong Kong has successfully navigated multiple international financial crises and the impacts of epidemics, resulting in a thriving financial sector. Drawing on the institutional advantage of "one country, two systems", Hong Kong's status as an international financial center remains resilient and robust, earning widespread recognition worldwide.
First, the convenience of free cross-border capital flows. Hong Kong, with its own currency and a linked exchange rate system, ensures free flows of capital. With ample foreign exchange reserves, a prudent fiscal policy framework, robust financial regulation and supervision, and a highly open and flexible economy, Hong Kong has emerged as the world's largest offshore RMB business center. The Resolution proposes to "promote high-standard opening-up of the financial sector, steadily and prudently advance the internationalization of the RMB, and develop offshore RMB markets". As a global hub for offshore RMB business, Hong Kong plays an irreplaceable role in advancing the internationalization of the RMB and supporting China's high-standard opening up to the world.
Second, independent fiscal and tax policies. Hong Kong adopts a territorial basis for tax collection, meaning that only profits and income earned within Hong Kong are subjected to taxation. Additionally, Hong Kong has signed agreements with numerous countries and regions to avoid double taxation and ensure that enterprises engaged in international transactions are not taxed twice. Hong Kong's open economic policies and stable tax system offer significant advantages for cross-border trade and the operations of global enterprises in Hong Kong.
Third, a flexible and innovative financial regulatory system. Hong Kong's financial regulatory system operates with a significant degree of independence, demonstrating greater autonomy and flexibility in institutional innovations. This provides a well-regulated, yet relaxed and favorable regulatory environment for the development of emerging financial sectors. For instance, Hong Kong has successfully attracted numerous talents and startups in the virtual assets sector. In response, the Hong Kong government and financial regulators have introduced a range of measures that balance regulation with growth, tradition and innovation.
Five Key Areas for further Cooperation between Shanghai and Hong Kong as International Financial Centers
As major global financial centers, Shanghai and Hong Kong are at the forefront of global development. The Central Financial Work Conference propo