Introduction
Shanghai and Hong Kong have become important in the global financial sector. Modern banking and finance started in HK and Shanghai in 1845 and 1847 respectively when the first British bank was opened, the Oriental Banking Corporation. The Hong Kong and Shanghai Banking Corporation, a multinational Holdings was founded in 1864 with its Head office in Hong Kong. Other foreign and local banks from Britain, Europe, America and Japan were subsequently opened. The modern Commercial Bank of China was formed in 1897 with its head office in Shanghai. The first stock exchange was established in Hong Kong in 1891 and in Shanghai in 1904. Insurance companies and agencies also started emerging in the mid-19th century. By 1936, Shanghai had already 47 foreign banks operating, four of which were from Hong Kong (Bhattacharya 2011). Apart from being the country's banking center, Shanghai was also a center for modern financial markets; the securities market, the gold market, and an insurance center. Hong Kong’s metamorphosis into an International Financial Centre started actively in the late1960s (Jao NA). Over the last decades, financial services have become key in driving Hong Kong’s economy. According to research findings of Financial Services Development Council of HK, 2013, financial services contributed over HKD 300 billion, 16% representation to HK’s GDP in 2011(Hong Kong: China’s Global Financial Centre NA). HK is known around the world as the leading financial center. This essay discusses Shanghai's and HK's strengths and weaknesses as global financial centers in four sections. The first section introduces the two cities; the second section discusses the strengths, and the third section discusses the weaknesses. The fifth section concludes the essay.
Strengths
The rapid growth of Asia's economy is perceived as the key driver of economic growth shortly. There are plenty of investment opportunities in the Asian economy, and mainland China is among the economies being eyed by investors.
Shanghai’s Strengths as a Global Financial Centre.
Shanghai has emerged as a global financial center with the largest number of foreign banks and non-bank financial institutions in Mainland China, in 2002. In 2000, the financial services sector accounted for 15.2% of Shanghai’s GDP (Laurenceson, Tang & Wong, and NA). As of now, Shanghai is already established as a financial hub for mainland China. Shanghai now serves as the contact point for China’s financial integration with many financial activities including interbank lending, bond trading, foreign trading and fledging futures, all taking place in the city. Following are some of Shanghai’s strengths.
Market Access
Shanghai is strategically located to access important markets. Since China joined the WTO, numerous companies have relocated their regional and China headquarters to Shanghai, which has improved access to China's domestic market (Laurenceson, Tang & Wong, and NA).
Legislation/Regulations
Friendly tax system
The foreign banks and financial institutions are offered tax reductions. Goods produced for export are exempted from export and value added tax, and imports meant to be used as inputs are exempted from customs duties and value-added tax, in bonded areas. High-tech industries like IT, telecommunication and internet industries are offered special tax breaks and tariff cuts. The Pudong New Area also receives tax breaks and special treatment.
HK’s Strengths as a Global Financial Centre.
Hong Kong is the only city in the world that enjoys global and China advantage converged together. The city acts a gateway for Mainland China to the world's financial markets and leading global investors to opportunities in China. It is also an international business center where one can seize opportunities both in Asia and the whole world. Some of its strengths are;
Market Accessibility.
HK acts as a gateway to Mainland China. The mainland offers plenty of market opportunities from which Hong Kong benefits. Further, the city is located in the time zone of GMT +8, which forms a link between American and European markets (Hong Kong: China’s Global Financial Centre NA). HK hosts regional headquarters for over 100 multinationals corporations including banks and Non-bank Financial Institutions.
HK's market is also highly compatible with the international markets. This is made possible by the English language capability of a large segment of HK's population working in the financial services sector, which makes it easier for international financial firms to operate in HK. The social and business environment is totally compatible with the international market (Cheung & Yeung 2007).
HK’s stock market is mature and dynamic. There is ease of access to international financial markets, business capital and customers. HK has some financial markets and institutions offering a variety of financial products and services. The establishment of HK Mortgage Corporation in 1997 to specialize in buying residential homes from banks then reselling after securitizing them has contributed a great deal to the growth of the security market (Jao NA).
The banking system is stable and effective. HK has always treated foreign banks and financial institutions a ‘national treatment'. There are no protective restrictions against foreign firms. HK has always applied the liberal non-interventionist policy towards banking and finance; it is termed as the world's freest economy.
Legislation/Regulations
HK's common law system, upheld by an independent judicial system, provides an efficient and secure environment for individuals and businesses. The rule of law is internationally known and well understood. The laws regarding IFC like company laws, banking law and securities law are constantly updated to match the changing needs.
Strong Regulatory Regime- HK’s strong regulatory regime, which has stood the tests of financial crises, has enabled HK to build a fair, open and orderly financial system by international best practices. The regulatory body also helps interpret international regulatory standards in all aspects.
Simple and transparent taxation policies- HK’s taxation system is simple, transparent and stable. It does not rely on any tax breaks. However, its tax rates are relatively low to attract foreign investors. The company profit tax is 16.5%, and personal income tax is at 15% (Hong Kong: China’s Global Financial Centre NA). Two features of HK’s tax system make it attractive to foreign investors. The first is the ‘scheduler system’ which levies income tax separately, according to the source. The second is the ‘territorial source principle’ under which tax is only levied on income originating from HK (Jao NA). There is no sales tax, withholding tax dividends and interest, capital gains tax, value-added tax, and state duty. Plans are underway to grow a network of comprehensive double taxation agreements (CDTAs) with HK’s major trading and investment partners. If successful, the resulting tax system will support business development and expansion of member states (Hong Kong: China’s Global Financial Centre NA). HK also enjoys favorable fiscal policies from the central government.
Weaknesses
Shanghai’s Weaknesses as a Global Financial Centre
Lack of Market openness
Extensive controls over capital mobility still exist in China and extend to Shanghai. Shanghai is still not able to ‘national treatment’ to foreign banks and non-bank financial institutions. China’s banking system has been incapacitated by non-performing loans making the banking system unstable.
One of the conditions for successful operation of an IFC is the presence of a liberal, non-interventionist policy towards banking and finance, a condition which has not been fulfilled by Shanghai since it still has the interventionist mentality, which some bureaucratic controls and restrictions still in existence.
Financial market inefficiency. Currently, shares are traded at a high P/E. The availability of financial products and services to consumers, depositors and investors are limited in Shanghai, the financial markets lack diversity. For example, stock futures and options are not traded in Shanghai’s stock market. The majority of stock traded on Shanghai's stock market are state owned and therefore cannot be traded freely (Laurenceson, Tang & Wong, NA).
Legislation/Regulation
Inefficient regulatory framework. Numerous national company laws, banking laws, and securities laws were enacted after the lawlessness during the Cultural Revolution, but none of them have been enforced up to date (Cheong Cheng, Cheung and Yeun 2011). The governance structure for stock exchange is still traditional, it is still based on a non-profit, cooperative model, whereas the global trend is demutualization.
Complex Tax System outside Pudong and high-tech Sector. Company income tax which is inclusive of local income tax is 33% (Jao, N.A). Individual income tax is subjected to a sliding scale of between 5%-45%. Numerous other taxes are levied like the property tax, husbandry, inheritance, sales stamp duty, value-added and consumption tax.
HK’s Weaknesses
Liberalization of the mainland economy. This move will lead to competition from rising Asian financial centers that may even overtake HK. Further, leading global financial centers like London, New York, Singapore and Shanghai have come up with strategic reviews and initiatives to enable them to remain competitive in the market.
The rise of competitors in Asia. HK faces stiff competition from Singapore, which is already well established in fixed income, commodities, and other investments. Singapore further aims at becoming the best in Asia regarding private banking. Shanghai is also emerging quickly with an aim to match its infrastructure to international standards (Cheung & Yeung 2007).
Changing Regulatory policies. Policy makers have tightened policies with regards to financial institutions globally, after the 2007/9 financial crisis (Cheung & Yeung 2007).
The politicized and divided society in HK is also a weakness, coupled with the lack of financial products and services diversity.
Conclusion
Asia, an emerging economy is being eyed by all investors both local and foreign and is perceived as the key driver of the growth of world economies in the future. The emergent of Shanghai and HK with HK being among the world's largest global financial centers is proving that Pacific Asia has got potential and vast opportunities. Shanghai was the first to venture and attain the IFC status in the early 19th century but later crumbled and since then HK has taken the lead in the IFC in China. There are some conditions necessary for the IFC to thrive in a city and Shanghai seems to be lacking on them while HK has fulfilled of them. The major condition is the liberal non-interventionist policies in banking and financial institution activities, which Shanghai is struggling to attain, as it still hangs onto protective bureaucratic controls and restrictions. HK, on the other hand, has thrived as an IFC as a result of its ‘free economy' status.
Reference List
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Cheung, L. & Yeung, V. 2007. Measuring the Position of Hong Kong as an International Financial Centre. Hong Kong Monetary Authority Bulletin.
Financial Services Development Council. 2013. Strengthening Hong Kong as a Leading Global International Financial Centre. Hong Kong.
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McCausley, R. N. & Chan, E. 2007. Hong Kong and Shanghai: Yesterday, Today 'and Tomorrow'. Bank for International Settlements.
