Actively Implement the Action Plan Build Shanghai International Financial Center in the New Era
Building Shanghai into an international financial center is a major national initiative and will contribute to China’s overall strength and socialist modernization. In March 2017, during a meeting with the Shanghai delegation at the Fifth Session of the 12th National People’s Congress, President Xi Jinping stressed that Shanghai should seek greater synergy between the pilot Free-Trade Zone and the initiatives for building the international financial center and technology and innovation center, as well as between related policies. In November 2018, at the opening ceremony of the inaugural China International Import Expo (CIIE), coinciding with his inspection tour in Shanghai, President Xi commented that “openness, innovation, and inclusiveness are now the defining traits of Shanghai,” and gave Shanghai three new tasks. He hoped that Shanghai continues to act as the country’s pioneer in reform and opening up, and innovation; raises the city’s modernization level and core competencies; and builds itself into a modern socialist metropolis. These are also the new mandates to Shanghai in becoming an international financial center.
With only two years between now and reaching the target set for 2020, the building of the international financial center has entered the home stretch. Recently, with the approval of the State Council, eight state agencies including the People’s Bank of China co-released the Action Plan for Building the Shanghai International Financial Center (2018-2020) (the “Action Plan”), outlining the goals, paths, priorities, and steps needed to reach the target by 2020.The Action Plan signals the city to gather pace and intensify efforts, and helps promote Shanghai’s financial services which are one of its hallmark sectors.
Significant Recent Progress
Under the leadership of the CPC Central Committee and the State Council, the guidance of relevant state authorities, and public support, Shanghai has been the pioneer of China’s financial reform and opening up programs. Focusing all efforts on developing its financial market system, and prioritizing reform, innovation, and creation of a favorable financial environment, Shanghai has picked up pace in its pro-market, internationalization, and rule-of-law initiatives and in working toward becoming an international financial center. A string of major achievements, as well as the city’s comparatively complete financial market system, have further strengthened its position as an internationally influential financial center. In particular, Shanghai moved up from the sixth to the fifth place in the latest Global Financial Centers Index released by Z/Yen, an independent British thinktank.
The five major achievements of Shanghai International Financial Center are as follows:
First, Shanghai now has one of the most complete financial market systems globally. Shanghai currently features many of China’s financial “building block” markets – stock, bond, currency, foreign exchange, commercial paper, futures, gold, and insurance. In 2018, Shanghai’s financial markets recorded a total transaction value of ¥1,645.8 trillion, up 15.2% compared with 2017. Many of those markets – including stock, bond, futures, and gold – also surged in global ranking by offering some of the world’s most traded products. As of the end of November 2018, Shanghai’s stock market ranked second internationally by capital raised, fourth by market capitalization, and fifth by turnover; the Shanghai Gold Exchange currently is the world’s largest exchange-based market for spot gold by trading volume; and the Shanghai Futures Exchange is the most active exchange worldwide for various futures products. Since 2018, Shanghai has seen the listing of crude oil futures, two-year treasury bond futures, copper options, and pulp futures. Indeed, Shanghai’s crude oil futures market has overtaken the Dubai Mercantile Exchange to become the largest crude oil market in Asia and the third largest in the world.
Second, Shanghai has become a major hub for domestic and foreign financial institutions. While maintaining its strong appeal to banks, securities firms, insurance companies, funds management companies, and trusts, Shanghai is also attracting international, functional, and innovative financial institutions as well as headquarters. At the close of 2018, Shanghai boasted 1,605 licensed financial institutions – gaining 469 compared with 2011 – including such major organizations as the New Development Bank, the Cross-Border Interbank Payment System (CIPS), the Global Association of Central Counterparties (CCP12), the China Insurance Investment Fund, and the National Internet Finance Association of China. Moreover, in first three quarters of 2018, the value-added output of the city’s finance industry rose 5.3% to ¥412.208 billion, representing 17.7% of the municipal gross domestic product and 7.9% of China’s total financial value-added, more than any other Chinese city.
Third, Shanghai is sitting at the forefront of financial opening-up in mainland China. Following the release of the 100 New Measures for a More Open Shanghai in 2018, Shanghai submitted 2 groups of a total of 23 financial opening-up projects for higher-level approval, 13 of which have been implemented; and another 8 projects have just been submitted recently. The city has become a major hub for foreign financial institutions in mainland China. As of the end of 2018, 502 foreign financial institutions have established a presence in Shanghai, representing 30% of the total number of financial institutions in the city. Moreover, half of the foreign banks have chosen Shanghai as the location of their headquarters in mainland China, and close to half of all joint-venture fund management companies and of all foreign insurance companies in mainland China are also in Shanghai. To make its markets more accessible to foreign investors, Shanghai has successively launched the Shanghai-Hong Kong Stock Connect, the SGE International Board, and Bond Connect; quickened the opening up of the interbank bond, foreign exchange, and money markets; and overseen the successful launch of numerous pilot programs including overseas Renminbi combined debt-equity investment funds and cross-border ETFs.
Fourth, Shanghai has become China’s testbed for financial reform and innovation. For years the CPC Central Committee has been supporting Shanghai as the pilot city for the latest financial reforms and innovations. Following the introduction of such national strategic programs as the Shanghai Pilot Free-Trade Zone (FTZ) and the building of a globally influential center for technology and innovation, Shanghai has intensified its reform efforts by actively aligning with these programs and promoting innovation synergies. Of note, the free trade (FT) account system sees expanded functions as the number of accounts is now over 72,000 following the inclusion of about 5,000 enterprises in 2018. In addition, Shanghai has piloted cross-border Renminbi (RMB) business and combined debt-equity investment – both first in the nation – supported the creation and growth of internet finance and other new businesses and business models, and launched the nation’s first individual tax-deferred commercial pension program.
Fifth, Shanghai now has one of the best financial environments in China. Shanghai has made great strides in strengthening the rule-of-law in finance markets, evidenced by the creation of the Shanghai Financial Court, the first of its kind in China, as well as of such new organizations as the Shanghai Court of Financial Arbitration, Financial Consumer Protection Bureau of People’s Bank of China (PBC), and the Shanghai Municipal Financial Consumption Dispute Mediation Center. To strengthen the credit system, Shanghai has released the Shanghai Credit Regulations, China’s first comprehensive set of local rules on credit; is home to the PBC Credit Reference Center, the creator and operator of the national database for corporate and personal credit information; and has launched a local, public service platform for credibility information. In addition, Shanghai has established a cultural and creative financial service platform in support of the CIIE. Shanghai has also attracted a large number of financial institutions and talents by improving its financial services as its financial sector now employs more than 370,000 people. The creation of the Shanghai Financial Innovation Award, the first financial association in China, and the annual Lujiazui Forum, which has been held successfully for ten years, has also boosted the international influence of the city.
II. Opportunities and Challenges
As socialism with Chinese characteristics has entered a new era, China, the world’s second largest economy and largest trading nation, is in urgent need of an international financial center commensurate with its economic strength and Renminbi’s international stature. Building Shanghai into an international financial center promises to facilitate more efficient allocation of financial resources as well as economic transition and upgrade; enable greater engagement by China in global financial governance to boost the international influence and competitiveness of its financial industry; and enhance financial risks prevention to safeguard national financial security. This initiative is built on solid foundations, both historical and present, and comes with unprecedented opportunities and challenges alike.
In terms of new opportunities and tasks, profound changes to the increasingly diversified global landscape have boosted the voice of developing countries and emerging economies such as China in international economic and financial matters. Shanghai should identify the new global trends and build new competitive edges. At home, the “new normal” of China’s economy creates new market needs for financial services. Moreover, China’s further financial opening and reform; Shanghai’s accelerating progress to becoming an economic, trade, shipping, and technology and innovation center; as well as the implementation of national strategies including the Belt and Road Initiative, have all brought great opportunities for Shanghai to become an international financial center. During the CIIE, President Xi imposed three new tasks on Shanghai: enlarging the FTZ; setting up a science and technology innovation board at the Shanghai Stock Exchange and piloting the registration-based IPO system; and supporting the holistic development of the Yangtze River Delta and elevating it to a national initiative. These tasks are integral to the financial development of Shanghai and prescribe greater mandates on the city’s financial programs.
In terms of challenges, compared with major global financial centers, Shanghai needs to address the following shortfalls: (i) Market influence. Shanghai has an active, full-featured market but there is a lack of product diversity and, in general, pricing power and global influence; (ii) Market accessibility and internationalization. Shanghai should better assert itself as a global investment and financing center and seek greater international influence; (iii) Soft infrastructure. Shanghai needs to improve the environment for financial development such as by attracting financial talents. Meanwhile, Shanghai is facing mounting competition as major cities around the world, especially those from emerging economies, are racing toward the very same goal. The prevention of financial risks is also becoming more demanding.
Given the unprecedented opportunities and complex challenges, Shanghai should take a timing- and context-sensitive and coordinated approach, strengthen good planning, and fully capitalize all favorable factors to overcome these challenges at a faster pace and to make the Shanghai international financial center a reality.
III. Priorities
In the Opinions of China’s State Council on Expediting Shanghai’s Development of Modern Services and Advanced Manufacturing and Building Shanghai into an International Financial Center and International Shipping Center (Guo Fa [2009] No. 19) released in 2009, the State Council sets out the requirement for shaping Shanghai into “an emerging international financial center commensurate with China’s economic strength and Renminbi’s international stature” by 2020. The Action Plan outlines the details of this target, stating that by 2020, Shanghai should have essentially established its position as a global financial market with a heavy focus on RMB products, strong financial resource allocation capabilities, and extensive influence; created a fair, law-based, innovative, efficient, transparent, and open financial service system; and become an international financial center commensurate with China’s economic strength and Renminbi’s international stature, making itself one of the leading financial centers in the world. The Action Plan also highlights six key tasks, namely accelerating financial reform and innovation; enhancing the functions of the financial market; strengthening the ecosystem of financial institutions; focusing on national development strategies; fostering financial openness and cooperation; and improving the financial environment, which will be the primary goals of Shanghai. In the coming years, Shanghai will duly implement the Action Plan through clear division of duties and responsibilities and invest greater efforts in the following five aspects, so as to achieve the “6+1” strategy by 2020.
The five aspects are further opening up the market, driving reforms and innovation, attracting resources, enhancing market functions, and preventing financial risks.
- Further opening up. Shanghai will carry out a new round of opening up the financial service industry in line with national directives, and invest more effort into and expand the scope of such programs to boost the city’s international influence.
- Driving reforms and innovation. Shanghai will pursue greater financial reforms and innovation; complete the three tasks assigned by the CPC Central Committee, and continue to spearhead China’s financial reforms.
- Attracting resources. To boost the competitiveness of its financial industry, Shanghai will attract functional financial institutions and headquarters to accelerate the formation of a financial ecosystem that covers all sectors and services, and encourage international financial organizations to settle in the city.
- Enhancing market functions. Shanghai will improve its ability to allocate global financial resources, promote higher-level development of the financial market, hasten the development of innovative financial products and instruments, and support economic transition and upgrade, so as to promote qualitative development.
- Preventing financial risks. Shanghai will always treat the prevention of financial risks as a priority, and be firmly committed to risk prevention and mitigation initiatives, in order to create a safe, first-rate business environment that will serve as the foundation of its bid to become an international financial center.
The “6+1” strategy calls for transforming Shanghai into a global center for asset management; cross-border investment and financing services; fintech; international insurance; the pricing, payment, and clearing of RMB assets; and financial risk management and stress tests; thereby creating a “world-class financial ecosystem.”
1. A global center for asset management
Shanghai will (i) attract world-renowned asset management institutions, functional financial institutions, and headquarters; support the development of foreign financial institutions; and incentivize them to establish regional and even global headquarters in the city; (ii) attract global resources to support innovation and supply-side structural reform; and encourage more banks, insurance companies, securities firms, and other financial institutions to set up asset management subsidiaries in Shanghai; and (iii) develop local functional financial institutions including asset investment and wealth management firms; further expand the Qualified Foreign Limited Partner (QFLP) pilot program; improve the Qualified Domestic Limited Partner (QDLP) pilot program; and boost the city’s cross-border asset management market.
2. A center for cross-border investment and financing services
Shanghai will (i) improve the investment and financing service system for the Belt and Road Initiative, and facilitate the issuance of bonds and stocks in Shanghai by qualified overseas institutions; (ii) gradually enable qualified overseas institutions to access the domestic currency market; and support the governments, financial institutions, and businesses of Belt and Road countries and regions to issue Renminbi-denominated bonds in Shanghai to build an Asian market for bond issuance, trading, and circulation; and (iii) encourage cross-border investment and financing by domestic and overseas entities; actively develop the city’s global financial information service market; make the Shanghai financial market more accessible and appealing to domestic and overseas entities; and foster technology and business cooperation between the Shanghai financial market and the exchanges and depository and clearing institutions in Belt and Road countries and regions.
3. A fintech center
Shanghai will (i) promote deeper technology-finance integration, and explore fintech applications and innovation; (ii) urge financial institutions to develop fintech in Shanghai and attract major fintech companies to create a fintech ecosystem; (iii) encourage the application of such technologies as artificial intelligence, block chain, and cloud computing to enable the financial industry to better serve China’s real economy and investors and to better control risks; (iv) explore ways to share data and develop big data applications with other industries to vigorously promote digital inclusive finance; (v) support financial institutions to develop Chinese fintech standards to boost China’s influence in this domain; and (vi) promote fintech by creating a demonstration area for combined debt-equity investment for technology and innovation enterprises, and by building synergy between the development of the financial center and of the technology and innovation center; attract venture capitals; support entrepreneurship and innovation; cultivate a group of technology and innovation enterprises with core competitive edge; and leverage Shanghai Stock Exchange’s sci-tech innovation board to develop innovative industries.
4. An international insurance center
Shanghai will (i) nourish the insurance and reinsurance markets, accelerate the development of the Shanghai Insurance Exchange, and enhance the appeal, influence, size, and global competitiveness of the local insurance market; (ii) seek to establish a reinsurance alliance and platform for the Belt and Road Initiative, support insurers to develop innovative insurance products to facilitate fintech, transformation of Shanghai into a technology and innovation center, and prevention of financial risks; and (iii) vigorously promote the development of marine insurance and reinsurance and of Shanghai as a center for investment of insurance funds.
5. A global center for the pricing, payment, and settlement of RMB assets
Shanghai will (i) expand the range of RMB products and instruments, promote interconnection of bond markets, and support coordinated development between its financial markets to develop itself into a major trading platform and global pricing center for RMB products; (ii) make its capital market more international, develop the “Shanghai Price” including “Shanghai Gold”, “Shanghai Oil” and “Shanghai Copper”, and increase the city’s pricing power in RMB products and commodities; (iii) improve The Shanghai Interbank Offered Rate (Shibor); (iv) advance the cross-border use of RMB and the cross-border RMB payment business, and raise the efficiency of RMB clearing and settlement; (v) support CCP12 to play a greater market role.
6. A center for financial risk management and stress tests
Shanghai will (i) attempt to build a stress testing center for innovation-associated financial risks, and strive to be the first city in China to test new financial products, technologies, institutional innovations, and key financial reforms; (ii) enhance the monitoring and management of financial risks to make itself the primary site for risk management and stress testing; (iii) draw on international advancements – such as regulatory sandbox – to diversify its supervisory toolbox; and explore data- and technology-driven penetrating and intelligent supervisory mechanisms, as well as establish a financial risk monitoring center, to monitor financial sector risks and guard against systemic risks.
7. A world-class financial ecosystem
Complementing the goal of building the “six centers”, Shanghai will accelerate its convergence with international standards and practices to become a leading city in terms of financial rule-of-law, institutional innovation, and financial talents, in order to create a world-class financial ecosystem.
To this end, Shanghai will (i) experiment with local financial legislation; (ii) improve financial judicial and arbitration mechanisms; (iii) strengthen information aggregation and sharing to establish a unified, efficient, and open social credit service system; (iv) seek to create a core activity zone for Shanghai as an international financial center; develop innovative management systems; organize globally influential professionals to take part in overseas promotion and publicity activities; and boost international cooperation; and (v) further improve policies on financial talents, attract high-level financial talents, stimulate their creativity and innovation capacity, as well as promote the creation of premier financial think tanks.