According to figures from the website of China Stock, 28 cities in China have proposed to become international, national, or regional financial hubs. That may seem like pie in the sky, but with the rivalry between Beijing and Shanghai, Chengdu and Chongqing and Northeast China’s aspirations the financial landscape in China has clearly entered what may be called a Warring States Period.
|Zhang Chengliang / China Daily|
So does China need so many financial hubs? The US financial market is huge, but apart from Wall Street and Chicago are their any other financial hubs there? What is the logic behind Chinese cities striving to become a financial hub, and what should our response be to that?
I have often been invited to places to analyze their feasibility of becoming a financial hub. Chongqing and Chengdu in Southwest China and Lanzhou and Xi’an in Northwest China have all expressed such a desire. Asked why they should become financial hubs, most cities – the exceptions are Beijing, Shanghai, Shenzhen, and Guangzhou – have said that they are the leader in their region.
In economic and financial circles, developing financial hubs is regarded as a sign of a developed economy, and if China wants to develop a market economy it needs to develop financial hubs. Their contribution to economic growth and employment cannot be ignored.
So the good intentions of these local governments should be given the recognition they deserve. A decade or two ago such proposals would not even have seen the light of day, which shows that we are now fully aware of the fact that finance is the core of a modern economy.
When Dai Xianglong, the former governor of People’s Bank of China, was the mayor of Tianjin, the State Council came up with a comprehensive trial reform program for Tianjin High-tech Industry Park, aiming to reform the finance there first.
Dai invited me to seminars and to give speeches. I said then that even with the trial program, Tianjin would be unable to come up with the kinds of financial innovation and reform and to promote new financial instruments the way Shenzhen and Shanghai did in the late 1980s and the 1990s.
Why? After three decades of reform and opening up, China’s financial market system and the institutional framework of financial markets have essentially been formed. In these frameworks, the operating mechanism of the entire market is unified, and the country’s financial markets are unified. That means investors across the nation can buy and sell any financial products in, say, Shanghai or Lanzhou.
In such circumstances Tianjin’s financial reform program would face challenges.
The Chinese central government has established its financial strategy to build Shanghai into an international financial center by 2020. When this strategy was confirmed, many financial institutions, including the financial futures exchange, the gold exchange and China Union Pay all set up headquarters in Shanghai, and the city became a second headquarters for the People’s Bank of China.
It should not be assumed that finance promotes economic development. For it to do so it needs to be in step with the economic circumstances of the time.
When a country’s economy reaches a certain point, a financial center will naturally form, and it will service economic development. Problems arise when everyone tries to set up financial centers before that point has been reached.
The Yangtze River Delta is China’s most economically developed region, and Shanghai has traditional financial resources, so choosing Shanghai as an international financial center is appropriate.
But as I said when I worked at the Shenzhen Stock Exchange, in a purely technical sense it would be possible to set up a stock exchange in the deserts of Qinghai province because of paperless trading. The brokered transactions could be done via satellite, and it is an invisible market.
The key to a financial hub lies in the variety of transactions, trading tools and trading systems. For example, transforming Shanghai into an international financial center is the long-term aim, but the city cannot enjoy that status yet, because its trading system has not been formed. The renminbi is not yet freely convertible, the variety of transactions is still confined to renminbi assets within China, and foreign currencies cannot be converted into renminbi to do transactions.
So long as that state of affairs exists, Shanghai’s aspirations remain exactly that.
A friend once told me that he was looking for a job in Hartford, Connecticut, where the headquarters of many US and European insurance giants are located. He soon found out that despite all the headquarters in the town, no money seemed to change hands in them, and it was a bit like a ghost town. It certainly could not be described as a financial center.
Later he told me that Yiwu, in Zhejiang province, had developed from a small village into an active market, and even began to have financial buildings there. There were transactions first, and then came financial development. So it was not like towns that build a street of tall buildings with fancy names like Wealth Center or Finance Tower and then call themselves a financial center.
In fact, if a financial center gradually develops, high-end consumers will go to it, and high added value will be generated, resulting in rising land prices and a variety of business costs. General manufacturing companies will gradually move out of the city because of the high cost of doing business there.
In other words, when a financial center develops to a certain extent, it will push out some of the entity industries to the surrounding region. This can be called the crowding out effect. Financial development has to hold certain resources to make it functional. If the finance there can really render good service to the economy, the cost of the crowding out effect is effective and appropriate. But if you develop finance just for the sake of it, it is a waste, and squeezes out the entity economy.
For example, two years ago, capital markets and real estate markets were quite popular. A lot of business owners sold their factories to do equity investment, or real estate investment, or were too preoccupied with private equity investment. When an entrepreneur stops focusing on manufacturing and turns to speculation it bodes ill for the company.
When it comes to evaluating if there is financial excess, we have to look at the overall relationship between finance and the entity economy. The US subprime mortgage crisis is a case in point. There were a variety of derivative products that in themselves were not bad. But the way they were sold, meaning deposits were not even needed for a mortgage loan, was a perfect example of financial excess.
Finally, when a country has to resort to finance to stimulate its development, its economic strength is in fact in decline. Britain and the US were mired in the global financial crisis, but Germany, the world’s fifth largest economy, has fared relatively well.
German manufacturing has long been strong in innovation, and has had a huge pool of skilled workers with high levels of technical training. Its manufacturing accounts for 24 percent of its GDP, much higher than the US. The country’s resilience can be attributed in no small part to its overall national economic structure.
The author is director of Institute of Finance and Banking, Development Research Center of the State Council. The views do not necessarily reflect those of China Daily.