As Shanghai has been sweltering for a month in a 100F heat wave, history is about to accelerate in the megacity. Shanghai’s free trade zone is the key to China’s future in the Xi-Li era of reforms.
In the coming years, Shanghai’s role in the mainland, regionally and globally will grow in leaps. While critics argue that this is “too much too fast,” they ignore the weight of history.
Shanghai was ready for its future in the 1930s, had it not been for colonialism, Japanese invasion and World War II. During the pre-reform decades, Shanghai also had to wait for its turn.
In the reform era, again, Shanghai had to wait a decade longer. And in the past decade of global integration, the megacity’s financial district Lujiazui could only watch as Hong Kong – not Shanghai – served as the mainland’s financial intermediary.
So it is not the case that Shanghai is too impatient. Rather, the megacity has been extraordinarily patient.
The long march
Like Hong Kong and Singapore, Shanghai suffered immensely under colonialism. But unlike those two metropolises, Shanghai also had to wait far longer to fully participate in global economic integration.
In the 1920s, Shanghai was still the major center of international trade and finance in East Asia. The position of the “Pearl of the Orient” eroded only with the turmoil of the 1930s.
After World War II and the Civil War in China, most foreign firms moved their offices from Shanghai to Hong Kong. Meanwhile, the megacity was transformed into an industrial center.
In China, Shanghai was the largest contributor of tax revenue to the central government, but at the cost of crippling its own infrastructure and capital development.
Change came slow to Shanghai. The first decade of reforms and opening-up policies began in Southern China. The development of Pudong was initiated only in 1992 to restore Shanghai’s historical role for the Yangtze River Delta and to China.
Even as China joined the World Trade Organization in 2001 and international trade soared, Hong Kong still enjoyed an extraordinary decade as the financial lifeline of the mainland.
While China was growing very fast, its level of economic development was still relatively low and its financial sector remained relatively closed.
Change was initiated in March 2009, when the State Council approved Shanghai’s plans to forge itself into one of the world’s leading financial, trade and shipping centers by 2020. Only a month later, Shanghai also got the nod from the central government to use the yuan in overseas trade settlement.
The free trade zone
Last January, the newly-elected mayor of Shanghai Yang Xion unveiled Shanghai’s plan to develop the mainland’s first free-trade zone, starting in the Yangshan deep-water port, Pudong airport and Waigaoqiao.
In the past, Beijing has approved over a dozen bonded areas, which are prototypes of free-trade zones. But a more extensive zone in Shanghai could bypass that of Hong Kong over time.
Meanwhile, President Xi Jinping, who had stayed in the city as party secretary in 2007, made it clear that Shanghai would be a pacesetter in the impending reforms. The new leadership believes that it is easier to achieve greater equity through economic growth, supported by the financial sector.
Reportedly, Shanghai was recently also provided loan credit worth $40 billion by Agricultural Bank of China, one of the major state lenders. The idea is to ensure the building of the free-trade zone and ensure growth during the transition.
But change never comes easy. In the past few months, Premier Li Keqiang has fought open opposition by financial industry regulators – including the China Banking Regulatory Commission (CBRC) and China Securities Regulatory Commission (CSRC) – to open Shanghai’s financial services sector to foreign investors.
As the momentum of the property markets has been shifting from the 1st tiered megacities to 2nd and 3rd-tiered urban centers, Shanghai needs accelerated reforms in finance and trade – to boost the megacity’s maturing growth as well as its regional and global role.
The anticipated three-year plan is moving in parallel with financial reforms, which began last year, when China already tightened rules on delisting companies, cut trading costs, increased for foreign institutions and encouraged dividend payments.
Last March, China’s securities regulator announced that China shall allow the residents of Hong Kong, Taiwan and Macau to open domestic accounts in the mainland.
For over half a decade, China’s equity, bond, and currency markets have expanded significantly. Now is the time for new reforms to allow commercial banks to grow their lending, to expand the fragmented bond market, to move gradually toward the securitization of loan portfolios and to open doors to foreign investors and financial institutions.
Most importantly, Shanghai will have a crucial role to play as China moves from investment and net exports toward consumption. The mainland’s new growth model requires more sophisticated financial services, which, in turn, can support more sustainable economic growth, inclusive growth and social support to ordinary Chinese.
The idea that Shanghai is about to become a “mini-Hong Kong” is based on a rear-window outlook of future. More probably, Hong Kong is likely to be seen as a “mini-Shanghai” in the future.
As China’s tallest skyscraper Shanghai Tower recently took the spotlight in Pudong, the megacity is in a hurry. Its defining moment has come.
Dr. Dan Steinbock is Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore).
A short version of this commentary was published as “City to play crucial financial role,” Shanghai Daily, August 6, 2013