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Shanghai vs Hong Kong as Financial Hub

Updated on October 31, 2012

There is a never-ending debate between Shanghai and Hong Kong: which one will be the leading financial hub in China? To answer this question properly, we must let you understand a little bit more about the history first.

By 1920s, Shanghai was still the major international financial hub in the Eastern Asia region. However, due to the Sino-Japanese War and the Chinese Civil War, most foreign companies moved their offices to Hong Kong from Shanghai by 1949. Since then, Hong Kong quickly industrialized, became the "Pearl of the Oriental", and further developed itself gradually as a major financial hub.

Shanghai, at the same time, fell into a period of historical oblivion. It was until 1992 Shanghai started to restore its historical role to be the "head of the dragon" as declared by Deng Xiaoping, the chief architect of China's economic reform and opening policy. Shanghai's economic reform also gave birth of Lujiazui, a large financial hub in the Pudong New Area at the east of the Huangpu River, where foreign bankers and investors were granted preferential treatment there. In 1996, Shanghai established a nationwide inter-bank market for improved transaction efficiency. Later in 2001, China's entry to WTO (World Trade Organization) triggered more and more multinational companies (MNCs) to bring all or part of their regional or Asian headquarters to Shanghai. Nowadays, Shanghai financial hub consists of the Shanghai Stock Exchange (SSE), the Shanghai Futures Exchange (SFE), the China Foreign Exchange Centre (CFEC), and also the Commodities Exchange for gold and metals trading.

Shanghai still, however, has many banking regulatory restrictions on licensing, financial products, and foreign exchange. There are also too many rules regulating local bankers in developing their Renminbi (RMB) retail banking business. Additional banking restrictions include annual quotas on many businesses, and limitations to business volumes. Foreign banks in Shanghai therefore have to delegate their clearing desks, treasury functions and legal proceedings to their Hong Kong offices.

Hong Kong's financial hub regulator is an independent statutory body, but Shanghai's regulator is still part of the Chinese central government's State Council. Hong Kong also has an independent legal system as compared to Shanghai.

Meanwhile, now Hong Kong is already an international financial hub, and recently even becomes one of the so-called "Ny-Lon-Kong" (New York-London-Hong Kong) as described by the Times Magazine. Hong Kong, however, strategically relies too much on H-share listing companies which already contribute over 50% of total market cap for its securities market development. Stock market in Hong Kong is still generally retail, margin trading or short selling remains uncommon in Hong Kong. Hong Kong has also missed almost all the recent development opportunities in other financial markets except for the H-share in stock market and the offshore Renminbi (RMB) bond market. As a result, forex market and commodities market, and fixed income market are still very small in size in Hong Kong.

Please find related information about this topic at: Shanghai vs Hong Kong as Leading Chinese Financial Centre, or similar topic at: Shanghai vs Hong Kong Financial Centre Development.

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