The stock market boom last year put Shanghai in the map of world markets, but that's only half the story of the journey the city has embarked on to emerge as a global financial center to rival New York and London.
While the world was fixated on the bulls and bears in the Shanghai stock exchange, the city made great strides in its quest of this global status, from playing host to international banks to expanding its commodities market, with the China Financial Futures Exchange putting the final touches for the launch of the mainland's first index futures contract.
In November, Shanghai Mayor Han Zheng laid down the road map for the international financial center goal: put in place the necessary infrastructure by 2010 and achieve the status by 2020. To that end, the municipal government has established a high-profile task force headed by the mayor.
An international consultancy committee has been formed under the task force with powerful figures in the financial sector to guide the authorities. These include central bank chairman Zhou Xiaochuan, former World Bank president James D Wolfensohn, Nobel laureate Joseph Stiglitz and leaders of China's banking, securities and insurance watchdogs as well as senior executives of financial institutions.
"Getting the initiative moving, including the setting up of the task force, is one of the most significant steps made by Shanghai in 2007 to become an international financial center," says Lu Hongjun, chairman of the International Financial Centers Association.
"The year 2007 saw more integrated moves by the central and local governments on the ambitious plan, which was raised to a much higher national strategic level," says Lu, who also serves as the president of Shanghai Institute of International Finance.
Shanghai's capital market saw rapid development last year. The Shanghai Stock Exchange (SSE) now ranks sixth in the world and third in Asia in terms of market capitalization. Its total market capitalization soared to 25 trillion yuan, while the annual turnover increased nearly 400 percent to 28.57 trillion yuan ($3.93 trillion) by the middle of December. There are 857 companies listed on the Shanghai exchange, 822 of which have completed share reforms, accounting for 96 percent of the total market capitalization.
Geng Liang, chairman of SSE, says the exchange is entering an important period of development. "We will strive to build the stock exchange into a more standardized and open world-class bourse. We aim to cultivate the blue-chip market."
Thanks to the booming stock market and the red-hot Chinese economy, 855 companies listed on the exchange posted a 73.8 percent increase in net profit to 512.3 billion yuan in the first nine months of last year, surpassing 320.2 billion yuan for the whole of 2006. The aggregate revenue of these 855 companies rose 43.7 percent to 4.35 trillion yuan.
Following the China Securities Regulatory Commission's call to prevent irregularities, SSE released new rules for stock trading in September to curb insider trading, excessive speculation and price rigging.
The exchange launched a new index on the governance of China-listed companies on January 1, the first to evaluate corporate governance in the country. Zhu Congjiu, general manger of SSE, says: "We will take measures to improve corporate governance, and it's a long-term task."
SSE is now stepping up efforts to create a more diversified market, improve the market's money-raising capacity and speed up the development of the fixed-income security market, including corporate and national bonds.
The influx and impressive growth of foreign banks in the past year have greatly enhanced the city's expertise in a wide range of financial businesses. Their newfound local status, which gives them an equal footing as their Chinese peers, has boosted their efforts to launch innovative products in both retail and corporate banking. Since four foreign banks were locally incorporated in April, a dozen have been approved to set up local entities in Shanghai.
The government's planning has played a crucial role in nurturing the growth of the city's financial sector. The introduction of the Shanghai Interbank Offered Rate (Shibor) last year laid the foundation for enabling the country's monetary authorities to achieve macro-control indirectly by adjusting the benchmark interest rate rather than maneuvering the money supply.
Landmark efforts in 2007 also included the expansion of an integrated system to record personal and corporate credit histories, which helps improve the city's credit environment and reduces financial risks. More than 600,000 enterprises and 7 million individuals have been included in the system.
Great achievements have been made in Pudong New Area - home to 476 financial institutions and a zone that will play a crucial role in making Shanghai's global dream come true. The GDP of its financial sector accounts for one-sixth of the area's total, a level similar to other international financial centers. By 2010, more than 600 financial institutions are expected to have operations in the area, employing 200,000 people in the finance industry, whose GDP is likely to exceed 18 percent of the total.
"The focus will be on the capital market, and we'll make great efforts to attract asset management companies," says Sun Wei, a sub-director of the area's financial service office.
Financial information providers, such as law firms, accounting firms and professional rating companies will also be targeted this year.
Last year witnessed giant leaps in the domestic futures market with the introduction of five new futures contracts - zinc, rapeseed oil, palm oil and chemical products PTA and LLDPE - on Dalian, Zhengzhou and Shanghai commodity exchanges.
Compared with the other two exchanges, Shanghai bourse is playing a particularly crucial role in developing this market. Last year, the total turnover of all contracts on the Shanghai Futures Exchange (SHFE) amounted to 21.76 trillion yuan, up 72 percent from the year before. It accounted for no less than 70 percent of the combined volume of futures transactions on all the three commodity exchanges.
Cooperation with foreign exchanges helps SHFE hone its competitiveness and exert increasing influence in the international futures market. In November, SHFE inked a deal with Central Japan Commodity Exchange to collaborate in a wide range of fields, including information sharing, staff training, product research and development, and market promotion. SHFE President Yang Maijun says the exchange will seek more such alliances and expand its product range.
After launching gold futures last week, SHFE is working on other new contracts, including nickel, silver and steel futures, in the years to come.
Beginning from late October, China Financial Futures Exchange, where the proposed CSI300 index futures is to be traded, has approved 52 futures companies as the exchange's members to trade. This is widely seen as a major step toward the launch of the mainland's first index futures.
But there is one major hurdle in Shanghai's race to the top. Officials, scholars and company executives in financial service sectors point out that the city needs to have a pool of highly skilled professionals if Shanghai is to achieve its goal of becoming an international financial center.
"Talent is at the core of this endeavor," said Tu Guangshao, former vice-chairman of China Securities Regulatory Commission now vice mayor of Shanghai at a recent summit of China Financial Talents Strategy. "It takes 10 years to grow a tree and a hundred years to bring up a generation of quality people," he said, stressing the importance of specialized education and cultivation of specialized experience for finance professionals.
In a survey of 40 CEOs, Chen Wei, China president of global management consultancy Hay Group, says the biggest challenge for Shanghai in competing with other financial centers lies in its scarcity of talent. Compared with the United States, which has approximately 25,000 people with Chartered Financial Analyst certificates, there are only dozens of them in China. That's far behind even Hong Kong or Singapore that have about 1,000 such professionals each.
"Most of China's businesses in the financial sector are incapable of producing global leaders," says Chen.
As Yan Qingmin, sub-director of the China Banking Regulatory Commission, puts it, "wisdom" comes ahead of "system".
(China Daily January 14, 2008)