HOW quickly can Shanghai transform itself into an international financial center?
Shanghai's goal is to become an international financial center. The city can certainly achieve this.
However, after being in charge of London's economic policy for eight years and after having visited Shanghai over seven years and carefully studied its progress, I think there are still issues that need to be clarified in the process of moving toward Shanghai's objective. They really boil down to one key question: Is Shanghai underestimating the general scale of structure required to become an international financial center?
To start with its strengths, Shanghai's success in building an international financial center is based on China's financial resources. China's annual savings, which are simultaneously a resource available for investment and the core of its financial system, are already the world's largest, exceeding those of the US by US$1.3 trillion a year. This core strength is reflected in China's banks having the world's highest market capitalization.
A new development is that financial strength is now being translated into brand strength.
The 2012 survey of global brands by Brandz, part of WPP, the world's largest advertising agency, ranked ICBC as the world's most valuable financial brand. This is not fundamentally based on ICBC's strength in the US and Europe, although it is reinforcing its position there, but on its position in the rapidly developing economies of Africa, Latin America and the Middle East. In the latter region, ICBC's annual percentage expansion is in triple digits. China Construction Bank holds the world's second position in banking market capitalization and Bank of China is in the top 10.
But developing the strength of individual Chinese financial institutions is not yet consolidated into equivalent strengths in China's own financial centers. In the latest ranking in the Global Financial Centers Index, the standard survey on the subject, Shanghai only ranks eighth in the world. Furthermore, in Shanghai's definition, there is an ambiguity in what is meant by international financial center.
There are really two groups of international financial centers, as reflected in the rankings. One level is Singapore or Hong Kong, which might be termed regional international financial centers with some significant global reach. It is a challenge for Shanghai to reach the level of Singapore or Hong Kong by 2020. It depends on whether correct policies are pursued.
The second type of international financial center is New York and London's truly global centers that are considerably ahead of Singapore and Hong Kong. It is not possible for Shanghai to reach the level of New York and London by 2020.
The reasons for this do not lie in issues of regulation or law but in simple institutional strength the hardware of an international financial center. Such a center must be capable of managing trillions of dollars. It depends on enormous management resources and extremely strong companies operating in a wide range of areas.
The corporate structures of London and New York as international financial centers are almost the same. In both cities, over one million people work in financial and related industries. This means not simply banks and insurance companies, but also accountancy, law, consultancy, information technology and public relations firms related to that realm. Of these, around 200,000 people in the industry are foreign.
The reason for such large numbers of foreign professionals is precisely because London and New York are international financial centers. If serious and sustained business is to be done with the US, it is necessary to have Americans. To do business with Germany requires Germans. And so on.
For Shanghai to become an international financial center comparable with New York or London, therefore it would require approximately 800,000 trained Chinese professionals in finance and related businesses, and also about 200,000 trained foreigners working in Shanghai. Shanghai is nowhere near than level, and it is not possible to achieve it by 2020.
Furthermore, London and New York are dominated by large companies in non-financial services, such as retailing, media and advertising. London and New York are comprised of large services sector companies. By international standards, Shanghai is still weak.
This is reflected in Shanghai's overall productivity. Shanghai's productivity is only 21 percent of New York's and 23 percent of London's.
To become an international financial center capable of competing with New York or London, Shanghai must increase productivity levels.
Policies being adopted by Shanghai to create an international financial center are correct, but the time scale must be realistic. Can Shanghai become an international financial center? Yes. Can it become an international financial center on the level of Hong Kong or Singapore by 2020? Possibly. Can it become an international financial center ranking alongside New York or London by 2020? No.
In these serious matters, neither optimism nor pessimism is a virtue. Only realism should prevail. Not only a direction but also a realistic timeframe for Shanghai must therefore be set.
John Ross is currently visiting professor at Antai College of Economics and Management, Shanghai Jiao Tong University. He was consultant to Fortune Global 500 companies and from 2000 to 2008 London's director for economic and business policy.
Source: Shanghai Daily