China in Transition
Shanghai versus Hong Kong as China's Financial Center
- Do they compete or complement each other
Chi Hung KWAN
Consulting Fellow, RIETI
Shanghai, once the financial center of prewar China, saw its fortunes wane under the centrally-planned economy of the postwar era. In recent years, however, the city has successfully ridden the waves of liberalization to demonstrate to the world once again its vibrancy and immense potential. Shanghai is blessed with the sprawling hinterland of the Yangtse Delta and enormous economic resources. Its infrastructure is in the process of being upgraded and modernized, and it boasts an increasingly advanced science and technology base and an abundant supply of well-trained professionals.
Shanghai's clear superiority in these areas and other advantages suggest that its prospects of developing into an international financial center appear bright. In fact, the Shanghai economy, revolving around the Pudong development project, has grown by over 10 percent per annum for the last ten years, and a proud and bustling financial district with the Shanghai Stock Exchange at its center has begun to emerge.
In contrast, Hong Kong has fallen on hard times since its return to China on July 1, 1997, having been delivered a major blow when the Asian currency crisis erupted shortly after Hong Kong's reversion. A marked slowdown of the global economy since 2001 has served to further exacerbate the situation, and the outlook of Hong Kong's economic recovery remains uninspiring at best.
Given Hong Kong's predicament, the assertion that Shanghai may some day replace Hong Kong as a global financial center has gained both credence and subscribers. However, the simple truth is that China is an immense country with a population of 1.3 billion people, with ample space existing for both Shanghai and Hong Kong to grow and prosper as long as China's economic progress is steady and unabated. The notion that this tale of two cities must be a zero-sum game therefore does not necessarily apply.
When the growth rate of Hong Kong's economy is compared to Shanghai's, it is clear that the latter has enjoyed far greater success in recent years. Yet when the comparison is expanded to inventory human resources, the legal system, languages, currency and general infrastructure, Hong Kong retains a distinct superiority, an edge that it will not easily forfeit.
First of all, Hong Kong boasts an impressive array of human resources that includes not only mainland Chinese who have been educated and trained in the West, but also a standing force of lawyers, accountants and other professionals hailing from every corner of the world. Secondly, post-reversion Hong Kong has inherited the British legal system, with its international financial transactions upholding the laws and regulatory standards that apply to the financial markets in London or New York.
Another reason for Hong Kong's supremacy is history. As a former British colony, English-the international language of the world today-has long been integrated into its socioeconomic fabric. The fourth and final advantage is the fact that the Hong Kong dollar is readily used in capital transactions and is convertible, whereas the Chinese renminbi will not serve as a hard currency for some time to come.
Having taken the aforementioned factors into account, it is likely that Shanghai will remain a domestic financial center dealing mainly in renminbi transactions for now, and may take decades to develop into a truly international force.
Back in the early 1980s, it was out of the question to speculate that Shanghai would one day overtake Hong Kong. At that time, many residents in Hong Kong actually feared that the return to Chinese sovereignty would transform the colony into another Shanghai. That fear was legitimate, given the rapidity the Shanghai economy lost its dynamism after the communist regime's rise to power in 1949. That episode triggered a massive flight of local and foreign capital and talented people-the very elements that had previously sustained Shanghai-out of China. All that remained of the city's former glory and affluence were the European-styled buildings that line Shanghai's riverfront.
Among the financiers who fled to Hong Kong from Shanghai, many felt the wrath of the communist regime after it expropriated everything they owned. For these people, the possibility that Hong Kong would be remade into another Shanghai was tantamount to reliving a nightmare. Since the dramatic revival of Shanghai that ensued in the 1990s, however, the notion that Hong Kong may become another Shanghai has come to carry a very different meaning.
March 8, 2002
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