SINGAPORE: Beijing is China’s capital and centre of political power, but it is the southern city of Shanghai that has been dubbed "the capital of capital".
Then came decades of revolution, political turmoil, and economic isolation. This only started to change in the late 1970s with China’s reform and opening up.
Since then, Shanghai has been back on the map. And in that map of the world, China has become a key player.
China is now the world’s second-largest economy, with the world’s second-largest foreign exchange reserves. It is also the world’s biggest trading nation.
Shanghai too has the most developed financial exchange in mainland China.
In 2019, Shanghai attracted a record US$19.05 billion in foreign capital, up 10.1 per cent year-on-year.
Foreign financial institutions have also increased their presence in the city. In the latest Gobal Financial Centres Index, Shanghai was ranked the fourth most competitive financial centre worldwide, second only to Tokyo in Asia.
Professor He Shuquan from the School of Economics at Shanghai University said the city’s key selling point is the access it offers to markets in mainland China.
But a strategic location is not Shanghai’s only selling point.
Mr Lim Chee-Kiang, a Singaporean consultant working in Shanghai, said the city has a “secret sauce” that distinguishes it from others.
One is talent, the other is innovation, said Mr Lim, the managing director of consultancy firm Urban Science in China.
“We all know that industries around the world are facing massive amounts of digital disruption. The financial industry is one of the most impacted sectors. So these elements of innovation will help strengthen Shanghai’s position and its growing prominence as a financial hub for China and for the rest of the Asia-Pacific,” said Mr Lim.
The vision for Shanghai to be an international financial hub was first unveiled by China in 2009.
In February 2020, the Chinese government issued a new directive, calling for the acceleration of this transformation.
The plans included trials in the Lingang New Area, an extension of the city’s free trade zone that’s touted as a new window to economic globalisation.
Experts said such a policy document, issued while China was at the height of the COVID-19 pandemic, showed the extent of official support for this goal.
They also cautioned, however, that financial hubs cannot be created by government policy alone.
“We will have to see whether the Chinese government is able to cultivate the people or systems to meet the requirements of being an international financial hub," said Prof He.
"If the government is unable to cultivate the environment, Shanghai might not be able to become a true international financial hub. This environment can either be formed naturally, or due to the efforts of the government. However, for the government to create a financial hub artificially, there will certainly be a price to pay,” he added.
One major sticking point is the convertibility of the Chinese yuan.
According to Prof He, Shanghai cannot be considered an established financial hub, because one criterion is that the yuan has to be freely convertible. He considers the financial hub goal a work in progress.
He also pointed out that export and import volumes need to be considered too.
“There is a gap between Shanghai’s financial hub status and its export and import volume. The RMB’s status and export and import volume are not proportionate. The volume is very high, but the RMB’s status isn’t very high,” said Prof He.
But businessmen such as Mr Lim take this as part of the operating environment in China.
“The non-convertibility of the yuan imposes an additional cost of doing business, an additional barrier. So it means that, for example, if we have to bring capital from overseas internally for our company, we have to go through a lot more legal and administrative process which in a more open market, would be almost immediate," he said.
"Those are some of the pain points that companies have to deal with being in China. But I think we have to think of it from the longer term perspective.”
Hubert Tse, a Hong Kong lawyer who now works in Shanghai, said while he is confident that Shanghai will grow as China continues to develop, the wider eco-system needs to be considered as well.
This includes regulatory frameworks, rule of law, and enforceability of contracts.
“Shanghai’s role depends on how China turns out in the next 10, 20, 30 years’ time, as well as how global and how convertible the RMB will be. But as China, and Asia continue to grow, and more deals are done in Asia, cities like Shanghai, Hong Kong, Singapore and Tokyo will grow in importance and more resources, talent and people will shift from west to east,” said Mr Tse, a partner at Chinese law firm Boss & Young.
Ultimately, said Mr Lim, Shanghai has already made tremendous progress towards the goal of being a financial hub.
"In a race, you have a finishing line, and you're running towards the finish line. You might fall short, you might be number two, number three, but eventually if you finish the race, that itself is a remarkable achievement,” he said.