China Finance Center, HongKong and Shanghai

With rapid development of Chinese Mainland, Shanghai, the pearl of the Orient become one of the most developed city in Mainland, aimed to be “four-Centers”, which are clearest themes of Shanghai’s 12th FYP(Five Years Plan), international financial, trade, shipping and economic center. Hong Kong, one of mature international finance center in the world, is always a module for Shanghai, and it is a hot topic to compare these two cities. Years ago, the Chinese government announced a national strategy about Shanghai. According to this strategy, Shanghai is planed to be built into an international financial center completing with mature financial centers and full of a wide range of globally competitive financial products and service by next decades. As an international financial center, Shanghai plans to become the world’s center of trading, pricing and clearing of Chinese yuan assets. The initiative will facilitate FIE(Foreign-invested enterprise) growing use of funds, like offshore RMB and the issuance of RMB-denominated bonds. Other initiatives include finance leases, small loan services, local innovation products and financial guarantees for FIEs(Foreign-invested enterprise). As a mature international finance center, Hong Kong and Shanghai have gradually been as competitor for the finance center in Greater China region, in Asia, even in the world. With the rapid rising position of Shanghai together with China mainland, more and more multinational corporations move Asia headquarters to Shanghai. According to recent statistics, there are about 60 headquarters in Shanghai today, and this number is still increasing.
As an important indicator of international finance center, multinational banks’ statuses reflect the maturity of finance center.
Foreign banks in China Market in 2012
As an important indicator of international finance center, multinational banks’ statuses reflect the maturity of finance center.
In the past 2012, less than 10% growth of China banks will surprise market, however, 8 out of 14 foreign banks’ profit decrease, refer to the statistics of foreign banks in China (2012) below. China interest rate liberalization and slow growths led by economic reform are more challenge to foreign banks than China domestic banks owing to foreign banks special environment, such as limited branches and client resource, meanwhile, not all products are opened to them as well.
Based on this statistics, 6 out of 14 foreign banks’ profit increase, including HSBC(11.7%), Standard Chartered(85%) and MHBK(87%). There are 3 key points that matters, first, deposit and loan of 4 banks increase; second, from operating indicator perspective, such as deposit and loan, net profit, HSBC, NCB and First Sino Bank have balanced business development, which belong to stable increment. On comparison, Standard Chartered, UOB and MHBK are not so balanced; last, cost-to-income ratio is kept at a low level for these 6 banks.
Statistics of foreign banks in China (2012) Bank | Net Profit | Variability | Bad-loan ratio | Capital adequacy ratio | HSBC | ￥3.824 Bil | 11.70% | | 16.70% | RBS | $0.367 Mil | -98% | | 35.20% | OCBC | ￥0.260 Bil | -24% | 0.45% | 22% | ANZ | ￥0.078 Bil | -24091% | 0.11% | 27.12% | DBS | ￥0.306 Bil | -42% | 0.60% | 18.70% | StandardChartered | ￥2.129 Bil | 85% | 0.52% | 14.80% | The Bank of East Asia | ￥1.286 Bil | -2.17% | | 12.58% | NCB | ￥0.183 Bil | 18.90% | 0.45% | 16.45% | UOB | ￥0.215 Bil | 127.10% | 0.70% | 23.50% | MHBK | ￥0.421 Bil | 81% | 0.14% | 18.52% | First Sino Bank | ￥0.388 Bil | 24% | | 12.48% | SOCIETE GENERALE | ￥0.011 Bil | -83% | | 31.95% | HANABANK | ￥0.102 Bil | -42% | 0.27% | 26.32% | Wooribank | $5.1 Mil | -47% | 0.73% | 36.32% |

The annual report and financial statements of HSBC China (2011 & 2012)
Unit: CNY million | 2012 | 2011 | Variability | 2010 | Variability | Whole Year | | | | | | Operating Income | 8,990 | 8,135 | 10.5% | 4,622 | 76% | Operating expenses | 4,544 | 4,019 | 13.1% | 3,807 | 5.6% | Total Profit | 4,476 | 4,121 | 8.6% | 1,013 | 306.8% | Net profit | 3,824 | 3,424 | 11.7% | 922 | 271.4% | | | | | | | To Dec31 | | | | | | Loan and advances | 131,860 | 111,171 | 18.6% | 94.383 | 17.8% | Total Assets | 298,508 | 269,015 | 11.0% | 205,620 | 30.8% | Deposit | 182,309 | 156,546 | 16.5% | 143,116 | 9.4% | Total Liabilities | 273,666 | 249,536 | 9.7% | 192,566 | 29.6% | Total equity | 24,841 | 19,478 | 27.5% | 13,055 | 49.2% | | | | | | | Capital adequacy ratio | 16.7 | 14 | | 12.1 | |

Hong Kong’s advantage
Hong Kong has independent legal system and language advantage.
Compared with Shanghai, Hong Kong has numbers of advantage to be as international financial center.
Hong Kong’s stock market is opened to global funds, and currency is related to US dollar since Hong Kong dollar is linked to US dollar at a fixed rate.
Hong Kong’s legal system is mature, and sourced from western legal system, meanwhile, it is implemented for years successfully.
Hong Kong’s official language is English, and it is used in business environment, including in business document and conversation, along with Cantonese and Mandarin these years, while Mandarin is standard language in Shanghai.
Hong Kong has incentive tax rate compared with that in Shanghai. It is a flat tax rate of 15% in Hong Kong, while it is up to 45% in shanghai.
Long way for Shanghai
Although Shanghai has kinds of advantage, so far it is not an international financial center. There are plenty of restrictions for shanghai to be an international financial center like Hong Kong, including following two aspects: * Freely convertible RMB
Shanghai has a long way to catch up with Hong Kong, and is admitted to implement a free trading area.
Although Chinese government is promoting RMB internationalization, and does currency exchange plans with some countries and areas, like South Korea, countries in East Asia, RMB is not a freely tradable currency, and many restriction on currency exchange. While Hong Kong dollar is linked with US dollar, which is a free market for international investors. * Legal system
Currently regulation in Mainland China is not mature, and it is still at initial stage. There are lots of supplement regulation should be implemented to meet international requirement, since China mainland legal system is output from socialization legal system. While Hong Kong legal system is developed from western legal system, which meets international regulation without any gap.
On Jul. 3th, 2013, Chinese Government announced that a new free trading area is admitted to be created in Shanghai, and it covers 28 KM2. Reformations covers several aspects, including to freedom interest rate of financial market, release freely converted of RMB capital item with controlled risk, admit to establish joint-bank of foreign and civil private capital, open domestic banks to do offshore business, encourage financial lease with tax incentives, and etc. Parts of policies are the same as those implemented in Shenzhen Qinghai.
In short term, free trading area will accelerate to raise shanghai’s position, and attract international investors, however, Shanghai still should take a long way to catch up with Hong Kong’s position to be as international financial center, since immature regulation, denominated SOE(state owned enterprise) in listed market, RMB converted freely.