VZCZCXRO0911
RR RUEHCN RUEHGH
DE RUEHGH #0211/01 1010828
ZNY CCCCC ZZH
R 110828Z APR 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 5687
INFO RUEHBJ/AMEMBASSY BEIJING 0959
RUEHHK/AMCONSUL HONG KONG 0650
RUEHSH/AMCONSUL SHENYANG 0551
RUEHGZ/AMCONSUL GUANGZHOU 0526
RUEHGP/AMEMBASSY SINGAPORE 0043
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHCN/AMCONSUL CHENGDU 0545
RUEHIN/AIT TAIPEI 0437
RUEHKO/AMEMBASSY TOKYO 0108
RUEHGH/AMCONSUL SHANGHAI 6069

C O N F I D E N T I A L SECTION 01 OF 03 SHANGHAI 000211 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/CM, EB AND E 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SF FRB 
FOR CURRAN/LUNG; NY FRB FOR CLARK/CRYSTAL/MOSELEY 
TREASURY FOR ADAMS, AND OASIA - DOHNER, HAARSAGER, CUSHMAN 
USDOC FOR ITA  KASOFF,  MELCHER, MCQUEEN 
NSC FOR HUBBARD AND TONG 
 
E.O. 12958: DECL:  4/11/2032 
TAGS: EFIN ECON CH
SUBJECT: SHANGHAI'S FUTURE AS LEADING FINANCIAL CENTER 
 
REF: A. SHANGHAI 159 
     ¶B. SHANGHAI 174 
     ¶C. SHANGHAI 133 
 
CLASSIFIED BY: Kenneth Jarrett, Consul General, U.S. Consulate 
General Shanghai, Department of State. 
REASON: 1.4 (b), (d) 
 
 
 
¶1. (C) Summary: During a March 23 meeting with the Consul 
General and Econoff, Shanghai Futures Exchange (SHFE) CEO Yang 
Maijun and Shanghai Office for Financial Services Deputy 
Director-General Fang Xinghai said Shanghai's role as China's 
leading financial center was secure; Hong Kong and Tianjin were 
not threats; and the May or June launch of the China Financial 
Futures Exchange (CFFE) should further solidify Shanghai's 
position.  Fang was not optimistic about short-term prospects 
for reforms he had advocated in a March 6 Asia Wall Street 
Journal op-ed, including liberalization of China's Qualified 
Foreign Institutional Investor (QFII) and Qualified Domestic 
Institutional Investor (QDII) programs, and an ability to 
arbitrage the price difference on stocks listed on Mainland 
China and Hong Kong markets. He hoped that at least margin 
trading and the ability to take long and short positions would 
be allowed soon.  Yang and Fang said Secretary Paulson's March 8 
speech at SHFE (Ref A) was generally well-received by its 
audience of mostly Chinese financial sector officials and 
leaders of Chinese financial service companies because it 
identified the right course of action.  However, it provoked a 
defensive nationalistic response by some who did not appreciate 
a foreign official telling China what it needed to do -- even if 
that official was right and it was in China's own interests. 
Fang said that to persuade China to undertake reforms at the 
upcoming Strategic Economic Dialogue (SED) meetings in May, the 
USG needed to be prepared to make concessions.  He raised the 
licensing of PRC banks in the U.S. as one example.  End summary. 
 
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Shanghai vs. Hong Kong: Not a Zero-Sum Game 
------------------------------------------- 
 
¶2. (SBU) During a March 23 meeting with the CG and Econoff, Fang 
Xinghai , Deputy Director-General at Shanghai's Financial 
Services Office (and a former Executive VP at the Shanghai Stock 
Exchange) said that Shanghai did not face competition from Hong 
Kong, Beijing or even Tianjin, as China's financial center. 
Shanghai's role was well-established and secure given its 
infrastructure and human-resources capital.  Fang said that a 
key part of his job was "developing Shanghai into a leading 
financial center;" the other key role was managing the Shanghai 
Government's investments in financial sector companies. 
 
¶3.  (C) According to Fang, Hong Kong and Shanghai's relationship 
should not be viewed as a zero-sum game.  Just because Shanghai 
grew 10 percent did not mean that Hong Kong lost 10 percent. 
Tianjin was not a real contender as a financial center and "was 
only a player due to the mayor's background in financial 
circles."  Beijing, despite having the regulators and major 
policy banks, was not a true threat to Shanghai in international 
terms.  To support this argument, Fang pointed to the fact that 
despite heavy lobbying by Beijing's municipal government, only 
two foreign banks had opted to incorporate with Beijing as their 
headquarters. 
 
--------------------------------------------- --------- 
Shanghai Futures and China Financial Futures Exchanges 
--------------------------------------------- --------- 
 
¶4. (U) Shanghai Futures Exchange CEO Yang Maijun said that the 
SHFE was the biggest of China's three commodity futures 
exchanges and traded copper, aluminum, rubber and fuel oil.  It 
had just launched trading of zinc that week since China was the 
world's top consumer. Yang said the SHFE had plans to list steel 
rods, gold, nickel and oil in the near future. 
 
 
SHANGHAI 00000211  002 OF 003 
 
 
¶5. (SBU) Yang said that the China Financial Futures Exchange 
(CFFE), co-located with SHFE, should launch its first product in 
May or June.  He believed that the development of CFFE had been 
fairly rapid since it was announced last August.  He said that 
CFFE had clear political support, but that launching of trading 
had been delayed by technical issues and the development of 
trading processes.  He reiterated that CFFE had worked very 
quickly to implement something as complicated as creating an 
entire market for trading financial futures. 
 
--------------------------------------------- ------------ 
Need Long-Term View for Reforming China's Capital Markets 
--------------------------------------------- ------------ 
 
¶6. (C) Fang was rather pessimistic about short-term prospects 
for reforms he had called for in a March 6 Op-Ed piece in the 
Asia Wall Street Journal (AWSJ) entitled "Taking Stock in 
China," including increasing QFII quotas, loosening QDII 
investment restrictions to increase demand, and devising a 
system to allow Chinese investors to arbitrage the differences 
in value of Chinese companies listed both in Hong Kong and 
Shanghai. (Note: Shanghai "A" shares sell at a P/E premium, 
compared to shares of the same company listed on the Hong Kong 
market, "H" shares.  End note.)  Fang was skeptical of his 
chances of influencing the policy debate in China, saying that 
he did not think that most Chinese decision makers read the 
English-language AWSJ.  As a Chinese with extensive 
international experience (see bio note paragraph 12), Fang said 
one always needed to take the "long term view" to changes in 
China.  He said that it often took several years for a policy 
proposal to become law.  It was "good to talk about new ideas, 
but don't have any expectations of accomplishing anything 
quickly." 
 
¶7. (C) Fang said that reforms the Shanghai Stock Exchange was 
planning (Ref B), such as changing the 10 percent daily limits 
on stock price movements and changing the settlement dates for 
stock purchases, were cosmetic and not necessary or important. 
What was needed, in addition to the more structural reforms he 
had discussed in the AWSJ article, was the development of margin 
trading and mechanisms for investors to take both long and short 
positions on stocks. 
 
¶8. (C) SHFE's Yang discounted rumors (Ref C) that average 
Chinese investors were mortgaging real estate holdings to fund 
stock purchases.  Yang said that Chinese culturally found a 
great deal of security in owning a house and any attempt to try 
to borrow money against it to play the market was unlikely for 
the average investor.  For "rich people," who owned more than 
one house, on the other hand, both Yang and Fang said that they 
knew of people who had mortgaged a second or third property to 
play the market.  Fang reiterated that one of the problems with 
the market was that it was made up of too many retail investors, 
noting that increased QFII quotas would allow institutional 
investors to play a greater role in China's stock markets, 
thereby increasing stability. 
 
--------------------------------------------- ----- 
A Nationalist Reaction By Some to Paulson's Speech 
--------------------------------------------- ----- 
 
¶9. (C) Both Fang and Yang agreed with the fundamentals of 
Secretary Paulson's March 8 speech in identifying the right 
 
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course of action and said Chinese financial leaders did as well. 
 According to Fang, however, some Chinese officials questioned 
the tone of Secretary Paulson's remarks, noting that he had 
spoken "very directly" and "was telling us what to do."  Yang 
and Fang agreed that Secretary Paulson had the credentials to 
give such a speech, but it had caused some in the audience to 
react in a "nationalistic" or defensive manner.  Fang also 
critiqued the Secretary's assertion that he had "never seen a 
successful joint-venture securities firm" despite having been 
the head of the Goldman Sachs investment firm when it formed 
such a joint venture in China.  (Note: Fang was referring to the 
Goldman Sachs-Gaohua joint venture.  End note.)  Fang said that 
 
SHANGHAI 00000211  003 OF 003 
 
 
this critique was a "direct attack" on the Chinese model that 
had only allowed foreign securities firms to invest in China as 
joint ventures and would have been noted as such by Chinese 
financial leaders. 
 
--------------------------------------------- --- 
SED: Just Because We Should Doesn't Mean We Will 
--------------------------------------------- --- 
 
¶10. (C) Fang said that the U.S.-China Strategic Economic 
Dialogue (SED) was a useful forum for senior-level discussions. 
Regarding increased financial sector liberalization in China, he 
said that just because what the United States has asked China to 
do what was in China's own long-term interests did not mean that 
China would do it without concessions.  The Chinese government 
had institutional issues it needed to overcome and domestic 
interest groups that were resistant to the reforms called for in 
the Secretary's speech.  Furthermore, due to China's political 
calendar, Chinese officials would be unwilling to undertake any 
risky or controversial reforms until after the Party Congress in 
the fall. 
 
¶11. (C) Fang added that the Chinese side would expect to receive 
concessions from the U.S. side for any concessions it made.  He 
pointed out that at the same time the United States was pushing 
China for access to its market, no Chinese bank had been 
licensed to open in the United States and, after such deals as 
CNOOC had been blocked, China was feeling that its access to 
U.S. markets was increasingly fragile and certain parts had been 
closed off to Chinese investors and goods. 
 
--------- 
Bio Notes 
--------- 
 
¶12. (U) Fang Xinghai has a PhD in Economics from Stanford 
University (1993) and a BS in engineering from Tsinghua 
University (1986).  In 1993 he joined the World Bank's Young 
Professional Program as an economist/investment officer in 
Washington, DC.  In 1998, he returned to China and worked at the 
China Construction Bank, China Galaxy Securities Company, and 
was Deputy Chief Executive Officer of the Shanghai Stock 
Exchange from 2001-2005.  He became Deputy Director-General of 
the Shanghai Office for Financial Services in December 2005.  He 
is married and speaks fluent English. 
 
¶13. (U) Yang Maijun was born in 1955 in Dali, Yunnan Province. 
In the early 1970s, he worked on a farm in Yunnan Province for 
two years and then at a factory for three years.  He was one of 
the successful applicants in the first round of college entrance 
examinations at the end of the Cultural Revolution.  He was 
appointed General Manager and CEO of the Shanghai Futures 
Exchange in August 2006.  Prior to joining SHFE, Dr. Yang was 
Director of the Futures Supervision Department at the China 
Securities Regulatory Commission.  He is married.  He 
understands more English than he speaks and is able to 
communicate on financial issues in English at a 3 level. 
JARRETT