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Viewing cable 08SHANGHAI396, SHANGHAI SEEKING NEW PERKS FOR FINANCIAL SECTOR

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Reference ID Created Released Classification Origin
08SHANGHAI396 2008-09-17 05:48 2011-08-23 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Consulate Shanghai
VZCZCXRO4403
RR RUEHCN RUEHGH
DE RUEHGH #0396/01 2610548
ZNR UUUUU ZZH
R 170548Z SEP 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7156
INFO RUEHBJ/AMEMBASSY BEIJING 2114
RUEHCN/AMCONSUL CHENGDU 1400
RUEHGZ/AMCONSUL GUANGZHOU 1371
RUEHHK/AMCONSUL HONG KONG 1554
RUEHSH/AMCONSUL SHENYANG 1394
RUEHGP/AMEMBASSY SINGAPORE 0167
RUEHIN/AIT TAIPEI 1207
RUEHKO/AMEMBASSY TOKYO 0362
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7742
UNCLAS SECTION 01 OF 02 SHANGHAI 000396 
 
SENSITIVE 
SIPDIS 
 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER 
SAN FRANCISCO FRB FOR CURRAN/GLICK 
NEW YORK FRB FOR CLARK/CRYSTAL/DAWSON 
STATE PASS CTFC FOR OIA/GORLICK 
CEA FOR BLOCK 
USDOC FOR ITA/MAC DAS KASOFF, MELCHER, AND OCEA/MCQUEEN 
TREASURY FOR AMB. HOLMER, WRIGHT, AND TSMITH 
TREASURY FOR OASIA - DOHNER/HAARSAGER/WINSHIP/CUSHMAN 
TREASURY FOR IMFP - SOBEL/MOGHTADER 
NSC FOR LOI 
 
E.O. 12958: N/A 
TAGS: CH ECON EFIN PGOV
SUBJECT: SHANGHAI SEEKING NEW PERKS FOR FINANCIAL SECTOR 
 
REF: 07 SHANGHAI 211 
 
1.  (SBU) Summary.  Slowing coastal economic growth and the 
slumping stock market are driving top Shanghai officials to 
lobby the central authorities for a package of financial sector 
reforms.  A key part of the plan is for increased authorities to 
be granted to local branches of financial regulators, or even to 
allow markets to self regulate.  Chinese central leaders, for 
their part, may be more open to reforms in light of 
macroeconomic concerns.  Approval could be announced by the end 
of September, but is more likely to take longer.  End summary. 
 
Shanghai Proposal at the State Council 
 
2.  (SBU) Shanghai by the end of September may be granted 
authority to carry out a package of reforms to promote the local 
financial services sector, Shanghai Financial Services Office 
Director-General Fang Xinghai told visiting Embassy FinAtt, 
Federal Reserve Board and San Francisco Federal Reserve 
professional staff members, and Congen Econoff on September 5. 
DG Fang said the package could include income tax rebates for 
Shanghai-based financial services firms and professionals, 
devolution of regulatory authority for approval of new products 
and other financial service innovations to the Shanghai branches 
of national financial regulators, and opening of new markets for 
bond and interest rate futures as well as exchange-traded funds 
for foreign market indices.  (Note: This past summer, Shanghai's 
Pudong District, home to much of the financial services industry 
in Shanghai, announced tax breaks and subsidized apartments for 
qualified finance professionals.  End note.)  The Central 
Government would establish a working group under Vice Premier 
Wang Qishan to implement the reforms, according to Fang. 
 
3.  (SBU) Shanghai Vice Mayor Tu Guangshao in a meeting 
September 6 said his biggest priority is devolving more 
authority on the operation of financial markets from the 
regulators to the exchanges.  (Comment:  Tu seemed to have in 
mind a model closer to U.S.-style self-regulatory organizations. 
 End comment.) 
 
4.  (SBU) Other interlocutors suggested that there may be other 
elements to the Shanghai proposal package.  High-level 
executives in foreign-invested financial firms in Shanghai 
separately said that the reform package could include a higher 
foreign equity cap in securities joint ventures -- although 
still a minority share in the range of 30%-35%.  However, an 
idea to allow Shanghai firms to set up offshore banking, 
publicly mentioned by Pudong officials in August, has been 
discarded, said one investment banker. 
 
The Premier Has Signed Off, Or Has He? 
 
5.  (SBU) Premier Wen Jiabao has basically approved the package 
following heavy lobbying by Shanghai Party Secretary Yu 
Zhengsheng, said Fang.  A foreign investment banker and Chinese 
press articles suggest that Wen's interest in Shanghai's 
financial reform package was piqued during his July 4-6 visit to 
the region, when he connected the dots on how slowing coastal 
growth due in part to financial sector inefficiencies would 
leave him open to criticism over his economic policies.  Vice 
Mayor Tu is less optimistic than Fang that the package would be 
passed quickly, although he judged that much of Shanghai's wish 
list would be approved. 
 
Wang Qishan Needs a Little Push 
 
6.  (SBU) Both Wen and Vice Premier Wang are now more ready to 
experiment with financial opening to stimulate services sector 
growth, said our interlocutors.  In particular, DG Fang said 
that U.S. requests to open China's financial sector should be 
raised by the President directly with President Hu Jintao, in 
stark contrast to his past warnings that U.S. officials should 
not appear to criticize Beijing's financial policies (see 
 
SHANGHAI 00000396  002 OF 002 
 
 
reftel).  Our interlocutors said that Vice Premier Wang has not 
yet moved on further financial opening, but he wants to. 
 
Is Shanghai China's Financial Center? 
 
7.  (SBU) This latest twist in Shanghai's ambitions to be 
definitively crowned as China's national financial center comes 
four years after President Hu first called for Shanghai to have 
this status, adding his imprimatur to that of former President 
Jiang Zemin and senior leader Deng Xiaoping.  Following Hu's 
July 2004 statement, Shanghai in November 2006 announced its 
eleventh Five-Year Plan which include the goal of building an 
international financial center with ambitious growth targets. 
To date, Shanghai can claim a stock market, the inter-bank 
lending market, a bond market, a commodity and gold futures 
exchange, and the bulk of the foreign-invested financial firms 
present in China.  The Shanghai Head Office of the People's Bank 
of China (PBOC) was established in August 2005, with 
responsibilities including the central bank's open-market 
monetary operations.  Just prior to this past May's inaugural 
Lujiazui Financial Forum, attended by global financial leaders, 
China's credit reference center (operated by the PBOC) was moved 
from Beijing to Shanghai. 
 
8.  (SBU) However, Shanghai also faces several domestic 
competitors for financial sector growth, said many of our early 
September interlocutors.  One foreign investment banker whose 
firm recently established its headquarters in Beijing went as 
far to say "the wind is not blowing Shanghai's way."  Fang 
himself admitted other cities are lobbying Beijing for local 
financial sector incentives:  Chongqing is proposing tax rebates 
for private equity, venture capital, and trust funds, for 
instance.  But Fang expressed confidence that Shanghai would be 
able to match any incentives Chongqing might win.  Interlocutors 
pointed to financial services in which other localities were 
attempting to gain market share:  Beijing for investment and 
commercial banking, Tianjin for private equity and renminbi 
trading, and Chongqing for regional finance.  Hong Kong, with 
its low taxes, is seen as the gold standard. 
 
Comment 
 
9.  (SBU) Most people we spoke with September 4-7 expect some 
financial sector reforms to be enacted, though views differed on 
their timing and breadth.  Optimists felt that Premier Wen would 
come under increasing pressure to take bold actions to spur 
growth and moribund financial markets.  China remains stuck in a 
repeating pattern of financial booms and busts and has yet to 
develop robust capital markets that can finance growth.  Chinese 
retail investors, having been burned, are placing savings back 
in banks.  Chinese securities firms, whose income depends 
heavily on brokerage commissions and high turnover, will face 
financial pressures and may be more accepting of capital 
injections from foreign investors. 
 
10.  (SBU) Nonetheless, DG Fang is probably exaggerating 
Beijing's support for the proposed Shanghai reforms.  His 
description of impending incentives and his appeal for 
intervention by high-level U.S. officials probably is intended 
to help tip the decisionmaking process at the Central Government 
level as well as in any firm considering where to base its China 
headquarters.. 
 
11. (U) Beijing Financial Attache David Loevinger has cleared on 
this cable. 
CAMP