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RUEATRS/DEPT OF TREASURY WASHINGTON DC
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RUEHUL/AMEMBASSY SEOUL 0570
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RUEHIN/AIT TAIPEI 2019
RUEHKO/AMEMBASSY TOKYO 0781

UNCLAS SECTION 01 OF 05 SHANGHAI 000410 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/CM 
NSC FOR MEDEIROS AND LOI 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA 
TREASURY FOR OASIA/INA -- DOHNER/WINSHIP/YANG 
TREASURY FOR SED -- LOEVINGER/OWENS/VAN HEUVELEN 
TREASURY FOR IMFP -- SOBEL/CUSHMAN 
STATE PASS CEA FOR BLOCK 
STATE PASS CFTC FOR OIA/GORLICK 
MANILA FOR ADB USED 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV PREL CH
SUBJECT: SHANGHAI DEFINING ITS ROLE AS AN INTERNATIONAL FINANCIAL 
CENTER 
 
REF: A. A) SHANGHAI 187 
     ¶B. B) SHANGHAI 191 
     ¶C. C) HONG KONG 1163 
 
SHANGHAI 00000410  001.2 OF 005 
 
 
¶1.  (SBU) Summary:  Shanghai received a large rhetorical boost 
this past spring in its quest to build a modern financial sector 
that might eventually rival New York and London.  The State 
Council, after months of delay, issued an endorsement of 
Shanghai's goal to become China's international financial center 
by 2020.  However, Shanghai continues to struggle with 
regulatory barriers that will limit the ability of Shanghai 
officials to use the State Council document to implement 
far-reaching financial reforms.  End Summary. 
 
========== 
Background 
========== 
 
¶2.  (SBU) EconOff in recent weeks met with a variety of contacts 
on Shanghai's plan to become an international financial center 
by 2020, the outlines of which were announced in April 2009 
following a late-March State Council meeting (Refs A and B). 
According to a top official with the Pudong Financial Services 
Bureau, the plan had been strongly supported by the late Huang 
Ju, who was Mayor and then Party Secretary of Shanghai before 
moving to the Politburo Standing Committee in 2002.  However, 
the State Council's April announcement embraced only part of 
earlier formulations, calling for Shanghai to become an 
international financial center and an international shipping 
center, while dropping mention of Shanghai becoming an economic 
and trade center.  (Note:  Shanghai officials, including Party 
Secretary Yu Zhengsheng and Mayor Han Zheng as of late September 
continue to promote development of "four centers" in Shanghai. 
See septel.  End note.) 
 
¶3.  (SBU) The "two center" plan was endorsed with great fanfare 
at this May's second annual Lujiazui Forum, held in the heart of 
Shanghai's financial district.  (Note:  Pudong is an eastern 
district of the Shanghai metropolitan area, largely built up 
over the last twenty years.  Lujiazui is that portion of Pudong 
directly across the Huangpu River from Shanghai's historic Bund 
and old city neighborhoods, and is home to the national or 
regional headquarters of a number of Chinese and foreign banks, 
as well as home to China's largest stock exchange, the Shanghai 
Stock Exchange.  End note.) Top financial officials opened the 
Lujiazui Forum with lengthy speeches supporting the goal, 
including People's Bank of China Chairman Zhou Xiaochuan, China 
Banking Regulatory Commission Chairman Liu Mingkang, China 
Securities Regulatory Commission (CSRC) Chairman Shang Fulin, 
and China Insurance Regulatory Commission Chairman Wu Dingfu, as 
well as Shanghai Party Secretary Yu.  The plan will take another 
eleven years to implement, according to Shi Haining, 
Director-General of the Pudong Financial Services Bureau:  it 
took five years (2001-2005) to build the foundation, will take 
until 2010 to set up, and then until 2020 to complete. 
 
========================================== 
The International Market Will Decide . . . 
========================================== 
 
¶4.  (SBU) Much of the debate over Shanghai's plan to establish 
itself as China's international financial center focuses on 
Shanghai's ability to outcompete other Chinese cities -- 
including Hong Kong, which is acknowledged to have a substantial 
lead (Refs A and C), Beijing, Tianjin, and Shenzhen -- and to 
eventually hold its own against the acknowledged international 
centers in New York and London. 
 
 
SHANGHAI 00000410  002.2 OF 005 
 
 
¶5.  (SBU) Officials closely tied with Shanghai's financial 
center plan say that Shanghai's best chance to compete for 
international status is to develop its comparative advantages 
and "allow the market to decide."  Fang Xinghai, 
Director-General of the Shanghai Financial Services Office, and 
Jeffery Chen, Deputy Director-General of the Pudong Financial 
Services Bureau, both said that Shanghai's strongest card 
relative to its domestic rivals is its proximity to financial 
markets.  They pointed out: 
 
 - Shanghai is the base for China's largest stock market, 
largest commodities futures exchange, the world's largest gold 
exchange, China's only bond market, and China's only financial 
futures exchange.  Fang Xinghai further claimed that all these 
markets are rated in the world's top five or ten. 
 
 - Fifty percent of China's asset management companies are 
headquartered in Shanghai, in order to be close to these 
markets, said Chen.  Private equity and venture capital firms 
are strongly attracted to Shanghai for the same reason. 
 
¶6.  (SBU) In turn, the confluence of domestic markets and 
players in Shanghai has already brought in international 
financial firms looking for a foothold in the China market. 
Fang noted that Shanghai has more foreign-invested bank 
headquarters than any other Chinese city, as well as being home 
to the most international insurance companies and 
foreign-invested mutual funds. 
 
¶7.  (SBU) By contrast, both interlocutors acknowledged that 
Beijing has the lead in terms of headquarters of major 
state-controlled banks and domestic insurance companies.  Under 
these conditions, an executive at a foreign-invested bank 
explained to EconOff, China could have more than one financial 
center, although in her view, Beijing would no longer challenge 
Shanghai for overall preeminence.  (Note: Of China's Big Five 
(state-owned commercial) banks, Industrial and Commercial Bank 
of China, Bank of China, China Construction Bank, and 
Agricultural Bank of China are all headquartered in Beijing, 
close to the regulators; only Bank of Communications calls 
Shanghai home.  Shanghai is headquarters to only three of 
China's top ten insurance companies as ranked by 2008 premium 
income, accounting for approximately 14 percent of total 
national premium income.  End note.) 
 
¶8.  (SBU) Comment: Shanghai's argument that competition among 
domestic localities should be decided by the market -- rather 
than a diktat from the Central Government -- appears to reflect 
confidence that it already has nudged aside its domestic rivals 
on the international stage, while also acquiescing that it 
cannot gain a monopoly in the domestic market.  End comment. 
 
============================================= = 
. . . With A Little Help From Local Incentives 
============================================= = 
 
¶9.  (SBU) Shanghai is offering some incentives to financial 
companies establishing local offices to level the playing field 
with rivals.  As described by Shi, these include the following: 
 
 - Individual income tax reimbursement.  This is a "big 
challenge," said Shi, because Shanghai must compete for talent 
with Hong Kong and Singapore, where taxes are low, but given 
China's current fiscal revenue situation in which revenue growth 
has slowed considerably over the last two years it is not a 
propitious time to convince leaders to lower taxes for 
high-income persons.  In addition, local governments are 
 
SHANGHAI 00000410  003.2 OF 005 
 
 
forbidden to reduce income taxes.  Instead, Shanghai is offering 
reimbursements: 40 percent for the top executive, and 20 percent 
for mid-level management personnel. 
 
 - One-time bonuses from the Pudong government to new employees 
in financial institutions. 
 
 - Fiscal subsidies, including for hiring college-educated 
interns.  In total, through spring 2009, Shanghai had provided 
RMB20 million in subsidies to financial firms.  (Note: 
Approximately US$2.9 million.  End note.) 
 
 - Assistance cutting bureaucratic red tape.  For instance, 
accelerating transfer of residency status (hukou), placing 
children of financial firms' employees at the head of the line 
for local schools, and helping to locate office space. 
 
¶10.  (SBU) Shanghai also provides indirect incentives, note the 
officials.  For instance, Shanghai has one of China's best 
educational systems.  Other cities -- such as Tianjin -- can 
offer educational preferences to employees' children, but they 
will not be as effective, since the schools are not as 
attractive.  Pudong Financial Service Bureau's Chen also said 
that Shanghai has a more transparent regulatory environment, 
helping to control costs as a company sets up operations. 
Shanghai's goal is to reduce taxes and transaction fees, so that 
it becomes a place where international firms can grow.  Shanghai 
does not want to be "a center for headquarters," he said, but "a 
center for capital." 
 
========================================== 
Financial Center Bureaucrats Gaining Clout 
========================================== 
 
¶11.  (SBU) Pudong District, home to Shanghai's tallest 
skyscrapers and the Lujiazui Finance and Trade Zone, is gaining 
bureaucratic clout as Shanghai pushes to build an international 
financial center.  In May, for instance, the State Council 
approved bordering Nanhui District to merge into Pudong 
District, more than doubling Pudong's land area.  According to 
Chen, this measure will open opportunities to develop Nanhui's 
largely rural land base, to gain economies of scale from 
combining administration of the large port facilities in each. 
In addition, the Pudong Financial Services Bureau was upgraded 
from its former status as an office and made independent of the 
Pudong Reform and Development Commission, said Chen. 
 
=========================== 
Pilot Projects . . . 
=========================== 
 
¶12.  (SBU) Chen said that Shanghai is lobbying the Central 
Government to allow pilot projects in Shanghai as a way to 
achieve financial sector liberalization.  Shanghai has succeeded 
in lobbying for pilot projects by arguing that local firms and 
officials will not try to skirt the spirit of the law during 
implementation.  For instance, Shanghai-based Hua'an Asset 
Management received CSRC licensing as the first Qualified 
Domestic Institutional Investor (QDII, a program under which 
China-based fund managers can invest in overseas assets), said 
Chen, because the Pudong Financial Services Bureau offered 
assurances to CSRC.  Fang of the Shanghai Financial Services 
Office said that Shanghai used the same argument in order to set 
up the local pilot for using renminbi in trade settlement (Ref 
B). 
 
¶13.  (SBU) Shanghai officials and financial sector players also 
 
SHANGHAI 00000410  004.2 OF 005 
 
 
mentioned the following measures currently under consideration 
that would liberalize the financial sector: 
 
 - Exchange-traded funds (ETFs).  Both the CSRC and the State 
Administration of Foreign Exchange would need to approve ETFs, 
which would allow domestic investors to purchase instruments on 
the Chinese stock markets that mimic the performance of an 
overseas investment, said Chen.  A likely first ETF on the 
Shanghai market would be the New York Stock Exchange (NYSE) 
index, he said.  Asset management companies are lobbying for 
this measure. 
 
 - Listing by overseas firms on the domestic market.  Peng Su, a 
representative of NYSE-Euronext in Beijing, told EconOff that 
the NYSE index ETF for now is not being emphasized as he works 
on smoothing regulations to allow overseas firms such as 
Coca-Cola to gain access to fundraising to through the Chinese 
market.  One continuing sticking point is whether or not to 
permit U.S. Generally Accepted Accounting Principles to be used 
in the Chinese books of these overseas firms, said Peng.  Some 
Chinese regulators want a quid pro quo with Chinese firms being 
allowed to use Chinese accounting standards when listing on the 
NYSE. 
 
 - Real estate investment trusts (REITs).  Shi said that the 
proposal to begin licensing REITs in Shanghai had been generated 
by his office, since there are experts on staff who research and 
propose financial liberalization measures. 
 
 - Opening a "credit card park."  China Construction Bank has 
established its credit card business in Shanghai, said Shi, and 
Bank of China has a payment and settlement center.  There are 
plans to establish a Shanghai Financial Information Services 
Park as part of the Zhangjiang High-Technology Park in Pudong, 
which would build off these existing services in collaboration 
with China Union Pay, China's leading credit card payment system. 
 
 
============================================= == 
. . . Cannot Always Overcome Regulator Log Jams 
============================================= == 
 
¶14.  (SBU) The formal process for approving new financial 
products is unwieldy, say our interlocutors.  For instance, 
noted Shi, asset management companies are currently allowed to 
introduce only two products per year.  Fang -- formerly a top 
executive at the Shanghai Stock Exchange (SSE) -- said each time 
the SSE prepares to offer a new product, such as a simple option 
on stocks, it is blocked because the CSRC must approve it and 
then report it to the State Council.  If one person believes 
that a product is not necessary, said Fang, then it can be 
blocked.  Fang said that he hopes the Central Government can 
delineate a few areas where decisions can be made in Shanghai -- 
more like the system used by the NYSE, in which pre-approval is 
not needed. 
 
¶15.  (SBU) A recent episode involving pilot incentives for 
private equity (PE) firms in Shanghai, however, illustrates how 
quickly log jams can reappear after being broken up.  In June, 
Chen said, Pudong extended to PE firms incentives -- such as 
income tax reimbursement -- that are available to other 
financial firms.  Even though it was not clear that the Central 
Government would approve the move, Pudong was able to convince 
the well-known firm Blackstone to establish a PE fund.  Other 
multinationals quickly followed in order not to cede the 
first-mover advantage to Blackstone.  However, Chinese media 
reported in September that Central Government authorities are 
 
SHANGHAI 00000410  005.2 OF 005 
 
 
now reviewing the policies. 
 
¶16.  (SBU) The lack of an arbiter to break deadlocks at the 
Central Government level will probably continue to slow 
Shanghai's financial liberalization pace, say financial sector 
professionals.  One Shanghai financial official said that a key 
part of the State Council's Shanghai financial center plan was 
for a working group to be authorized to make timely approvals 
(Ref B).  However, as of mid-August, the working group, which is 
to be headed by the National Development and Reform Commission, 
had not yet met, a Shanghai official told EconOff. 
 
======= 
Comment 
======= 
 
¶17.  (SBU) The biggest challenge remaining for Shanghai's 
aspirations to build an international financial center by 2020 
is improving China's regulatory structure, as Shanghai's hands 
remain largely tied by overly cautious bureaucrats in Beijing. 
Shanghai Financial Service Office's Fang said that he lobbies at 
every opportunity to open markets to foreign financial firms, 
which he estimates will bring much-needed expertise to 
Shanghai's financial sector.  He said a cause of the global 
financial crisis was too little regulation, whereas China 
continues to have too much.  While there are voices in the 
Chinese government that are using the Shanghai international 
financial center plan to press for greater financial 
liberalization, there are also clearly groups in China lobbying 
to limit financial liberalization, in part to protect domestic 
financial players.CAMP