The Strength of Shanghai International Financial Center

The Strength of Shanghai International Financial Center

The Strength of Shanghai International Financial Center

As the economic center of China, Shanghai has always been the epitome of China’s reform and opening up, and a pioneer of China’s modernization, and its achievements have impressed the whole world. Particularly, it has its own strength in making itself an international financial center. Currently, the value of output of the financial sector in Shanghai is higher than any other city in Mainland China. Shanghai’s direct financing accounts for more than 1/4 of China’s total volume. And its financial facilities are way ahead of other areas in Mainland China. Shanghai is also well-known for its openness in the financial industry. Around 2/3 of non-Chinese banks are headquartered in Shanghai and 80% of their assets within the country are here. Many leading international financial enterprises and intermediary institutions such as Citigroup, HSBC, Morgan Stanley, Bank of America, Blackstone Group, Deloitte, GE, McKinsey & Company, have set up their Chinese headquarters in Shanghai. According to 2012’s Xinhua-Dow Jones International Financial Centers Development Index (IFCD index)[1] , Shanghai ranks the 6th out of the 45 international financial centers, with distinct competitive edge in every aspect compared with other major financial centers in emerging economies.

I. Development of Major Financial Elements

1. The Money Market & the Foreign Exchange Market
Shanghai has played a significant role in the development of China’s Money Market. China Foreign Exchange Trade System (CFETS), also known as National Interbank Funding Center (the Center) was founded in Shanghai on April 18, 1994. Shibor (Shanghai Interbank Offered Rate), calculated by the Center is one of the most common benchmark interest rates used in RMB interest rate swaps. As shown in Fig 1, in the year of 2011, the RMB interest rate swap turnover based on Shibor, 7-day fixing repo rate and the benchmark interest rates published by the People’s Bank of China (PBC), reach RMB 1218.5 billion, RMB 1379 billion and RMB 78.5 billion, making up 45.5%, 51.5% and 3% of the total respectively[2] . Comparing to the previous year, the percentage of turnover of interest rate swap underlying Shibor increased by 5%.

Fig. 1. Turnovers Based on Different Benchmark Interest Rates in 2011

Located in Shanghai, the Interbank Foreign Exchange Market of China has been developing rapidly. The number of currency pairs in the Interbank Foreign Exchange Spot Market has increased up to 10. The market structure has been further improved as well, and the trading volume has increased substantially. In 2011, when the RMB foreign exchange option was introduced, China’s foreign exchange derivative market became a market that covered Forwards, Interest Rate Swaps, Currency Swaps and Options, which formed a complete product system of fundamental exchange rate derivatives.

2. Futures Market
Two out of China’s four futures exchanges are located in Shanghai, and they are Shanghai Futures Exchange (SHFE) and China Financial Futures Exchange (CFFEX). At present, 10 futures contracts’ underlying commodities, i.e., gold, silver, copper, aluminum, lead, steel rebar, steel wire rod, natural rubber, fuel oil and zinc, are listed for trading in SHFE. SHFE has already become one of the three copper pricing centers in the world. Since CFFEX introduced the CSI 300 Index Futures to the market in 2010, its turnover has been growing continuously. Today, CFFEX is China’s largest futures exchange in terms of the turnover. As shown in Fig. 2, in 2011, CFFEX and SHFE accounts for 31.8% and 31.6% of the total turnover in China’s futures market[3] respectively.

Fig 2. Turnovers of Different Futures Exchanges in 2011

3. Gold Market
In 2011, the accumulative volume of all listed gold products traded in Shanghai Futures Exchange (SHFE) and Shanghai Gold Exchange (SGE) are 150,000 tons and 140,000 tons, ranking the 4th and 5th globally. SGE has reinforced the gold market structure and become increasingly internationalized. The volume and amount of gold traded in SGE grew rapidly, with year-on-year growth rate of 22.9% and 53.3% respectively. Meanwhile, the gold futures trading volume and amount on SHFE increased substantially, with year-on-year growth rate of 112.59% and 178.68% respectively. The investor structure on the gold futures market has also been further improved[4].

4. Insurance Market
At the end of 2011, there are 115 insurance companies in Shanghai, an increase of 13 over that of 2010. The total insurance fee, including property insurance, life insurance, accident insurance and health insurance, reached 75.3 RMB billion in Shanghai, with the insurance density of RMB 3272 per person, which ranked the 6th and the 2nd respectively in Mainland China[5].

5. Securities Market

The development of Shanghai Multi-tiered Blue-Chip Market is of significant importance in building China’s multi-level Capital Markets. To some extent, it also reflects the development and growth of China’s economy.
The stock market at Shanghai Stock Exchange (SSE) continues to be one of the most preeminent stock markets in the world. By the end of 2012, the total market capitalization, the raising capital and the turnover of SSE ranked the 7th, 3rd and 6th, respectively[6].
Moreover, the bond market at SSE grows dramatically. The number of listed bonds, the nominal value and the turnover of bonds outstanding all hit record high. At the end of 2012, 1,021 bonds were listed on SSE, representing an increase of 62% from that of previous year; the nominal value exceeded RMB 1 trillion and increased by 45% (year-on-year) reaching RMB 1.0612 trillion; the turnover reached RMB 37.98 trillion, with an increase of 80%[7] year-on-year, making up 70%[8] of the total turnover on SSE and 94%[9] of total turnover of China’s exchange-based bond markets.
The fund market at SSE has gradually become standardized and mature. By the end of 2012, there are 42 funds listed on SSE, with a total market capitalization of RMB 98.171 billion, increased by 44% year-on-year. Especially, SSE has made great progress in the development of ETF products. 29 ETFs have been listed with a total market value of RMB 71.676 billion, increased by 69% from the previous year[10]. The first inter-market ETF (the Huatai-Pinebridge CSI 300 ETF) was introduced to the market in May, 2012. And other types of ETFs such as inter-country ETF are commodity ETF, are about to coming out.

II. The Comparison among International Financial Centers
According to Xinhua-Dow Jones International Financial Centers Development Index 2012 (IFCD index), Shanghai was seen to have the highest potential to become one of global leading international financial centers. And among all the international financial centers, Shanghai ranked the 6th, right after New York, London, Tokyo, Hong Kong and Singapore.
In terms of the five major indicators, i.e. Financial Market, Growth and Development, Industry Support, Service, and General Environment[11], Shanghai ranked the 6th, 1st, 4th, 12th and 16th respectively, as shown in Fig. 3.

Fig. 3 International Financial Center Ranking of Shanghai (2010 – 2012)

Shanghai outperforms other major financial centers in those emerging economies in most aspects. In Comparison with other four financial centers (St. Paul, Moscow, Johannesburg, and Mumbai) in BRICS nations, Shanghai ranked the the 1st in terms of any of the following aspects: confidence index, capital and human resource attraction index, currency familiarity, financial internationalization, financial innovation, financial convenience, intermediary service and financial regulation.

III. The Future of Shanghai as an International Financial Center
At the beginning of 2012, National Development and Reform Commission officially issued the “Shanghai International Financial Center Construction Plan during the 12th Five-Year Plan Period” (the Plan), which required the full expansion of Shanghai’s financial service function, speeding the promotion of financial innovation, and continuously enhancing the international influence of Shanghai’s financial markets. The Plan also pointed out that Shanghai would become the global center of the RMB derivatives innovation, transaction, pricing and settlement by the year of 2015. We believe, as a part of the national strategic development, the construction of Shanghai international financial center shall be embracing a brighter future.

[1] The Xinhua-Dow Jones International Financial Centers Development Index (IFCD Index) was launched jointly by CFC Holding Company, Ltd., a subsidiary of Xinhua News Agency, and CME Group Index Services LLC (Dow Jones Indexes) in Shanghai in 2010.

[2] Shanghai International Financial Center Blue Book 2012, Shanghai Renmin Press

[3] Futures Association of China

[4] Shanghai International Financial Center Blue Book 2012, Shanghai Renmin Press

[5] Shanghai International Financial Center Blue Book 2012, Shanghai Renmin Press

[6] World Federation of Exchanges (WFE)

[7] Bond Market Department of Shanghai Stock Exchange

[8] Information Center of Shanghai Stock Exchange

[9] WIND

[10] Fund and Derivatives Department of Shanghai Stock Exchange

[11] The indicator of Financial Market has four indicators, i.e. the capital market, the forex market, the banking market, and the insurance market. The Growth and Development index contains four sub-elements, i.e. capital
market growth, economic growth, city innovation output, and creation potential. The indicator of Industrial Support has three indicators, including business environment support, basic city conditions, and city infrastructure. The index of service has three elements, including government services,
intellectual capital, and urban environment. The indicator of general environment is composed of three sub-elements, including the economic environment, political environment, and openness.

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Shayne Heffernan Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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