International Financial Centre Comparison
International Financial Centre Comparison Hong Kong and Shanghai Both Shanghai and Hong Kong are ranked in the top five global financial centre according to GFCI, 2011. Shanghai keeps up with Hong Kong in finance field in the recent years. We pick up four criteria including diversity of financial products, availability of qualified staff, taxation of capital gains and local currency convertibility to compare Hong Kong and Shanghai. Diversity of financial products The diversities of financial products reflect the competitiveness of financial centre.
Only with various financial products, investors can make different portfolios to hedge risks or speculate. With more financial derivatives, the financial industry will be boosted as well. At present, the financial products in Shanghai mainly include stocks, commodity futures, CDs, commercial papers, stock funds, trust funds and some derivatives related to foreign exchange rate or metal prices. In 2009, the Growth Enterprise Market was launched in the stock exchange of Shenzhen. In April, 2010, stock index futures firstly came to the market in Mainland China.
I see the two events above as the most innovative things during the past five in the financial markets in Mainland China. Though the volume of financial products sold in the banks was about 8. 5T RMB by August, 2011, the sorts of financial products were very limited. And we should keep in mind the background is high inflation continuously. However, these products concentrated more on the profit style of giving loan and earning higher interest than basic bank interest rate. Some numbers are listed in the following part. Number of securitized derivatives in Hong Kong Exchanges was 6578 by January, 2011.
In Shanghai SE, the number of securitized derivatives is quite limited in contrast. The number of ETFs in Hong Kong Exchange, Shanghai SE and Shenzhen SE was 72, 14 and 4 respectively by January, 2011. Hence, a large gap exists between HK and SH in financial derivative markets. In addition, as we can see from the open market or news, the procedure of launching a new financial product usually will take quite a time in Mainland China. I believe even by 2020, the whole kinds of financial products in Shanghai will still be kind of limited despite that the whole volume will be much greater than today.
Furthermore, innovation of financial products needs support of big regulator institutions like CBRC and CIRC. The role of these institutions will affect how fast the growth of financial innovation in Mainland China. When it comes to the financial products in Hong Kong, financial products almost cover all sorts of products. Corresponding regulation rules are relatively mature. Ordinary investors can easily get access to different derivatives. Though the expand of financial companies in future in Hong Kong may probably not be as fast as that in Shanghai, these financial products will also attract investors to some extent.
The quality of such financial products will be the same. The population of Shanghai is roughly three times as large as that of Hong Kong, thus the numbers of potential customers in Shanghai will be larger in the finance industry. Meanwhile, we should acknowledge that nowadays a large proportion of ordinary investors in Shanghai are short of finance knowledge. With the progress of finance knowledge in the youth people, they will have more complicated financial needs after graduation, which can only be met by means of more advanced financial products.
So the future growth in financial products in Shanghai will beyond expectation. But the process may endure a long period. At least by 2020, I do not think the financial products in Shanghai will be as mature as in Hong Kong. In term of a further long period, Shanghai will catch up Hong Kong in financial products. Availability of qualified staff Compared with world-class financial center to the size of qualified staff, Shanghai still has a large gap. Currently, the world’s major international financial centers gather a large number of leading international financial professionals.
For example, nearly 800,000 New York financial employees serve more than 700 million people ; Hong Kong, more than 400,000 financial professionals serve Hong Kong’s 7. 1 million households; Shanghai only has 231,900 financial professionals, while the number of households in need of services is as high as 8. 25 million. From the relative proportions of view, London and New York financial professionals’ proportion of employment accounts for 12%; Singapore for nearly four years, the average employment in the financial sector is at 12 million, representing about 7. % of total employment. Hong Kong’s financial sector employment will remain at 5. 5% of the total employed population, while the proportion in Shanghai is only about 3%. Not only had that, Hong Kong has also brought together the world’s financial elite. These high-end financial professionals affect the changes in the financial order to some extent. In addition to the numerical gap, in the domestic financial market, personal finance staff has a great lack of professional ability.
Take the internationally recognized Chartered Financial Analyst for example: there are 25,000 people in the United States, 1,000 people in Hong Kong, only less than 100 people in Shanghai. The age structure of financial planning services is also very low. As most financial planning service staffs work less than three years, service quality is seriously affected. According to the latest data issued by www. 51job. com (one of the biggest job sites in mainland), from January to May this year, in the financial sector of mainland China, total number of posts online is 425,451, increased by 36% over the same period in 2010, and increased by 72. % over the same period in 2009. Although Shanghai has a lot of talented people, compared with Hong Kong, Shanghai has more staffs familiar with operating local financial market, their experience of cooperating with the international banking is not enough. Balanced development is now essential. Shanghai needs not only more local financial professionals, but also international experienced talents. Taxation of capital gains Taxation of capital gains is quite important in capital market operation. It directly influences the confidence and enthusiasm of investors.
In general, higher capital gains rate will restrict the development speed of financial market. Currently, the applicable tax rate for capital gains in China depends upon the nature of the taxpayer and whether the taxpayer is resident or non-resident for tax purposes. Tax-resident enterprises will be taxed at 25% in accordance with the Enterprise Income Tax Law. Non-resident enterprises will be taxed at 10% on capital gains in accordance with the Implementing Regulations to the Enterprise Income Tax Law. In addition, to share investors, they should pay a dividend tax rate at 20%.
In contrast, Hong Kong has no capital gains tax. However, employees who receive shares or options as part of their remuneration are taxed at the normal Hong Kong income tax rate on the value of the shares or options at the end of any vesting period less any amount that the individual paid for the grant. Now Shanghai aims at becoming an international financial centre by 2020. A financial centre should include various kinds of investors and institutions. As an international financial centre, taxation preference is an important factor to most investors.
At the same time, we can see Mainland China is gradually confronted with the situation of change of economic development style. Financial service industry should be one of the pillar industries in the future. Mainland China must take efforts to develop its financial power. In my opinion, the taxation system of capital gains, as one of adjustment tools to the operation of the whole country economics, will definitely be diversified by 2020. For example, to the retail investors and institutional investors, I contend there will be lower tax rate on the capital gains, even no tax in some fields like dividend tax.
This method will indirectly stimulate the financial innovation. However, I believe the application scale of taxation will be broadened as new investment products appear. By means of it, the whole financial system will be sanity, because people will have little chance to take advantage of some areas which are absolutely tax free. On the other hand, in Hong Kong, people do not need to pay capital gains tax, which I believe will hold for a long time. In such a mature finance market, except for some extreme economics or political situations, holding taxation system stable is more reasonable to the regulators.
Making change on taxation frequently will worry investors and international companies. The whole finance system has to get the response when new tax rate will be executed. So Mainland China may face another problem about the pace of its taxation reforming. Lower taxation is one kind of deregulation. Hence, to most investors and institutions, Hong Kong is more attractive in terms of taxation of capital gains at present. Nevertheless, Mainland China, especially in Shanghai will actively adjust the taxation of capital gains in order to attract new finance institution like hedge fund and private equity invest company.
In 2020, the difference in taxation of capital gains between Shanghai and Hong Kong will be narrowed. Local currency convertibility Free convertible currency helps to improve the currency’s international status. Only fully convertible currency can be used in international trade and international investment, thus the issuing country can make use of its currency demands to establish an international financial center through providing all kinds of financial services for international trades.
RMB, China’s currency, is increasingly used in international trades. The regional financial status of Shanghai is significantly improved. However, Shanghai is sure to achieve the free convertibility of RMB to become an international financial center. International financial center cannot be a closed system; free flow of money is a necessary condition. Although China has planned to build Shanghai into an international financial center in 10 years, but the timetable for free convertibility of RMB is still not issued.
As capital projects are not yet open, the business scope of financial institutions and business volume are strictly limited, which will restrict further expansion of financial markets. We know that pursuit of profit is the intrinsic motivation of capital, so a liberal financial environment is an important foundation for a financial center to nurture. It is clear that capital account liberalization will lift the financial repression, and promote the international development of financial markets for Shanghai.
David Ku Qinuo, EU Chamber of Commerce President, recently said that China will allow the RMB fully convertible in 2015. But on this September 8th, Zhou Xiaochuan, governor of People’s Bank of China(PBOC), responded that China didn’t have a detailed schedule to achieve the free convertibility of RMB, but planed to eventually achieve this goal. The current international financial situation is very volatile, especially during the past few weeks. USD Index rallied rapidly and the volatility of main currencies was great.
Despite the great potential, it is difficult for Shanghai to catch up or exceed Hong Kong. From a practical point of view, Shanghai is still difficult to realize its dream of being an international financial center in a short time due to capital market environment and many other factors. As long as the RMB has not yet become a real hard currency, and China isn’t open to capital flows, also supervision system are far from mature, Hong Kong will always be the top international financial center of China. Conclusion In the four criteria above, Hong Kong has its advantages over Shanghai at present.
However, in the long-term, Shanghai definitely has more potential opportunities. With more mature supervision system and derivative markets, Shanghai will become a top international financial centre in the future. I believe Hong Kong and Shanghai will play much more significant roles in the growth of finance industry in Greater China. Reference  Wikipedia, http://en. wikipedia. org/wiki/Global_Financial_Centres_Index , World Federation of Exchanges members, http://www. world-exchanges. org/statistics/ytd-monthly ,  Wikipedia, http://en. wikipedia. org/wiki/Capital_gains_tax