Shanghai needs to do more to become a global financial centre by 2020

The Shanghai Government is planning for the city to become one of the world's leading financial centres by 2020. Allowing for greater participation of foreign financial services companies would aide in this regard and also contribute to the resilience of China's financial sector.
Earlier this year, in January, the Shanghai Government announced a new set of measures to support the city's development into a center of international finance by 2020. By 2020, Shanghai should be home to mature financial institutions that are capable of providing their clients with a wide range of modern and globally-competitive financial products and services. The presence of international financial institutions is necessary to achieve these goals. These foreign financial institutions will need to be able to access all business lines and conduct their business in a fair manner not different from their domestic peers.
Yet today, just a few months before the 2020 deadline, there remains a sizeable gap between stated ambition and reality. Even though Shanghai is the undisputed financial centre of Mainland China—and this is deservedly reflected in the fact that the latest Global Financial Centres Index, published in March this year, which listed Shanghai in fifth place globally—more needs to happen for Shanghai to compete directly with London and New York.
What is missing for Shanghai to become an international financial centre—like London or New York—is the adjective ‘international’. Put bluntly: Shanghai's financial sector is still not as international as people want it to be. Although starting from June 2018, a substantial effort to open up China's financial sector has been ongoing, including the removal of ownership limits for foreign banks, and the raising of foreign ownership limits in Sino-foreign joint-venture securities, futures brokerages as well as insurance companies from 49 to 51 percent, and the fact that the Chinese Government is moving its timeline to liberalize the sector forward – to 2020 –, many market access barriers that continue to stunt that growth of international financial services firms in the Chinese market still exist.
Foreign banks, for one, still face licensing delays and high minimum thresholds for capital, shareholding and asset growth. It is due to many of these restrictions, that foreign banks' market share was only 1.29 percent in 2016. The same holds true for the securities sector, where licensing delays and high minimum threshold requirements prevent international banks from participating in the securities sector and contributing best practices that can help to stabilise markets. In its combined effect, this stunts both the affirmation of Shanghai as an international financial centre as well as the development of China’s financial system.
Yet, what will become more important in the future is to develop a proper ecosystem for financial services in China, as the country's financial sector has come to a point where it is increasingly necessary for the authorities to take a systemic view on how to reform markets. This should ideally include reforms, such as introducing a functioning bankruptcy law, increasing the participation of international rating agencies, making strides to ensure that financial products are priced accurately, as well as continuing with the internationalization of China's capital markets. The recent inclusion of Chinese A-shares and bonds into two respective international indices has been a very encouraging development in this regard.
Undertaking these reforms in earnest is essential for Shanghai to achieve its ambitions – whether by 2020 or later.

Article published in the Italian language by Milano Finanza on July 30th, 2019