The Battle for China's Wall Street

The charging-bull statue at the financial square in Shanghai. Aly Song / Reuters-Landov

New turf battles have erupted in the rivalry between Hong Kong and Shanghai over which metropolis will be the Wall Street of China. The conventional wisdom has long been that the former British colony of Hong Kong would prevail, thanks to its Western legal institutions, greater transparency, and established track record of international transactions. But in July new battle lines were drawn when the Beijing government accelerated moves to internationalize China’s currency, the yuan or renminbi (RMB). Now the RMB can be used to settle cross-border trade transactions between 20 provincial-level regions in China and all their international partners. (Launched a year ago, the initial pilot program involved just two provinces trading with Southeast Asian nations; since then total cross-border RMB settlement was about $2 billion as of February, but has surged in recent months.) Now, with so many foreign firms accumulating so much RMB, pressure is building to establish RMB backflow channels and an RMB offshore market.

At present, Hong Kong has a de facto monopoly over the offshore RMB trade, with Beijing’s blessing. In an environment of free competition, Hong Kong’s dominance would probably go unquestioned. However, China’s playing field is far from level. Whichever city Beijing authorities want to win this tussle will do so. The real question is how strongly the Chinese regime wants to maintain Hong Kong’s image as a thriving economy after its 1997 reversion to Chinese sovereignty.

At the moment, allowing Hong Kong to be the center for RMB-denominated offshore financial products serves a useful purpose; it reassures foreign partners that they’re operating in an international business environment. It also serves as a self-contained test tube for ongoing experiments in RMB liberalization.

However, Shanghai is keen to grab a bigger piece of the action, and it’s on a fast learning curve. With the quickening of RMB reforms, Shanghai is also scrambling to devise new RMB backflow methods. Recently Bloomberg quoted Zhang Jianhua of the People’s Bank of China Research Department as saying, “We should develop Shanghai’s foreign-exchange market to match expansion of yuan use overseas ... We should try to control price setting.” Meanwhile, on the domestic side, the city’s total cross-border RMB trade settlements hit $2.8 billion in early July, according to the Shanghai branch of the People’s Bank of China.

Moreover, when the current leadership team headed by President Hu Jintao and Premier Wen Jiabao steps down in 2012, the new lineup is expected to feature personalities identified with the so-called Shanghai faction in Chinese politics. Once the new regime consolidates power, the city once known as the “Paris of the Orient” may make a more forceful bid to establish itself as the financial heart of China.