From historical perspective, Shanghai had been the most financially important centre in the Far East Asia region in the early 19th century before the Sino-Japanese War. There were hopes for a come-back of Shanghai as a major financial centre after the establishment of the People's Republic of China (PRC) in 1949. However, as PRC involved in the Korean War, the subsequent U.N. and U.S. embargoes against PRC made a total different story.
Shanghai declined rapidly due to the Korean War, and then the Chinese civil War, the Great Leap Forward and the Cultural Revolution, while Hong Kong started to develop fast after the PRC went into big troubles. A huge number of PRC refugees, including Shanghai's entrepreneurs, migrated to Hong Kong and boosted the economy of the city. Many liberalization policies then upgraded the financial development of Hong Kong. For example, Hong Kong government announced to resume issuing new bank licenses in 1978 to boost the banking industry development there, and gradually developed Hong Kong as an international financial centre.
In the PRC's side, the economic reform and opening policy launched in 1979 by Deng Xiaoping gave a new hope to Shanghai. Shanghai did recover, but slowly until 1990, PRC announced to develop the Pudong New Area into a special economic zone. Following the Chinese exchange rate reform, the China Foreign Exchange Trading Centre (CFETC) was developed in Shanghai since 1994 to unify forex trading for the entire country. Last year, Shanghai further announced its strategic plan in the next 10 years.
Nowadays, in term of fund-raising ability of stock exchanges, both Hong Kong and Shanghai perform very well, for example:
By total investment flow (totaling funds raised through both IPOs and already listed companies), Hong Kong Stock Exchange (HKEx) ranked the 2nd in the world in 2010 after NYSE Euronext (US), while the Shanghai Stock Exchange (SSE) also ranked high as number 4 globally.
| Ranking | Exchange | Country/Region | Total (IPOs + Already Listed Companies) Equity Funds Raised, or Total Investment Flows (USD billion) |
|---|---|---|---|
| 1 | NYSE Euronext (US) | U.S.A. | 208.1 |
| 2 | Hong Kong Stock Exchange | Hong Kong SAR | 109.5 |
| 3 | BM&F BOVESPA | Brazil | 100.5 |
| 4 | Shanghai Stock Exchange | China | 83.5 |
| 5 | NYSE Euronext (Europe) | Europe | 79.1 |
| 6 | London Stock Exchange Group | U.K. | 60.7 |
| 7 | Shenzhen Stock Exchange | China | 60.3 |
| 8 | Australian Securities Exchange | Australia | 53.8 |
| 9 | Tokyo Stock Exchange Group | Japan | 50.2 |
| 10 | BME Spanish Exchange | Spain | 36.6 |
Many people nowadays still believe that Shanghai will not be in a position to challenge Hong Kong's status as an international financial centre in the foreseeable future. That is probably true, especially up to this moment, there are still real problems that are not easy to overcome for Shanghai.
For Shanghai to rival Hong Kong, Shanghai basically needs better financial regulation, transparency, instruments, judiciary protection, and more importantly, does need to source and attract financial talents and professionals staying in the city.
Some local Shanghai experts, however, believe that insufficient financial product innovation and poor risk control in Chinese financial institutions will hold back Shanghai's development as an international finance centre. Lacking of economic and political freedom, as well as shortcomings in the rule of law can also be particularly problematic because the free flow of information (collection, generation and distribution) are so important for a successful international financial centre. While Hong Kong imposes no capital controls, exchange controls in the PRC do restrict foreign investment flowing in and out of Shanghai.
In any case, the timing and degree of opening up of the PRC's financial markets to larger participation by foreign financial institutions will surely impact the development of Shanghai as an international financial centre.
Although the pace of development can vary, one thing which is clear is that the gap between Shanghai and Hong Kong will gradually narrow down, especially if Hong Kong is still lacking of a definite long-term plan to keep Hong Kong ahead of the competition. Shanghai's rise will continue to challenge Hong Kong's stature as the only international financial centre in China. Unless the Hong Kong government really recognizes the urgency of the challenge, Hong Kong remains too passive and therefore does not have enough energy and innovation to make further breakthrough.
Who will win? Can Asia, and also the global financial communities, afford the co-existence of two international financial centres, Hong Kong and Shanghai, in China? We would say definitely yes. In the longer run, perhaps both Shanghai and HK-Shenzhen will win. There is an ingenious suggestion that Hong Kong should merge with Shenzhen in 2047 after the end of the implementation of the "one country, two systems" policy. We think it should work, and we would further suggest that, at the later stage, the HK-Shenzhen merger may also extend to include Macau and Guangzhou as well.
By that time Hong Kong will be developed as a much more competitive city in terms of GDP base, land resources, high-tech industry, source of talents, and logistic integration with the PRD (Pearl River Delta) region etc and will kick off a new head-to-head competition with the Big Shanghai in the YRD (Yangtze River Delta) region at the next level.
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