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The Shanghai Free Trade Zone (FTZ) has been receiving a lot of media attention recently. In Mainland China, the introduction of the special economic zone has raised expectations and ignited people’s imaginations about what’s possible, especially in terms of economic liberalisation and further opening up. The zone has also received a lot of attention in Hong Kong where it has generated substantial discussion.
I hear a lot of comments in the market, with the most common being: “Can Hong Kong maintain its leading position with the emergence of the Shanghai Free Trade Zone? The FTZ will reinforce the status of Shanghai as an international financial centre, which makes it a direct threat to Hong Kong.”
I understand why people in Hong Kong might have mixed feelings. On one hand, many people are excited; but on the other, they feel uncomfortable and threatened. They say China already has one international financial centre in Hong Kong, so why does it need Shanghai, too? While I see why people would ask this, I also think it’s approaching the issue from the wrong point of view. It’s clear that Shanghai will benefit from the FTZ much more than Hong Kong will, but that misses the point. What we should be asking is this: What will bring more benefit to Hong Kong, a China with a Shanghai FTZ or a China without?
The answer is undoubtedly a China with a Shanghai FTZ. The Shanghai FTZ will make China more open and internationalised, and Hong Kong is in the best position among all global financial centres to convert the liberalisation of the Mainland market into its own opportunities. The faster China’s economy and financial markets open up, the greater the opportunities for Hong Kong.
We have been a huge beneficiary of China’s reform and opening up over the past 30 years. When the Chinese economy and financial markets were closed, Hong Kong, with its advantages under the One Country, Two Systems framework, became the main bridge between Chinese and world economies. Hong Kong helped Mainland China take its first step in the opening-up its capital account by facilitating Mainland companies to raise funds through overseas listings. By doing this, Hong Kong became not only the main overseas hub for Chinese capital, but also the most important market for overseas investors to invest in China.
Now China is taking another step forward. The National Pilot Free Trade Zone in Shanghai is being designed to innovate with financial policy. It will be a testing ground for China’s deeper reform and opening up. If reforms tested in the zone succeed, they may be rolled out to other cities in China, which could accelerate China’s overall reform and opening up.
In the future, the development of Shanghai FTZ will influence Hong Kong in two ways. First, Hong Kong has developed into a well-respected international financial centre over the past 20 years. Our success has attracted global institutions, funds and talent from around the world, making Hong Kong the first stop for investment in China. The establishment of the Shanghai FTZ may result in some international institutions, funds and talent flowing out of Hong Kong to the north, but a more open and globalised China will absolutely make Hong Kong an even more attractive transfer station to the world and bring more traffic flow to Hong Kong. In this sense, the establishment of the Shanghai FTZ will benefit Hong Kong.
More importantly, the quick development of the FTZ will make China speed up the opening of its capital market, which will gradually make the traffic between Hong Kong and the Mainland move from one direction to bi-directionally. We expect overseas funds to continue to enter mainland China through Hong Kong, the convenient and well-equipped transfer station. But with the further opening of its capital market, we also expect China to give domestic investors access to international markets. Our well-established legal and credit systems as well as our business friendly operating environment mean Hong Kong has key advantages to becoming the main destination for Chinese funds going overseas.
In my opinion, the faster China reforms and opens, the bigger the opportunity Hong Kong will have as both a transit point and a destination. China now has total financial assets of over RMB100 trillion. In the last 20 years, H share companies have raised only HK$1.5 trillion, less than 2 per cent of China’s total financial assets. But even this small number has brought huge opportunities for the Hong Kong capital market. So if the Chinese financial market continues to open up, it will speed up the flow of capital, which will create a larger pie for Hong Kong’s financial industry.
Now to the question of whether the Shanghai FTZ will intensify competition with Hong Kong. Our city has been in competition for as long as we’ve existed as a financial centre and that will not change now. We are competing with our peers, but more importantly, we are competing for growth. A larger pie will bring benefits for all competitors, but it also means a bigger slice for Hong Kong. This is why Hong Kong should welcome this development and root for its success.
As a financial professional who has worked in Hong Kong for many years, I sincerely welcome the establishment of the Shanghai FTZ and I wish it great success because I firmly believe it will ultimately bring many more exciting opportunities to Hong Kong.
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