Shanghai gains ground as global financial hub

Public information showed that the total value of financial products traded in the city topped over 2.274 quadrillion yuan in 2020, up 17.6 percent year-on-year. The actively traded market helped Shanghai rise to third place, up one spot in the most recent Global Financial Centers Index jointly released by the Shenzhen-based China Development Institute and United Kingdom independent think tank Z/Yen Partners in September.

But the city is not ready to rest on its laurels. More innovative asset-based securities can be expected in the next few years as the municipal government emphasized the importance of such products in its 14th Five-Year Plan. Shanghai should be the prime option for trading infrastructure real estate investment trusts in China with the Shanghai Stock Exchange playing a crucial role, according to the plan.

On April 30 last year, the CSRC and the National Development and Reform Commission jointly issued a notice to officially launch a pilot program for publicly offered infrastructure REITs. On Jan 31, the Shanghai bourse released three sets of rules for such REITs, which marked major progress in the country's REIT sector.

Xu Xianping, distinguished professor at Peking University's Guanghua School of Management, said that 4 percent of the assets can be transformed into REITs based on mature markets' experiences. At present, the total value of China's infrastructure investment exceeds 130 trillion yuan. If the Shanghai exchange issues infrastructure REIT products, the value of these products will be equal to 10 percent of the market value of the stocks currently traded on the bourse, which will be six times the size of Japan's REIT market. If REIT products can be cover the entire real estate market, the Shanghai Stock Exchange will grow into the largest REIT market in the world, he said.

The futures market is another highlight in Shanghai's 14th Five-Year Plan. Apart from futures for commodities such as petroleum and natural gas, which are in the pipeline, efforts should be made to experiment with renminbi-based foreign exchange futures.

Analysts from Galaxy Securities wrote in a note that renminbi foreign exchange futures have already become a popular product overseas but have yet to appear onshore. As the Belt and Road Initiative advances and the internationalization of the Chinese currency accelerates, the market has been seeing more demand for renminbi offshore. Hedging demand for renminbi in the foreign exchange market has also increased.

With the launch of renminbi foreign exchange futures in the domestic market, foreign trade companies can easily hedge foreign exchange risks and avoid major losses. It will no longer be necessary for these companies to seek arbitrage tools in overseas exchanges, which will help companies reduce management costs and lead to sustained development, according to the note.

More importantly, China will have the dominant right over the pricing of foreign exchange by rolling out renminbi foreign exchange futures. More parts of the world will thus more fully embrace the renminbi, which is conducive to the internationalization of the currency, said Galaxy Securities analysts.

Fintech is also underlined regarding the development of Shanghai's capital market within the next five years. A national-level fintech research and development center should be set up in Shanghai. Fintech should be more widely applied in market trading, payment settlements, construction of smart banks, smart investment management and innovative insurance products, according to the plan.

Meanwhile, a fintech industrial cluster should be incubated in Shanghai, according to the municipal government. The People's Bank of China, the central bank, will be encouraged to set up a fintech subsidiary in Shanghai, and so would the leading companies and institutions.

The development of the fintech industry is already noticeable over the past few years in Shanghai. In May last year, the Shanghai Fintech Industry Alliance was officially launched. The Investment Technology League, which aimed to integrate development of fintech and asset management, was formed in Shanghai in early September last year.

Shanghai Vice-Mayor Wu Qing said that finance and technology sectors are integrating at a faster pace, injecting new vitality into the financial ecosystem. Shanghai will ride the tide and continue to come up with more policies to provide a top-class environment for fintech development, Wu said.