Shanghai’s ambitions to become one of the world’s leading financial centers have been evident for a while. During the past two decades, the city has attracted a significant amount of foreign investment through its Free Trade Zone and several strategies to facilitate business operations.
More recently, in August of 2021, the Shanghai Municipal Government published the 14th Five-Year Plan for Developing an International Financial Center (the 14th FYP), which outlines 44 measures to turn the city into a leading world class finance center.
The further liberalization of the renminbi (RMB) and the opening up of the industry to outside investors are two examples of the steps that will be taken to increase Shanghai’s influence in capital markets internationally.
A day before the release of the 14th FYP, the city’s government published the Measures to Support the Innovative Development of the Financial Industry in the Lingang New Area of the China (Shanghai) Pilot Free Trade Zone. The goal of this initiative is to attract foreign and domestic institutions to Lingang, located in the city’s Pudong district, a key development sector of the Shanghai Free Trade Zone (FTZ).
Domestic as well as foreign investors will be able to benefit from the incentive policies targeting financial institutions to set up offices in the Lingang New Area.
During the last decade, Shanghai’s financial sector gained significant importance and in 2020, it added RMB 716.6 billion (US$111.4 billion) in value, accounting for 18.52 percent of the city’s GDP that year (RMB 3.87 trillion (US$601.5 billion)).
Together with the cities of the Yangtze River Delta (YRD), Shanghai’s financial industry is a crucial component in the economic development of the region.
The main objective of the 14th FYP published by local authorities is to expand the city’s financial sector, implementing additional liberalization policies, opening it up to foreign investment and utilizing improved financial tools to activate the high-tech industry.
Among other things, the measures look to improve the influence and recognition of the Shanghai price index commodities in the international market and attract at least fifty significant fintech companies by 2025.
The measure that will be the most attractive to foreign investors is the liberalization and further opening of the local financial industry. To achieve these goals, Shanghai will be turned into an RMB-denominated asset allocation center.
At the beginning of July, Chinese authorities announced guidelines for the development of the asset allocation industry in the Pudong New Area.
These guidelines include facilitating global investors to carry out cross-border investment and financing activities in Shanghai, promoting the establishment of an international financial asset trading platform and accelerating the opening of China’s bond market, including the interbank and exchange bond markets.
The expansion of the futures market and a more convenient risk hedging support for foreign investors holding domestic RMB assets is part of the plan, as well as the increase of the number of ‘panda bonds’ issued, among other things.
The measures also call for a higher level of participation of foreign investors that meet certain criteria in financial activity. This includes participating in securities, funds, and futures, or establishing financial institutions, such as life insurance companies, wealth management subsidiaries of commercial banks, insurance asset management companies, pension management companies, and credit rating agencies.
The development of Shanghai’s asset management industry will also be promoted. To reach this objective, cross-border investment of private equity funds will be allowed, and foreign institutions will be able to manage domestic RMB funds by participating in the Qualified Foreign Limited Partnership (QFLP) program.
The Qualified Foreign Limited Partnership is a system under which certain qualified foreign asset management institutions can establish renminbi funds within ‘pilot areas’ on the Chinese mainland. There are currently 10 QFLP pilot areas and include the cities of Shanghai, Beijing, Tianjin, Shenzhen, and Qingdao.
The 14th FYP will expand the QFLP program. Shanghai will promote the management of domestic RMB funds by foreign companies participating in the QFLP, encourage qualified domestic institutions to participate in QFLP and support overseas asset management and domestic institutions to apply for QDLP.
On another note, the plan proposes a stronger collaboration on capital markets with the Belt & Road Initiative (BRI) countries and member countries of the Regional Cooperation Economic Partnership (RCEP), by deepening equity and business cooperation with financial markets, and promoting the cross-border interconnection of financial infrastructure, among other measures.
This document serves as a guideline for formulating and implementing incentives and other policy tools in the future. It is expected that the government issues more specific tools and solutions to further develop Shanghai’s financial industry.
Finally, the 14th FYP mentions the Lingang New Area, established in 2019, as a region in which to develop the financial industry. The local government offered specific incentives and rewards to attract and develop financial institutions in the area.
The rewards are given only to companies that have been established in, relocated to, or obtained business licenses in the Lingang New Area from January 1, 2021 onward. These companies must promise in writing not to leave the area or reduce the amount of registered capital for 10 years, starting from the year they receive the reward. Enterprises that don’t keep this promise will be required to repay the monetary rewards or support they have received.
New financial institutions set up in Lingang are eligible for economic contribution rewards, which are given out on a yearly basis. The reward is based on their realized added value and local economic contribution from their total profit.
Certain new asset management institutions are eligible for rewards amounting to an unspecified proportion of their scale. This reward is given on a yearly basis for four years starting from the year following their establishment in the Lingang New Area, with the total amount capped at RMB 40 million (US$6.2 million).
Eligible institutions include banks and wealth management companies, security asset management companies, insurance asset management companies, public funds and QFLP and QDLP pilot institutions.
Fintech companies may also be eligible for additional rewards if they make large-scale investments, introduce a significant number of new talent and are an influential driving force in the area.
Since China started to open up three decades ago, Shanghai has become a financial powerhouse and the main engine behind the economic development of the region and beyond.
The city’s success and experience with pilot programs is serving as a blueprint for other Chinese cities. As China’s plan to further open its capital markets to outside investment and internationalize the RMB continue, Shanghai’s importance as a mature capitals market will solidify.
Shanghai’s ambitions go beyond the Chinese stage and aim to achieve not only international respect and recognition but maintain a long-term leadership in the financial industry.
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