Like many of China’s technocrats, Fang Xinghai learned much of what he knows about financial markets in the U.S. After studying engineering at Beijing’s Tsinghua University, the now-45-year-old official earned a Ph.D. in economics from Stanford University in 1993, after writing a dissertation titled “Essays on the Strategies of Economic Transition.” His adviser, professor Paul Milgrom, says Fang was “by far the most ambitious” of his students.
Fang spent five years working as an economist at the World Bank in Washington before returning to China in 1998 to work at China Construction Bank. After stints at China Galaxy Securities Co. and as deputy CEO of the Shanghai Stock Exchange, Fang since 2007 has been leading the effort to promote Shanghai’s financial sector as director general of the city’s Financial Services Office. He recently discussed Shanghai’s future with Institutional Investor’s Asia Bureau Chief, Allen T. Cheng.
Institutional Investor: What is the vision behind China’s goal of establishing Shanghai as a global financial center by 2020?
Fang: This State Council directive is mainly to speed up Shanghai’s transformation. We are not envisioning ourselves taking over London or New York any time soon, though Shanghai will be among the top three in the world as early as 2015. We want a more decentralized financial system, where domestic private capital plays a bigger role and foreign financial firms play a bigger role, so that the needs of small and medium enterprises and ordinary citizens can be better served. Gradually, this will happen, but so far it’s been too gradual. Whether this will be faster or not will depend on the Chinese economy. If the economy slows down, the reform will be faster. If the economy does well, then there will be very little urgency for faster financial reforms.
How can this vision be carried out?
Shanghai is working hard to make the city an even better place for financial firms to locate. Among the efforts are huge investments in infrastructure, education and health care, services that improve the quality of life, and a better legal system that services the financial community. We are working together with central government regulators to introduce more products, more financial firms, new types of firms, more market-oriented regulatory approaches. We are making an effort to attract more unregulated financial companies to Shanghai — for instance, private equity companies and venture capital companies. We can offer one-time subsidies to defray opening costs. Senior managers can be given individual income tax benefits that are substantially lower than the top brackets. We’re talking around 25 percent.
We are working on improving the legal system. We are grooming judges and lawyers who specialize in the financial industry. We also are working hard to improve our English environment, but executives of leading international firms coming to China must realize they have to learn Chinese, not the other way around.
When will the Shanghai exchange establish a listing board for foreign companies?
It will take time. The board and other financial innovations to come are important in financial markets, but they are not that important in propelling growth. As long as the economy is growing nicely, the need for these financial innovations will not be that huge. We will introduce them, but it will not be as fast as the international community would like.
How do you see the development of the China Financial Futures Exchange, which is due to offer stock index futures?
There will be high margin requirements initially. The idea is to have stable trading and make sure that investors don’t take excessive risks. Once the regulators gain confidence in the product, margin requirements will be lowered.
Foreign securities firms are restricted to minority stakes in joint ventures with domestic firms. Can Shanghai become a global center with such limits?
The domestic brokerage industry is so profitable. The general sense is, why would we let these foreigners come in and make this money? We don’t need them very much. We don’t want to make an international financial center just for the sake of being an international financial center. We want it to serve the interests of the people. Things can evolve, of course. The current restrictions were imposed when China entered the World Trade Organization. If the U.S. and European Union want more access, they need a new round of bargaining with China.
Do you think exchange controls can be liberated enough by 2020 to allow Shanghai to become a truly global center?
Exchange controls will be more relaxed, but it will be risky to predict how relaxed. Chinese residents can take out some money through the Qualified Domestic Institutional Investor program, but QDII is limited in choice. In the future they may have something Taiwan has. Every Chinese resident may be able to convert $100,000 or more annually to invest abroad. Right now the limit is $50,000. It is entirely possible we can achieve that in the next ten years.
