Will there be any rivalry between the Shanghai Free Trade Zone (FTZ), and Hong Kong going forward?

In a Bloomberg.com news article published on September 30, 2013, it was reported that China’s State Council had released details on September 27, 2013 through a press release indicating that the Chinese government will move ahead with its plans to set aside an approximately 11.0 square mile area dedicated to allow foreign entities in the financial and service sectors to set up their operations in the new Shanghai FTZ, including plans to allow for Chinese Yuan convertibility in capital flows in the region.

With the setting up of the Shanghai FTZ, there are some questions over whether it will set up a potential rivalry with nearby Hong Kong as the global premier financial and trading hub. In the past, many Chinese leaders have outlined their plans to make Shanghai as one of the future leading global financial centres in the world. However, many hurdles have been put up along the way including the tough regulations, banning of certain multinational corporations from setting up shops in China, including the likes of Facebook, and Google Inc. Hong Kong, on the other hand, has long been a gateway to China, and has maintained its status as a major financial centre dating back to pre-handover years in 1997.

Since the announcement of the setting up of the Shanghai FTZ, it has garnered several foreign multinational sign-ups including the latest by Citigroup and Bank of China, Ltd. Other financial institutions including DBS Bank Ltd., and Bank of Communications Co. disclosed that they have received regulatory approval to set up in the zone. According to Bloomberg News, eight domestic banks joined with two foreign banks with licenses to operate. Other non-financial institutions totalling approximately 25 companies, including the units of Porsche AG, SAIC Motor Corp., and a trading unit of BNP Paribas SA were also granted licenses to operate in the FTZ.

With all these buzz and hype among many foreign investors interested in setting up their operational units in the new Shanghai FTZ, Hong Kong’s position as one of the major financial hubs in the Asia-Pacific region has been put into a limelight. How can Hong Kong benefit or lose with this setting up of the Shanghai FTZ? Does it pose a threat to Hong Kong as one of the major trading hubs in the region, etc.? Some market observers have ruled out the possibility that the Shanghai FTZ will soon overtake Hong Kong given that the Chinese territory continues to maintain the rule of law, open transparency, etc. However, in the longer-term, it could pose some threats to Hong Kong, such as the relatively high real estate prices in the Chinese territory, space constraints operating in the Chinese territory, etc., but with all these hurdles, I believe that is unlikely to turn into a major threat, as history has shown that when the next door Shenzhen Special Economic Zone (SEZ) was set up as part of former late Premier, Deng Xiaoping during the 1980s to transform the country into the second-largest economy in the world, Hong Kong continues to maintain a relatively robust economy, and did not lose its shine. In many respects, both Shenzhen SEZ, and Hong Kong complemented each other in terms of the proximity to Mainland China, constant flow of people, goods, transport and communications, and most important of all, ease of trade flows. Cross border trade with Mainland China has increased tremendously with the setting up of the Shenzhen SEZ, and it is still a vital economic region linking to other parts of the Mainland.

In addition, Hong Kong, being strategically located at the mouth of the Pearl River Delta, enjoys an influx of robust trade coming from ships that need to pass through the Chinese territory to get to the Mainland. This helps to boost transhipments, cross-border trade flows, and as well as other trading activities that have profited from these trade flows.

With the setting up of the Shenzhen FTZ, I believe that there could be a relatively miniscule amount of competition between both regions as some corporations including Facebook and Google Inc., who are part of those being sanctioned by the Chinese Government to set up major presence in the Mainland, will continue to operate in Hong Kong, which in some respects represents an edge over its potential Shanghai rival, for the Chinese territory. There is no doubt that competition will remain as it has always been for Hong Kong, in comparison to its other Asian Pacific rivals including Singapore, Taiwan and South Korea. Overall, I believe that at the end of the day, Hong Kong will continue to stand out against the Shenzhen FTZ, as it offers much benefits, than costs, including its open transparency, rule of law, availability of talent, ease of restrictions in terms of setting up operations in the Chinese territory, etc.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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