For many years, it has been predicted that Shanghai will replace Hong Kong as China’s financial centre. Given Shanghai’s regular, upbeat announcements on new bank branches, financial services and measures to open up its market more to foreign players, such a scenario looks increasingly likely. Hong Kong has yet to recover fully from the recent recession brought about by the outbreak of SARS last spring. Banks have narrower margins, defaults on credit card payments are still high and more financial professionals are heading north to China for jobs.

A closer look, however, shows a different picture. While Shanghai is fast developing its financial sector, Hong Kong’s status as China’s premier financial centre remains as strong as ever. “It will still be many years before Shanghai can seriously threaten Hong Kong,” says Allan Ng, an economist at BOC international, the securities subsidiary of Bank of China in Hong Kong.

In fact, the territory’s financial industry has been able to ride the wave of the China boom. It continues to be the leading capital market overseas for mainland companies, thanks to its well-regulated and liquid stock market. In the first five months this year, nine mainland companies raised $7.3bn. More are waiting in the queue: China Construction Bank, Ping An Insurance, China Netcom, Minsheng Bank and Air China each plans to raise billions of dollars in Hong Kong this year.

Market preference

In contrast, Shanghai’s stock market remains in the doldrums, attracting less prominent Chinese firms and with fewer IPOs. The market continues to suffer from problems such as poor disclosure, insider trading and other malpractices. “International investors prefer to buy Chinese shares traded in the Hong Kong market, which has more credibility and transparency that the mainland one,” states Mr Ng.

Another aspect of Hong Kong that remains miles ahead of the mainland is its healthy, resilient banking system. Six consecutive years of deflation and a property slump may have hit the bottom line of Hong Kong banks but not their balance sheet. The capital adequacy ratio of Hong Kong banks is an average of about 16%, twice the international standard. The level of doubtful loans is about 4%-5%, while the ratio of mortgage delinquency hovers around 1%, even while the property prices have halved from their peak in 1997.

Hong Kong banks remain the envy of a region where many banks are suffering from bad loans and poor management despite years of restructuring. The city has vigilant regulators and well-tested financial institutions. Top Chinese banks are keen to learn from Hong Kong, either through setting up branches in the city or acquiring local banks.

Fewer limitations

While foreign banks can compete on equal footing in Hong Kong with local institutions, their business activity is highly restricted on the mainland. Even when the market in China opens up by 2007 as required by the WTO, it will still be more regulated and less transparent than Hong Kong, given the country’s short history in developing a modern financial system.

Over time, Hong Kong will also add another positive dimension to its financial business: as a leading offshore renminbi centre. As from February 25 this year, the city’s banks can offer renminbi deposits to Hong Kong residents. Already the Chinese currency is a widely accepted form of cash and credit-card payment in Hong Kong, where hundreds of thousands of mainlanders visit every week. The new service will pave the way to develop a yuan market in Hong Kong, with Beijing-approved clearing services. By May 2004, local banks had attracted Rmb6bn ($724m) of such deposits.