This Research Bulletin has been published in a substantially revised version in Urban Studies, 49 (6), (2012), 1275-1296, under the title 'Differentiated Markets: Shanghai, Beijing and Hong Kong in China's Financial Centre Network'.
Please refer to the published version when quoting the paper.
The contemporary rise of China in the global economy is reflected in the economic and urban transformation of its most cosmopolitan city, Shanghai. Since the early 1990s, Shanghai has been earmarked by the central government as the new flagship city to connect China to an increasingly integrated world economy. Apart from its rapid urbanization (Yeung and Sung, 1996; Olds, 1997; Han, 2000; Wu, 2000a; Gu and Tang, 2002), Shanghai’s transformation has also been noted for its development in banking and finance and its aspiration to become an international financial centre (Hertz, 1998; Wu, 2000b; Yatsko, 2001; Yusuf and Wu, 2002; Green, 2004). The rise of Shanghai has, however, raised questions regarding Hong Kong’s future as an international financial centre. During the 1980s and 1990s, Hong Kong’s strategic advantage in connecting global capital and China led to the rapid development of its finance sector and economy (Li, 1995; Enright et al., 1997; Meyer, 2000, 2002). As Shanghai further develops its urban and economic infrastructure and encourages foreign direct investment (FDI) into its finance and trade industries, there is increasing concern that it may overtake Hong Kong as the pre-eminent financial centre within China, if not the wider Asian region (Wild, 1997; Ng, 2000b; The Economist, 30 March 2002; Wong, 2007; Chan and Chiu, 2009).
Such concerns regarding urban competition may be rooted in the hierarchical tendencies of global cities research. Since the early 1980s, urban scholars have systematically explored the interplay between globalisation and urban development, relating dominant socioeconomic trends within cities (such as industrial restructuring, labour market changes and social polarisation) to the emergence of a global urban hierarchy (Friedmann, 1986; Smith and Feagin, 1987; King, 1991; Knox and Taylor, 1995; Sassen, 1991, 2000). This hierarchy divides cities into different tiers of importance according to their degree of integration into the global economy (mainly according to transnational corporation (TNC) activities), and their roles as basing points of global capital in the spatialisation and articulation of global production and markets. This narrow focus on the fixed attributes of a few top cities and the lack of comparative data has been criticised for limiting our understanding of global urban processes (Short et al., 1996; Robinson, 2005; Derudder, 2008; Lai, 2009). In seeking more nuanced and richer accounts of global city processes, there has been a shift away from examining urban functions and hierarchies to exploring networks and flows between global cities and the adoption of a relational perspective to inter-city relations and linkages (see, for example, Beaverstock et al., 2000; Beaverstock et al., 2002; Sassen, 2002; Taylor, 2004). The earlier focus on rankings and hierarchies had the side effect of placing cities in competitive terms; more recent studies have highlighted the importance of a relational approach that examines how cities are embedded in flows of capital, culture, policy and labour. While I take this relational approach to global cities as a point of departure for this paper, I also extend the argument by noting that much of these relational studies have tended to focus on the structural and functional aspects of inter-city networks (e.g. mapping office locations and functions, types and density of telecommunication networks, number of flight connections), rather than analysing the content and processes of such linkages. There has been a l ack of qualitative research that examines the motivations, rationales and decisions that effect the flows of capital, people and knowledge underpinning global cities as command and control centres of the world economy.
This paper seeks to address this lacuna by examining how the social, cultural and political contexts of different cities influence the types of financial activities located there and implications for their roles as financial centres within a regional business strategy. Using this approach, I demonstrate how the development of Shanghai as a financial centre and its relationship with other key Chinese cities (i.e. Hong Kong and Beijing) can be understood based on concepts of complementarity rather than competition. This is reflected in the decisions of foreign banks to base different parts of their operations in different Chinese cities based on place-specific advantages. I nstead of thinking in terms of competition and hierarchies, I argue that it might be more fruitful to focus on how cities like Shanghai, Beijing and Hong Kong capitalise on their respective advantages and perform different roles in the regional development of Greater China and to attain positions of influence in the global economy.
The rest of the paper develops these arguments as follows. Section 2 presents theoretical reflections on global city networks, identifies the need for more qualitative research on the social constructs of global cities and outlines my methodological approach. In section 3, I assess Shanghai’s aspiration and achievement vis-à-vis other global cities that might be seen as competing for the title of international financial centre for China, namely Beijing and Hong Kong. Empirical research reveals a qualitative distinction in the roles of these cities that is reflected in the operational structures and business strategies of foreign banks and the reasons behind those decisions, which suggests some form of functional coordination and complementary roles played by these cities. The paper concludes in section 4 in which I argue for the importance of integrating both a dynamic network approach and a grounded place-based perspective in global cities research.
Global cities research: from hierarchies to networks
Comprehensive overviews of the field have been covered by a number of geographers and urban scholars (see Yeoh, 1999; Smith, 2000; Scott, 2001; Taylor, 2004; Brenner and Keil, 2006). For the purpose of this paper, my interest is in the shift in global cities research from urban hierarchies to networks and flows. Friedmann (1986) and Wolff (Friedmann and Wolff, 1982) are widely acknowledged in establishing the connection between the organisational structures of TNCs and the changing configuration of the global urban system. They specifically introduced the concept of a hierarchy of cities in terms of their functions and position in a global system; it is the scale of a city’s spatial articulation that orders the city as global (London, New York, Tokyo), multinational (e.g. Los Angeles, Singapore, Frankfurt), national (e.g. Paris, Zurich, Sao Paulo, Sydney) or subnational/regional (e.g. San Francisco, Chicago, Vancouver, Hong Kong, Barcelona). While they acknowledge the difficulty of such assignments as the criteria becomes ambiguous after the top global centres of London, New York and Tokyo, and that the global economy is too volatile for such a hierarchy to remain stable, the model of a world city hierarchy remains influential in the literature. This hierarchical approach continues in the earlier writings of Sassen (1991, 1995, 1999, 2000) who focuses not on the power of the large TNCs to coordinate and control large sections of the global economy but on the practice of global control – i.e. advanced producer services that actually ‘do’ the control and management. Global cities thus function as sites of production for services and financial products, which coordinate global economic activities. In this way, Sassen (Sassen, 1991) argues that New York, London and Tokyo are leading examples of cities that have evolved into strategic sites for the development, production and supply of innovative financial and business services. Although the theme of cities as international financial centres have been a significant focus of research (see Reed, 1981; Daniels, 1985; Thrift, 1987, 1994), and was generally considered central to the identification of world cities, Sassen’s renewed focus on services has been instrumental in integrating research on finance and advanced producer services into understanding global cities.
While the contribution of Sassen’s (1991) classic text is not in doubt, her book comes across as a comparative study of London, New York and Tokyo with surprisingly little explicit discussion of the actual relations between these cities. Most of her empirical evidence on finance and services is used to create city rankings to show that her selected trilogy are the leading cities in a global hierarchy. However, in the second edition of The Global City (2001), she began to pay more attention to inter-city relations and the idea of systemic linkages and a network of cities are reiterated in subsequent writings as she focuses on more complementary forms of relations and alliances alongside the notion of hierarchy:
This network perspective has also been developed by the prominent sociologist and urban theorist, Castells (1996, 2000), who posits that networks constitute the new social morphology as information and communication technologies (ICT) are reshaping the material basis of society. He defines space in terms of social practices; space facilitates social practices in the physical bringing together of interacting agents but it is precisely this physical requirement that is being overcome by ICT. Thus in the network society, the dominant form of space is no longer spaces of places, but a new space of flows (see also Castells, 1989), in which places do not disappear but become defined by their position within flows. Part of this space of flows is constituted by social agents who use the infrastructure networks to link together specific places to carry out economic, cultural and political functions, places he terms nodes and hubs. While Castells concurs with Sassen’s (1991) argument on unique functions that defines the global city, he also extends it to a far greater number of cities to constitute a network and argues “the global city phenomenon cannot be reduced to a few urban cores at the top of the hierarchy” (Castells, 1996: 380). He postulates a global network that connects centres with different intensity and at different scales, integrating them at a global level. While Sassen is concerned with the particular status and roles of specific cities, Castells defines global cities as networked phenomena and what is truly significant is the network itself.
Castell’s theorisation of a network of global cities has inspired a number geographers to turn their attention to inter-city networks based upon flows and connections (Beaverstock et al., 2000; Taylor, 1997b) and the establishment of the Globalisation and World Cities (GaWC) research network based at Loughborough University in the UK. While these scholars acknowledge the groundwork established by early world cities researchers, they also criticise the tendency to focus on fixed attributes of individual cities (e.g. number of TNC headquarters) instead of the changing relations between these cities (e.g. volume of inter-city skilled migration). This dearth of relational data has been referred to as the “dirty little secret” of world cities research (Short et al., 1996) and Beaverstock et al. (2000) sought to address this lacuna by examining the global office networks of major London-based producer and financial services firms. This is taken further by Taylor (2004) in assessing global cities in terms of their network connectivity by sectors and regions, in analysing the location strategies of 100 leading global service firms across 315 cities. Instead of economic data on corporations, Smith and Timberlake (2001, 2002) utilise data on flight connections and airline flows between various cities as a tool to conceptualise inter-city linkages, and Graham (1999, 2004) takes an urban infrastructural approach to examine how the global urban system is connected through advanced telecommunication networks and their implications for urban spatial transformations.
As noted in a review of empirical world cities research by Derudder (2008), there has been an upsurge of relational analyses in recent years that have challenged existing conceptions of global cities. These innovative methodologies have opened up new theoretical and empirical perspectives on the articulation of global cities within the global networks and flows of capital, people and knowledge. A specific contribution is the unveiling of new global cities within a literature that has sometimes been criticised for normalising the sociospatial features and development trajectories of North American and Western European cities (Robinson, 2002, 2005). The study of airline flows between cities, for example, reveals the growing integration and importance of cities in the Global South (Taylor et al., 2009). Another recent example is the mapping of corporate linkages between Islamic financial services firms that reveals the importance of cities such as Manama, Dubai and Abu Dhabi, which are often missing in conventional accounts of global city networks (Bassens et al., 2009).
While these studies have developed different methods to delineate the strength and nature of connectivity amongst global cities, their quantitative analyses tend to focus on more abstract discussion of agglomeration and clustering of firms and services, which often overlook qualitative changes and socioeconomic processes within and across global cities (for some exceptions, see Beaverstock et al., 2001; Hall and Pain, 2006; Chu, 2008; Pain 2008). It is not my intention to enter into a potentially pointless debate as to whether quantitative or qualitative approaches are better suited to the study of global city networks and processes. Rather, I argue that the incorporation of more qualitative research adds another layer of analysis that will enrich our understanding of global urban processes. While research on the structural aspects of inter-city linkages have brought more cities and different forms of urban networks into prominence, they often do not explain how or why certain urban and economic processes take place in those cities to integrate them in a regional or global system. If we are to understand global city formation as constituted by variegated processes leading to contextually different pathways of development (see Hill and Kim, 2000; Marcuse and van Kempen, 2000; Olds and Yeung, 2004), we need to dig deeper into these relational accounts and examine the content and meanings of inter-city flows and linkages by analysing the perspectives and motivations of socioeconomic actors embedded in such networks. This network perspective will also enable us to explain inter-city relationships not on purely competitive terms but in terms of how different urban centres perform different and complementary roles as part of a wider strategy of global integration. For example, instead of seeing Shanghai’s financial centre aspiration as a threat to Hong Kong’s global city status, Shanghai’s development could be interpreted within the context of strategic collaboration with other global cities in the region. Qualitative research into the historical, social and cultural contexts of these cities and the decision-making process of key actors in inter-city linkages could illuminate how and why Shanghai, Hong Kong and Beijing are performing different roles in regional flows of capital and implications for their future development.
To address these research questions, field research was conducted in Shanghai between August 2005 and February 2007 (with some supplementary data from London) and in Hong Kong in 2009. Sixty-eight interviews were conducted with foreign and Chinese financial institutions (mostly banks and some securities companies), Chinese regulators and officials, and foreign chambers of commerce. While the majority of my interviewees were based in Shanghai, many of them have had regional postings in Beijing, Hong Kong and other cities. Their positions as regional managers, chief executive officers or other senior management positions also gave them insights into how different cities fit into their business networks and strategies. These interviews were complemented by secondary data sources (e.g. government reports, press releases from banks and regulators, analyst reports, newspaper and business magazine articles) that provided contextual information as well as a means of triangulating interview data. A field journal also recorded observations made outside of formal interviews and events in local and national politics and business circles, particularly those relating to changes in the finance industry or being circulated in the industry grapevine.
The rise of global cities in China: competition or complementarities?
Over the past decades, Chinese cities have undergone significant changes in urban built environment, land use patterns, and economic base and social structures with increasing globalisation of the Chinese economy (Sit, 1985; Lin, 2002; Ma and Wu, 2005; Wu, 2006), and Shanghai is one of the biggest cities at the forefront of these changes. International interest in Shanghai’s development and future is expected given its illustrious history; it was the most advanced and important financial centre in Asia before 1949, notable for its receptiveness to international capital, people and ideas (Wei, 1987; Yatsko, 2001; Wasserstrom, 2009). Following the Open Door Policy in 1978, Shanghai became a city of national strategic importance; it was to drive the growth of the Yangtze delta region and connect China to the global economy through its financial and trade sectors (Yusuf and Wu, 2002; Wu, 2003). The (re)emergence of Shanghai as a world city has been noted by many scholars as the city experienced a process of urban development arguably unmatched in scale and speed in recent urban history, in terms of infrastructural projects, urban growth and redevelopment, and industrial transformation (Olds, 1997; Gu and Tang, 2002; Shi and Hamnett, 2002; Cai and Sit, 2003; Ng and Hills, 2003). The Lujiazui Finance and Trade Zone (LFTZ) in the Pudong New Area formed the focal point of Shanghai’s development as a financial centre. Envisaged to be China’s “Wall Street” (Yusuf and Wu, 2002: 214) the Pudong development captures Shanghai’s aspiration and officially sanctioned role as a financial centre. Shanghai currently has the highest concentration of foreign banks in China and a range of equities and commodities markets, including the largest stock exchange in China, commodities exchanges in gold and metals, a futures exchange and the China Foreign Exchange Centre.
While there has been extensive research on the economic and urban development of individual Chinese global cities such as Shanghai, Beijing, Shenzhen and Hong Kong, comparative perspectives have been more limited. Taylor’s (2006) study on inter-city linkages between Shanghai, Hong Kong, Taipei and Beijing reveals the increasing importance of Shanghai and Beijing in terms of connectivity with other cities in the Asia Pacific. However, it says little about different types of global service firms and functions in different cities and implications for different roles of cities within the network. Zhao and colleagues (Zhao, 2003, Zhao et al., 2004) have undertaken an in-depth study analysing different types of headquarter and business functions of firms located in Hong Kong and other Chinese cities to compare their relative importance as financial centres. However, the approach places these cities in competitive relationships in assessing whether Hong Kong would still remain the top financial centre or whether Beijing might become dominant. A complementary relationship between the stock markets of Hong Kong, Shanghai and Shenzhen is uncovered by Karreman and van der Knapp (2009) in a study that indicates strong geographical as well as sectoral clustering of firms listed on the stock exchanges in the three cities. While these are important findings, the quantitative data used in their analysis does not capture the reasons and motivations behind the decisions of economic actors to list companies on specific stock exchanges or to open branch offices in particular cities. An established scholar of Hong Kong, Meyer (2000, 2004, 2009) also argue for a complementary relationship with Hong Kong as an Asia hub and Shanghai as a gateway to mainland Chinese markets. While his approach highlights the significance of social networks for financial intermediaries and the development of financial hubs, his analyses are largely based on Hong Kong and lack detailed and explicit comparison between Chinese cities (with the exception of a short working paper, see Meyer, 2004). The rest of this paper seeks to extend and contribute to the literature by examining the socioeconomic processes and factors behind such trends in order to illuminate how different Chinese cities feature in the business strategies of financial institutions and actors. In doing so, I argue that the relationships between these global cities need to be conceptualised in terms of complementary roles and inter-city networks rather than zero-sum game competition.
Shanghai and Beijing: Dual Headquarter Strategy
There have been some concerns regarding the role and future development of Shanghai as a financial centre for China due to recent rhetoric about Beijing’s own aspiration to become a global financial hub and its political dominance (Hu, 2008; Zhang, 2008). Beijing’s most significant advantage lies in its role as the capital of socialist China and home to institutions responsible for managing and determining the economic and political life of the country. It has the country’s central bank (People Bank of China), the headquarters of all major financial regulatory institutions, such as the China Banking Regulatory Commission (CBRC; and counterparts in insurance and securities regulation – CIRC and CSRC) and State Administration of Foreign Exchange (SAFE), along with the headquarters of almost all state-owned and domestic commercial banks and state-owned enterprises (SOEs). The development of a Jinrong Jie (Financial Street) in Beijing that is home to many of these financial and regulatory institutions is also seen as symptomatic of its own aspiration in the finance sector. The agglomeration of these important institutions creates an environment rich in political and economic information that is crucial to the development of a financial centre. This lack of high level institutions have led some recent studies to cast doubts on Shanghai’s aspiration to become China’s leading financial centre (Yatsko, 2001; Shi and Hamnett, 2002; Cai and Sit, 2003; Zhao, 2003; Zhao et al., 2004). Research by Zhao (2003) and Zhao et al. (2004) indicate that although Shanghai has been heavily publicised and promoted as China’s financial centre, more foreign companies choose to locate their head offices in Beijing. If the head offices of TNCs and financial institutions provide a good indicator for overall assessment and ranking of international financial centres and, by association, global city status (see Porteous, 1995; Dicken, 2006), the premiere position of Shanghai appears to be threatened by Beijing. The authors note that Hong Kong continues to serve as the preferred location for the Asia-Pacific headquarters of global TNC, but in terms of the Chinese market more Fortune 500 companies choose Beijing as a base over Hong Kong, with Shanghai ranking third, followed by Guangzhou and Shenzhen (Zhao, 2003).
Zhao attributes the preference for Beijing over Shanghai to the problem of information asymmetry; an asymmetry of regulatory information occurs when administrative agents know more than participating agents in the market. Chinese rules are normally expressed in generalities while implementation and enforcement are often subject to the interpretation of local administrative authorities, which could vary from case to case. If formally published policy information cannot be interpreted ‘correctly’ by information users, non-standardised policy information becomes crucial for conducting business in China, which is facilitated by geographical proximity and intensive policy contact with regulators. This could explain why global TNCs prefer to locate their head offices as close as possible to the central government departments in Beijing. While Shanghai has much larger number of foreign bank branches, Beijing has a larger share of foreign representative offices that perform important roles in information gathering and interpretation for business decisions. Therefore, although Shanghai may have a prominent and officially sanctioned role, Zhao and colleagues conclude that its claim to becoming the national financial centre may not be as strong as Beijing due to the effect of information asymmetry and that real power arguably rests with the Beijing-based institutions that make key decisions.
Although Zhao’s argument and data are persuasive, I would disagree that Beijing is necessarily outmanoeuvring Shanghai as a financial centre. My research findings indicate that the situation is more complex than revealed from the quantitative data of which city has more branch offices or headquarters; the qualitative functions of these cities are clearly different from the perspectives of economic actors and their operational structures and business strategies reflect that division of labour. Both Chinese and foreign respondents in my study point to a clear division between the roles of Beijing and Shanghai with the former being predominantly a political centre and the latter is a business and commercial hub, which stems from the distinctive historical, social and cultural contexts of these cities. A focus on relationships, information gathering and exchange and politics in Beijing is contrasted with an orientation towards commercial opportunities and action in Shanghai, resulting in different types of business environments that are conducive for different types of business activities. These nuances are not readily evident from economic data but are embedded in the social and cultural aspects of business transactions and day-to-day encounters. A Chinese respondent, for example, described how the political atmosphere in Beijing is reflected in the everyday topics of conversation on the street in what he calls ‘guan hua’ (literally, official speak/talk). This was much less so in Shanghai where people tended to focus on business opportunities rather than on the fortunes of specific political figures or events:
The history of Shanghai as a commercial and financial hub in the early-20th century is well documented (Howe, 1981; Wei, 1987; Yatsko, 2001; Wasserstrom, 2009) and is also deemed particularly important by interviewees in accounting for the more open-minded approach and efficiency of Shanghai compared to the more relationship-driven approach in Beijing. Interviewees highlight a cultural propensity to be open to outside influence and foreign investors and an ethic for commerce that has been built up over generations, such that it has become woven into the cultural consciousness of the city. Through history and discourse, these qualities have become seen as intrinsic to Shanghai as a global city and set it apart from other Chinese cities:
The different social fabric of these cities has varying appeal to foreigners who tend to feel more comfortable living and working in Shanghai compared to Beijing. This is a significant asset for a city that thrives on global linkages:
One could certainly critique these statements as stereotypes but they do influence the perceptions and business decisions of economic actors who believe that the jawing culture in Beijing is in contrast to people in Shanghai seen as more practical and focused on producing results. From their experience and perspectives, Beijing and Shanghai are clearly not competing as financial centres due to their distinctive political and corporate cultures. Instead they have different emphasis within the financial sector as reflected in, firstly, their different roles in financial regulation and, secondly, the different types of foreign financial institutions based in those cities and the rationale behind such decisions. In terms of financial regulation, Beijing is responsible for policy-making and macro-planning while Shanghai is tasked with testing new products, developing new markets and financial innovation. As mentioned above, the laws are passed by central authorities in Beijing but are implemented and enforced by local branch offices. This lack of specificity allows for adaptation to local needs by local branches in the context of a large country with wide disparities in regional and local political economies. While the final decision-making is restricted to policy circles in Beijing, authorities in Shanghai have considerable autonomy to interpret and implement them. Therefore, the fact that the headquarters of regulatory bodies are based in Beijing need not be seen as an impediment to Shanghai’s aspirations. At the same time, local offices in Shanghai have been given increasing levels of authority in their operations as former headquarter functions have been delegated to branch offices. According to regulatory officials, this will be an enduring trend as regulatory bodies seek to improve their efficiency and service quality. As Shanghai continues to have the highest concentration of foreign banks and host new financial markets in futures, derivatives and foreign exchange, it makes sense to allocate more responsibilities to local branch offices in order to be closer to the market and respond quickly to changing economic conditions (interview data, April and October 2006).
The establishment of a second headquarter of the PBOC on August 10, 2005 is a case in point. Zhou Xiaochuan, a governor of the PBOC explained that due to Shanghai’s importance as a financial hub, the existing Shanghai branch office of the PBOC had often assumed a role of greater importance than a mere regional branch and that was a key consideration in establishing a headquarter in the city (Xinhua News Agency, 9 August 2005). The Beijing headquarter will continue to run policy-oriented operations related to monetary policy, financial research, note issuance, statistical data and anti-money laundering while the Shanghai headquarter will focus on market-oriented and international activities such as conducting financial supervision, financial analysis, and coordinating regional financial cooperation. To further improve the central bank’s management, it will also transfer some of its bureaus for payment, liquidation and national credit profiling to the Shanghai headquarter over the next three years (China Daily, 10 August 2005). The Shanghai headquarters will also play an important role in consolidating feedback from market participants in Shanghai and affecting subsequent policy changes. The two headquarters therefore perform complementary roles in regulating China’s finance sector as a whole (Shanghai government official, April 2006). The opening of a second headquarter is also seen as confirmation of Shanghai’s increasing importance as a financial centre that is not in contradiction with Beijing’s role:
This financial specialisation between Shanghai and Beijing is also reflected in the business strategies and types of foreign financial institutions in those cities. An interviewee described Beijing as an “administrative capital” and Shanghai as a “business capital” in guiding their business plans in China (foreign manager of foreign bank, March 2006). This distinction resulted in a dual headquarter strategy for most foreign banks who have different types of corporate activities in the two cities. Offices in Beijing serve as “diplomatic posts” (foreign president of foreign bank, April 2006) tasked with maintaining relationships with Chinese corporate clients, government and regulatory officials and lobbying on particular issues; offices in Shanghai are responsible for the bulk of business transactions and focus on the provision of financial products and services to clients. Therefore, it is not simply a matter of one city being seen as more important than the other but that they each have their own advantages in the scheme of the banks’ operations and they structure their networks accordingly. A Chinese manager of a foreign bank explained that:
These characteristics have led to a division or specialisation in the types of foreign financial institutions and functions found in Shanghai and Beijing, depending on client base and types of financial institution involved. For political and historical reasons, the headquarters of regulatory bodies, state-owned banks and SOEs are almost all located in Beijing, and this affects the locational strategy of foreign banks. For those whose target clients are Chinese SOEs, it is more important to be in Beijing; for those whose target clients are foreign TNCs they will concentrate on Shanghai as those TNCs tend to locate in the Yangtze and Pearl river delta regions. Since most foreign commercial banks in China have foreign TNCs as their primary client base, it is not surprising that they prefer to locate their head offices in Shanghai rather than in Beijing. Even for Chinese banks, while almost all have their headquarters in Beijing due to historical and political reasons, many of them have moved their credit facilities, accounting departments, reporting branch and other functions to Shanghai, which reflect the volume and significance of business being conducted out of the city.
There is also specialisation in the types of foreign financial institutions found in these cities. Most investment banks such as Goldman Sachs, BNP Paribus, Morgan Stanley and Credit Suisse are in Beijing to be closer to their target clientele of Chinese SOEs in the energy, telecommunications and utilities industry and state-owned banks.1 Commercial banks, on the other hand, such as HSBC, Standard Chartered, Citibank, Bank of East Asia, RBS, ING and Deutsche Bank, prefer to locate their China head offices in Shanghai to better serve their foreign TNC clients. For banks with both investment banking and commercial banking divisions, their investment banking function would be in Beijing but their trading and asset management functions would be in Shanghai to capitalise on its global linkages and agglomeration economies with the concentration of other foreign banks. The general consensus amongst foreign banks was that the minimum set up needed in China was a branch in Shanghai and a representative office in Beijing, and not just one or the other. Amongst the foreign banks in my study, the typical set up consisted of a branch office of between 10 to 50 people in Shanghai offering financial products and services in corporate banking and wealth management, and between three to eight people in a representative office in Beijing who would maintain linkages with the headquarters of Chinese companies, the relevant regulatory and government institutions and perhaps run a research desk. This “dual-headquarter structure” (Shanghai government official, April 2006) reflects the qualitatively different advantages of each locality distinctive political, economic and social environments, with no one particular city being a clear ‘winner’ that can substitute for the other.
Shanghai and Hong Kong: Developing as Parallel Markets
During the 1980s and 1990s, Hong Kong financial sector grew rapidly as it developed into a strategic conduit linking China and global capital. Over the past decade, the aspiration of Shanghai as a financial centre and its integration into the global economy has led to speculations that it may usurp Hong Kong’s position as the pre-eminent financial centre in China. An announcement by the State Council on March 25, 2009 to build Shanghai into an international financial centre and shipping hub by 2020 has also sparked further discussions and anxieties in Hong Kong (People’s Daily Online, 26 March 2009; Zhang, 2009; interview data, 2009). Evidence from field research and secondary data suggest that such concerns are largely exaggerated and do not take into sufficient account the regulatory complexities and shortcomings that still plague the immature financial markets in Shanghai (despite its rapid development) and the distinctive advantages that Hong Kong continues to hold. This section will consider the stock markets and banking sectors of both financial centres in turn.
The growing stock market in Shanghai is one possible area since a Chinese company could theoretically list on either the Shanghai Stock Exchange (SSE) or Hong Kong Stock Exchange (HKSE). A recent study by Karreman and van der Knapp (2009) uncovers significant geographical and sectoral clustering in the types of firms listed on these stock exchanges. Firstly, small and locally oriented companies are predominantly listed on the SSE while the HKSE attracts large internationally oriented companies. Secondly, firms listed on the SSE are predominantly in primary and heavy industries such as mining, utilities, chemicals and food production while those listed on the HKSE are largely in information and knowledge intensive industries such as banking, insurance, telecommunications and computer technology. They conclude that both financial centres exhibit considerable complementarity in terms of their stock market and are not developing as close substitutes. While the study is well executed and establishes important observations on the two financial centres, it only offered some preliminary observations on the reasons behind this complementary relationship. To unravel the rationale behind this trend, I focus on the different reasons for listing in Shanghai or Hong Kong based on the experience and perspectives of regulatory and government officials and financial actors who have insights into the process of stock market listings from their business and regulatory relationships with mainland Chinese companies and institutional investors.
Table 1 summarises the feedback from respondents, showing specific and distinctive reasons for Chinese companies to seek public listings in either stock markets. The HKSE’s biggest advantage is its larger and more liquid market that is not hindered by regulatory restrictions regarding the listing of shares on the primary market and buying and selling of shares on the secondary market as in the SSE (Karreman and van der Knapp, 2009). These regulatory restrictions are related to the partial privatisation of Chinese SOEs, resulting in the issuance of two types of shares: A-shares are initially designed for domestic investors and offered by all listed firms, and B-shares are denominated in foreign currency for foreign investors and offered by some listed companies.2 Apart from these tradable shares, the majority of shares are nontradable and mostly owned by the government. This multiple ownership structure and persistent state control has resulted in limited liquidity on the mainland stock exchanges (Hertz, 1998; Walter and Howie, 2003; Green, 2004). In comparison, the absence of such restrictions on the HKSE has enabled a deeper and more liquid capital market to develop, where listed companies could raise more capital from a broader range of potential and international investors.
Table 1: Some reasons given for mainland Chinese companies to list in Shanghai or Hong Kong (Source: interview data)
The international reputation of the HKSE and Hong Kong as a financial centre is another distinct advantage as a public listing on the HKSE is seen to boost the international brand and reputation of the company. This can be an important consideration depending on the company’s business expansion plans and internationalisation strategy. If it intends to expand overseas into Asia and other global markets, a listing on HKSE not only raises capital in (a freely convertible) foreign currency but also its regional and international profile ahead of overseas expansion. Compared to the mainland, Hong Kong’s well-developed legal system with its reputation for investor protection, high financial reporting standards and prudent regulatory system have a longer history of establishment and international recognition (Enright et al., 1997). This constitutes a key advantage as being listed on the HKSE would reflect positively on the company’s accounting standards, corporate governance and business management and thereby improve company valuation. This is important not only for the stock market listing itself but also affects business relationships such as transactions with suppliers and securing further financing. A foreign manager of a foreign bank, for example, explained that when assessing a local company as a potential client, he would consider not only whether they are publicly listed but also where they are listed for further assurance regarding their financial status and stability:
This suspicion relates to increased criticism of the opaque listing criteria and procedure for the SSE. Recent studies have shown that mainland China’s legal system and institutions, such as investor protection, corporate governance practices and financial reporting standards are still relatively underdeveloped. Coupled with the inadequate enforcement of imposed rules and regulation, listed Chinese companies have little incentives to meet corporate transparency standards (Huang, 2001; Ferguson and McGuiness, 2004; Allen et al., 2005). As a result, price manipulation, fake transactions and the issuance of false information is pervasive on mainland stock markets and adds to the difficulty of making informed investment decisions, particularly for foreign investors (interview data, 2006 and 2007). This reinforces the HKSE’s advantage in setting higher standards for listed companies.
However, listing on the SSE does have its advantages for certain companies. A number of local interviewees point to the regulatory bias of state regulators that give special consideration to SOEs over private companies, especially in the IPO application process. Although there is a long list of companies waiting to be approved by the CSRC for their IPO, SOEs often get to ‘jump the queue’ and have their applications fast-tracked and become publicly listed ahead of smaller or private companies due to political considerations (interview data, October 2006). A Chinese company might also prefer to list publicly in Shanghai due to the lower fees (e.g. legal, accounting, brokerage) and relatively less stringent listing requirements compared to Hong Kong. For a cash-strapped SOE who might be ‘fast-tracked’, the SSE could be a better option for raising capital quickly. As noted above, a company that aims to expand overseas could benefit from the exposure of listing in Hong Kong and the raising of capital in foreign currency. On the other hand, a Chinese company that wants to focus on the large domestic market might obtain a better price per share with an IPO in Shanghai with a well-established brand name on the mainland compared to an IPO in Hong Kong where it might have to spend more on advertising and publicity ahead of the IPO to raise investor awareness and interest. A HKSE listing is therefore not suitable for every Chinese company and the SSE provides a valuable platform in those cases.
The decision to list on the SSE or HKSE could also be politically motivated. Chinese companies have to obtain special permission from the state in order to be publicly listed overseas, which means the decision of whether to list in Shanghai or Hong Kong is still under state control. This has particular resonance in recent years with increasing local concerns that the best Chinese companies are listed abroad while mediocre companies list in Shanghai (or Shenzhen), which has been interpreted as having the country’s wealth and opportunities ‘leaking’ out of the mainland to Hong Kong and foreign investors rather than benefiting the Chinese citizenry (interview data, 2006 and 2007). While this competitive view of stock market relations may not be entirely accurate, the Chinese government are mindful of public sentiments in the interest of social and political stability and this would influence their decision regarding the numbers and types of companies to approve for overseas listings. This could partly explain Karreman and van der Knapp’s (2009) observation that Chinese companies in strategic industries, such as utilities and chemicals, tend to be listed on the SSE instead of the HKSE.
As seen from the above, there are different reasons for mainland Chinese companies to list on the SSE or HKSE due to their different regulatory environments, market characteristics and the objectives of companies seeking public listings. The relationship between these two stock markets is therefore not purely competitive. This is particularly evident in the strategy of Chinese companies that have dual listings in Shanghai and Hong Kong such as China Life, Sinopec, China Merchants Bank and ICBC. While some companies such as ICBC launched its IPO simultaneously in both financial centres, others had an initial listing in Shanghai and then sought a secondary listing in Hong Kong. This strategy enabled them to gain some experience in public listings, improve corporate governance, information disclosure and accounting standards, and receive some capital injection from domestic investors before venturing overseas to woo foreign investors. In doing so, they were able to benefit from the different advantages of listing in Shanghai and Hong Kong (interview data, 2006).
As part of its economic reforms under the Open Door policy in 1978, China has been restructuring its banking sector from a mono-banking system to an increasingly open commercial banking system. One of the most significant changes in the past two decades is the opening up of the Chinese banking sector to foreign banks that would bring in foreign capital and introduce new banking products and practices (Garcia-Herrero et al., 2006; CBRC, 2007; Cousin, 2007; Berger et al., 2009). As of 2006, there were more than 70 foreign banks with representative or branch offices in China, with the highest concentration in Shanghai. Despite these rapid changes, significant differences still exist between the regulatory environments of Shanghai on the mainland and Hong Kong. Foreign banks continue to face significant regulatory restrictions in business licenses and foreign exchange on the mainland, which limits the range of financial products and services that they can offer. Although China’s WTO accession has theoretically opened up the Chinese banking sector to foreign banks, rules regarding local incorporation3 means the lucrative RMB retail banking sector is limited to the very large foreign banks who are willing and able to commit the large amounts of capital requirement and meet other operation criteria (such as deposit-to-loan ratio) in order to gain access to this market. Foreign banks that do not incorporate locally on the mainland cannot accept deposits of less than 1 million yuan (US$125,000) or issue bank cards, which effectively restricts their business scope. The non-convertibility of the renminbi (RMB) was identified by many interviewees as another key factor holding back Shanghai’s development as an international financial centre, as foreign exchange controls not only restricts the types of financial products but also effectively limits the business volume of foreign banks on the mainland. While foreign banks could theoretically mobilise a significant amount of funds from their head offices or branches elsewhere in the region (such as Hong Kong or Singapore) to finance their China operations, they are subject to an annual foreign currency quota. This often means turning down business opportunities on the mainland in order to stay within that quota, which is understandably frustrating as explained by this foreign manager of a foreign bank:
In contrast to these licensing and foreign exchange restrictions on the mainland, foreign banks face no such restrictions in Hong Kong. Therefore, although the growing Chinese market has induced many companies to relocate their China headquarters to Beijing or Shanghai, which has pulled some sales and services functions of banks over to the mainland as they followed their corporate clients, their Asia-Pacific headquarters and facilities such as dealing rooms and treasury business are still maintained in Hong Kong (or further afield in Singapore). This spatial division of functions was reflected in the regional business structures of all the foreign banks interviewed in Shanghai. The few foreign banks who have set up dealing desks in Shanghai admitted that they are underutilised and their main treasury business still operated out of their Hong Kong offices (interview data, October 2006 and February 2007). With the non-convertibility of the RMB and foreign exchange restrictions on the mainland, many financial products and services relating to capital markets are difficult if not impossible to operate out of a mainland financial centre like Shanghai. This difference in regulatory space has enabled Hong Kong to specialise in treasury and offshore financial services as it took on the role of international capital intermediation centre for China since the mid-1990s. In conjunction with the PRC authorities, it has helped develop a number of financial products and services for the mainland, such as the listing of PRC equities on the HKSE, the listing of red chip companies,4 development of China-related venture capital and private-loan syndications. RMB deposits, remittances, exchange and credit cards were introduced in Hong Kong in 2004, followed by RMB cheques in 2005 and RMB bonds in 2007. The recent launch of a pilot RMB Trade Settlement scheme in July 2009 now allows certain mainland companies to settle their trade accounts in RMB (instead of a foreign currency like US dollars) with their corresponding enterprises in Hong Kong, Macau and selected Southeast Asian countries. These developments are cementing Hong Kong’s role to become the premier RMB settlement centre outside the mainland (People’s Daily Online, 30 June 2009, 3 July 2009; Chan and Chiu, 2009). Therefore, even as Shanghai develops its banking sector and experiments with capital markets, restrictions on the mainland combined with the established financial expertise of Hong Kong means that the latter will still play a vital role in providing offshore financial products to complement the growing financial needs of China.
In lieu of the regulatory restrictions and the considerable gap between Shanghai and Hong Kong in terms of regulatory frameworks, legal structures and expertise in financial markets and products, the issue of whether Shanghai could take over Hong Kong’s position as the financial centre for China and the East Asia region was deemed almost irrelevant by all foreign interviewees as they were just too different. The scenario of Shanghai being on equal footing as Hong Kong, in order to be compared on the same basis, was estimated as 20 to 30 years in the future. Due to their very different regulatory and business environments, Hong Kong and Shanghai are seen to be developing as parallel markets rather than competing directly:
This notion of a ‘parallel market’ was also alluded to by the Chinese regulatory and government officials interviewed, who declined to champion one financial centre over the other. Instead, all of them emphasised complementary roles for both financial centres with their different advantages and highlighted the need for multiple financial centres in a growing world economic power like China – as a former Mayor of Shanghai pointed out: “One door is not enough” (TIME, 11 December 2000). This complementary relationship is evident in the business operations of foreign banks. While they do not dismiss the growing importance of Shanghai, especially given its rapid development over the past decade and broader regulatory reforms following WTO, Hong Kong remains a vital market in the region for offshore products, especially for foreign banks with limited business licenses on the mainland. This enables both Hong Kong and Shanghai to perform distinctive but complementary roles in their business strategies to serve customers in the China and East Asia region with a holistic range of financial products and services.
Based on the above discussion, Beijing, Shanghai and Hong Kong each have their own distinctive characteristics and advantages despite common perceptions of rivalry and competition. My interview respondents clearly saw distinctive roles for each city, identifying Beijing as a ‘political centre’, Shanghai as a ‘business centre’ and Hong Kong as an ‘offshore financial centre’ that stems from different historical, social and cultural contexts and institutional environments. This regional division of labour was reflected in the different business functions of the financial institutions located in these cities, such as representative offices and investment banks in Beijing, commercial banks in Shanghai and treasury business in Hong Kong. These findings support Shi and Hamnett’s (2002) postulation in suggesting some form of functional coordination amongst Hong Kong, Shanghai and Beijing to make up for each other’s limitations. They suggest that Hong Kong could be kept as an international financial centre as it possesses distinct advantages in administrative capability, stability, knowledge and international reputation. The continued prosperity of Hong Kong is also important for political reasons as it reflects on Chinese leadership following the handover of Hong Kong in 1997 and could also affect the relationship between Taiwan and China.5 Commentators also often overlook Article 109 of the Basic Law of Hong Kong, which clearly establishes the central government’s commitment to “the maintenance of Hong Kong as an international financial centre” (The Basic Law of the Hong Kong SAR, 1990). Beijing, on the other hand, could relinquish some economic functions and focus on its role as a cultural and political centre, giving Shanghai more scope to develop its national economic and financial role. This is already evident in the relocation of more market-based functions of the PBOC to its second headquarter in Shanghai while maintaining its policy-based and macroeconomic functions in Beijing.
Based on a network approach to global city processes, Hong Kong’s role could parallel that of New York in the US economy as it continues to serve as the largest international financial centre linked to China and as the frontier on China’s path towards globalising its economy, at least for the next few decades. Its superior administrative and regulatory expertise, attractive tax regime, free port status and international reputation are too far ahead of Shanghai’s at the moment to be substituted. As Shanghai continues to develop the necessary institutions and skills and build up its financial markets, it could then play a key role as the premier national financial centre with economic influence in the Asia region, similar to that of Boston and Chicago in the USA, while Beijing would hold the position of national political and cultural centre with relatively weaker economic functions comparable to the role of Washing DC. This view of complementary roles and functions was echoed by some of my respondents who viewed the different parts of their business operations in Shanghai and Hong Kong as “huxiang fubu” (Chinese chairperson of Chinese private company, August 2005), which translates as being mutually compensating and complementing. When one considers that China is about the geographical size of Europe with a much larger population, notes the number of financial centres within Europe and considers the size and potential of China’s growing economy, it would be fallacious to expect only one large international financial centre in China. London, Frankfurt, Paris, and Amsterdam are of varying sizes and importance as financial centres in the regional and international economy, specialising in particular financial markets, products and services (Clark and O’Conner, 1997; Faulconbridge, 2004). New York, Chicago, Boston, Los Angeles and San Francisco in the USA are further examples. One should therefore to expect multiple financial centres to develop in China with increasing demand for more sophisticated and specialised financial products and services in different parts of a large and growing economy of global significance.
In global cities research, there has been a discernable shift away from establishing urban functions and hierarchies to exploring networks and flows between global cities and the adoption of a relational perspective to inter-city relations and linkages. While I concur with the importance of examining global cities as networked phenomena (Castells, 2000; Beaverstock et al., 2000), most global cities research have focused on structural aspects of inter-city networks in measuring the connectivity of global cities. In this paper, I argue that this relational approach needs to be enriched by qualitative research to unravel the rationale and meanings behind the flows of capital, people and knowledge that transform urban centres, which could lead to more nuanced understanding of global cities development and processes. In my empirical study, I have focused on analysing the perspectives and motivations of socioeconomic actors embedded in regulatory and financial networks between Shanghai, Beijing and Hong Kong to explain how and why certain economic processes are taking place in particular global cities. This approach has revealed a qualitative distinction in the roles of these cities with Beijing as a ‘political centre’, Shanghai as a ‘business and commercial centre’ and Hong Kong as an ‘offshore financial centre’ that is reflected in the operational structures and business strategies of financial institutions across these global cities as they capitalise on the different place-based advantages of different locations. Contrary to popular conceptions of financial centre rivalry and zero-sum game competition between global cities, these findings strongly support a system of functional coordination and complementary roles between these top Chinese cities.
In taking a complementary rather than purely competitive approach to inter-city relations, and with growing concerns about the international financial system following the global credit crunch in autumn 2008, we are likely to witness an increase in specialised collaborative efforts between financial centres as the globally integrated financial system is not only about competition between centres. Take Sassen’s global cities, for example: New York, London and Tokyo are very similar in terms of their roles and functions as major hubs within the global financial network, but it is the differences that connect these cities in meaningful ways and integrate them into networks of capital, labour and information flows. A simple and obvious example is how their locations in different time zones enable them to operate as a 24-hour unit. Their different geographical locations also offer strategic advantages in terms of different products and services they can offer to the global market. These cities are highly interdependent and differentiated from one another at the same time and it is the very differences that make the networks/networking desirable and worthwhile.
In 2000, Newsweek (13 November 2000) published an article titled the “NY-LON phenomenon”, highlighting how London and New York have become more integrated not only in terms of economic flows but also in terms of social and cultural linkages. This concept was updated by TIME in January 2008 as “Ny-lon-kong” (Elliot, 2008), referring to the interconnectivity of New York, London and Hong Kong in driving the global economy as the leading international financial centres of America, Europe and Asia (Figure 1). The new label certainly highlights the increasing importance of Hong Kong and China in global financial flows but the selection of Hong Kong to represent China and the East Asia region, instead of Shanghai or Beijing, is also noteworthy and corroborates with the findings in this paper regarding the persistent gaps in regulatory standards, business environment and financial expertise between Hong Kong and other globalising cities on the mainland (Ritter, 2008).
Figure 1: The interconnectivity of New York, London and Hong Kong as leading international financial centres (Source: TIME, 18 January 2008)
While the idea of flows and networks is vital to the conceptual and empirical study of global city processes, the place-based geographies of such flows are also important in explaining the differentiation between global cities. Cities accumulate and retain wealth and power because of what flows through them and embedding cities in a space of flows thus directs our attention beyond simplistic concerns for what they contain to their connections with other cities. But we should also not neglect the ‘grounding’ of flows, which is what transforms these cities and is made possible only because global cities are also places with particular configurations of historical, political, social and cultural contexts. What does it mean to focus on global cities as places? Firstly, that means acknowledging and critically examining the very differences that enable global cities to perform particular roles in the global urban network and connect them in meaningful relationships. This perspective leads to better appreciation of the specific historical circumstances and contexts that contribute to the contemporary development of globalising cities and influence their mode of integration into the global city network. In this paper, the place-based geographies of financial flows have been crucial in explaining the differentiation between Beijing, Shanghai and Hong Kong as financial centres that focus on different markets. A combination of historical legacy, cultural factors, regulatory restrictions, legal standards and financial expertise has created distinctive business environments in these three cities. Therefore, instead of thinking in terms of competition and pulling companies and institutions away from one centre to another, it might be more fruitful to focus on how cities like Shanghai, Beijing and Hong Kong could capitalise on their respective strengths to perform different roles in the regional development of Greater China and to attain positions of influence in the global economy.
Secondly, viewing global cities as places means recognising that they are inhabited by real people and communities whose social, political and economic lives shape, and are in turn influenced by, processes of global city formation. If we are to deepen our understanding of global city networks, we need to invest in more qualitative research that gets closer to the socioeconomic actors and decision-making processes driving the flows and connections between global cities. An examination of the meanings, motivations and rationale behind structural aspects of flows and linkages would enable us to not only describe but also better explain global city networks and processes and this paper is a contribution to that effort.
Fieldwork for this research was supported by the China Policy Institute at the University of Nottingham and the Killam Postdoctoral Fellowship at the University of British Columbia. Earlier versions of this paper have been presented in San Francisco (USA), Nottingham (UK), and Hong Kong and I thank participants for their comments and suggestions. All claims and omission remain my responsibility.
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1 These companies and banks have their headquarters in Beijing for historical reasons as they used to be parts of different government ministries that were subsequently corporatised.
2 This division is being revised following share reforms. The Qualified Foreign Institutional Investor (QFII) programme was introduced on 5 November 2002 allowing foreign institutional investors to apply for QFII status and participate in the previously locals-only market for A-shares and bonds. The Qualified Domestic Institutional Investor (QDII) scheme was later announced on 13 April 2006 allowing Chinese individuals and domestic institutions with foreign currency accounts to invest in overseas stocks and bond markets. However, these schemes are confined to approved financial institutions and the mainland stock markets continue to be characterised by limited liquidity.
3 In November 2006, an amendment was issued to the Regulations on Administration of Foreign Banks, which states that foreign banks with RMB corporate business licenses would not be automatically permitted to conduct RMB retail business; instead, they would have to reapply and fulfil specific conditions. These include being profit-making for two consecutive years in the first three years of operation, local incorporation with a registered capital of 1 billion yuan (US$125 million), operating capital of 100 million yuan (US$12.54 million) for each branch and a deposit-to-loan ratio of 75 percent by 2011 (State Council 2006).
4 Red chip companies are Hong Kong incorporated companies whose assets and business interests are predominantly in the PRC.
5 The concept of ‘one country, two systems’ for the Hong Kong SAR was devised with Taiwan in mind and is the basis for Beijing’s policy of peaceful unification. Apart from political considerations, Hong Kong is also a conduit for economic relations for those in South China and Taiwan to circumvent their respective governments’ sanctions and controls (see Taylor, 1997a).
Note: This Research Bulletin has been published in a substantially revised version in Urban Studies, 49 (6), (2012), 1275-1296