China is preparing for its rise that will follow the financial crisis. Besides Zhou Xiaochuan’s proposal to replace the USD with SDR as the world’s reserve currency, the Chinese government is determined to finish the construction of Shanghai into a global financial center rivaling New York and London by 2020.
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A strong impetus for Shanghai’s rise is the growing strength of the RMB, which is gradually becoming a hard currency. Shanghai has become the center for RMB settlement, RMB asset pricing and RMB wealth management.
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On March 25, the executive meeting of the State Council approved a proposal to accelerate developing modern service industry and advanced manufacturing in Shanghai, and build it into a global financial and shipping center. This is the largest policy support Shanghai has enjoyed since 2005, when Pudong, across the Huangpu River for old Shanghai, was made a pilot area for a so called comprehensive reform program.
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Shanghai has long lobbied Beijing for more support to its construction as a global financial center. The inevitable adjustment to the international financial order led by the global financial crisis comes as a great opportunity for China and for Shanghai. Among all the supportive policies approved this time, the most crucial one is the pilot for RMB settlement.
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Many officials in the Shanghai local government believe these policies have been approved mainly because Shanghai’s appeal well suits China’s strategy. The real chance lies in the post crisis period. China needs to consider how to seek its financial power during the present fluctuation and reconstruction.
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Early signs for the government’s new support for Shanghai emerged last fall. On November 12, when the financial crisis was most severe and most unpredictable, Premier Wen Jiabao visited Shanghai, saying the central government and local governments should cooperate to establish a working group consisting of all relevant departments to cope with the threat of the financial crisis.
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Shanghai’s rivals for Beijing’s choice as RMB settlement center included both Hong Kong and Tianjin, though Hong Kong faced a major obstacle, that its own currency is not RMB but the Hong Kong dollar. In the end, Tianjin’s ambitions also proved unsuccessful.
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The RMB settlement center will include offshore financial business as well as RMB settlement. Four years ago, the State Council chose Shanghai and Shenzhen as pilots for offshore RMB financial business. In Shanghai, the business is conducted by the Bank of Communications and Shanghai Pudong Development Bank, both headquartered in Shanghai.
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The current financial crisis offers China an excellent opportunity to promote RMB settlement. During the crisis, major settlement currencies in international trade, such as USD and Pound, are fluctuating steeply, leading to high exchange rate risk, while RMB is stable.
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In the past few years, RMB has been used as settlement currency between China and more and more neighboring areas. According to the government’s plan, in future all RMB-dominated transactions will be settled in Shanghai.
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Han Zheng, mayor of Shanghai, recently set forth three goals for the city: the construction of a commodities and futures center, a bond trading center, and financing and leasing business.
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Shanghai’s bulk commodities trade volume once accounted for 70% of China’s total but has dropped to only 50%. Although Shanghai already has a financial futures trading center ready to go into operation, the dim state of the macro economy and the financial crisis have delayed the launch of the financial futures market. So, it appears Shanghai’s commodities futures market will get its start before financial futures begin trading. Shanghai will soon be trading steel futures and is considering a crude oil futures market.
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There are now three nationwide platforms for bond transactions: bond transaction dependent on securities, over the counter, and inter-bank. Shanghai hopes to unify the three. After the unification, according to most optimistic calculation, Shanghai will own the world’s largest bond trading market.
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