Shanghai’s new role has significant implications for SAR

In his keynote speech at the opening ceremony of the first China International Import Expo on Nov 5, President Xi Jinping announced the central government had decided to implement three important measures for cities like Shanghai to better perform their roles in the opening-up of the country. The second measure of the three is to launch a science and technology innovation board at the Shanghai Stock Exchange and experiment with a registration system for listed companies. This will support Shanghai in cementing its position as an international financial center and a hub of science and innovation, and steadily improve the fundamental institutions of its capital market.

This initiative carries three significant implications: Firstly, it is to implement the decision by the Third Plenary Session of the 18th Central Committee of the Communist Party of China to optimize the multi-tiered capital market system with the introduction of a Stock Issuance Registration System. Secondly, allowing the Shanghai Stock Exchange to launch a new sci-tech board with a pilot registration system serves two purposes — steadily reforming and developing the mainland stock market while grooming the city as an international financial center and a hub of science and innovation. Thirdly, it aligns with the national strategy of promoting the integrated development of the Yangtze River Delta region, which will help both Shanghai as a financial and innovation center and the Yangtze River Delta gain more significance, not only in China, but in the whole world.

These three important issues therefore have significant implications for Hong Kong.

Firstly, although the Hong Kong Stock Exchange has introduced the weighted voting rights system to attract innovation and technology companies to list on the Hong Kong stock market, the establishment of the sci-tech board with a pilot registration system at the Shanghai stock market will attract many mainland-based companies who need RMB funds to list there. In other words, it is necessary for the Hong Kong Stock Exchange to make its system more innovative. In the long run, Hong Kong will have to establish a system that organically combines RMB financial services with the actual use of the currency. If the use of RMB is highly restricted in Hong Kong, then the RMB business in our city will certainly shrink when Shanghai becomes an international financial center that uses RMB as the major currency.

Secondly, the consolidation and enhancement of Hong Kong’s status as an international financial center should go hand in hand with the establishment of an international innovation and technology center for Hong Kong and the creation of an international innovation center for the Guangdong-Hong Kong-Macao Greater Bay Area. The lesson we learned from the once-in-a-century financial crisis in the US is that the finance industry must serve the real economy. Hong Kong handles it better than a lot of Western economies in this respect. However, the scale of the local real economy is limited, therefore the city’s financial sector mainly serves the needs of mainland patrons. It will require new ideas and approaches to expand the financial activities that serve the real economy on the mainland.

Hong Kong still maintains an outdated model: It serves as the base for listing and capital raising for companies whose production chains reside on the mainland, including the Pearl River Delta. This approach is still workable before Shanghai becomes an international financial center. As soon as competition sets in from Shanghai, that model will no longer work. The SAR government will have to promote the re-industrialization of Hong Kong by establishing a cluster of innovation industries. We should at the same time connect them to the real economy in the Pearl River Delta to create a truly integrated Bay Area. Only by doing so can we establish an international innovation and technology center for Hong Kong, set up an international innovation center for the Bay Area, and consolidate and enhance Hong Kong’s status as an international financial center.

Thirdly, the central government’s support for the integrated development of the Yangtze River Delta, which has now become a national strategy, has put pressure on Hong Kong to proactively integrate itself into the Bay Area development. The integrated development of the Yangtze River Delta, in which Shanghai is the leader, has gone ahead of the Bay Area. However, it is not until recently that the central government has elevated the integrated development of Yangtze River Delta to the level of national development strategy. In his speech on Nov 5, Xi said, with the integrated development of Yangtze River Delta having been elevated to the national strategy level, the region should now implement the new development philosophy in real earnest. It should build a modern economic system, and promote the reform and opening-up process with higher standards and levels. The region will develop in tandem with that of the Belt and Road Initiative, the BeijingTianjin-Hebei coordinated development area, the Yangtze River Economic Belt and the Guangdong-Hong Kong-Macao Greater Bay Area. This will help improve the overall design of China’s reform and opening-up.

I have reiterated in this column that Hong Kong, similar to the role of Shanghai in the Yangtze River Delta Development, is well-positioned to be a leader in the Bay Area development. The only hindrances to taking on that role are the “physical boundary” (immigration control) between Hong Kong and the mainland and the “intangible boundary” (ideological differences). The SAR government has to unite all sectors of the community to break through the double-boundary constraints as quickly as possible. Otherwise, Hong Kong will risk detaching from Macao and other partner cities in the Pearl River Delta. This will not only hinder the Bay Area development, but also hamper Hong Kong’s own development.

The SAR government will have to promote the re-industrialization of Hong Kong by establishing a cluster of innovation industries. We should at the same time connect them to the real economy in the Pearl River Delta to create a truly integrated Bay Area.