SJTU Antai MBA Professor Feng Yun: how can Shanghai stabilize its status as an international financial center?

Publisher : MBA Office       Nov.01,2021

With the progress of science and technology and its penetration in the financial sector, the evaluation system of international financial centers has changed greatly. Shanghai's ranking among the international financial centers has risen year by year, and it has been classified as a "world's top" financial center, demonstrating its strong competitiveness. However, research found that in the 29th edition of Global Financial Centers Index (GFCI 29) released in March 2021, five financial centers in the Asia Pacific region ranked third to seventh in turn, with a very weak gap and fierce competition, and Shanghai's dominant position is not stable. In the recently released GFCI 30, Shanghai fell from the 3rd to the 6th place, and the difference of score between the adjacent two places from the 3rd to 8th is only 1 point. How Shanghai can stabilize its status as an international financial center is an important issue that needs to be considered at present.

How to understand the evaluation system of international financial center?

The ranking of international financial centers is one of the ways to compare the achievements in the construction of major international financial centers in the world objectively and comprehensively. At present, a relatively well recognized evaluation system of global financial centers is the Global Financial Center Index (GFCI) published by Z/Yen, an independent British think-tank.

GFCI index has been developing since 2007. The instrumental factors of competitiveness are grouped into five key areas: business environment, financial sector development, infrastructure, human capital and reputational factors.

With the development of network information technology, the evaluation of business environment in the five areas of instrumental factors of competitiveness has expanded from offline to online. Under the background of regulatory technology development, it is more and more important to have a low-risk, orderly and stable environment in the evaluation of international financial centers.

The focus of infrastructure factor is gradually transferred from physical infrastructure to the convenience of online network.

The change of financial sector development factor mainly reflects two evaluation trends: one is the increased attention to financial technology, and the other is green finance.

The change of reputational factor reflects two trends. First, the attention to innovation is increasing, focusing on measuring the innovation ability and technology talent advantages of global cities. The number of high-tech enterprises, venture capital and R&D expenditure, the percentage of young population, etc. will be considered in the evaluation. Second, more attention is paid to the liquidity of capital, and the degree of internationalization of financial centers is becoming more and more important.

Shanghai jumped all the way from the 24th place in 2007 to the 3rd place in March 2021. The significant rise in the ranking reflects the outstanding achievements made in the construction of international financial center in Shanghai. Another major change is that Beijing and Shenzhen are no longer among the "world's top" financial centers, while Shanghai is still included in this category.

Compared with the ranking in 2008, the score gap between London and Shanghai has narrowed significantly. In the ranking in September 2021, the scores of Hong Kong, Singapore, San Francisco, Shanghai, Beijing and Tokyo, which ranked third to eighth, are quite close. Among them, five financial centers are in the Asia Pacific region. Seen from the ranking of each edition, the score gap has narrowed year by year, Shanghai's dominant position is not stable, and the competition within the region is really fierce.

In the ranking of GFCI 30, according to the instrumental factors of competitiveness, Shanghai performed best in financial sector development (ranking 4th) and infrastructure (ranking 7th), while performed relatively worse in business environment and reputational factor (both ranking 15th) and human capital (falling out of the top 15).

How can Shanghai become a "world's top" financial center?

It is a fact that Shanghai has been built into an international financial center, but how it can keep stabilizing its status as a "world's top" financial center is an important issue that needs to be considered at present.

At present, several central cities in Mainland China rank relatively low in business environment and other factors. Therefore, even though Shanghai is committed to building a demonstration center for high quality business environment, it suffers from the overall environment at the level of economy. It can be seen that the factors restricting the promotion of the ranking of Shanghai as an international financial center require the improvement of the overall environment.

Firstly, in the process of building a financial center, several domestic cities should identify their functional positioning, strengthen their respective advantages, support each other's development, and achieve the overall improvement from minority to majority.

In recent years, several big cities in Mainland China have put forward the strategic goal of building a financial center. In the international authoritative evaluation of financial centers, only Shanghai is recognized as a “world's top" financial center, and Beijing, Guangzhou, Shenzhen, Chengdu, Hangzhou, Qingdao and Tianjin are recognized as global professional financial centers, showing differentiated characteristics. In the future, these financial centers need to further identify their respective functional positioning, form an echelon situation, strengthen characteristic advantages, support each other for development, and achieve the effect of overall improvement.

At present, China positions Shanghai as an international financial center, while Beijing is more inclined to be a financial regulatory center. The R&D, promotion and application of regulatory technology can improve the domestic financial regulatory technology level, improve the business environment at the national level, and will have a positive impact on the construction of several financial centers in Mainland China. At the same time, with its strong financial factor market and extensive connection with global financial institutions, Shanghai has driven the in-depth development of several domestic professional financial centers.

Secondly, we should strongly develop regulatory technology and improve various indexes related to the business environment, such as Corruption Perceptions Index, Control of Corruption, Bribery Risk and E-Government Development Index.

Taking the application of blockchain as an example. Due to the characteristics of openness, transparency, whole process trace and traceability of blockchain itself, this technology can solve the problems of illegal operation and information asymmetry. It can be considered to be popularized and applied in government procurement departments at all levels to effectively control corruption from the perspective of technology, and thus improve the business environment.

Thirdly, Shanghai should continue to strengthen and expand the financial factor market, strengthen the construction of financial infrastructure, focus on the improvement of the interconnection of factor markets and the establishment and improvement of data governance mechanism, and continue to consolidate its existing advantages.

Shanghai is one of the cities with the most complete financial infrastructure and financial factor market in the world. It gathers various trading markets such as stocks, bonds, foreign exchange, futures, bills, insurance, gold and oil, as well as a number of key financial infrastructure such as Shanghai Clearing House, CSDC, China Trust Registration Co., Ltd. and CIPS. The construction and development of financial infrastructure are deeply integrated with advanced scientific and technological means. In recent years, major institutions in Shanghai financial factor market have focused on the transformation and upgrading of IT technology architecture, and continuously expanded and enriched the boundaries of core systems and core businesses by using technical means such as mobile Internet, big data, artificial intelligence, blockchain and cloud computing.

On the above basis, it is suggested that on the one hand, Shanghai should continue to creatively combine its technical and institutional advantages to improve the interconnection of financial factor markets and further eliminate market separation; and on the other hand, the data governance mechanism should be improved. The pricing, transfer and use of the massive data generated by the financial factor market, to directly serve various areas of the financial sector and create value, is not only an important attribute of financial center, but also an important feature of world's top financial center. We should not be satisfied with the precipitation of massive data in each exchange, but actively give full play to the strength of universities and research institutions in Shanghai to effectively convert data into productivity.

In addition, we should accelerate the development of green finance, increase the R&D and application of low-carbon technologies, and make up for Shanghai's shortcomings in environment and housing.

In the Global Power City Index 2020, Shanghai is behind London, New York, Tokyo and Hong Kong. The index measures 6 functions -- Economy, Research and Development, Cultural Interaction, Livability, Environment, and Accessibility. Among them, the largest gap lies in Environment and Livability, and the relevant indicators such as "Air Quality", "Green Space Fullness" and "Number of Retail Stores" and "Number of Doctors" need to be improved.

Under the carbon peak and neutrality goals, green finance is an important aspect in the construction of international financial center in Shanghai. The development of green finance can not only promote the realization of the carbon peak and neutrality goals, but also further consolidate and enhance the status of Shanghai as an international financial center by improving the quality of environment and livability. In line with its status as an international financial center, Shanghai should strive to build a world-class green financial center. Shanghai should make full use of its advantageous position in the financial factor market, establish and improve a shared and full green finance database, strengthen the collection, certification, circulation, monitoring, disclosure and application of relevant data, and accelerate the establishment of ESG evaluation system for listed companies and financial institutions. In addition, with the help of financial and market means, rather than relying solely on administrative means, it should accelerate the R&D and popularization of low-carbon technologies, reduce carbon emissions and achieve low energy consumption, so as to improve the quality of environment and livability.

Finally, the characteristics of the financial sector itself also determine that talents are the key production factors and core competitiveness. More institutional support and long-term mechanism in the training, gathering and flow of innovative talents are needed for the construction of international financial center in Shanghai.

Profile of the professor

Feng Yun, professor, doctoral supervisor and head of the Department of Finance, Antai College of Economics and Management, Shanghai Jiao Tong University, and director of SJTU Antai MBA program in Technology Finance.

Main research areas: (1) Application of Financial Derivatives and the Value / Risk of Corporates; (2) Exchange Rate Risk Management and Exchange Rate Derivatives; (3) Financial Innovation, Financial Markets Quality and Financial Regulation; and (4) Technology Finance 

Three of her research results won provincial and ministerial awards, of which two ranked first; four won excellent paper awards of international or national academic conferences, of which three ranked first; and one won the Award of Excellent Advice of Youth Scholars in Shanghai Science Technology Forum, ranking first.

As a project leader, she has successively taken charge of four projects of National Natural Science Foundation and one project of National Social Science Foundation.