Anything but an easy ride for Shanghai

There are differing opinions, however, on what exactly an “international financial centre” means.

“Becoming an international financial centre means allowing foreigners greater access and allowing them to raise capital,” Alan Wang, a Shanghai partner of Freshfields Bruckhaus Deringer, said.

Olsson took a more moderate view.

“It's the ability of a market to operate freely within the policy guidelines of China.”

TieCheng Yang, Beijing counsel with Clifford Chance, explained further, saying that the government's goal is probably to set up a mainland financial centre with the purpose of serving the real economy.

“The central government knows Hong Kong is the main financial centre – they don't want Shanghai to compete with Hong Kong, they want the cities to work together,” he said.

To do list
Lawyers seem to agree that in order for Shanghai to reach the 2020 goal, some key national changes will be needed. The first is a loosening of controls on foreign exchange.

“The goal is to make the renminbi a fully convertible currency, otherwise Shanghai can only be a domestic centre,” said Yang.

In the absence of national reforms, the approach that Shanghai is taking is to establish the city as a “yuan-based centre” and make it “a base for important, yuan-based operations involving pricing, trading and clearance-related financial products and services”, according to Fang Xinghai, director of the Shanghai Financial Service Office, who was quoted in Caijing magazine.

Moves have already been made: in April, it was announced that 400 enterprises on the mainland had been selected to participate in a pilot renminbi cross-border trade settlement programme with Hong Kong. Also, currency swap arrangements have been made between the PRC and countries including Indonesia and South Korea.

A second, much bigger step, is to reform the way that regulation is done in mainland China. The regulators are often seen as being too closely linked to the government, and the fact that they are all headquartered in Beijing – China's political capital – may not help that image. Additionally, regulation is relatively heavy-handed, particularly when compared with the laissez-faire approach employed in nearby Hong Kong.

“The entire regulatory framework in China is based on trying to regulate everything,” said Jonathan Zhou, a partner of Fangda Partners.

“Unless the regulatory system becomes more relaxed to encourage innovation in the finance market, the legal system will not be ready to accommodate an international financial centre,” he said.

Banking on change
There are many other smaller, but nevertheless essential, tasks to be accomplished, say lawyers.

For foreign banks, making initial investments and establishing a branch is “quite doable,” said Olsson. But converting to a foreign-invested local bank is a complex, time-consuming and expensive process.

“If Shanghai is serious, it's got to have more international banks operating on an equal footing as domestic banks,” he said.

Another big disadvantage of Shanghai when compared to Hong Kong, Tokyo, London and New York is that foreign firms are not free to list on the stock exchange. On May 11, the UK and China issued a joint statement saying that China had agreed to allow qualified foreign companies, including UK companies, “to list on its stock exchange through issuing shares or depository receipts in accordance with relevant prudential regulations”. There were reports soon afterwards saying that preliminary arrangements may be worked out this year. (The head of the State Administration of Foreign Exchange (Safe) said at the time that opening China's capital market could also lead to relaxation of foreign exchange controls.)

Relatively more complex products, which have been available on international markets for some time, are not yet available in Shanghai, and Zhou said this comes back to regulation.

“Forget about credit default swaps – this is about basic finance products. They are not developed in China and one of the reasons is regulation,” he said.

Where there's a will
Although their priorities vary, something on which everyone agrees it that very little will happen without the political will of the central government.

“Is 2020 achievable? It depends on various factors, among which the key one is the determination of the government to move forward,” Yang said.

Over the past decade, there have been considerable changes to the legal system, with many new laws introduced, and older ones revised: well-structured, high-level contract, property, securities and bankruptcy laws are all in place. Although a number of regulations need further updating, the bigger obstacle seems to be political.

“From a legal point-of-view, there's not any hurdle,” said Zhou. “It's mainly the determination of the government. People need to realise there are a lot of hurdles for Shanghai. It cannot overcome them alone – it is heavily reliant on the central government.”

The shipping news

The central government included making Shanghai a “global shipping hub” in its goals for 2020.

Reaching this target should be easier for the city than building up its financial services offering.

China's maritime jurisdiction is the largest in the world, boasting 48 specialist maritime courts. The country has a good arbitration network, and Shanghai has its own arbitration commission which has just opened a specialised shipping arbitration court in a region which Ince & Co Shanghai partner Peter Murray described as the “intended maritime cluster area” of Shanghai. And the city already has in place an advanced hardware infrastructure.

“You just have to see the Huangpu River where LNG ships are being built not far from world class cruise terminals,” Murray said.

There have already been considerable legal developments since the first official policy announcement in March 2009. In April, the State Council issued its Opinion on Promoting the Development of Modern Service Industry and Advanced Manufacturing Industry in Shanghai; later in the month, the local government promulgated its own implementation rules.

According to Murray, the implementation rules mention that Shanghai will issue further local regulations to facilitate the development of Shanghai port and relevant shipping services under the national general principles and laws (such as the Shanghai Port Regulation of December 2005).

Murray said he expects to see further favourable policies from the central government.

“Favourable tax treatment may be granted to companies that are engaged in marine insurance and ship financial leasing business in Shanghai,” he said.

Lawyers say that other revisions to existing laws are planned by the authorities, including changes to the PRC Arbitration Law and the Maritime Code (which was originally promulgated in 1994).

“It can be expected that the perfection of the arbitration and shipping legal regimes in China will no doubt make Shanghai one of the leading maritime arbitration centres internationally,” said Murray.