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This is the first in a series on "China's emerging economic power in terms of financial system and Asean". We will explore China and Asean's capital markets, banking, for¬eign exchange, and political economy.

The recent financial crisis, which originated in the US and plunged the world into a recession, has made many raise the issue of a paradigm shift towards China. Some, including Asean, are even eager to see China moving forward to gain more power in the world financial market.

China's State Council said on March 25 that Shanghai will be built into an international financial centre and a global shipping hub by 2020.

Over the past decades, Shanghai has witnessed an economic boom and social development, which has made great contribution to the country's growth. Now the time has come for a key transition.

Although Shanghai's ambition to be the world financial centre is not new as it has been on the city's agen¬da for years and many facilities as well as some framework have been imple¬mented towards realising that goal, the statement from Beijing this time definitely reflects China's intention of significantly increasing its role in the global arena.

High potential

Shanghai's potential as the new international financial centre - the socalled "New York of the East" - has not been in doubt, although Chinese authorities have said on many occa¬sions that a lot more needs to be done and that Shanghai was still far behind its peer, Hong Kong.

Historically, Shanghai used to be the financial centre of the Far East and the city has had a strong foundation for financial services.

To become a global financial cen¬tre, one needs an efficient financial system, financial institutions, profes¬sional talent, environment, and advanced market management. Looking around in China, Shanghai is the perfect choice for the mainland.

Shanghai registered 6.94 trillion yuan (Bt34.60 trillion) in assets of financial institutions, taking up 11.5 per cent of the nation's total of 60.48 trillion yuan by the end of 2007. You can find all kinds of financial markets in the city - stocks, bonds, currency, foreign exchange, commodity futures, OvertheCounter derivatives, gold and property rights.

The transaction volume of stocks at Shanghai Stock Exchange in 2007 totalled 30.54 billion yuan, standing seventh worldwide and second in Asia; the outstanding balance of bonds at the China Foreign Exchange Centre stood at 13 trillion yuan, ranking seventh in the world. Additionally, some prod¬ucts at Shanghai Futures Exchange were among the world's leaders, with the transaction value of natural rub¬ber standing at 8.7 trillion yuan and copper 10.1 trillion yuan, ranking first and second worldwide respectively.

According to statistics on stocks, state bonds, debt of listed companies and corporate shortterm financial bills, direct financing in Shanghai accounted for 17.7 per cent, 20 per cent and 25.2 per cent of the nation's total in 2005, 2006 and 2007 respec¬tively.

From 2002 to 2007, total financ¬ing of stateowned enterprises stood at two trillion yuan, with 95 per cent of the financing from enterprises outside the city.

A total of 375 for¬eigncapital finan¬cial institutions and Chineseforeign equity joint financial institutions set up headquarters or branch offices in Shanghai by the end of June 2008, accounting for 44.1 per cent of the city's financial institutions.

Among them, there are 17 foreign banks and five foreign insurance companies, accounting for twothirds of foreignfunded banks with legalperson status and fivesevenths of for¬eign insurance companies in China respectively.

A long way to go

However, the market is looking forward to see how the city would be able to clarify legal, accounting, tax, and other rele¬vant regulations.

Many also doubt how Shanghai could become a finan¬cial centre while the headquarters of the country's largest banks are still based in Beijing, which is two hours from the city.

Besides, the issues most foreign¬ers are sceptical about concern Shanghai's rule of law, the free flow of information and corruption.

There's also the issue of whether Shanghai would become a rival to Hong Kong, which has been China's financial centre for years. Hong Kong has been highly dependent on the mainland since it was handed over. As of December 2008, 465 listed firms, or 37 per cent of a total number of 1,261, are mainland enterprises, while their market capitalisation represents as much as 60 per cent.

In 2008 alone, 69 per cent of total equity funds raised were for main¬land companies. The current average daily turnover of equity from main¬land China accounts for about 70 per cent. Since 1993, mainland enter¬prises have raised over $2 trillion in Hong Kong, representing over 58 per cent of total funds raised in the mar¬ket during the period.

This has raised questions about Hong Kong's future if Beijing decides to choose Shanghai as its new global financial centre and moves all main¬land enterprises to list in the city.

Many believe it would take at least five to 10 years before Shanghai would be able to get close to Hong Kong, which has a long history as a finan¬cial centre.

Besides, the big questions are still focused around when and how the yuan currency would be internation¬alised.

Some market watchers predict that Beijing could create a winwin situation for Hong Kong by linking Chinesespeaking markets, includ¬ing Shanghai, Hong Kong and Taiwan. Taiwan's new president has made it easier for Beijing to pursue economic cooperation.

It can be started as "all Asia linked - electronic trading platform". With such cooperation, these three mar¬kets can be a strong anchor in Asia. Then, the link can be extended to other parts of Asia, including Singapore or even Asean.

Next: Chinese yuan as an interna¬tional reserve currency and its impli¬cations for Thailand.