ON THE DEVELOPMENT AND OPENING UP OF SHANGHAI’S FINANCIAL SECTOR1
DECEMBER 2, 1989
When I came to work in Shanghai on February 2 of last year, I got off the train in the morning and that afternoon I listened to a report by the city’s Bureau of Finance. Why? Because there’s no way you can be a mayor if you don’t know how to manage finances—so you must first seek a clear understanding of the fiscal situation. Now that a year has passed, I’ve come to feel that one can’t rely on fiscal work alone. I’ve become increasingly aware of the importance of finance, as I am reminded almost daily.
This January, for example, Luo Shilin2 came to me because it was time to distribute fiscal allocations to the rural areas. He needed RMB 1 billion for this purpose, but he didn’t have the money, he had no cash, and couldn’t make the allocations—things were very tight. Later, Jiang Zemin and I telephoned Yao Yilin,3 and he first transferred cash from the currency-printing facility; then we sent color TVs and refrigerators down to the villages, putting out almost RMB 400 million to 500 million worth of goods in one go. That was a transfer of funds—yet no cash passed through his hands. By borrowing RMB 500 million in cash and doing a transfer of RMB 500 million, we solved the problem of the RMB 1 billion allocation for the villages.
I sensed from this experience how truly important finance is. To invigorate enterprises, we must first invigorate finance; once that is done, finance can improve the operational and management capacities of enterprises and strengthen their ability to produce and survive. At the moment, enterprises come to us whenever they encounter the slightest problem—we can’t go on like this. This really impressed on me the importance of finance.
Speaking at an international symposium on finance in Shanghai, October 14, 1990.
This year in particular, the money supply has been tightened and difficulties seem to be mounting, so I asked Gong Haocheng4 if we should have a symposium on finance. Shanghai used to be the finance center of pre-liberation China. It has many experts, and the people working in this area are very knowledgeable about finance. There’s also a lot of talent in our new generation of banks, and they’re familiar with the domestic and international situations. Let’s invite everyone to come together and discuss how to do good work in Shanghai’s finance sector.
Regarding this talk of building a financial center, I want to avoid any misunderstandings and make it clear that I wasn’t the person who suggested this. It was first proposed by Mao Yuting, the general manager of Nippon Kangyo Kakumaru Securities Ltd. (Asia) in Hong Kong. He’s come to Shanghai a good number of times, and at one point I asked him how we could invigorate Shanghai. He replied that Shanghai should reclaim its former status as a financial center. He said that banks are very important and that Shanghai’s financial sector should train large numbers of talented people—that they would play a major role in Shanghai’s future development. To tell you the truth, the current standards of our banks are not very high, and compared with the commercial banks in capitalist countries, the role they play for enterprises just isn’t the same. At the very least, unlike the computerized banks in Western countries, our banks aren’t entirely familiar with the credit, debts, and operations of each enterprise—we still aren’t able to handle these matters.
Maurice Greenberg, chairperson of AIG, has also raised the issue of a financial center. This company was founded in prewar Shanghai, and it published the Shanghai Evening Post and Mercury. It got its start in Shanghai and then went to New York, where it became an internationally renowned insurance company. Didn’t I invite 12 internationally recognized entrepreneurs to form an International Business Leaders Advisory Council to the Mayor of Shanghai? Mr. Greenberg is its chairperson, and his attitude toward China is quite positive. He discussed this idea with me, asking how Shanghai will develop. He said the strategic approach is to build a financial center: first of all, you should announce that foreign banks may conduct business in Shanghai. I said, we can’t compete with foreign banks, they’ll take away all our business. He said, every country protects its own banks. You can legislate and have provisions for protection; that way you can constrain and control the foreign banks. This sends a signal to the whole world: Shanghai will open up, so hold up a big sign saying “Open for business.” He said that this way, we can motivate foreign capital to come to Shanghai and increase confidence in investing here.
Based on all this, I discussed the subject with Jing Shuping.5 He and Zhang Xiaobin6 had done research on establishing a securities exchange, originally to have been located in Beijing. After hearing this news, his interest shifted to Shanghai. Zhang Xiaobin wrote me that they were willing to work on behalf of Shanghai and establish the securities exchange and stock exchange in Shanghai. I later discussed this idea with Liu Hongru,7 who is very supportive of Shanghai and indicated that he is willing to personally come to Shanghai to help move it forward. I think this is very good. How should we go about it? Liu Hongru gave us a suggestion for guidance. I fully agree with what some people proposed just now, that we create a small group to study these special issues and come up with a substantive and workable plan.
I suggest that we not mention building a financial center in Shanghai. This could easily lead to misunderstandings; besides, Shanghai doesn’t become a center just because you call it a center. We also have to consider objective development, the appropriateness of policies, support from the central government, and collaboration with all parties. Ultimately we can develop into a center, and that’s when we can call it a center. Don’t give it that title at the very beginning—the wind blows hardest on the tallest tree. For now, we should do as Liu Hongru says and work according to the theme of “deepen reforms, develop the financial sector in Shanghai, and invigorate finance in Shanghai.” Two practical issues should be studied right off the bat.
1. Establishing Foreign Banks
Many foreigners are very keen on this idea. Last year a good number of foreign bank presidents looked me up, making a special trip to call on me and always saying the same thing: we hope to establish a branch in Shanghai. Shenzhen can accommodate 13 foreign banks. Are the four now in Shanghai enough? How about allowing a couple more? Because this is a signal, the impact of establishing a foreign bank in Shanghai is different from doing so in Shenzhen—Shenzhen is a special economic zone. If another foreign bank were to be established in Shanghai now, the impact would be very great.
The other day I saw Zheng Bolin,8 who has his headaches when it comes to foreign banks. The four already here are powerful competitors—they have strong finances and a great many tactics. The evening overtime pay at our Chinese banks was RMB 0.76 [per hour]; it will soon rise to RMB 3.76, but theirs is RMB 10—you can’t outdo them. But to get back to my point—this kind of competition has indeed raised the level of our Chinese banks, and that is what’s good about opening up. Although it also does do some bad things, it really has raised our standards. Without advanced management, Shanghai would now find it too difficult to build an externally oriented economy, and without an externally oriented economy, Shanghai can’t survive. How can we possibly build an externally oriented economy without a financial sector to back it up?
Last year the State Council approved a report we wrote on establishing foreign banks and agreed to allow several foreign banks to come into Shanghai before the end of this year. I don’t know the reason, but the idea was shelved this year. I privately mentioned this to [Premier] Li Peng at the time of the Fifth Plenary Session of the 13th Central Committee. I asked if it could be treated as a policy measure for developing Pudong and for further opening up Shanghai. Li Peng nodded, saying that we should devise a good way to manage foreign banks as soon as possible. That’s why as we step up the planning for developing Pudong, I want to include this as a measure. However, to make sure this measure is solidly based, I propose that a study group go to Shenzhen to investigate how it has been able to accommodate 13 foreign banks and how there can be enough [business] to sustain them when they have such a tiny land area and a mere US$1 billion in exports. We only have 4 foreign banks. Compare our strengths and weaknesses with those of Shenzhen and then come up with a persuasive argument as to why Shanghai should allow several foreign banks to be established here. It can’t be too few—or they’ll quarrel [with us].
2. Establishing a Securities Exchange
[Pointing to Liu Hongru:] The next time you come, can you also bring Zhang Xiaobin to study this issue? Just now Hongru made some very good comments. We must be bold and do a pilot program. Although there’s a bit of political risk, Shanghai is different from other places—how can we go on without taking some measures to deepen reforms? Every day I feel stretched to the limit! Government subsidies to cover losses have risen in a straight line for the last two years—increasing by over RMB 900 million last year, and up to RMB 1.37 billion this year. We can’t go on like this. We couldn’t even reach the contracted baseline figure for this year, and it will be difficult next year. That’s why we must think of some measures—not just from Shanghai’s own perspective, but from that of the country—by which Shanghai can contribute more to the country. This is why I say that studying the issue of finance has very great significance.
In my view, the foregoing two topics are the most urgent ones. I’m sure a great many other specialized subjects should be listed. What’s more, this exercise isn’t for theoretical research, it’s for feasibility studies, and a plan should be produced. I need to see a comparison of the pros and cons of specific plans, and we should sum up experiences derived from practice.
Under the concrete proposal, the Shanghai branch of the People’s Bank of China would take the lead. One person from the bank, one from the city’s Office of Systemic Reform, and one from the city government would form a three-person team to direct this study. Their office should still be located within the bank—you’re in the lead and are in overall charge. You can look into which people are needed for what specific staffing. Also, the main task is to develop contacts with the various financial institutions and research organizations in Shanghai. Assign them tasks, organize them to conduct symposia, give them topics to investigate, ask them to produce results, and so forth, using many formats. You should also do some fieldwork. For instance, the materials on foreign banks that I referred to just now are very persuasive. The last briefing paper from the Bank of China was also very compelling—it made everything clear at a glance for [Premier] Li Peng. That’s why you should compile some materials.
The person from city government will be Li Xiangrui,9 because he’s a member of its Advisory Group on Urban Administration—we’re about to issue his letter of appointment. He’s also a veteran of the People’s Bank—no one else can take his place. We hope the head office of the People’s Bank will support us and guide our work, and we also hope Liu Hongru will give it his attention. He wears two hats—he came from the head office of the People’s Bank of China, and now he’s a vice chair of the State Commission on Systemic Reform. He is the best person for this job, and I hope he will use Shanghai for a pilot program in system reform.
We will be presenting a report to the State Council. That way, we’ll have legal recognition and then we’ll work on financial reforms. As for specific measures, these will be rolled out one by one. For example, I hope the report on developing Pudong, including some financial measures, can be issued by year’s end or by the beginning of next year.
1. This is a speech Zhu Rongji delivered at a Shanghai symposium on financial work.
2. Luo Shilin was then vice president of the Shanghai branch of the People’s Bank of China.
4. Gong Haocheng was then president of the Shanghai branch of the People’s Bank of China and also director of the Shanghai branch of the State Administration of Foreign Exchange.
5. Jing Shuping was then chairperson of China International Economic Consultants Co. Ltd.
6. Zhang Xiaobin was then general manager of the China Venturetech Investment Corporation.
7. Liu Hongru was then a vice chairperson of the State Commission on Systemic Reform.
8. Zheng Bolin was then president of the Shanghai branch of the People’s Bank of China.
9. Li Xiangrui was then chairperson of the Bank of Communications.