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December 15, 2009 4:08 PM

Letter from Asia: Will Shanghai Overtake Hong Kong as World Financial Center?

Posted by Anthony Lin

A report by British law firm Eversheds claiming that Shanghai could overtake London as a world financial center in ten years has led to a predictable round of hand-wringing from the British press, including the Financial Times, the BBC, and the Telegraph.

But not all of Asia is gloating. Missing altogether from Eversheds's report is the city that's most worried about losing ground to Shanghai: Hong Kong.

Obviously, such surveys are to be taken with a grain of salt; after all, over a tenth of Eversheds's respondents predicted Dubai would emerge as the world's preeminent financial center in a decade's time.

And Hong Kong, a special administrative region of China with a separate local government and legal system, has been booming recently. So far this year, its exchange is leading the world in initial public offerings, mostly on behalf of mainland Chinese companies. It remains the preferred regional base for global banks and, consequently, international law firms.

Still, Hong Kong has long had a complex about Shanghai, which was the region's preeminent financial center before falling under communist rule in 1949. Now that the same communist government has embraced capitalism, fears abound that Shanghai will be promoted at Hong Kong's expense.

That anxiety was reflected in a Reuters article last week, in which one Hong Kong banker fretted that his city would become a second city--a Boston or a Chicago to Shanghai's New York.

The Chinese government has indeed done much to build up Shanghai as a financial center, building gleaming skyscraper districts, directing state-owned enterprises to float on the exchange there, and launching periodic campaigns to recruit international financial expertise. But ten years still strikes many as too soon.

"People get on these bandwagons," says Matthew Bersani, the Hong Kong-based Asia managing partner for Shearman & Sterling, which also has offices in Beijing and Shanghai. "They don't take into account how much the infrastructure matters.

Bersani points out that Hong Kong has a reliable legal system, a large, well-educated population of English speakers and a fully convertible currency--all necessary elements for an international financial center. He thinks Shanghai will get there, but he thinks it will take considerably longer than a decade.

Even when that happens, it does not necessarily mean Shanghai will eclipse Hong Kong. "This is an issue of the pie getting bigger rather than a zero-sum game," Ronald Arculli, the chairman of the Hong Kong Exchange, told Reuters. Arculli certainly has his bases covered--the law firm he cofounded merged with mainland legal giant King & Wood in July.

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