Cablegate: Shanghai Seeking New Perks for Financial Sector

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RR RUEHCN RUEHGH
DE RUEHGH #0396/01 2610548
ZNR UUUUU ZZH
R 170548Z SEP 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7156
INFO RUEHBJ/AMEMBASSY BEIJING 2114
RUEHCN/AMCONSUL CHENGDU 1400
RUEHGZ/AMCONSUL GUANGZHOU 1371
RUEHHK/AMCONSUL HONG KONG 1554
RUEHSH/AMCONSUL SHENYANG 1394
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RUEHIN/AIT TAIPEI 1207
RUEHKO/AMEMBASSY TOKYO 0362
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7742

UNCLAS SECTION 01 OF 02 SHANGHAI 000396

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SAN FRANCISCO FRB FOR CURRAN/GLICK
NEW YORK FRB FOR CLARK/CRYSTAL/DAWSON
STATE PASS CTFC FOR OIA/GORLICK
CEA FOR BLOCK
USDOC FOR ITA/MAC DAS KASOFF, MELCHER, AND OCEA/MCQUEEN
TREASURY FOR AMB. HOLMER, WRIGHT, AND TSMITH
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TREASURY FOR IMFP - SOBEL/MOGHTADER
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E.O. 12958: N/A
TAGS: CH ECON EFIN PGOV
SUBJECT: SHANGHAI SEEKING NEW PERKS FOR FINANCIAL SECTOR

REF: 07 SHANGHAI 211

1. (SBU) Summary. Slowing coastal economic growth and the
slumping stock market are driving top Shanghai officials to
lobby the central authorities for a package of financial sector
reforms. A key part of the plan is for increased authorities to
be granted to local branches of financial regulators, or even to
allow markets to self regulate. Chinese central leaders, for
their part, may be more open to reforms in light of
macroeconomic concerns. Approval could be announced by the end
of September, but is more likely to take longer. End summary.

Shanghai Proposal at the State Council

2. (SBU) Shanghai by the end of September may be granted
authority to carry out a package of reforms to promote the local
financial services sector, Shanghai Financial Services Office
Director-General Fang Xinghai told visiting Embassy FinAtt,
Federal Reserve Board and San Francisco Federal Reserve
professional staff members, and Congen Econoff on September 5.
DG Fang said the package could include income tax rebates for
Shanghai-based financial services firms and professionals,
devolution of regulatory authority for approval of new products
and other financial service innovations to the Shanghai branches
of national financial regulators, and opening of new markets for
bond and interest rate futures as well as exchange-traded funds
for foreign market indices. (Note: This past summer, Shanghai's
Pudong District, home to much of the financial services industry
in Shanghai, announced tax breaks and subsidized apartments for
qualified finance professionals. End note.) The Central
Government would establish a working group under Vice Premier
Wang Qishan to implement the reforms, according to Fang.

3. (SBU) Shanghai Vice Mayor Tu Guangshao in a meeting
September 6 said his biggest priority is devolving more
authority on the operation of financial markets from the
regulators to the exchanges. (Comment: Tu seemed to have in
mind a model closer to U.S.-style self-regulatory organizations.
End comment.)

4. (SBU) Other interlocutors suggested that there may be other
elements to the Shanghai proposal package. High-level
executives in foreign-invested financial firms in Shanghai
separately said that the reform package could include a higher
foreign equity cap in securities joint ventures -- although
still a minority share in the range of 30%-35%. However, an
idea to allow Shanghai firms to set up offshore banking,
publicly mentioned by Pudong officials in August, has been
discarded, said one investment banker.

The Premier Has Signed Off, Or Has He?

5. (SBU) Premier Wen Jiabao has basically approved the package
following heavy lobbying by Shanghai Party Secretary Yu
Zhengsheng, said Fang. A foreign investment banker and Chinese
press articles suggest that Wen's interest in Shanghai's
financial reform package was piqued during his July 4-6 visit to
the region, when he connected the dots on how slowing coastal
growth due in part to financial sector inefficiencies would
leave him open to criticism over his economic policies. Vice
Mayor Tu is less optimistic than Fang that the package would be
passed quickly, although he judged that much of Shanghai's wish
list would be approved.

Wang Qishan Needs a Little Push

6. (SBU) Both Wen and Vice Premier Wang are now more ready to
experiment with financial opening to stimulate services sector
growth, said our interlocutors. In particular, DG Fang said
that U.S. requests to open China's financial sector should be
raised by the President directly with President Hu Jintao, in
stark contrast to his past warnings that U.S. officials should
not appear to criticize Beijing's financial policies (see

SHANGHAI 00000396 002 OF 002

reftel). Our interlocutors said that Vice Premier Wang has not
yet moved on further financial opening, but he wants to.

Is Shanghai China's Financial Center?

7. (SBU) This latest twist in Shanghai's ambitions to be
definitively crowned as China's national financial center comes
four years after President Hu first called for Shanghai to have
this status, adding his imprimatur to that of former President
Jiang Zemin and senior leader Deng Xiaoping. Following Hu's
July 2004 statement, Shanghai in November 2006 announced its
eleventh Five-Year Plan which include the goal of building an
international financial center with ambitious growth targets.
To date, Shanghai can claim a stock market, the inter-bank
lending market, a bond market, a commodity and gold futures
exchange, and the bulk of the foreign-invested financial firms
present in China. The Shanghai Head Office of the People's Bank
of China (PBOC) was established in August 2005, with
responsibilities including the central bank's open-market
monetary operations. Just prior to this past May's inaugural
Lujiazui Financial Forum, attended by global financial leaders,
China's credit reference center (operated by the PBOC) was moved
from Beijing to Shanghai.

8. (SBU) However, Shanghai also faces several domestic
competitors for financial sector growth, said many of our early
September interlocutors. One foreign investment banker whose
firm recently established its headquarters in Beijing went as
far to say "the wind is not blowing Shanghai's way." Fang
himself admitted other cities are lobbying Beijing for local
financial sector incentives: Chongqing is proposing tax rebates
for private equity, venture capital, and trust funds, for
instance. But Fang expressed confidence that Shanghai would be
able to match any incentives Chongqing might win. Interlocutors
pointed to financial services in which other localities were
attempting to gain market share: Beijing for investment and
commercial banking, Tianjin for private equity and renminbi
trading, and Chongqing for regional finance. Hong Kong, with
its low taxes, is seen as the gold standard.

Comment

9. (SBU) Most people we spoke with September 4-7 expect some
financial sector reforms to be enacted, though views differed on
their timing and breadth. Optimists felt that Premier Wen would
come under increasing pressure to take bold actions to spur
growth and moribund financial markets. China remains stuck in a
repeating pattern of financial booms and busts and has yet to
develop robust capital markets that can finance growth. Chinese
retail investors, having been burned, are placing savings back
in banks. Chinese securities firms, whose income depends
heavily on brokerage commissions and high turnover, will face
financial pressures and may be more accepting of capital
injections from foreign investors.

10. (SBU) Nonetheless, DG Fang is probably exaggerating
Beijing's support for the proposed Shanghai reforms. His
description of impending incentives and his appeal for
intervention by high-level U.S. officials probably is intended
to help tip the decisionmaking process at the Central Government
level as well as in any firm considering where to base its China
headquarters..

11. (U) Beijing Financial Attache David Loevinger has cleared on
this cable.
CAMP

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