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China’s Financial Fetish
Zhang Jun is Director, China Center for Economic Studies, Fudan University, Shanghai. This is his first piece to be published on Webdiary
by Zhang Jun
With the drum beating for the development of the coastal areas of Tianjin near Beijing, the curtain seems to be rising on yet another "financial center" in China. When Shanghai sought a similar role several years ago, bankers and investors around the world wondered whether the aim was really for Shanghai to replace Hong Kong as China’s financial heart. In the current pilot project, Tianjin in China’s north and Shanghai in the south are competing against each other, prompting even more second-guessing.
Once upon a time, no one had any idea about how to create a "financial center." A financial center was simply a great metropolis where enormous financial dealings took place. Cities such as London and New York became known as financial centers only after they had proved themselves in the role.
China’s authorities seem to be unaware that many major cities have not had the luck to become financial centers. There is no economic or other theory that explains why a city called a "financial center" should be more valuable or lovely than others. Why, then, should China make developing global financial centers a vital national goal? Does China really need its own financial centers of world standing? Does the world need China to have them? Or is such a goal necessary because a financial center can determine the fate of a great metropolis?
Nothing in the history of finance, the evolution of cities, or modern economics provides a clear answer. It is the Chinese who have endowed the term "financial center" with such weight and meaning by trying to dissect the functions of such cities and quantify every detail. As a result, China’s authorities are prepared to pick a city and order it to create the functions of a financial center, as if such a thing can be constructed like a building – a concept that could not be more off the mark.
Indeed, according to modern development models of finance, whether or not a physical center of finance exists is no longer a meaningful issue. Owing to historical factors and opportunities, financial transactions were concentrated in cities that were traditionally closely linked to the rise of European and American capitalism. But what counts nowadays is not where financial transactions physically take place, but rather the growing importance and globalization of finance in the operation of the world economy.
Cities do not become financial centers because they are more "excellent" than other cities, or because they have done something that other cities failed to do. Instead, once financial transactions begin to concentrate in a place, it becomes hard to move them to other places. A free-market economy and its legal traditions -- both indispensable to the survival of financial centers – certainly helps them to rise, but that initial rise has always been attributable to historical evolution, not government strategy.
In this sense, China’s effort to deliberately create, through government fiat, global financial centers is both exacting and dogmatic. There is no doubt that China needs its financial sector to develop soundly in order to ensure sustained economic growth. And there is now a common understanding in China that meeting this objective requires that the government safeguard financial liberalization.
But progress has been slow, because China’s rulers have put nurturing financial centers – which should be the objective of local governments – at the heart of the country’s financial development. Indeed, equating financial liberalization with privileges for cities designated as "financial centers" undermines the very goals of liberalization – namely, to reduce government control and to accelerate the development of financial markets.
China’s financial system is failing in that respect, owing to frequent administrative and political intervention. As a result, Shanghai has been restricted from making the best of its financial functions, and Hong Kong, Asia’s acknowledged financial center, from assisting China’s financial modernization.
What China needs most is a financial sector capable of harnessing the forces of liberalization and globalization to drive economic growth in the decades ahead. The time has come to cast off the burden of building financial centers, and focus instead on advancing the modernization of Chinese finance.
Copyright: Project Syndicate, 2007.