Strict capital controls, lack of yuan convertibility and ongoing regulatory issues pose a serious threat to the Chinese government’s stated goal of turning Shanghai into a global financial centre by 2020, according to the European Union Chamber of Commerce in China.

A study by the chamber found that almost nine out of 10 members felt Shanghai’s banking and finance market was too regulated compared to other international financial centres, and that has hindered their growth in the mainland.

“Only removal of capital controls and renminbi convertibility can bestow the title of international financial centre upon Shanghai,” said Thilo L. Zimmermann, vice-chairman of the chamber’s banking and securities committee.

In the past few years, Chinese authorities have taken a slew of measures and reforms to open up the country’s economy and boost Shanghai’s appeal. These include removing ownership caps on futures, securities and fund management companies, launching the London-Shanghai Stock Connect and allowing foreign rating agencies to operate in the domestic market.

However, the chamber has called for more practical details and support for foreign financial institutions to ease their entry into the market.

In March 2009, the State Council, China’s cabinet, set a goal to establish Shanghai as an global financial centre by 2020.

“Although Shanghai has certainly moved towards its goal of becoming an international financial centre, it is just not here yet,” said Carlo D’Andrea, chairman of the chamber’s Shanghai chapter.

Another board member of the chamber said that the mindset here in Shanghai was much more regulatory influenced than Hong Kong.

The member, who did not want to be named, explained that although the stock exchange in Shanghai was larger and better organised than Hong Kong, Hong Kong was easier to work with from a regulatory perspective.

“The government should really try to combine Shanghai and Hong Kong, not make them competitors,” he added.

Volatile equity markets, rising risk of bond defaults and underdeveloped post bond default legal process have all increased the risk of financial activities in Shanghai.

None of the surveyed executives said that equities are accurately priced in China, while only 12 per cent believe that corporate credit in China is accurately priced.

According to rating agency Fitch, a lot of onshore bond defaults have yet to be resolved.

Nearly 30 per cent of the issuers that have defaulted on debt between 2014 and November 2019 have not entered into any bankruptcy process or made repayments, while there is very limited information on the post-default status of another 23 per cent, it said.