The escalating tensions between China and the United States and related uncertainty over Hong Kong makes the development of Shanghai as an international financial centre more urgent than ever, according to a new report.

While the long-term goal is to make the east China megacity into a financial hub like New York, London or Hong Kong, the study by Renmin University of China said Shanghai should prioritise building a global yuan asset management and pricing centre, and increasing its financial allocation ability when future national growth focuses on the domestic market.

“The external environment for China and yuan internationalisation is tense and changes a lot,” according to the report, which was released at the International Monetary Forum in Beijing on Saturday.

“International entities have a strong reliance on major currencies, which makes it hard [for the yuan] to make a breakthrough. As economic downward pressure and global financial turmoil intensify, the monopolistic position of the US dollar will be further consolidated,” it said.

While the process of achieving a status for the yuan commensurate with China’s economic influence would be long and convoluted, the relevant authorities should use the construction of an international financial centre as an opportunity to herald China’s high-quality growth and high-level opening, it said.

The escalating tension between the world’s two largest economies – as seen by the tit-for-tat closure of consulates this week – has increased the need to make Shanghai an international financial centre, especially after the introduction of a national security law in Hong Kong, which has clouded its future.

Liu Yuanchun, vice-president of Renmin University, said at the forum that the global health crisis caused by Covid-19 had also contributed to the growing tensions between Washington and Beijing.

“The pandemic has elevated China-US conflicts to a new high,” he said. “It not only brings financial turmoil, but also a financial war.”

Shanghai was “in urgent need of having [better] interactions between modern industries and finance on the basis of domestic economic circulation,” he said.

Xiao Gang, a former chairman of the China Securities Regulatory Commission, said a strong capital market was necessary to raise funds for China’s corporate innovation, technological progression and international competitiveness.

The calls come as the internationalisation of the yuan – a vital process to break dollar homogeny and American dominance in the global financial system – as seen only modest progress in recent years.

Renmin University’s yuan internationalisation index rose 13 per cent last year to 3.03 and could rise to 5 in the first half of this year, but the currency still trails the US dollar at 50.85 and euro at 26.28.

The proportion of global currency reserves held in yuan rose to 2.02 per at the end of March, compared to 62 per cent for the US dollar and 20 per cent for the euro.

Meanwhile, the proportion of international payments made in yuan stood at 1.79 per cent in May, ranking sixth worldwide.
The report said also that offshore yuan markets also need “rebooting”, as Hong Kong’s deposits dropped 35.6 per cent from 2015 to 632 billion yuan (US$90 billion) at the end of last year, while numbers also fell in Taiwan, Singapore and South Korea.

More importantly, a heavily restricted capital account and the absence of a legal system favoured by international business are still huge obstacles in the eyes of foreigners.

As well as optimising the yuan’s use in its current account and direct investment, Shanghai was advised to foster its core competitiveness by “finishing the last mile of interest rate liberalisation”, build “Shanghai prices” and benchmark yuan pricing for more commodities.

Chinese Vice-Premier Liu He said last month that Shanghai was regarded as a key source of China’s economic growth and at the forefront of its opening up of financial markets.

Wu Qing, Shanghai’s vice-mayor, said there were “still gaps” in the city’s insufficient allocation of international resources and that the proportion of international investors remained low.

“We’ll optimise the connect mechanism with major financial markets worldwide and increase the say in pricing of key products and businesses,” he said at the forum.