A report submitted to International Business Leaders` Advisory Council for the Mayor of Beijing

by BMO Financial Group

May 2010


INTRODUCTION

BMO Financial Group is pleased to respond to the Mayor of Beijing’s request for recommendations on what the city should consider to bring it to world-class status, similar to cities like New York, London and Tokyo, by 2020.

In many ways, Beijing can be characterized as a world-class city. As the capital of the world’s third – and soon to be second – largest economy and the host of the 2008 Summer Olympic Games, the city possesses strengths in the political, social and technological spheres that already place it in the highest echelons of major cities across the globe.

But world-class cities need world-class financial systems and regulations that allow companies that reside in such centres to succeed. In a changing world with increasingly open markets and freedom of movement, Beijing has the opportunity to take yet another step forward.

Beijing’s position relative to other cities with respect to the financial sector is made clear in the March 2010 edition of the Global Financial Centers Index, which ranks cities based on a survey of international financial service professionals. Beijing ranks 15th in the world and 6th in Asia – a showing that is not yet shoulder-to-shoulder with world-class ranks .

We believe the world’s emergence from the financial crisis represents an opportunity for Beijing. There are plenty of traits of world-class cities that Beijing could emulate, but the ways these cities handled the financial crisis provide excellent lessons for the development of a sound financial sector.  

As Canada’s first bank, we are pleased to have the opportunity to share our experiences and offer ideas on Beijing’s opportunities to become a world-class city with respect to matters relevant to the China and Beijing’s financial sector.  We offer this from the perspective of being a major bank in the Canadian financial system – a system which rather uniquely among industrial countries successfully weathered the recent financial crisis.

This paper will review what Beijing has been doing well and where its momentum lies, and it will also provide some suggestions on how to create even more advantages to allow its financial sector to reach the level required for the international community to see China’s capital as a world-class city.  

BEIJING’S FINANCIAL SECTOR – INHERENT ADVANTAGES

Beijing holds a number of advantages that provide the city a strong starting point in having its financial sector contribute to world-class status. 

The city acts as headquarters to both China’s central bank and the government’s main regulatory arms for banking, insurance and securities, as well as all of the national-level state-owned enterprises. As well, the headquarters of key institutions like the four largest state-owned banks, more than half of the country’s 100 largest state enterprises, the largest insurance company, two auto finance firms and the only two investment banks in the country are located in Beijing. 

Such a financial presence gives Beijing an inherently strong base of expertise and manpower. At the same time, the city is working to become a centre for IT back-office functions for companies – a benefit that multinational financial corporations see as a valuable asset. 

As well, Beijing has the largest number of universities and colleges of any city in China, adding to the city’s strength and prestige. They also provide a source for young talent for employment, not only for the national institutions and firms but also for incoming foreign companies that benefit from local expertise.

Beijing is also engaged in significant work to provide major changes to the city’s infrastructure. Whether these projects are related to transportation with the opening of the new terminal at the airport and construction of new roads and rail links, or the upgrade in water and gas infrastructure, or the building of new accommodation and the modernization of waste disposal, they provide a strong demonstration of Beijing’s intent and determination to keep the momentum to be one of the great, modern cities of the world. 

THE FINANCIAL SECTOR – THE NEXT STEPS TO GREATNESS

Clearly, Beijing’s advantages and accomplishments stand the city in good stead.  However, it is absolutely crucial that the momentum Beijing has attained be continued in the coming months and years. The city must do whatever is necessary to ensure that changes and improvements continue, in order to show its intent to the international marketplace.

In the case of the financial sector, Beijing has enormous potential. Yet, we note the findings of the World Economic Forum’s Global Competitiveness Index, which ranks China 29th out of 133 countries, but 81st on the specific measure of Financial Market Sophistication . Beijing’s aspirations cannot help but be affected by this international perception.

Clearly, Beijing faces a number of challenges. The first challenge lies in the area of financial sector regulation.

As a Canadian financial institution, we understand the importance and role of effective regulation in the success of any country’s financial sector; indeed, Canada’s system and how it avoided the worst excesses of the financial crisis provides valuable lessons. Despite all that went wrong in international financial markets in the past two years, Canada’s banks have been exemplified by their safety and stability. Of particular note, Canada’s banking system received recognition in the Geneva-based World Economic Forum’s Global Competitiveness Report for 2008 and 2009 as the soundest banking system in the world.

This recognition flows from a number of factors, most especially strong regulation and supervision. The result has been a financial sector exemplified by strong, stable, well-diversified firms. This has strengthened Canada’s reputation as a banking centre, and has shown how it can be a potential model.

In the current climate, China, given its more robust financial regulatory system, has an advantage similar to Canada’s. But for China, this advantage represents a regulatory conundrum. When it comes to the financial sector, the national government has a tendency to be cautious, in order to avoid acting too precipitously. With Beijing in particular, there has been a preference by the national government to hold off on reforms – the consequence of a general policy of implementing financial reforms elsewhere in the country and bringing the changes to the capital at a later date. Plus, rules on corporate governance have been implemented for firms in Beijing that are significantly more rigid than those found in other centers. 

We suggest that an examination of the regulatory and legal standards found in countries and financial centers that demonstrated ongoing success would assist in providing examples of useful reforms for China. With the implementation of such reforms, Beijing would reap the benefits of having competitive regulatory and legal standards.  

We would propose consideration of the following specific reforms that the national government could undertake that would be of particular benefit to Beijing’s competitive position but would not place the financial sector, and therefore the city, at risk:

•A free flow of market information. In the world financial system, market participants look to obtain a full understanding of the risks associated with their activities. With a free flow of market information, international firms and their employees will have the comfort of knowing they can analyze all the relevant factors of their activities and minimize risk.

•Changes in national laws and regulations that would provide transparent, predictable and market friendly rules for market participants while protecting systemic soundness. Progressive deregulation may also be an option in some cases.

•Strong, independent regulators with strong rules and systems. International firms seek the certainty that consistent, independent regulation with robust systems and rules provides. Governments set the regulations, but the implementation is best placed in neutral, expert hands. The most effective regulators are those that act in the best interests of the financial sector, and are designed not to be influenced by short-term political expediency.

•A more market-sensitive currency exchange. Major financial centers around the world operate with fully flexible currency exchanges, for both current account and capital account transactions. Moving towards such a system in a predictable way would ensure that the full benefit of trade in the world’s largest market will be realized.

These suggested regulatory reforms are important for China – not as a result of a desire to impose western standards, but because of the benefits that would accrue to the country, its own financial institutions, and the international firms that do business there. For Beijing, these benefits that flow from regulatory reform would benefit its competitive position, and contribute to its move to world-class status.  

NEXT STEPS FOR THE BEIJING GOVERNMENT

Beyond the reforms we suggest for the national government, there are a number of actions the Beijing’s city government can take that would strengthen its financial sector and its hold on world-class status.

Within the financial sector itself, we suggest the expansion of bond and capital markets and the development of a commodities exchange. Other world-class cities around the world that are also international financial centres possess some or all of these elements. To the extent that Beijing has limited debt and capital markets and has not established a commodities exchange, the city’s financial sector portfolio will remain incomplete. The establishment of these elements could be achieved in relatively short order.

Beijing would also benefit from an examination of how others in the world perceive it.  As an example, the September 2009 edition of the Global Financial Centres Index noted that Beijing’s standing, while still not yet sufficiently high to suggest world-class status for the city, had been steadily rising.  The report made particular mention of the fact that this rise was related to increased interest from Asian respondents to the survey . 

This suggests that Beijing has established itself as a major financial centre in the eyes of key influencers in Asian countries. While this is encouraging, it also leads to the conclusion that there is work to do in the rest of the world. 

Beijing’s potential to be a world-class city elsewhere must be encouraged among key influencers around the world. The city can encourage this process by continuing to build relationships with international companies and institutions.

The International Business Leaders Advisory Council is an excellent example of what Beijing is already doing, and there is the opportunity to do more. Beijing can benefit significantly by setting up offices in major centres around the world.  Such offices, with a mandate to establish closer linkages with key players in the international marketplace, can lead to new partnerships that will promote Beijing in the eyes of key figures around the world.

In the same vein, the city could establish an executive office – an arm of the municipal government – that would have the responsibility of building up Beijing as a world-class city. This office could act to bring together key players in Beijing and the rest of the country – such as national level associations, NGOs and the China Banking Association – in support of expanding Beijing’s influence and strength in the international marketplace.

Another avenue Beijing could take is to encourage the establishment of key international institutions within the city. Beijing could be seen as the focal point for Southeast Asia – an example to its peers. Whether this is in the area of the financial sector, or in culture, technology or the environment, establishing itself as the exemplar in these key areas will certainly ensure that the momentum for Beijing as a world-class city will be maintained well into the future.

The experiences of other cities also show that other, "softer" elements, such as service culture, human capital and information system development, are absolutely crucial to market participants’ willingness to do business in a particular centre – a key element to world-class status. 

Of particular importance is a change in focus for Beijing’s universities. These august institutions have long nurtured the talents required to serve China’s central planned economy. But in the new era of globalization, in which China is a key player, the educational system must put greater focus on the entrepreneurial thinking that adapting Chinese firms and institutions need – thinking that will contribute to financial success. 

With educational institutions adapting to these new expectations by offering business-oriented education such as MBA degrees, they are certain to provide Beijing with an impressive supply of talent which will contribute to success and growth among firms in the city. Partnerships with Canadian universities could help facilitate the process of bringing this new focus to China’s centres of higher learning. With such a change in focus, Beijing’s competitive position in the international marketplace is bound to rise.

We also note that the world community’s expectations of great cities go beyond questions of business, infrastructure and human capital. Although not directly related to finance, being a world-class city means being a centre for arts and culture. Significant efforts have already been made in this regard, the Olympics being one. These efforts must continue in all facets of arts and culture, from both a Chinese and international perspective. 

RECOMMENDATIONS

To review, we recommend that the city government in Beijing work in the following ways to help achieve world-class status:

•Establish international offices and an executive office of the city government to relationships around the world and promote the city’s world-class status;
•Encourage the establishment of international institutions in the city;
•Encourage the development of bond and capital markets and establish a commodities exchange;
•Encourage Beijing’s universities to adapt to support more business-oriented, entrepreneurial thinking;
•Continue efforts to make Beijing a centre for arts and culture.

We further recommend that Beijing encourage China’s national government to establish a financial regulatory system that would allow the city, and firms based there, to compete on a level playing field in the international marketplace.  Specifically, we recommend the following:

•A free flow of market information;
•A transformation of national laws and regulations that would provide for transparent, predictable and market friendly rules for market participants;
•Making financial regulators strong and independent; and
•Establishing a more market-sensitive currency exchange.

As a firm with an exciting stake in the success of both the country and the city, from a country with a deep respect for the Chinese people and its culture, BMO Financial Group is very enthusiastic about the opportunity to operate in Beijing.  China’s capital has accomplished great things in a very short time, and we are proud to have the headquarters of what will shortly become our locally incorporated Chinese bank in a city of such importance and potential.

But there is much to do, and much to be gained. With continued work by Beijing’s city government, and the assistance of the national government of the People’s Republic of China, we have no doubt that the city will indeed take its place among the great world-class cities.

As always, BMO Financial Group is delighted to provide its assistance and expertise to Beijing, whether through the auspices of the International Business Leaders’ Advisory Council for the Mayor of Beijing, or through local government and companies. Indeed, BMO is currently hosting four key representatives of Beijing’s financial services sector in Toronto for a summer training course, so we can learn from each other and contribute to the success of both cities and both countries.

BMO is pleased to have the opportunity to help ensure Beijing’s success. We look forward to being a part of this great city’s exciting future in the years to come.