The implementation of Beijing's national security law in Hong Kong could threaten the special administrative region's status as the prime Asian financial center, with the Chinese government said to be planning to elevate Shanghai to the top status.
However, stricter capital controls in China and a differing legal system could prove difficult obstacles for Shanghai to overtake Hong Kong as the top money-making hub in the region.
China has long yearned to mark Shanghai as the top international hub over Hong Kong, but the US government's restrictions on China's financial reach, including tightened access to capital markets, could hinder Shanghai's growth.
A heavily restricted capital account and the lack of legal system that better welcomes international business remain huge obstacles for China, preventing it from being a stonger competitor against London and New York in terms of being a truly global money hub.
Last March, a global financial centers index released by Z/Yen Group and the China Development Institute showed that Shanghai ranks as the fourth most competitive financial center worldwide. Hong Kong ranked sixth.
Investors in Shanghai can also trade bonds, equities, futures, foreign exchange, gold, insurance, and trusts. Despite its remarkable status, the trade of capital account controls is limited. It only has a few official openings as the Stock Connect compared to Hong Kong.
According to the director of the Asia Global Institute at the University of Hong Kong, Chen Zhiwu, the rise of Shanghai has been caused more by the declining fortunes of Hong Kong and not its own market performance.
Hong Kong was said to be an offshore money center for China that might lose its status depending on how strictly implemented the new national security law is. However, it might still be considered a Chinese financial center depending on international investor confidence. The latter has been declining after the implementation of China's national security law on the city.
The decline of Hong Kong might not also result to an advantage for Shanghai. According to S&P, the recent downgrading of Hong Kong's sovereign credit rating was caused by the drastic fear that the territory's financial sector development, including economic growth, would be greatly jeopardized with the implementation of the national security law.
