Shanghai and Hong Kong. One is the Chinese mainland's financial center and the other an international financial hub. Both of the cities are Chinese and their financial development was greatly impacted by colonialism. When Shanghai proposes that it wants to develop into an international financial center, people naturally compare the two cities.

It is said that today's Hong Kong is yesterday's Shanghai. A century ago, when Shanghai was the well-known international financial and trade hub of the Far East, Hong Kong was relatively lagging behind. Currently people tend to believe that Shanghai's tomorrow will surpass Hong Kong today, though that still may be a few years away from realization.

In terms of tangibles, Shanghai's Lujiazui Finance & Trade Zone resembles the finance district in central Hong Kong.

However, there is still a huge gap between Shanghai and Hong Kong in terms of intangibles. "Shanghai is laying its foundations," said Hu Zuliu, head of Goldman Sachs Greater China Research. "In the short term, Shanghai cannot pose a real challenge to Hong Kong's status as an international financial hub."

Hu believes the gap between Shanghai and Hong Kong is huge. Hong Kong embraces a vast and reputable global banking system, while Shanghai is still striving to reform the state-owned system of the Chinese banking industry. Moreover, the market value of the Hong Kong stock market far outpaces that of Shanghai. Compared with the mainland market, the Hong Kong stock market is more popular with investors. This kind of stereotype cannot vanish overnight. Although Shanghai has built many skyscrapers for financial institutions and seems as prosperous as Hong Kong, Hu says that this kind of prosperity is actually real estate prosperity, not financial prosperity.

The favorable conditions of Hong Kong include the rule of law, open markets, transparency, the free flow capital and a convertible currency. It will take Shanghai a much longer period of time to catch up with Hong Kong regarding such intangible construction. Shanghai needs to learn a lot from Hong Kong regarding supervision, product innovation and company management.

Hu believes that Shanghai's financial industry should be further opened and that both the interest rate and exchange rate should be further marketized. Meanwhile, currency market construction still lags behind, and the financial market liquidity and convertibility are weak; the quality of supervisory personnel and technology needs to be advanced; the level of transparency of financial institutions and markets remains low; financial information development is slow; financial intermediary institutions' capabilities are inadequate; and there is a serious lack of high-quality financial personnel. All the setbacks mentioned above seriously restrict Shanghai from faster development. Most importantly, the fact that the Chinese yuan cannot be converted freely is an obvious barrier to Shanghai's development as an international financial hub.

"That's why I said Shanghai has a long way to go before it can become another international financial center as Hong Kong," said Hu.

Chai Qingshan, an official with the State Administration of Foreign Exchange, agrees with Hu. He said that Hong Kong is the ninth largest stock market in the world, while the market value of the Shanghai stock market is less than half of that of Hong Kong. Although the mainland is abundant with capital, the central bank has already paid attention to the liquidity and vowed to kill the excessive liquidity. But a lot of companies, especially large and high-quality ones, are more willing to be listed in Hong Kong.

Regarding the banking industry, the banking assets of Shanghai are only 41 percent of that of Hong Kong. Hong Kong has many world-class banks, and 70 of the 100 world's largest banks are incorporated in Hong Kong. Overseas business of Hong Kong banks accounts for 13 percent of all loans, indicating that the opening degree and internationalization of Hong Kong's financial sector far outpaces Shanghai.

In March, the city of London issued a financial center competitiveness report, showing that London ranked first of all international financial centers, followed by New York. Hong Kong and Singapore ranked third and fourth, while Shanghai was listed as the 24th. The report said that due to the drawbacks in terms of personnel, market management and supervision, as well as company environment, Shanghai, the financial center of the Chinese mainland, is incomparable with Hong Kong.

Nonetheless, Shanghai is the most developed city on China's mainland and has enormous development potential. For instance, foreign banks favor Hong Kong as well as Shanghai. Many foreign banks such as Citibank, HSBC, Standard & Chartered have chosen Shanghai as their principal headquarters on the Chinese mainland. This is encouraging news for Shanghai. In addition, costs of business operation in Shanghai are much lower than that of Hong Kong, making Shanghai more competitive. The trade volume of Shanghai Stock Exchange surmounted that of Hong Kong last year.

He Liping, professor at Beijing Normal University, believes that Shanghai needs to embrace certain advantages it has in order to become an international financial center. First, Shanghai enjoys optimal geography. It is the biggest port city on the Chinese mainland with fast and convenient international transportation and quickening development of imports and exports. Meanwhile, Shanghai is located at the heart of the Yangtze River Delta, which is the fastest developing area on the Chinese mainland. Compared with Hong Kong, Shanghai can tap the energy of the entire Chinese economy more easily, and its development potential outpaces that of Hong Kong.

Shanghai has had a long history as a financial center. Its status as one of the biggest financial hubs in the Far East last century taught it precious lessons and gave it much experience, a fact that provides the city with great confidence to further develop into a reputable international financial hub.

The large number of higher education institutes in Shanghai also provides it with huge quantity of high-quality personnel.

He Liping argues that it is unnecessary for Shanghai to compete with Hong Kong, as China can fully contain two international financial centers. What Shanghai needs to do is to learn from the financial innovative theories developed in Hong Kong as well as Hong Kong's management expertise and technology innovations.

The rule of law in China is becoming more mature and its financial market will be opened further and become more transparent. In the future, like Hong Kong, Shanghai will surely achieve the free liquidity of capital and free convertibility of currency.

As early as 1991, Deng Xiaoping, the reform and opening-up forebear of China, stated, "Shanghai was once a financial hub where currencies could be converted freely, and it will be in the future."

Sixteen years have passed. Shanghai is moving quickly toward this goal.