With the launch on June 1 of direct trading between the Chinese yuan and the Japanese yen through the Shanghai and Tokyo markets, and the recent progress that Shanghai has made in the area of qualified domestic limited partnership, the city has boosted its bid to become a global financial center.

These developments are particularly encouraging given less successful attempts in the past year to build the international board on the Shanghai Stock Exchange and the offshore yuan market in Shanghai.

It has become widely accepted that China's economy will keep growing at an impressive speed, compared with other economies of its size. To achieve such impressive growth, it is imperative that China remains open and becomes more integrated into global trade and economy.

The more meaningful question to many observers is which city or cities of China will become the center of centers? After the 2010 World Expo, Shanghai has already successfully built its international image as a city that mixes tradition with modernity, and a warm welcome with a hard business edge, which makes it an ideal place for many foreigners to come and seek opportunities in the coming decades.

However, many overseas financial institutions are less certain that Shanghai's ambition to become a truly global financial center will materialize any time soon.

With the development of the warrants market and the index futures market, the world has witnessed how much enthusiasm Chinese investors have displayed regarding financial innovation and new financial instruments.

The question for the next step is how to create new markets and further reform existing markets so that the border no longer poses major challenges for investors on either side.

This is one of the main reasons why some argue that Shanghai would have to overtake Hong Kong to become a global financial center. Such a point of view suggests an unnecessary element of competition between the two cities. That said, it is critical that Shanghai finds a strategic position as a global financial center, especially among the existing regional financial centers, such as Hong Kong, Singapore and Tokyo.

With the development of modern telecommunication technology, distance seems to matter less than it used to. In this regard, Shanghai faces unprecedented challenges to catch up with the trust built up in existing financial centers over the past several decades, when most business had to be conducted locally.

In addition to new products and new business models, Shanghai is in desperate need of expertise in almost all areas of finance. According to statistics, about 10 percent of the City of London's workforce is employed in the financial sector. New York City and Hong Kong are not far behind with their ratios of financial sector workers.

In contrast, only about 2 percent of Shanghai's workforce is employed in the financial sector. The financial service industry is after all a special part of the service industry, and the quantity and quality of the workforce directly determine the size and soundness of that industry.

Apart from strategic consideration, many foreign institutions choose to build their local headquarters in other Asian cities, most notably Hong Kong and Singapore, for more practical reasons, such as the nature of the host legal system.

Many companies, especially those from British Commonwealth countries, favor Hong Kong and Singapore because of similar legal backgrounds.

To lure foreign institutions, Shanghai would have to work closely with the central government and leverage its own financial resources to come up with some innovative policies and practices in the near future.

The author is deputy director of the Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University.

(China Daily 06/01/2012 page7)