Piercing Shanghai's financial myths

What is important is not what it is but what it is becoming......

Shanghai's office and hotel towers are ritzy, the entertainment area, Xintiandi, looks like a Chinese version of London's Covent Garden, and Shanghai girls dress with an almost French sophistication. The city has certainly done a better job of controlling Sars and traffic flows than Beijing. No wonder that this year, all the big foreign conference organisers shifted to Shanghai.

In 2001, Shanghai's financial sector was recognised as one of the city's six pillar industries, growing at a rate of 2.1 per cent that year, compared to 10.3 per cent gross domestic product (GDP) growth. From 1998, however, Shanghai's recorded financial crimes increased by 4.8 per cent per annum, just below its separate recorded rate of economic crimes (contract fraud).

......Three of Forbes' favourite Shanghai rich, Zhou Zhengyi, Qian Yongwei and Xu Peixin, are under investigation in connection with irregular bank loans for shady property transactions.

Property is revealing. From 1995 to 2001, total profits of all Shanghai's several thousand property development companies reached 27.2 billion yuan. Their publicly stated return on investment averaged 1.85 per cent, meaning they would have all done better leaving their money in the bank.......Clearly, property fortunes were made on shadow, not declared, income, usually from illegal land transfers, removals or construction-cost kickbacks.

......The Shanghai Securities Exchange is an insiders' trading floor.......Investigators have difficulty collecting evidence against insider trading, as systems for monitoring are either incomplete or non-existent.

Shanghai Securities Exchange is a paradise for falsifying company valuations. Accountants frequently deliberately over-rate the asset value of a company about to be listed.

......While the rate of foreign currency credit card fraud for all Asia-Pacific countries combined stands at 0.010 per cent of all transactions, in China it has already hit 0.038 per cent, almost four times the total amount of such fraud for the entire region, much driven from Shanghai.

The financial services sector accounts for 15 per cent of Shanghai's gross domestic product, exceeding what it contributes to both Hong Kong and Singapore GDP. Still, Shanghai's financial services severely lack products available in Hong Kong and Singapore, and the service efficiency of both. The truth is Shanghai's financial sector contribution to GDP stems mainly from interest spread (annual interest on deposits is 1.8 per cent, while lending is 5.31 per cent). All this means Shanghai is not offering much in financial services.

Foreign financial analysts should heed the Chinese saying that one cannot taste a dumpling's filling from its soft doughy skin. Amid the rush of perfumed waitresses sweeping through lobby lounges with gin and tonics on a tray, everything in Shanghai seems great these days. Under the surface, maybe it is not.