A tale of two cities: can Shanghai challenge Hong Kong’s offshore finance crown?

Hong Kong has been seizing every opportunity to consolidate its role as a global financial centre, leveraging unique advantages and national strategies. In the first piece of our miniseries focusing on the city’s financial industry ahead of the handover anniversary, we examine what Shanghai’s rapid development of offshore markets means to Hong Kong.
Beijing’s latest push to strengthen Shanghai’s offshore financial capabilities is prompting fresh questions about whether Hong Kong’s long-standing dominance in the sector could eventually come under pressure.
For many analysts, it is not any single policy measure that stands out, but rather the speed of Shanghai’s ambitions, the determination of local officials and, most importantly, Beijing’s explicit commitment to support the city in “taking the lead in building an offshore financial business system”.
The message was underscored at this month’s Lujiazui Forum, where People’s Bank of China Governor Pan Gongsheng unveiled a pilot foreign-exchange trading programme in Shanghai’s free-trade zone.
According to domestic media citing the China Foreign Exchange Trade System, six participating state-owned banks completed 125 transactions worth 7.24 billion yuan on the programme’s first day.
Foreign-exchange trading is only one component of a broader blueprint. The newly released Action Plan for the Development of Offshore Finance in Shanghai International Financial Centre also covers free-trade-zone offshore bonds, offshore trade financing, international treasury centres and other cross-border financial services.
“Competition between Hong Kong and Shanghai is likely to intensify as paths converge,” said Gary Ng, senior economist for Asia-Pacific at Natixis.
The concern among some market participants is that Beijing’s growing institutional firepower could gradually erode areas of business that Hong Kong has long regarded as secure.

For decades, Hong Kong has served as China’s primary offshore financial gateway, helping facilitate capital flows and supporting initiatives such as yuan internationalisation. That role is now facing closer scrutiny.
Zhennan Li, senior Asia economist at Pictet Wealth Management, said the Shanghai programme would strengthen the ability of China’s largest banks to guide market expectations, particularly during periods of stress when volatility in the offshore yuan market risks spilling over into the onshore market.
The central bank already exerted influence over Hong Kong’s offshore yuan market through mainland bank branches and bill issuance, Li noted. Allowing mainland state-owned banks to participate directly in offshore trading from Shanghai would make intervention faster and potentially more effective.
“It will strengthen the role of China’s major banks in offshore yuan trading and help narrow the gap between onshore and offshore exchange rates,” Li said.
Tommy Ong, managing director of T.O. & Associates Consultancy, said the initiative could also divert some trade-related foreign-exchange business that has traditionally flowed through Hong Kong.
“The direct impact on Hong Kong would be some volume loss in trade-related foreign-exchange settlements originating from Shanghai Free Trade Zone companies,” Ong said.
Such transactions are relatively straightforward and require little financial intermediation, reducing the incentive for firms in the zone to route them through Hong Kong.
Ong also cautioned that Hong Kong’s influence over offshore yuan pricing could weaken over time. The city currently hosts the benchmark reference rate used by international institutions for offshore yuan pricing and settlement.
“Rates published through the mainland’s foreign exchange platform could eventually become an industry standard for rate fixing,” he said.
The latest measures are widely viewed as part of Beijing’s broader effort to expand the yuan’s international reach amid heightened global uncertainty. They have also revived a long-standing question: could Shanghai eventually encroach on Hong Kong’s position as the world’s leading offshore yuan centre?
The latest Global Financial Centres Index, published by Z/Yen Group and the China Development Institute, ranked Hong Kong third globally behind New York and London, while Shanghai placed eighth. Hong Kong scored particularly strongly in areas such as business environment, human capital and infrastructure, and ranked first worldwide in insurance.
The gap is even wider in offshore finance.
Hong Kong remains the principal venue for international investors seeking yuan exposure, hosting dim sum bond issuance, offshore yuan derivatives trading, cross-border wealth management and foreign-exchange settlement. It is also an established centre for offshore asset management, family offices and trust services.
Shanghai’s offshore business, by contrast, remains at an earlier stage of development. The new action plan adopts a phased approach, initially focusing on areas where the city already has some foundation, such as offshore trade financing and commodity-linked settlement, before expanding into offshore bonds, reinsurance and international treasury centre operations.
China’s top regulators have also pledged to improve the policy framework governing offshore finance, covering business rules, risk management and the broader operating environment. Pan said the ultimate goal was to build an offshore financial system commensurate with Shanghai’s status as a global financial centre.

Despite the competitive pressure, many analysts argue that Hong Kong retains structural advantages that Shanghai will struggle to replicate.
“Hong Kong is still widely seen as the offshore hub for renminbi,” Ong said, pointing to the city’s broad ecosystem of investors, bond issuers, hedge funds, multinational corporations and sovereign institutions.
Its mature derivatives market and deep liquidity pool, he added, would take years for Shanghai to match.
Hong Kong held 1.1 trillion yuan in offshore yuan deposits at the end of April, the largest pool outside mainland China, according to the Hong Kong Monetary Authority. Cross-border trade settlement handled through the city reached 1.2 trillion yuan in March alone.
The city also processes more than 70 per cent of global offshore yuan payments and remains the world’s largest offshore yuan foreign-exchange centre. Average daily renminbi foreign-exchange turnover reached US$315 billion in the latest Bank for International Settlements survey.
Le Xia, chief economist for Asia at BBVA Research, said Hong Kong’s legal framework, world-class financial infrastructure and long-standing reputation as an international financial centre were “hard-to-imitate” advantages.
“In the near term, most overseas investors will feel more comfortable taking part in offshore renminbi business here,” he said.