On a blustery October day, the remaining fragments of what was once Shanghai’s hottest bar and restaurant are being liquidated. The champagne glasses cost Rmb28 ($4), waistcoats hang from a Rmb1,500 lime-green screen, and a framed poster from the 1930s leans against the wall.
M on the Bund closed its doors for the last time in February 2022, in the midst of China’s Zero-Covid policy. By the time its contents were finally sold off last month, they had already become relics of another era.
For more than two decades, the restaurant had been the regular haunt of business people, financiers and visiting delegations to a booming city of over 20mn people. But if they were to visit Shanghai now, “they wouldn’t believe it’s the same place,” says Michelle Garnaut, the Australian restaurateur who founded the venue in 1999.
More than 15 years after China pledged to turn Shanghai into an international financial centre, the port city has failed to live up to its early promise.
Once positioned as the frontier of China’s gradual incorporation into a global economic system, its recent exceptionalism is today overshadowed by a growing rift between Beijing and Washington.
In a city of shipping routes and western concessions, where the distinctive trees that line its avenues were initially introduced from Europe, an inward shift across Chinese politics that accelerated during the pandemic has shaken Shanghai’s international identity.
A beneficiary of decades of economic growth since the country opened up in 1979, the city is the world’s biggest container port and a base for many foreign companies. But it now sits uneasily amid a new era of trade protectionism and mutual suspicion across the Pacific, and is increasingly disconnected from international finance.
American law firms, once participants in huge cross-border financial flows, have left the city as foreign investment plummets. No western bank has participated in a single IPO on Shanghai’s stock market this year, and, in a domestically-focused market, the need for foreign staff is increasingly unclear. Asset management firms that flocked to the city in the hope of a loosening of China’s capital controls, must reckon with the prospect that Beijing will tighten them instead.
For Xi Jinping’s government, this is not necessarily a problem. A critique of finance that arose after the global crisis of 2008 has gained salience domestically, especially after a 2015 stock market crash and anti-pandemic measures that reasserted the dominance of the state. Beijing is now prioritising an internationalism based around exporting infrastructure and green technology that echoes its domestic model, and in which Shanghai plays a role.
Many of the world’s leading foreign financial firms maintain at least a nominal presence in Shanghai, hoping for one of the many U-turns that have characterised its history. But, like the colonial-era banks and counting houses that neighboured the out-of-business M on the Bund, they risk being reduced to a facade.
“This was really the last frontier of capitalism [in China],” says one person present at the fire sale, referring to the buzz of the restaurant’s heyday. “It’s all gone. It’s all changed.”
In the early 20th century, Republican-era Shanghai was, for some, an oasis of free markets. On the Bund, the waterfront mirrors the architecture of London or New York — a legacy of British, French and American concessions established in the 19th century, carved out of the Chinese government’s sovereignty.
A century later, after decades of closure, market forces seemed to be in the ascendancy once again. In spring 2009, Beijing’s state council, the country’s top decision-making body, set an ambitious target: Shanghai would become an international financial centre by 2020.
Even if the term was not strictly defined, it signalled a wider opening-up and came a year after the Beijing Olympics had alerted the world to China’s economic miracle. The goal of becoming an international financial hub is “highly desirable” not only for the city, but for China more broadly, the Brookings Institution wrote in 2011. But it also noted the disappointments of Tokyo and Frankfurt, which had once held similar ambitions, and the importance of the rule of law. Shanghai was “on track” to meet its target, the American Chamber of Commerce said a year later in 2012.
“I got excited, and I kept telling all the young people, the future of finance is Shanghai,” recalls Han Shen Lin, formerly deputy general manager for Wells Fargo bank in China and now China Country Director for The Asia Group, a US consultancy. At that time, “everyone thought China would succeed in loosening its capital controls,” he adds, a reference to the government’s practice of tightly controlling the flow of money in either direction across its borders.
The project, he adds, also hinged on the free movement of information and people — both of which were tightly controlled in China.
For Shanghai, the target was a clear opportunity. The city in 2012 pioneered the so-called Qualified Domestic Limited Partner (QDLP) scheme, one of several similarly titled policies that, behind their abstruse names, hinted at further liberalisation. The scheme, which was soon copied by other cities, allowed approved asset managers to take money — initially $300mn in total — from mainland clients and invest it overseas.
One Chinese asset manager for a foreign firm, who spoke on condition of anonymity, says Shanghai’s plan reflected its “unique position in the political structure” of China. Its party secretary, currently Chen Jining, also serves on China’s 24-person Politburo in Beijing.
The city was “privileged to try new policies”, the person says, and dozens of foreign asset managers set up in the city as a result, hoping that they would one day benefit from China’s internationalisation.
The scheme was just one of several, including the so-called Stock Connect link between the Shanghai and Hong Kong stock exchanges, that appeared to be allowing more money to leave the country in a highly controlled way.
In 2020, although the international target was largely forgotten in the furore of the Covid-19 pandemic, new relaxations subsequently encouraged more investment from the likes of Goldman Sachs, Amundi and BlackRock.
But since then, a sense of a deeper shift in China’s approach has taken hold. Foreign asset managers, like foreign banks, have struggled to gain traction. Shanghai’s QDLP quota, which requires firms to gain approval from regulators, has remained unchanged since 2020 and at $10bn is only twice its 2015 size.
“There’s no doubt that what [was] envisioned . . . not only has not come to fruition [but] has been tabled for the time being,” says Peter Alexander, founder of asset management consultancy Z-Ben Advisors, of the various outbound schemes and the quota.
Global investors “want to buy stocks directly from the Shanghai Stock Exchange, not through the Stock Connect scheme via Hong Kong”, says one employee of an Asian central bank
The Shanghai government said that SAFE, China’s foreign exchange regulator, had repeatedly supported the expansion of Shanghai’s QDLP quota and cited participation from firms such as BlackRock and UBS.
It added that Shanghai had “basically established” itself as an international financial centre by 2020, that international firms continued to expand in the city, and that financial reform and opening up would “never stop”.
For The Asia Group’s Lin, the schemes did amount to some loosening of capital controls over the past decade, but he similarly points to a “slowdown” of that loosening in the last three years. “That has been a primary detriment to China — [and] to Shanghai — being an international financial centre in the conventional sense,” he says.
But capital controls are ultimately a matter of “national security” for Beijing, Lin adds. “I remember [when] coming into China, I went through a bit of a shock period on capital controls,” he says. “I had been taught in the conventional western sense.”
In the freewheeling markets of Republican China, foreign banks provided “wealthy officials and merchants with the ideal place in which to deposit and hide their funds from the government” which was unstable at the time, writes Hong Kong-based historian Ghassan Moazzin.
The weight of this legacy was still felt many years later. Even as it appeared to be opening up to them, China maintained extreme regulatory caution over the role of foreign financial institutions on its soil. It nonetheless encouraged them to enter the country as part of an ethos of learning from international practices dating from the 1980s.
Ken Wilcox, who between 2011 and 2015 ran the now defunct China joint venture of Silicon Valley Bank, which collapsed in 2023, says that when he received a banking licence, he was informed by Shanghai regulators that his company could not use renminbi for three years. The rule, introduced in 2006, was designed to limit foreign competition and remained in place until 2019.
This was a problem, says Wilcox, as “our expected potential client base was largely early stage venture-backed technology companies and the only currency they use is renminbi”.
To complicate matters further, he had needed to hire 62 staff, mostly Chinese, in order to obtain the licence. The regulator offered subsidies — with an accompanying request: “Please act like good citizens and do what Chinese banks would do, teach other banks your business model, because you’re here to help China.”
Wilcox quickly grew frustrated. “I spent all my time trying to get a message to Xi,” he says.
Three years later, and finally able to use renminbi, Wilcox received more bad news. “We admire your business model so much that we intend to use it ourselves,” Shanghai officials informed him. They were opening their own bank.
Foreign financial businesses, often referred to in the 2000s as the “coming wolf”, have long operated under a tacit understanding that such issues would balance against eventual gains. In 2020 and 2021, Beijing allowed foreign firms to take full ownership of their businesses, encouraging new investment.
Geopolitical tensions with the US have not only threatened to reverse an earlier convergence, but also undermined the flow of data as well as people. “Even a confidential [meeting] with SOE [state-owned enterprises] heads one-on-one, is hard to get nowadays,” says a senior executive from one Asian investment bank, who spoke on condition of anonymity.
The domestic financial industry has also fallen out of favour, with widespread pay cuts and a focus on the “real economy”. “Many financiers now feel a sense of shame about their profession,” the banker says, adding that Shanghai is “drifting further away from its goal of becoming a global financial hub. But publicly, you must uphold the official slogan.”
Meanwhile, as economic momentum weakens in China, with the government under pressure to meet a 5 per cent GDP target, financial benefits from a presence on the mainland are less clear cut. Across 88 foreign-owned enterprises in asset management, Z-Ben Advisors estimates that a return on invested capital has been limited for most “if not all” of them and that “self-sustainability is largely out of the question”. “Cash burn is, therefore, a recurring and widespread problem,” the consultancy noted in September.
Against the backdrop of a domestic model that takes a different perspective on both finance and the outer world, Shanghai’s identity has already shifted.
“There was a time when China had ambitions to [turn] Shanghai [into] a global financial market, and rhetorically they will still say that, but I think realistically it is about domestic capital formation,” says Z-Ben’s Alexander.
“I believe there are going to be opportunities for foreigners to come in,” he adds. “But it’s going to be passive.”
The pandemic, in which the Chinese government imposed three years of lockdowns, intensified a sense of distance from the wider world.
After a Covid-19 outbreak in Shanghai in the spring of 2022, local authorities initially responded with a degree of flexibility, before imposing a strict two-month lockdown. Widely seen as orchestrated by Beijing, it came to embody the newly-restated dominance of the capital over the city’s relative freedom to innovate, as it had with the QDLP scheme.
As a result, Shanghai’s expat population plummeted. One estimate attributed to a think-tank in the city puts the foreign population at 72,000 at the end of 2023, compared to over 200,000 in 2018. “We only have started to appreciate now how the free movement of people back and forth has diminished quite a bit,” says The Asia Group’s Lin.
“If I were a Chinese city I wouldn’t take the lead on policy now,” says the Chinese asset manager, highlighting the economic difficulties. Shanghai’s earlier “leadership”, he says, was critical because “as businesses in China our voices are minor”. The country is “a managed country, a managed economy” and we “need local government to create some holes in the wall so we can move liquidity out”.
Some believe Shanghai’s decline can be reversed. Despite their struggle for profitability, Z-Ben notes that there have been few exits from asset managers. Alexander points to “the expectation that this might turn around and ‘we want to make sure we stay there and don’t leave’.”
Elsewhere, there are policies that capture the attention of those still banking on opening-up, such as a new swap connect programme between Shanghai and Hong Kong, launched in 2023 and part of reforms to growing derivatives markets.
Given its vast size and domestic importance, multinationals across a range of sectors have a major presence in and close to Shanghai, providing some default business for their compatriot financial institutions, even if a disappointing economy has strained business activity and geopolitical tensions have weighed on new investment. Tesla has its biggest factory in Shanghai, and over half of the Fortune 500 appeared at an annual import fair this month.
Given China’s capacity for sudden changes, others see Shanghai as a countervailing force to a wider shift inwards. The Chinese asset manager says the city “always promotes liberalism” through turbulent times from the civil war to the pandemic. “It’s a Communist city, but deep down, in its heart, it’s very liberal,” he says.
For Garnaut, the restaurateur, her “gut feeling” is that the city’s current predicament is temporary. People in China, “especially those in Shanghai”, have an approach that “whatever the system, they make it work,” she says. “Somehow they work around it.”
And even though her restaurant’s last remaining possessions have finally been sold off, it appears its reputation has not entirely faded from the scene. “We still get reservations on the website,” she adds.
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