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Making Shanghai a global financial centre

By Sun Lijian (China Daily)
Updated: 2006-09-21 14:26

In the 1930s, Irving Fisher, one of the pioneers of modern financial thought, pointed out in his famous Fisher Separation Theorem that a price system reflecting the real situation of financial resource allocation is the best guideline for the financial resource holders to make investments and finance decisions that could maximize social wealth.

Under this theoretical framework, a precondition for establishing a global financial centre is a price system reflecting the real supply and demand of the financial assets at this moment as well as in the future, like free interest and exchange rates.

However, in the later development of financial theory and practice, Fisher's conclusion was proven to be defective. As a result, the goal of a global financial centre becomes more demanding and challenging to attain.

First of all, financial assets are circulated based on the involved parties' common assumptions regarding the future. Such assumptions are usually accompanied with high uncertainty, which could not be fully indicated in the pricing system Fisher described.

Hence, it is important to develop necessary financial services that could diversify the risks brought by the uncertainty. It is key in risk control to develop financial derivatives and financial institutions capable of withstanding risk. Fortunately, Shanghai has done pretty well in this regard.

Besides the tools for diversifying risk, the investors should also be able to circulate their financial assets at low costs.

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