Aug. 18 (Bloomberg) -- Shanghai Mayor Han Zheng has every intention of fulfilling his mandate to enable China’s financial capital to overtake Hong Kong, Singapore and Tokyo as preeminent in Asia, as long as bankers don’t get in the way.

“Financiers have the least conscience in the world when it comes to making money,” Han, 55, said in an interview. “By saying that, I would have offended many bankers and financiers, but this is my personal experience.”

The mayor’s misgivings mirror a wider dilemma for leaders in China, where a centuries-old Confucian disdain for the merchant class gave way to outright hostility when the communists seized power in 1949. Han said that Shanghai needs to contain the “animal spirits” that led Western banks to take on too much credit risk, triggering $1.6 trillion in losses.

China’s government in April gave Shanghai until 2020 to become a global finance hub, a role played by Hong Kong since Britain handed back the former colony 12 years ago. To get there, China needs to make the currency convertible, bring the legal system in line with international norms and cut taxes that are double those in Hong Kong, Han said.

“This is certainly a very challenging strategic mission,” Han said in the Aug. 5 interview at the city’s Hengshan Picardie Hotel. “What we have to focus on in Shanghai at the moment are the fundamental things, including the legal framework, credit systems and a set of open rules for competition.”

New York

To transform Shanghai’s $200 billion economy, Han aims to lure more professionals from overseas. The 230,000 people working in Shanghai’s financial industry each on average accounted for $91,300 in economic value added last year, according to city data. In Hong Kong, which employs about the same number of people, the figure was $200,000 a head in 2007, according to the Census and Statistics Department.

The gap with New York is even greater. The city’s securities industry employed twice as many people as Hong Kong’s and produced 10 times the economic output, according to a 2006 paper by Dong He, Ivy Yong and Peter Lim for the Hong Kong Monetary Authority.

“Those two cities still lead in the financial sector at the moment and they’re ahead of Shanghai by a very big margin,” Han said. “Shanghai will certainly be growing at a very rapid pace and the speed of growth will certainly be faster than that of New York and Hong Kong.”

Growth Market

Shanghai’s economy grew 7.9 percent in the second quarter of this year, and has increased 50-fold over the past three decades.

The city of 19 million people, home to the larger of China’s two stock exchanges, last month hosted the world’s biggest initial public offering in more than a year when China State Construction Engineering Corp. raised $7.3 billion. Chinese companies have raised 782 billion yuan ($114 billion) in initial share sales at home since 2006, according to data compiled by Bloomberg. There have been $133 billion of IPOs in the U.S. in that time, the data show.

Shanghai-listed PetroChina Co. is the world’s biggest company by market value at $355 billion, while Industrial & Commercial Bank of China is the largest lender. The stock exchange is also preparing to welcome overseas companies, including London-based HSBC Holdings Plc, which traces its roots to the city in 1865.

Musical Leaning

“It’s difficult to argue with the 30 years of growth that China has been able to deliver,” Richard Yorke, head of HSBC’s China unit, said as he prepared for a meeting with Han. “Chinese officials are very good at studying what has happened elsewhere and then taking the lessons of what has worked and what hasn’t.”

Han was born five years after China’s Communist Party took power, in the town of Cixi, across the Hangzhou Bay from Shanghai. He graduated in 1994 with a master’s degree in economics from East China Normal University in Shanghai and was named the city’s mayor in February 2003. Along the way, he served as Party Secretary of the No.6 Rubber Shoe Factory and turned down a place at the Shanghai Conservatory of Music.

“I would like to be a musician, but perhaps I’m already too old,” he said, adding he would never choose to be a banker.

People in the industry are “obsessed with financial innovation and leverage and they’ve put risk management on the backburner,” he said. China needs “to develop regulations and laws to put those ‘animal spirits’ on a leash so they play within the scope we’ve defined.”

Global Mindset

Paul Calello, chief executive officer of Credit Suisse AG’s investment bank, said he didn’t think the Shanghai mayor’s comments about bankers represented a particularly Chinese attitude.

“That mindset toward financial people is a global one,” said Calello, 48, who spent six years at Credit Suisse in Hong Kong before moving to New York in 2007. “I don’t know that he’s got that market cornered.”

Shanghai is no stranger to financial bubbles, which have plagued China since the stock market opened in 1991. One of Han’s predecessors, Xu Kuangdi, in 1995 blamed the head of a local brokerage for a futures trading scandal that led to a national ban on the securities. More recently, the Shanghai Composite Index, after almost doubling in the year to Aug. 5, has lost more than 17 percent of its value since.

Confucian Legacy

The teachings of Confucius, the Chinese philosopher who lived 2,500 years ago and whose ideas on governance and ethics have percolated throughout Asia, placed scholars at the top of the social hierarchy and merchants at the very bottom, with peasants and craftsmen in between.

Merchants were often accused of being parasites because they earned a profit by “moving things around, and buying low and selling high,” said Loy Hui Chieh, an assistant professor at the National University of Singapore, who teaches courses on Confucianism.

“Animal spirits are important as drivers of risk-taking and innovation in any system,” said Loren Brandt, a professor who specializes in China’s economy at the University of Toronto. “The recent experience in the U.S. and Europe is a good reminder that this behavior is not self-regulating.”

No Control

China’s Communist Party rulers have created an economy that’s a mix of capitalism and government control. The nation’s biggest banks are state owned and have a history of channeling money to government steel mills, automakers and airlines without much regard to investment returns.

One obstacle for Han is that he has no control over when China will make its currency fully convertible, change taxes or overhaul the legal system. Regulations will have to be hammered out with national bodies such as the People’s Bank of China and the China Securities Regulatory Commission in Beijing.

For now, Han is focusing on what he can do himself.

“It’s still possible for local governments like Shanghai to adopt flexible measures to provide benefits to people coming to Shanghai,” he said. “We have been transforming the city to make it look even more modern.”

Employees of overseas financial companies get a one-time rental subsidy of about $29,000 and a 20 percent tax rebate from the city’s government. Earnings exceeding the equivalent of $14,600 a month are taxed at 45 percent in China. Hong Kong’s top rate is 17 percent.

Blackstone Fund

To develop its capital markets, the city government plans a venture with New York-based Blackstone LP, the world’s biggest private equity firm. The two will set up the 5 billion yuan Blackstone Zhonghua Development Investment Fund, marking the Chinese government’s first partnership with a global buyout firm.

Shanghai spent $1.25 billion building the world’s fastest train, a 431 kilometers-per-hour magnetic-levitation ride to its main airport. The historic Bund district is also undergoing a makeover as the city spruces up ahead of next year’s World Expo, when 70 million visitors are expected.

Han still finds time to indulge his passion for music, recently attending auditions aimed at lifting standards at the 130-year-old Shanghai Symphony Orchestra before a world tour.

“I could have ended up in the music industry,” he said. “If I’d accepted that offer, perhaps I’d be speaking now as the president of Shanghai’s music conservatory, not the mayor.”

Alan “Ace” Greenberg, the former chairman of now-defunct Bear Stearns Cos., laughed in response to Han’s comments about financiers’ “conscience.”

“I wish the mayor well,” said Greenberg, 81. “I hope he succeeds.”

For Related News and Information: Top government stories: TOP GOV <GO> Most-read stories about China today: MNI CHINA 1D <GO> China economic statistics: ECST CH <GO> Bloomberg stories on Han: NSE "HAN ZHENG" IN WIRE: BN <GO>

Last Updated: August 17, 2009 15:14 EDT