Letter from Shanghai

The Prodigal Prodigy

by Godfrey Firth

By any objective measure, Shanghai is doing remarkably well. To be Shanghainese is to have enjoyed 15 straight years of double-digit economic growth, rapidly rising incomes, and apartments that have doubled in value over the past five years. Even the stock market, breaking out of a dismal five-year slump, shot up 130 percent in 2006. Foreign multinational corporations have set up 123 regional headquarters and 191 research and development centers—the pinnacle of a mountain of $44 billion in utilized foreign direct investment (FDI) attracted since 2000. Trade volumes continue to rise, hitting $227 billion in 2006, with the engineering marvel of Yangshan Port, perched on two rocky islets in the Hangzhou Bay, smoothly handling the torrent of goods flowing through the city. Shanghai remains mainland China's undisputed business capital, and business is good.

One would expect untrammeled confidence in a city with such a stellar track record. Yet the current mood in Shanghai is more cautious than the statistics suggest. Across China, the metrics of success, as most concretely defined in the career paths of local and provincial officials, are shifting. Shanghai's strengths—blazing growth, openness to foreigners, and financial sophistication—are no longer viewed with unabashed admiration. New leadership in Beijing has brought new policies, and targets for energy efficiency, environmental protection, income equality, and affordable property prices are replacing the nearly single-minded pursuit of growth. The city is slowly falling into line and even aims to break its double-digit growth streak this year.

Scandalized

Shanghai's former Chinese Communist Party secretary, Chen Liangyu, remains in disgrace and under house arrest following the revelation in October 2006 of a massive financial scandal involving the city's $1.25 billion pension fund. Investigators have found that the pension fund was used for unapproved investments in property projects— including the marquee Tomorrow Square development, with its five-star JW Marriott Hotel. Along with Chen, several other senior municipal government officials and top executives at state-owned companies have been removed from their posts and detained.

Scandal and a new policy focus in Beijing bring a firmer hand to China's freewheeling commercial hub

The pension fund scandal has tarnished Shanghai's image, exposing serious cracks in a key pillar of the city's long projected itself as the destination of choice for foreign investors, in part because of its claim to be the most transparent and well-managed Chinese municipality. The stamp of investment approval from so many Fortune 500 companies, with their strong corporate governance, is compelling support for Shanghai's claims. But the scandal has sparked a reexamination of the Shanghai model and, by proxy, the direction of future reform. Spurred by the central leadership's new policy focus on social groups left behind during decades of rapid growth, and played out both in closed-door government meetings and the increasingly nationalist Chinese media, the debate around Shanghai and its successes and failures remains an important weathervane for China as a whole.

Critics of Shanghai ignore the favorable environment foreign investors have found there and charge that the city has attracted foreign companies more by extracting key concessions from the central government than through any innate administrative virtue. Starting with the formation of the Pudong New Area in 1990, Shanghai has been at the forefront of almost every major pilot program to ease regulation, create new corporate structures, and generally improve China's investment environment. From the first wholly foreign-owned trading companies, set up in Shanghai's Waigaoqiao Free-Trade Zone in 1990, to the holding company and regional headquarters' initiatives, Shanghai has enjoyed the status of a pioneer. This status is now in doubt as scandal ripples through the city's administrative hierarchy. Concessions and pilot experiments from the center are likely to be harder to come by, especially as competing municipalities push hard for their own projects. Guangzhou has recently issued new regulations seeking to attract foreign companies' regional headquarters, and Tianjin has ambitious plans to develop the Binhai New Area into a financial center to rival Pudong.

Victim of its own success

While Shanghai's image and status have suffered over the past year, the city's fundamentals remain strong. Foreign investors remain optimistic, pouring in $7 billion of new investment in 2006, some 11 percent of China's total. There are still sound business reasons why companies choose to locate their key operations and highest-level employees here. In many ways, Shanghai's growing vulnerability stems from its own overwhelming success, as companies scramble in a cutthroat war for scarce management talent and as compensation, office rents, and other costs rise steadily. Foreign-invested companies now employ nearly 10 percent of Shanghai's workforce, and most have plans to expand hiring in 2007.

The expansion of foreign companies in the city is creating new tensions. Five years ago, the Shanghai Municipal Government commissioned McKinsey & Co. to draw up a plan to help revitalize the city's principal commercial street, Nanjing East Road. The consultants produced a lengthy, sophisticated plan for a pedestrian walkway, centered on attracting big-name foreign retailers. At the time, the plan generated admiring approval, and today the gleaming neon- lit walkway is jammed with hordes of tourists each day. In January, however, the city came under withering domestic media criticism for purportedly refusing to renew the leases of domestic retailers in order to attract higher-paying and more prestigious foreign brands. The political and media environment in China is shifting, and Shanghai is shifting with it.

The city government is aggressively pursuing suspected commercial bribery investigations involving multinational corporations and recently sent teams of quality inspectors to test clothing pulled from the racks of luxury foreign- owned fashion boutiques—including some on Nanjing East Road. Some 5,000 of the 24,000 labor arbitration cases in Shanghai last year involved foreign companies, and employees won full or partial restitution in 86 percent of all cases. While foreign companies are still welcome, Shanghai is becoming a less-solicitous host.

Filial piety

For now, Shanghai will carefully toe the central line. It will push, quietly, for its pilot programs and initiatives but is much less likely to get all that it wants. Beijing's hand on the reins will be somewhat tighter, as demonstrated by central interventions to bring down sky-high property prices in 2006 and to cool the stock market in early 2007. Still, as the contributor of more than 15 percent of the central government's tax revenues and the home of China's principal stock market, the city will remain vital to the country's reforms. Expect Shanghai to keep on beating the forecasts, including its own: targeting single-digit growth is one thing, actually slowing down to achieve it another.

As the world's eyes turn to Beijing for the Olympics, Shanghai is readying itself for its own coming-out party on the global stage—the 2010 World Expo. It never hurts to have two extra years of preparation time to outdo one's elders, and Shanghai is still, by any measure, a true prodigy.

Godfrey Firth is chief representative, Shanghai, at the US-China Business Council.

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	E-Mail \| Print \| License Letter from Shanghai The Prodigal Prodigy by Godfrey Firth By any objective measure, Shanghai is doing remarkably well. To be Shanghainese is to have enjoyed 15 straight years of double-digit economic growth, rapidly rising incomes, and apartments that have doubled in value over the past five years. Even the stock market, breaking out of a dismal five-year slump, shot up 130 percent in 2006. Foreign multinational corporations have set up 123 regional headquarters and 191 research and development centers—the pinnacle of a mountain of $44 billion in utilized foreign direct investment (FDI) attracted since 2000. Trade volumes continue to rise, hitting $227 billion in 2006, with the engineering marvel of Yangshan Port, perched on two rocky islets in the Hangzhou Bay, smoothly handling the torrent of goods flowing through the city. Shanghai remains mainland China's undisputed business capital, and business is good. One would expect untrammeled confidence in a city with such a stellar track record. Yet the current mood in Shanghai is more cautious than the statistics suggest. Across China, the metrics of success, as most concretely defined in the career paths of local and provincial officials, are shifting. Shanghai's strengths—blazing growth, openness to foreigners, and financial sophistication—are no longer viewed with unabashed admiration. New leadership in Beijing has brought new policies, and targets for energy efficiency, environmental protection, income equality, and affordable property prices are replacing the nearly single-minded pursuit of growth. The city is slowly falling into line and even aims to break its double-digit growth streak this year. Scandalized Shanghai's former Chinese Communist Party secretary, Chen Liangyu, remains in disgrace and under house arrest following the revelation in October 2006 of a massive financial scandal involving the city's $1.25 billion pension fund. Investigators have found that the pension fund was used for unapproved investments in property projects— including the marquee Tomorrow Square development, with its five-star JW Marriott Hotel. Along with Chen, several other senior municipal government officials and top executives at state-owned companies have been removed from their posts and detained. Scandal and a new policy focus in Beijing bring a firmer hand to China's freewheeling commercial hub The pension fund scandal has tarnished Shanghai's image, exposing serious cracks in a key pillar of the city's long projected itself as the destination of choice for foreign investors, in part because of its claim to be the most transparent and well-managed Chinese municipality. The stamp of investment approval from so many Fortune 500 companies, with their strong corporate governance, is compelling support for Shanghai's claims. But the scandal has sparked a reexamination of the Shanghai model and, by proxy, the direction of future reform. Spurred by the central leadership's new policy focus on social groups left behind during decades of rapid growth, and played out both in closed-door government meetings and the increasingly nationalist Chinese media, the debate around Shanghai and its successes and failures remains an important weathervane for China as a whole. Critics of Shanghai ignore the favorable environment foreign investors have found there and charge that the city has attracted foreign companies more by extracting key concessions from the central government than through any innate administrative virtue. Starting with the formation of the Pudong New Area in 1990, Shanghai has been at the forefront of almost every major pilot program to ease regulation, create new corporate structures, and generally improve China's investment environment. From the first wholly foreign-owned trading companies, set up in Shanghai's Waigaoqiao Free-Trade Zone in 1990, to the holding company and regional headquarters' initiatives, Shanghai has enjoyed the status of a pioneer. This status is now in doubt as scandal ripples through the city's administrative hierarchy. Concessions and pilot experiments from the center are likely to be harder to come by, especially as competing municipalities push hard for their own projects. Guangzhou has recently issued new regulations seeking to attract foreign companies' regional headquarters, and Tianjin has ambitious plans to develop the Binhai New Area into a financial center to rival Pudong. Victim of its own success While Shanghai's image and status have suffered over the past year, the city's fundamentals remain strong. Foreign investors remain optimistic, pouring in $7 billion of new investment in 2006, some 11 percent of China's total. There are still sound business reasons why companies choose to locate their key operations and highest-level employees here. In many ways, Shanghai's growing vulnerability stems from its own overwhelming success, as companies scramble in a cutthroat war for scarce management talent and as compensation, office rents, and other costs rise steadily. Foreign-invested companies now employ nearly 10 percent of Shanghai's workforce, and most have plans to expand hiring in 2007. The expansion of foreign companies in the city is creating new tensions. Five years ago, the Shanghai Municipal Government commissioned McKinsey & Co. to draw up a plan to help revitalize the city's principal commercial street, Nanjing East Road. The consultants produced a lengthy, sophisticated plan for a pedestrian walkway, centered on attracting big-name foreign retailers. At the time, the plan generated admiring approval, and today the gleaming neon- lit walkway is jammed with hordes of tourists each day. In January, however, the city came under withering domestic media criticism for purportedly refusing to renew the leases of domestic retailers in order to attract higher-paying and more prestigious foreign brands. The political and media environment in China is shifting, and Shanghai is shifting with it. The city government is aggressively pursuing suspected commercial bribery investigations involving multinational corporations and recently sent teams of quality inspectors to test clothing pulled from the racks of luxury foreign- owned fashion boutiques—including some on Nanjing East Road. Some 5,000 of the 24,000 labor arbitration cases in Shanghai last year involved foreign companies, and employees won full or partial restitution in 86 percent of all cases. While foreign companies are still welcome, Shanghai is becoming a less-solicitous host. Filial piety For now, Shanghai will carefully toe the central line. It will push, quietly, for its pilot programs and initiatives but is much less likely to get all that it wants. Beijing's hand on the reins will be somewhat tighter, as demonstrated by central interventions to bring down sky-high property prices in 2006 and to cool the stock market in early 2007. Still, as the contributor of more than 15 percent of the central government's tax revenues and the home of China's principal stock market, the city will remain vital to the country's reforms. Expect Shanghai to keep on beating the forecasts, including its own: targeting single-digit growth is one thing, actually slowing down to achieve it another. As the world's eyes turn to Beijing for the Olympics, Shanghai is readying itself for its own coming-out party on the global stage—the 2010 World Expo. It never hurts to have two extra years of preparation time to outdo one's elders, and Shanghai is still, by any measure, a true prodigy. Godfrey Firth is chief representative, Shanghai, at the US-China Business Council. Further Reading Letter from Washington: The New Congress Letter from Beijing: WTO Is Only the Warm-Up Click here for copyright permissions Copyright 2007 US-China Business Council Top of Page Table of Contents
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Departments

Letter from Shanghai

The Prodigal Prodigy

Scandalized

Victim of its own success

Filial piety

Further Reading