VZCZCXRO7559
RR RUEHCN RUEHGH
DE RUEHGH #0486/01 3501057
ZNR UUUUU ZZH
R 161057Z DEC 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8426
INFO RUEHBJ/AMEMBASSY BEIJING 3199
RUEHSH/AMCONSUL SHENYANG 2297
RUEHCN/AMCONSUL CHENGDU 2306
RUEHGZ/AMCONSUL GUANGZHOU 0763
RUEHHK/AMCONSUL HONG KONG 2475
RUEHIN/AIT TAIPEI 2096
RUEHKO/AMEMBASSY TOKYO 0830
RUEHUL/AMEMBASSY SEOUL 0619
RUEHGP/AMEMBASSY SINGAPORE 0300
RUEHGV/USMISSION GENEVA 0106
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHFR/AMEMBASSY PARIS 0025
RUEHPS/USMISSION OEDC PARIS FR
RUEHGH/AMCONSUL SHANGHAI 9090
UNCLAS SECTION 01 OF 05 SHANGHAI 000486
SENSITIVE
SIPDIS
DEPT FOR EAP/CM
NSC FOR LOI , SHRIER
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/MAIN/KATZ
USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP
E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV CH ETRD
SUBJECT: 2009 SHANGHAI FDI SNAPSHOT
REF: A. SHANGHAI 410
B. SHANGHAI 444
(U) This document is sensitive but unclassified. Please protect
accordingly.
1. (SBU) Summary: In 2009, Shanghai's foreign direct investment
(FDI) continued to grow despite China's dramatic drop in
nationwide FDI. Municipal officials and academics report that
Shanghai's increasingly service-based economy, the Central
Government's anointment of Shanghai as a future international
financial and commercial center, new local regulations
empowering district-level governments, and intense competition
with other jurisdictions in the Yangtze River Delta Region are
factors causing the Municipality's FDI strategy and development
to differ from other jurisdictions in China. The potential
effects of renminbi (RMB) appreciation and the proposed Shanghai
Disneyland project on FDI remain unclear. End Summary.
========================
FDI Growth...Just Barely
========================
2. (SBU) According to the Shanghai Municipal Commerce Commission
(SCOFCOM), during the first ten months of 2009, Shanghai's
utilized FDI grew 3.0 percent, compared with the same period in
2008. When compared to China's nationwide numbers, Shanghai's
anemic three percent growth rate looks relatively strong. Over
the first ten months of 2009, nationwide FDI dropped 12.6
percent, with a year-on-year drop of 35.7 percent in July.
3. (SBU) The U.S. is the third largest foreign direct investor
in Shanghai, after Hong Kong and Japan. SCOFCOM Foreign
Investment Promotion Department Director Tian Zhongfa admitted
that having Hong Kong in the number one spot for FDI is
misleading. He stated that the origins of investment from Hong
Kong are notoriously difficult to identify, often initiating in
a foreign country and being funneled through the Hong Kong
branch of a foreign bank.
============================================= ==================
The Blessing and Curse of Shanghai's Increasingly Service-Based
Economy
============================================= ==================
4. (SBU) Shanghai has structured its FDI policies to effect a
transition from a manufacturing-based to a service-based economy
since the early 1990s. This transition strategy recently gained
momentum on the national level when, in April 2009, the State
Council in Beijing announced the goal for Shanghai to become an
international financial center by 2020 (ref A). SCOFCOM
officials noted that the vast majority of new FDI flows into the
service sector, reflecting the central government's ambition to
turn Shanghai into a service economy. During the first 10
months of 2009, 89 percent of FDI contracts were in the service
sector, up from 87 percent in 2008, and 80 percent in 2007.
SHANGHAI 00000486 002 OF 005
5. (SBU) It appears that Shanghai's increasingly service-based
economy insulated the Municipality from the staggering drop in
FDI seen in other parts of China in 2009. Zhejiang and Jiangsu,
whose economies are more dependent on manufacturing, saw a 13.5
percent and 14.6 percent drop, respectively, in FDI during the
first half of 2009, compared with Shanghai's 2.5 percent growth
in that period.
6. (SBU) However, local academics indicate that there might be
some obstacles to completely achieving the goal of a service
economy. Dr. Xu Mingqi, Professor and Deputy Director of the
Institute of World Economy at the Shanghai Academy of Social
Sciences, cited to congenoff administrative barriers and market
fragmentation within the Yangtze River Delta region as factors
contributing to Shanghai's slow transition to a service economy.
Shanghai-based service companies (law firms, consultancies,
financial services firms) are sometimes blocked from competing
in the region outside Shanghai Municipality, limiting the city's
ability to become a regional services hub. Dr. Xu said this was
especially true in the banking and legal professions, which are
often limited in their ability to establish branch offices. In
addition, the competitive dynamic in the region means that
Shanghai's neighboring provinces and cities are loathe to lower
administrative barriers for fear of more advanced Shanghai-based
services firms poaching market share from their own local
companies.
============================================= ==========
The Role of Regulation: Empowering Shanghai's Districts
============================================= ==========
7. (SBU) In August 2009, the Shanghai Municipal Government
greatly relaxed the foreign investment approval process by
giving district-level authorities the power to approve foreign
investment projects valued at up to US$100 million. The
previous threshold for district-level approval was US$30
million. Along with the Ministry of Commerce (MOFCOM) in
Beijing, SCOFCOM will still maintain tight control over
investment in sensitive sectors and very large investments, but
will now spend less time reviewing projects. This will enable
the municipal government to focus its efforts on "creating a
stable environment for investment", and less time acting as a
clearinghouse for projects, according to SCOFCOM's Investment
Promotion Director Tian. Dr. Xu stated that any reduction in
bureaucracy would be viewed by investors as a positive step, and
that cutthroat competition between Shanghai's districts should
attract more investment. Furthermore, he pointed out that
district-level authorities now controlled most of the incentives
used to attract international investors, including the ability
to offer tax rebates, cash subsidies, as well as housing and
special tax treatment for executives.
8. (SBU) Districts in Shanghai are embracing their new powers.
On November 20, congenoff attended Xuhui District's 2009
International Advisory Council Meeting, an open forum to discuss
goals and strategies for economic growth and attracting foreign
investment. (Note: Located in the center of Shanghai, Xuhui
District has a population of almost one million, and in recent
years has developed into a commercial center and one of the
SHANGHAI 00000486 003 OF 005
major retail shopping areas in Shanghai. End note.) Ideas
discussed included: positioning Xuhui to play a leading role in
the development of Shanghai as an international trade center;
the types of incentives that should be offered to international
investors; and the creation of an international legal hub with
the headquarters of law firms all in a centralized location --
similar to Pudong District, which is home to most of Shanghai's
financial services firms. The nature and substance of the
meeting demonstrated the sophisticated nature of economic
development on the district level and the depth of the
transition to a service economy in certain areas of Shanghai.
============================================= ===================
Shanghai's Real Estate Sector: Still Open for Foreign Investment
============================================= ===================
9. (SBU) Director Tian was not concerned about foreign
investment overheating Shanghai's property market. On the
contrary, he was keen to point out that foreign investment in
the real estate sector is crucial to Shanghai's emergence from
the economic crisis, and all but assured congenoffs that real
estate would not be named on an updated list of Shanghai
Municipality's investment sectors prohibited to foreign
investors. Managers at E-house (China) Holdings Limited -- a
NYSE-listed real estate services company -- also played down the
idea that foreign investment in real estate is overheating the
sector. E-house Director of International Product & Business
Development Robert Fong noted that a lack of supply and rising
prices in the residential market, particularly the luxury
market, is balanced by overcapacity in the commercial sector
(the firm estimates 30 percent of office space in Shanghai is
empty). Nevertheless, he expected a regulatory shift would
increase restrictions on real estate investment in late 2010 or
early 2011 to maintain control of the sector.
==================================
Stiff Regional Competition for FDI
==================================
10. (SBU) "Fierce, with no one willing to back down," is how Dr.
Frank Peng, Professor of Economics and Finance at Tongji
University and Senior Advisor to the Foreign Investment Board of
the Shanghai Municipal Government, described the competition for
foreign investment between Zhejiang Province, Jiangsu Province,
and Shanghai Municipality to congenoffs. SCOFCOM's Director
Tian similarly explained that regional competition for FDI has
become much more of an issue for Shanghai than it was just a few
years ago. Previously, Shanghai's infrastructure and geographic
location alone convinced foreign investors that it was the best
place for their assets. Presently, with the costs of living,
labor, and land steadily rising in Shanghai, foreign companies
are moving operations to Jiangsu and Zhejiang, which have
developed and refined their economies very quickly, diminishing
Shanghai's competitiveness. Additionally, Dr. Peng pointed out
that Jiangsu and Zhejiang Provinces are no longer content to
take old manufacturing capital fleeing Shanghai's high
production costs. These provinces are now actively recruiting
service industry investment and high-end research and
development in the pharmaceuticals, biotech, and biomedical
sectors, all of which Shanghai is also targeting (Ref B). Dr.
SHANGHAI 00000486 004 OF 005
Xu agreed that Shanghai's competitive advantage for attracting
FDI has dwindled considerably. He pointed out that Shanghai's
policy of transitioning to a service economy is rather
convenient since even without such a policy, the rising cost of
production would have forced Shanghai to cede most of the
manufacturing sector to Zhejiang, Jiangsu and other provinces.
11. (SBU) According to Dr. Xu, Shanghai's competitive advantage
is that it has a relatively efficient, credible government with
a history of protecting investor's interests. Furthermore,
Shanghai's legal infrastructure is unparalleled in China,
particularly when it comes to business law. In addition,
SCOFCOM's Tian noted that domestic consumers perceive Shanghai
products and services to be of extremely high quality. He
stated that international investors should consider this factor
when determining where to make their investment.
============================================= ========
The FDI X factors: The Role of the RMB and Disneyland
============================================= ========
12. (SBU) A number of interlocutors referenced the role of the
RMB in attracting FDI into Shanghai. Professors Xu and Peng
both stated that RMB appreciation would help stimulate a
short-term, nationwide "recovery" in FDI, attracting back some
of the hot money that disappeared when the exchange rate froze
in 2008. Long-term, they did not think FDI would suffer from a
gradual RMB appreciation, as long as the Chinese economy
continues to grow at a steady pace. While neither professor was
willing to indicate whether he thought the RMB would appreciate
in the near future, both referenced a gradual adjustment to come
at some point in the future. Dr. Peng also stated that Shanghai
cannot realize its full investment potential and receive the
investment necessary to become a true international financial
center as planned by 2020 without RMB convertibility. He
claimed officials in Shanghai and Beijing are well aware of this
fact. Consequently, although short-term moves on the RMB are
unpredictable, convertibility is expected before 2020, and with
it a still greater rush of foreign investment into Shanghai.
13. (SBU) Another factor that could have a dramatic effect on
foreign investment is the much feted Shanghai Disneyland
project. Media sources estimate that a $3.7 billion investment
is planned. Speculation is rife regarding how much additional
investment will be attracted to Shanghai as a result of the
project, formal approval of a first phase of which was announced
in November 2009. Mr. Fu Qi, Shanghai Branch Project Manager at
E-House, was pessimistic, predicting that investment in property
will not extend much beyond the Disney site itself in a less
settled part of Shanghai's Pudong District. E-House expects
that many people will want to stay in hotels downtown, not by
Disneyland, and that employees would likely live in more
heavily-developed areas of Pudong. Dr. Peng worried that
Shanghai Disneyland would meet a similar fate as the Disney
parks in Hong Kong and Paris and struggle to make a profit. Dr.
Xu, however, was more bullish, envisioning the creation of an
entirely new economy in Shanghai, unique from other surrounding
provinces and guaranteeing sustained investment to the city for
many years to come.
SHANGHAI 00000486 005 OF 005
=======
Comment
=======
14. (SBU) To a certain extent, FDI numbers march to the beat of
their own drum in Shanghai. The city's continuing shift to a
service-based economy and innovative policies to attract
investment seem to have detached it somewhat from negative
nationwide FDI trends over the last year. In order to keep pace
with opportunistic neighboring provinces offering feasible
investment alternatives for foreign companies, Shanghai will
likely be forced to continue loosening its regulatory grip on
investment. Despite the fierce competitive environment in the
Yangtze River Delta, with official designation as a future
international financial center and massive development projects
such as Disneyland, Shanghai has established a path for future
FDI growth -- one that is likely to deviate to some extent from
overall patterns of investment into China.
CAMP