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