The entire Hongqiao area close to the Shanghai Airport has taken on a new look since foreign investors took up the call of the municipal authorities to move into what was a neglected part of the city in the late 1980s.
Almost 10 years on, the Shanghai Municipal Foreign Investment Commission, one of the highest governing bodies in the city, and the Shanghai branch of the Ministry of Foreign Trade and Economic Cooperation are hoping to work a new miracle. This time they are focusing on Lujiazui in Pudong, the eastern half of the city, to spearhead a new round of investment in Shanghai and restore the city's former glory as the leading financial centre in the Far East.
Both these bodies, along with the Shanghai Municipal Real Estate Bureau which governs planning, development and land leases across the city, are expected to relocate to Lujiazui, immediately opposite the famous Bund on the other. side of the Huangpu River.
Second time lucky
The local government considered developing the scarcely-populated Pudong as early as the 1950s. But the area, about the same size as the developed western bank known as Puxi, required massive capital investment to build even a basic infrastructure.
It was left to Chinese Premier Li Peng nearly 40 years later in October 1990 to rekindle the plan to develop Pudong. However the timing of the announcement left many believing that it was an attempt to distract international attention from the awful events of June 1989. To make matters worse, major two major international events of the early 1990s – the Gulf War and the worldwide economic recession ? served to dampen the enthusiasm of investors.
As a result, most initial investment in Pudong came from Hong Kong, Taiwan and other parts of mainland China. For some time the biggest single investment project in 'Pudong worth about US$100m was by Nanyang Brothers, manufacturing the popular Double Happiness cigarettes in the Waigaoqiao area. Its owner was the Hong Kong-incorporated Shanghai Industrial, dubbed as a 'fake' foreign investor since it is the local government's commercial arm in the territory. Mr Zhu Rongji, then city mayor, was said to be too embarrassed to instruct the local media to write up the project as a foreign investment. Those 'genuine' foreign investors which did make an early commitment, such as Du Pont, were quickly seized upon by the state media and cited as evidence of continued confidence in the Chinese economy.
Three major land development companies were set up in the Lujiazui, Jinqiao and Waigaoqiao areas to tackle the problem of infrastructure shortage. The plan was for the companies, all of which are now listed on the Shanghai Stock Exchange, to buy land use rights from the local government at cheap rates, then develop the land by building roads and laying telecoms and power lines, and finally sell the land at a premium to property developers.
The Shanghai government's promise not to change the price for land use rights for at least three years helped to promote confidence among property developers and investors. In Lujiazui, designed to form the 'Oriental Wall Street' along with the Bund, as many as 28 buildings were under construction at one time.
However the boom was short-lived, ironically because of the stringent economic measures introduced by former mayor Zhu. In July 1993 when he was both vice-premier and governor of the People's Bank of China, Zhu announced measures to cool the overheated national economy. In Lujiazui, where most building work is concentrated, the depressed economic environment quickly translated into an acute oversupply of office space which remains today. As much as 70 per cent of the 282,000 square metres of top-grade office space is still vacant, according to a report published in March by First Pacific Davies, a Hong Kong-based property consultant.
By the end of this year, the stock of top-grade office supply in Pudong including the Lujiazui, Jinqiao and Waigaoqiao areas is likely to soar to 587,000 square metres.
Despite the glut of space, the progress made in Pudong is evident both in the infrastructure and in the amount of economic and social activity now taking place there. It has taken a long time for the outside world to appreciate the achievements of the local authorities working in concert with the central government. Those able to witness the invigoration of Guangdong province following government intervention there, would have been less surprised.
The 10-year capitalist experiment in Shenzhen has transformed a fishing village into a modern and dynamic city and also brought economic vitality to the rest of Guangdong. Such was the speed of the economic transformation in the south that resentment soon started to build up in the rest of the country which had been left behind. Under pressure, Beijing was forced to repeat the experiment on a larger scale.
Shanghai was the natural choice for leading the reforms. Being the national industrial centre, with a strategic central location and by far the most important contributor to the national coffers, Shanghai's economy is interwoven with other parts of China's
But while the opportunities in Shanghai are on a larger scale than in Shenzhen, so are the ,dong risks. There are at least 9,000 state-owned enterprises in the city, which the Chinese Communist Party is reluctant to abandon to market forces.
According to Shanghai Mayor Xu Kuangdi, 34 per cent of the state-owned enterprises were in the red last year and a total of about 700 were declared bankrupt. His government plans to save 400 small and medium-sized firms from bankruptcy by encouraging profitable companies to acquire them. The social welfare system is admitted to be too immature to cope with the social costs of unemployment caused by bankruptcy.
But a fresh start has been made by the state-owned companies set up in Pudong during the past few years. Structured in a way to reflect the on-going changes in the social welfare system, they contribute to the local government's pools of pension and redundancy funds, while the health care of the average worker is taken care of by insurance companies.
In essence, the plan to develop Pudong is not just about promoting prosperity in the region, but it is also about introducing radical social change. If it is shown to benefit Shanghai, it will be introduced in other parts of China.
If Pudong is central to the modernisation of Shanghai's economy, the development of Lujiazui underlines the determination of both the local and central governments to restore the city's past glory. Municipal government departments are in the process of moving into the zone and the big financial institutions are following suit.
Already it is home to the Shanghai branch of the central bank, the People's Bank of China, which moved into its own building in June 1995. Financial markets such as the grain and oil exchange, the real estate exchange centre, the commodity exchange, the metal exchange and property ownership exchange have also moved to Lujiazui. The Shanghai Stock Exchange is expected to occupy its own building in the second half of this year. This will have a trading floor about twice as big as that of the Tokyo Stock Exchange. A recruitment market, where personnel managers can access a registered database of citizens who are looking for new positions, is also moving.
For those foreign banks seeking access to local currency business, the government has announced a new requirement ? establish your main office in Lujiazui. So far nine out of the 40 foreign banks operating in the western part of the city including Hongkong Bank, Citibank, Bank of Tokyo-Mitsubishi and Industrial Bank of Japan have been granted licenses to run yuan-related business in their main branches in Lujiazui. Of the 153 representative offices of foreign financial institutions and investment banks now in Shanghai, at least half are expected to expand and upgrade within the next five years. They will all have to consider the option of Pudong.
To facilitate a recovery in the property market, the local government issued new measures last August. They included provisions allowing for the first time foreign enterprises to buy Chinese properties on a leasehold basis, a halving of the major levies relating to a transaction and providing the public easier access to mortgages.
Templeton of the US, one of the world's largest fund management companies, took the initiative by buying an entire floor of about 4,500 square metres in the Shanghai Stock Exchange Building for US$3m, according to Templeton Emerging Markets Fund president, Mr Mark Mobius.
Templeton has invested US$1.2bn in Hong Kong and China, of which US$500m is in the form of B-shares. Mobius said that if China further eased foreign exchange controls, the company would consider moving its global centre for emerging markets investment from Hong Kong to Shanghai.
All these developments will help Shanghai to compete with Hong Kong as the main regional financial centre, especially once the Chinese currency becomes fully convertible. In the months leading up to Hong Kong's handover on July 1, the central government has been careful not to talk in terms of an erosion of Hong Kong's financial position, but there is no hiding from the competitive challenge.
Templeton's Mobius is forthright, predicting that Shanghai will eventually overtake Hong Kong as the main financial centre in the region. "Shanghai will be a larger market than Hong Kong 15 or 20 years in the future because it represents a much bigger population and investment base," he said.