Since the early 1990s, Shanghai has embarked on a frantic building spree, with construction taking place all-year round – even round-the-clock for certain projects. This year, the city looks as if it is finally going to take a pause after the completion of yet another landmark – the 88-storey, 420-metre high Jinmao Building.
With China's highest building now up and running, there is a sense in Shanghai that a new page has been turned. What else is there left to be built now that the city already possesses one of the country's most impressive skyscrapers? Most facilities needed by a modern city have been constructed in recent years – dozens of highways, cross-river bridges and tunnels, a world-class museum and opera house, the country's biggest library and an international sports stadium.
A few big public works still need to be completed later this year, but the image of the soaring Jinmao tower seems to be the most potent reminder that a threshold has been crossed. "Shanghai's years of investment-pull economic growth is over. We will have to find new engines of growth," says Dr. Zhou Zhenhua, deputy director of the Economic Research Institute at the Shanghai Academy of Social Science.
Economists like Zhou say growth will have to come from industries that serve Shanghai's new service-based economy. "There are still many businesses that should [exist] but have not yet emerged in a big city like Shanghai," adds Wu Yikang, vice president of the Shanghai-based Chinese Association for the World Economy. Services have already surpassed manufacturing industry as a percentage of the city's GDP, while new industries such as information technology have barely started.
Tough external conditions
Shanghai can no longer rely on massive inputs to generate growth as it did earlier this decade, analysts say. With the imminent completion of a new airport in Pudong, a new section of the subway and another elevated road circling the inner city, there are no more big-ticket projects on the horizon.
With less property and infrastructure spending, the municipal government expects GDP growth to slow from 10.1 percent a year ago to nine percent this year to reach about Yn400bn. This would be the first single-digit growth rate recorded since 1992. GDP growth in the first quarter rose 8.1 percent year-on-year to stand at Yn80.46bn.
Growth of exports and foreign investment, the sectors hit hardest by the economic turmoil in Asia, will fare worst of all. Exports are expected to reach US$16.5bn, an increase of only 3-4 percent on 1998. Even this might be optimistic. "We are facing very tough external conditions this year. We will be lucky if we can still maintain any increase in exports," says Wu.
Foreign investors that have poured billions of dollars every year into the city have become more cautious. While contracted foreign investment still held up with a year-on-year growth of 10 percent to US$5.85bn last year, actual investment fell 24 percent to US$3.68bn. Many Japanese and Korean companies, because of troubles at home, have closed down their Shanghai offices or sold their stakes in joint ventures. "These have created acquisition opportunities for other investors," says Mr. Peter Come, a lawyer at Simmons & Simmons in Shanghai.
Hotels, too, have felt the pinch, with many offering steep discounts and package deals. Some, like the City Hotel, are focusing on local customers, for example offering free gifts and rooms to those deciding to hold their wedding banquets there. Regal International East Asia Hotel, just one year old, attracts customers by claiming the nation's biggest private sports club, complete with eight outdoor tennis courts.
The tourism industry is expected to pick up later this year, when many international seminars are scheduled to take place. "The whole city is going to be very busy, with an influx of people attending the events," says Ms. Phillipa Yule, director of communications at the Portman Ritz Carlton.
Domestic consumption and corporate investment have also remained weak because individuals and companies expect the national economy this year to get worse, not better. Department stores are offering steep discounts of as much as 90 percent on certain lines, but there are few buyers. It is common to see cotton shirts being sold at Yn100 for three, while leather coats and shoes are routinely discounted by 50 percent.
State enterprises are expected to continue laying off workers this year, having made redundant half a million of them since 1995, according to official reports. Already, 160,000 have registered with government-run agencies to find jobs and the number is expected to rise much higher soon. Even white-collar professionals are finding it harder to find jobs.
Need for stability
In a year with plenty of economic bad news, the government's watchword is stability. Xu Kuangdi, the academic-turned-mayor, has emphasised in public speeches the importance of "steady progress."
The government for the country's second-largest city – Chongqing being the largest ?warned state firms against laying off workers indiscriminately. "Shanghai must control the number of state workers to be laid off each year at around 250,000, or five percent of the total state workforce of five mil-lion," said Xu earlier this year. "If state enterprises wish to lay off workers, they must come to us for clearance. You cannot just lay off workers without going through the required procedures."
He also stressed that redundant state workers must be paid the minimum handout of Yn200 a month, a dismal sum but an important gesture showing the government's concern for their plight.
In a city where everyone knows someone without .a job, the government has relied on the state media to boost public morale. There are television dramas and news stories which detail how dismissed workers, through persistence and retraining, have found new and often better jobs.
Aside from defusing social time-bombs, Shanghai is concentrating its efforts on reviving two sick sectors – property and state industries. Shanghai is getting impatient with the slow pace of reducing the property glut. In the last two years, the government has intervened aggressively to dispose of empty apartments, especially low-end residential units. Taxes and fees have been cut to make it slightly cheaper to buy property. The government has offered the much-valued Shanghai residency to non-Shanghainese Mainlanders who have bought a home in the city.
This year, it is dangling another carrot that will last until the year 2003: home-buyers will be exempt from income tax. The concession, though not attractive to the average worker whose salary is too low to be taxed, appeals to rich private businessmen who are most likely to be homeowners anyway. Meanwhile, banks are starting to offer mortgages of up to Yn500,000 to selected customers.
All these incentives have breathed some new life into the sluggish market, but it will be several years before the housing sector will become an engine of growth. "A Shanghai couple has to have a combined income of Yn5,000 a month before they can afford to buy a house," says a taxi driver, who earns a little less than the city's median monthly wage of Yn1,000.
State sector reforms
With the state sector, the emphasis is still on making it leaner and fitter. After years of downsizing, the debt-to-equity ratio of state firms. has dropped from 84 percent in 1995 to the current 60 percent – "a level similar to other newly industrialised countries", said Mayor Xu at a recent government meeting.
The number of employees working in state-run industries has also dropped from 1.29 million to around 800,000 during the same period. Labour productivity, as measured by annual output per worker, has doubled to Yn40,000, Xu added. Shanghai achieved this improvement in efficiency by forcing backward industries to close down or relocate to inland provinces with lower costs. The textile industry, once the pride of industrial Shanghai, has undergone the most intense restructuring, – laying off 150,000 workers and destroying millions of spindles.
Having slashed debt and lobs Shanghai now has to find new ways to get its still-inefficient state firms into shape. Under the old command-style economy, officials at ministries and local industrial bureaux could intervene directly in the running of factories – for example, amending production plans and appointing factory managers.
The aim of the reform is to remove such bureaucrats from the day-to-day running of factories. One method is to convert industrial bureaux into holding companies. Their relationship with factories will then be between the board of directors (typically in China, representatives of the holding companies) and the executive managers. Important decisions will be made at regular meetings with directors. In theory, everything will be run in a more formal way, in line with joint stock companies elsewhere in the world.
Another reform is the swapping of assets among state firms. This is usually done through the stock market, with strong state firms taking over weak ones listed in the market. Mr. Chen Jianyuan, general manager of Shanghai Asia Business Consulting, expects more such acquisitions this year. "For the buyer, there are a lot of benefits that come with a listed vehicle – it can raise funds from the market and also it can raise its corporate profile," he says.
Industry analysts say that Shanghai is rolling out the red carpet to non-Shanghai companies to acquire local state firms through such asset swaps – a departure from its protectionist policy of earlier years. It also opened up its skilled labour market this spring, dropping the long-standing official distinction between university graduates of Shanghai and non-Shanghai origin. From now on, all graduates of Shanghai universities will in theory be competing on an equal basis.
By opening up its economy to internal competition, Shanghai plans to phase out weak and inefficient industries. It wants only new and high value-added industries, such as automobiles, petrochemicals, electronics and biotechnology to stay in Shanghai. The thinking is that only such advanced industries can help to raise average per capita GDP from the current US$3,400 to US$5,000 in the next one or two years.
It also aims to have a handful of products that will rack up a share of 20 percent or more of the national market within three years. The former industrial heavyweight now makes fewer national brand names, as more aggressive cities have overtaken Shanghai in the market. Local brands which have lost their shine in recent years include Maxim tooth-paste, Phoenix bicycles, White Cat washing powder and Hero pens.
Shanghai intends to make a strong comeback, capitalising on its much improved infrastructure. Its aim is to be a high-technology, knowledge-intensive city making use of its big pool of professional and highly-educated talent. Now that it is among the most expensive cities in China, Shanghai is committed to competing on skills and knowledge, not on costs. To this end, Shanghai has been organising many seminars and inviting eminent economists worldwide to provide advice on future policy.
In moving up the next rung of the economic ladder, Shanghai still needs a certain number of labour-intensive industries, Professor Wu warns. "State workers dismissed must be able to find new jobs. We cannot just push them to the streets," he says. Other economists agree, noting that industries and services supporting a vast city such as Shanghai still have a lot of scope to grow. They cite sectors such as food processing, printing, apparel, tourism and housing management. "These urban-based businesses will help to absorb workers from traditional dying industries,” says Zhou of SASS.