Does Shanghai Have a Future?

There’s a lot to be said for Shanghai. The city’s infrastructure is top notch; it’s the most metropolitan Chinese city outside of Hong Kong; if the city’s shopping options are any indication then people have plenty of money to spend. Nevertheless, I think its safe to say that until something changes in China’s financial policies, the city’s growth story has pretty much ended. That’s not to say that the city won’t grow – the city continues to receive policy support and benefits from China’s overall macro-economic climate – but that the city has lost the advantages it once held over other cities, and a significant change in national policy needs to happen before Shanghai regains the initiative it once had. There are three major drivers of Shanghai’s growth and each of these have significant, and perhaps insurmountable, problems.

1. Manufacturing being priced out

Despite appearances of being an economy of office buildings, manufacturing actually accounts for a larger portion of Shanghai’s economy than in Beijing – 36% vs. 18.5% – this is despite the fact that wages in Shanghai are among the highest in the country. Simply put, the city cannot maintain cost competitiveness in this area, particularly as infrastructure in central regions is developed enough that getting products to port is no longer a major problem. Intel just last year relocated from Shanghai to Chengdu, and other smaller companies are relocating all the time.

I would put this in the insurmountable category. As does the Shanghai government it seems – most recent policy initiatives have been directed at attracting “regional headquarters” of foreign firms as opposed to industrial activity. Still, the continuing hollowing out of this sector makes finding alternative means of growth all the more pressing.

2. Ports being out-competed

Though Shanghai will be shipping less and less of its own goods to the world, it still has among the best ports in the country. These ports could be major revenue drivers shipping goods from nearby export sectors in Jiangsu and Zhejiang provinces. All fine and dandy, except Jiangsu and Zhejiang have their own ports, and they are increasingly trying to develop them. Ningbo port in Zhejiang is the major competitor for Shanghai’s shipping dollars, with comparable size, closer proximity to Zhejiang’s factories, and less environmental damage (Shanghai has a silting problem). Jiangsu’s port infrastructure is still rather underdeveloped, but there’s a major “coastal development” project going on, with 40+ port projects in the works, each of which is going to suck business out of Shanghai.

The government is putting considerable force into reasserting Shanghai’s position as a logistics center, but its unclear what can be done. Shanghai is likely to keep the largest piece of the pie, but as infrastructure to the north and the south continues to improve,there will be more and more players clamoring for a piece. If imports of consumer goods picked up Shanghai would likely benefit, but commodities imports often go elsewhere.

3. Sluggish financial reform

The central government declared last year that Shanghai would be a world financial center by 2020, sending a clear message to numerous local competitors – Tianjin and Dalian particularly – that the government is fully behind supporting financial clustering in Shanghai. The message left foreign observers somewhat confused though, because it remains hard to see how a global financial center can develop where the currency is not convertible and investment by foreign financial firms is restricted. Little has been done to clarify the situation since then, but the country still has 10 years to make some changes.

This is what has to change if the city is to maintain its development, though the government has been much more tepid here than it has been in the other areas. A lot can change in 10 years, but a slow pace of reform makes eventual competition with Hong Kong and Tokyo less and less likely, without even talking about London and New York.

Drudging along

Shanghai is among the most developed cities in the country, and its existing wealth, if nothing else, will keep it moving along with the Chinese economy. But the city faces large structural problems that could cause it to stagnate for years to come, unless the Chinese authorities let their most global city take part in the global financial system.