Why Shanghai's still a wonderland for international investors

2022 was certainly not a good year for Shanghai's international reputation: three years of restrictions and a sudden two-month lockdown due to pandemic controls disappointed quite a number of international businesses in Shanghai. Some of them even chose to leave. As a result, observers worry that Shanghai is no longer attractive to international investors.

Surprisingly, however, it was reported that in 2022, Shanghai's actual use of foreign investment went up by 5% to a record US$23.5 billion, the number of regional headquarters for multinational companies in Shanghai also increased by 60 to 891, while foreign investment and research centres increased by 25 to 531. For instance, BASF, the world's largest chemical producer, expanded its technology innovation park in Shanghai Pudong (the largest in the Asia Pacific) in 2022. In short, Shanghai's charm to international investors has not faded away regardless of Covid restrictions and even the lockdown.

One may argue that the data actually reflects the investment decisions or agreements made in 2021 so the lockdown in 2022 was not a factor. This argument is reasonable, but cannot justify the overall investment situation, as most of the FDI decisions can still be reassessed or deferred in practice. In my view, there are at least five reasons to explain why Shanghai remains a wonderland to international investors even in the tough year of 2022.

First, Shanghai is the economic bellwether of the Yangtze River Delta region. It is well known that the Yangtze River Delta region (YRD) and the Greater Pearl River Delta (GPRD, led by Shenzhen and Guangzhou) are the two leading economic concentrations in China. In comparison, the former accounted for 24% of the national GDP in 2022, while the latter accounted for 10%. Furthermore, there are now eight metropolises in YRD with a GDP of over 1000 billion RMB (US$150 billion) whereas GPRD has four.

The GDP of YRD actually exceeded Germany's in 2021 and surpassed Japan's in 2022. Evidently, international investors cannot ignore the huge local market of the YRD and the city that stands at its centre, Shanghai.

Second, Shanghai is a headquarters of global production chains. YRD, Shanghai's "backyard" has world-class industrial clusters which are closely linked to Shanghai. Though industrial upgrading forces some of the production capacity to leave for the central and western parts of China, they are typically moving to the west along the Yangtze river. That is, the production chains that Shanghai links and controls are enlarged, but not disconnected.

Furthermore, located in the middle part of China, it is geographically more expedient for Shanghai to be the node that connects with the production bases in both south and north China, compared to other major cities such as Beijing and Shenzhen.

For instance, one of the key reasons that led to Tesla locating its first global super factory in Shanghai is thanks to Shanghai's robust supply resources. According to Tesla, more than 90% of the parts needed in car production in Shanghai are easily supplied in China, whereas the domestic parts ratio in Tesla's Nevada factory was only 73%. As a result, Shanghai became the city with the highest number of global and regional headquarters of multinational corporations (MNCs) in China.

Third, the pilot free trade zones in Shanghai enable international investors to have more freedom to do business in China. The well-known pilot free trade zone (FTZ) programme is one of the key reform projects aimed at adapting China to the general requirements of the so-called high quality free trade agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Many reform and liberalisation policies have been experimented with in the FTZs, later becoming national policies.

Shanghai is the first city to have an FTZ. The Shanghai FTZ includes Yangshan Port (the world's largest automated container terminal) and Pudong International airport (the 8th largest airport in the world). Due to more liberalised policies, the first Tesla global super factory was launched in the FTZ in 2018, making it the first and the only foreign-owned auto factory in China.

Fourth, Shanghai is a national financial centre with a very strong services sector. Since its birth, Shanghai has been known for its internationalisation in the far east. In 2020, Shanghai announced its ambitious development strategies which aim to make Shanghai the world's first-class centres in economics, trade, finance, aviation and innovation. These ambitious goals are proposed based on Shanghai's most robust service sector in China.

Though China is still imposing rigid cross-border capital controls, Shanghai nevertheless enjoys many "pilot" financial policies to facilitate the capital flows of MNCs and transactions on its international exchange platforms such as gold, oil, steel, etc.

Fifth, Shanghai's innovation-driven development mode creates remarkable investment opportunities. In Shanghai, the number of high-tech firms increased by five times in just ten years, from 4,311 in 2012 to more than 20,000 in 2021.

Importantly, Shanghai's ambition to become a city of innovation is internationally inclusive. As of 2021, 516 MNCs have set up their research centres in Shanghai. So far, the Shanghai government has signed technology cooperation agreements with more than 20 national and sub-national governments and participated in setting up 28 overseas research labs and 14 technology transfer platforms.

With the open and friendly environment for innovation and highly efficient industrialisation capacity, it is not surprising that foreign investors are finding increasing opportunities in Shanghai and sharing in the gains of the innovation economy.

It is worth noting that the Shanghai government's support contributes to the status of Shanghai to international investors. Admittedly, Shanghai's reputation for doing business has been clouded by the restrictions and lockdowns due to pandemic controls in the past three years. That is why high-profile officials of Shanghai rushed to travel abroad to have face-to-face introductions of Shanghai's business opportunities right after the lifting of Covid restrictions last December. They felt the obligation to maintain its hard-earned reputation and wish to rebuild investor confidence.

In addition, China's newly elected Premier Li Qiang was the former party secretary of Shanghai, who also presided over Zhejiang and Jiangsu provinces. Premier Li has a very good reputation for his abundant experience working with businesses, particularly with international investors. It is well expected that he will support more opening up reforms to improve Shanghai's environment for doing business. In his first press meeting, Premier Li vowed greater openness and reiterated that the "Open Door" policy remains one of China's fundamental policies regardless of the international environment.

Of course, given the fact that the US-China trade war is still ongoing and the high-tech war becomes more fierce, Shanghai faces a very challenging external environment. But as Shanghai's major investment attractions still remain and the government's efforts for more opening up are still persistent, it is therefore well expected that Shanghai's fame as a wonderland for international investment will be sustained.

Related: Reflecting on two months of lockdown in Shanghai | Best of both worlds: China wants both zero-Covid and economic growth | It takes a mountain of effort to tell the truth about China's economy | The Yangtze River Delta region: Promoting economic integration amid provincial competition