FDI In Shanghai

Basic Infrastructure

Transportation. Situated at the estuary of the Yangtze River, Shanghai boasts the world's third largest port, handling an annual international trade volume of US$112 billion. A new deepwater port project (conservatively estimated to cost US$16 billion) will make Shanghai the world's largest container handler when completed. The city's two airports are expected to handle 35 million passengers this year (already comparable to Hong Kong's numbers), and with plans to build three more runways at Pudong International Airport, Shanghai intends to become a regional aviation hub by 2015. Shanghai also maintains the country's most developed highway system, with six modern (mostly) divided highways integrating the Yangtze River Delta area.

Economic Zones. Developed from rural land over the past 15 years, Pudong New Area (comprising five of the 22 special economic zones in Shanghai) has burgeoned into an international standard human-capital and investment centre. China's largest development zone offers VAT and tax rebates and other financial subsidies, which often exceed the traditional national benefits. Waigaoqiao, where WFOEs have for years been allowed to conduct international and domestic trade activities not permitted elsewhere in China, is the country's largest free trade zone. Zhangjiang and Jinqiao are home to leading high-tech multinationals in electronics, semi-conductors, pharmaceuticals, bio-tech and software, and in recent years have seen an increasing number of R&D centres.

Regulatory Regime Highlights

Regional Headquarters (RHQs). While the national Establishment of Companies with an Investment Nature by Foreign Investors Provisions of February 2004 set stringent thresholds for a holding company to qualify as an RHQ, Shanghai still applies its own Encouraging the Establishment of Regional Headquarters by Foreign Multinational Corporations Tentative Provisions (issued in July 2002), which provides for significantly lower thresholds and allows for an RHQ in the form of a management company rather than a holding company, but slightly fewer privileges than an RHQ established under the 2004 national rules. Over 60 RHQs have been set up in Shanghai, including by GE, ExxonMobil, Johnson & Johnson, and Honeywell.

Traditional Greenfield FDI. In August 2004, the Shanghai Commission of Foreign Trade and Economic Cooperation (COFTEC), gatekeeper of FDI in Shanghai, issued Examination and Approval of, and the Provision of Services to, Foreign-invested Projects in the Municipality Several Opinions, setting forth more transparent and streamlined approval procedures for the establishment of foreign-invested enterprises (FIEs), and cutting the approval time to 10 working days (as opposed to several months under national law). Some approvals can even be completed on-line within three working days. A simple registration system for foreign representative office establishment replaces the more cumbersome approval procedures found elsewhere in China.

M&A. Leading the nation in acquisitions of domestic enterprises, Shanghai has been a pioneer in establishing clear and predictable rules. The Mergers and Acquisitions of State-owned Enterprises in the Municipality by Foreign Investors Several Opinions (2002) and their Implementing Rules (2003) outline procedures for acquiring equity or assets of state-owned enterprises in Shanghai. The same regulations also apply to acquisitions of privately owned domestic enterprises. Largely motivated by the more transparent legal framework, eight acquisitions by multinational companies took place in Zhangjiang Hi-tech Park between March and September 2004 alone.

Transparency

Shanghai took an encouraging step in January 2004 when it issued the Information Disclosure of Shanghai Municipal Government Regulations. These regulations place a legal obligation on the government to disclose non-confidential information, including its own rules and circulars. General business information registered with the AIC is publicly accessible as in other countries. So are real estate records, pursuant to the Shanghai Municipality, Real Property Registration Regulations (2002, revised in 2004) and Real Property Registration Materials Search of Shanghai Tentative Provisions (1998).

Conclusion

Many of the wealthiest families in Taiwan and Hong Kong were originally from Shanghai, as are a number of central government leaders, so the city's revival to economic prominence could perhaps have been anticipated. But with an overheated property sector, an inadequate mass transit system, air quality concerns, a shortage of trained managers and rapidly rising wages, the challenges that lie ahead are arguably even more daunting than those that have already been conquered.