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How Shanghai can win back the confidence of foreign capital: A look at history
It inevitably ends up in the east - 40 years of attracting external capital in Shanghai
Tomorrow, June 1, Shanghai is to fully restore normal life, with the overall risk of COVID-19 contained.
The development of Shanghai shapes not just China's economy, but also the global supply chain. After two months of sinking, would this city, one of China's economic centers, a pioneer in reform and opening-up, shine with radiance again? Let's turn back the clock to just a bit over 30 years ago and see how an institution created and personally led by 朱镕基 Zhu Rongji (then mayor of Shanghai, premier of China from 1998 to 2003) put up a desperate fight to attract foreign investment. All those setbacks and hardships are treasures Shanghai could turn to right now. If the government, which has a long-standing reputation of being pragmatic and determined, learns from the past, the vigorous and bustling Shanghai that we are all familiar with will be back in the game soon.
The following article is by WeChat blog 兽楼处, literally translated as Bureau of the Beast Building. It shares the same pronunciation with 售楼处, which is the sales office of a housing property. This blog is run by Mr. 张育群 Zhang Yuqun, who is the chief real estate reporter for Jemian. This blog mainly covers topics related to China's real estate market, and because real estate is such a centerpiece in China's economy, it also touches on the wider economic and policy affairs.
This article was originally titled 毕竟东流去, or, "it inevitably ends up in the east". This is a piece of Chinese poetry from 12th century general-cum-poet 辛弃疾 Xin Qiji, admiring at the fact that almost all rivers (in China) flow eastwards, implying that the tide of history cannot be stopped. It helps that Shanghai is also at the easternmost tip of many of China's major rivers. The original tag line is 招商引资四十年 Forty years of attracting external capital.
Ginger River believes that foreign capital will inevitably end up in Shanghai, once again.
On the evening of May 12 1988, four deputy directors of departments of Shanghai government, including the Municipal Planning Commission, the Commission for Economic Affairs, the Construction Commission, and the Foreign Economic Relations and Trade Commission were gathered at then-mayor Zhu Rongji’s office on Kangping Road. Zhu told them that the participants present would compose the 上海市外资委 Shanghai Municipal Foreign Economic Relations and Trade Commission (Shanghai Foreign Investment Commission).
An old picture of the office building of Shanghai Foreign Investment Commission, No. 33 Zhongshan East Road
As someone said later, the establishment of Shanghai Foreign Investment Commission divided Shanghai's history into two. However, the preparatory meeting for such a crucial commission was done in haste.
At the meeting, Zhu Rongji said that Shanghai wouldn't make great accomplishments on merely 1.4 billion U.S. dollars worth of foreign investment a year. Unless some big move is taken to attract tens of billions of dollars, Shanghai will always be the same old Shanghai.
At that time, it would take a lot of trouble for foreign capital to enter Shanghai, and a project of one million U.S. dollars had to be approved by five commissions and 20 bureaus, with a maximum of 126 stamps.
To combine these 126 stamps into “one stamp” is the purpose of establishing the Shanghai Foreign Investment Commission. Zhu served as the director of the commission himself.
A month later, on June 10, Shanghai Foreign Investment Commission was officially established. At a press conference held at Jinjiang Hotel, the mayor promised that the foreign investment commission was put on standby 24/7, and made public the telephone number of the deputy director right on spot.
Four days later, the commission approved the first project, the Macao cannery project. It took the commission only two hours to discuss the feasibility research report.
In the year of its establishment, Shanghai Foreign Investment Commission introduced 129 foreign investment projects, which is twice the average number of previous years. Any difficulty faced by foreign investors, even the need for one can of gas, could be solved with the aid of the commission.
Even the mayor could be called in at anytime. A German businessman in Luwan District wrote directly to Zhu Rongji, complaining of garbage piled up next to the company. Zhu gave instructions immediately, and the chief of Luwan District personally went to the site and organized the cleaning.
The establishment of the foreign investment commission simplified bureaucratic paperwork, which is the first step in introducing foreign investment. A thousand more problems come after that one, and most of them are ideological ones.
A new business system had to be built from the scratch.
About 20 months after the establishment of the foreign investment commission, the research office of the Communist Party of China Shanghai Municipal Committee published an investigation report, stating that foreign projects could not commence construction long after approvals, because they met 投资黑箱 "Investment black box" in Shanghai.
Land, administration of industry and commerce, taxation... foreign investors faced one hurdle after another. After reading the report, Zhu Rongji wrote: 此文可称“官僚主义大全”，呜呼上海，不改革，要完蛋 This article can be called “a complete collection of bureaucracy”. Alas, what a regret for Shanghai. It would be done without reform.
He skillfully steered clear of the ideological debate and held bureaucratism guilty for the contradiction in bringing in foreign capital.
Zhu proposed to sent 10,000 copies of the report to all officials concerned, and the fees would be covered by the municipal government. One can hardly imagine how scared these "officials concerned" would be.
A breakthrough was thus made in the systemic problems facing foreign investors. Shortly afterwards, the foreign investment commission declared that districts and counties would be given the authority to assess and approve foreign investment projects worth less than 5 million U.S. dollars.
That year, Japanese zipper giant YKK proposed to build a wholly foreign-owned factory in Shanghai, which was opposed by the Shanghai Economic Commission on the grounds that it would jeopardize the national industry. Some even wrote a complaint, saying: "Japanese imperialism is coming again."
Prior to that, Shanghainese people had already driven Coca-Cola factory out. However, with the support of the foreign investment commission and mayor Zhu, YKK entered Shanghai.
YKK invested and built a zipper production base in Shanghai in 1992. Thereafter, garment companies in the Yangtze River Delta no longer need to fly to Japan to buy zippers.
More importantly, Shanghai sent a message to the world: restrictive projects and wholly foreign-owned enterprises were welcome in Shanghai as well.
Before, to get foreign investors access to lands in Shanghai, Zhu Rongji invited 梁振英Leung Chun-ying [Then worked in the real estate appraisal industry. Fourth-term chief executive of the Hong Kong Special Administrative Region (HKSAR) 2012 - 2017] from Hong Kong as an adviser, and the right to use a plot of land in Hongqiao was sold to 孙氏企业 Sunyou from Japan, one of the first such cases in history.
Sunyou built the Sun Plaza on this land, sending the message of China’s opening up to Japan. This building then became the first base camp of Japanese enterprises in Shanghai.
Only those who experienced the hardships before the opening up understand why Shanghai grants super-national treatment to foreign investors.
In 1982, 蔡宁林 Cai Ninglin, deputy director of the State Planning Commission, publicly warned that the interest rate in the Euro-dollar market reached a staggering 20 percent, and Chinese people need to pay 10-15 percent of the total payment in cash as advance payment when they took out a loan through export credits.
The loan policies of the World Bank had also been changing. The hard loan interest rate was 8.75 percent in 1980, and rose three times in 1981 to 11.6 percent. If you wanted to take out loans, you must also pay a 0.75 percent additional commitment fee and a 1.7 percent activation fee. 包叔 Baoshu, a senior internet lending professional, said: 这比网贷还黑。This is more wicked than internet lending.
How many companies can afford such high-interest loans even today, not to mention enterprises with worse operation and management levels back then?
In comparison, direct investment by foreign investors is far more cost-effective. There is no need to provide supporting investment or run the risk of defaulting on the loans. It can also increase China's foreign currency reserves and create jobs.
The significance of foreign investment goes far beyond business connections. China began to make earnest communication with the world, after foreign direct investment land in China. After all, nothing solidifies a relationship faster than money.
In 1989, there was a shortage of funds to build 南浦大桥 Nanpu Bridge, and Western financial institutions imposed a blockade. Zhu Rongji went so far as to require the foreign investment commission to undertake the task of borrowing money.
No one knows foreigners better than the Shanghai Foreign Investment Commission. They turned to the Asian Development Bank for money under the human rights program on the grounds of the “stampede and drowning incident at the Pujiang ferry port”. 叶龙蜚 Ye Longfei, then executive deputy director of the foreign investment commission, flew directly to Manila, where the Asian Development Bank is headquartered, and finally secured a loan of 800 million yuan (about 212 million U.S. dollars at that time).
Nanpu Bridge after construction
Because of this, Ye Longfei got criticized by the central bank (People's Bank of China).
[This is an interview of 叶龙蜚 Ye Longfei, then executive deputy director of the foreign investment commission, which was published by www.thepaper.cn in 2018. GRR found it serves as a major source of this article.]
The external difficulties we encounter today probably would not be more difficult than what occurred that year. Room for maneuvering can be found once we master the rules of the game.
When the epidemic just broke out in Shanghai this time, many people called Shanghai a 买办城市 comprador city [a comprador refers to Chinese businessmen who help the West trade bilaterally with China, or intermediaries and managers who are employed by foreign investors and assist them in their trading activities in China]. However, a brief look at history shows that Shanghai has never been a city where the market is simply exchanged for capital.
When China just started to open up to the outside world, foreign investors were keen on constructing buildings and hotels in Shanghai. However, Shanghai soon realized that it needed to channel foreign investment to the industries it needed.
An example is the localization of Santana. The first Santana vehicle, produced by the Sino-German joint venture Shanghai Volkswagen, was assembled by workers using hoists and benches. Only five parts were domestically produced: tire, radio, horn, antenna and plate.
The Germans were taken aback by the primitive production methods. A reporter of Der Spiegel said: 大众好像来到了一个孤岛。Volkswagen seemed to have come to a desert island.
In 1990, mayor Zhu Rongji, who graduated from the Department of Electrical Engineering of Tsinghua University, launched the “Santana Localized Production Community”, which involved more than 130 parts manufacturers, research institutions and universities across the country. Car making talents across the country were brought together and made one breakthrough after another in the localization of auto parts.
A Santana ushered in an enlightenment movement for the localization of automobiles in China, and also turned Shanghai into a powerhouse in the automobile industry.
In those years, aggressive leaders leveraged their authority to promote several key manufacturing companies to settle in Shanghai.
In 1992, Shanghai Bell, a Sino-Belgian joint venture, built a new factory in Pudong district on the plot of land approved by 吴邦国 Wu Bangguo [former Shanghai municipal party committee secretary, chaiman of National People's Congress 2003 - 2013]. Vice Mayor 蒋以任 Jiang Yiren visited the construction site four times, and the issues of water and gas supply were solved under his coordination.
Later Shanghai Bell paid annual taxes equivalent to one-sixth of the taxes paid by the entire Guangdong province, and was affectionately called “my baby” by Zhu Rongji. More importantly, Shanghai Bell was hailed as the “Whampoa Military Academy” [a military academy that produced many well-known commanders in China's modern history] of China’s telecommunications sector.
When Delphi, an automotive system giant, settled in Pudong in 1993, it even rented the office space from local companies. Pudong almost granted whatever was requested by Delphi. Within three years, Delphi brought its six major systems, including power propulsion systems, auto door systems, and exhaust emission systems to Shanghai.
More importantly, they attracted dozens of auto parts manufacturers to Shanghai, which almost covered the entire auto parts industrial chain. Today, nine out of the world’s top 10 auto parts manufacturers put their China headquarters in Shanghai.
Those projects that were pushed forward by personal vision and authority still nourish Shanghai today.
When Tesla entered Shanghai, an entire supply chain was already in place. It is the culmination of several generations of hard work over 40 years of attracting external investment.
In Santana’s localization, Shanghai automotive lighting factory and Japanese automotive lighting giant Koito established a joint venture to produce lamps for Santana. Later, Shanghai Koito has become 华域汽车 "Hasco”, which is now a Chinese car lights titan.
Three subsidiaries of Hasco have become suppliers for Tesla. In 2021, four percent of Hasco’s turnover was attributed to Tesla and this proportion is still rising.
Delphi, crown jewel of Pudong district, transformed into Aptiv after spin-off. Aptiv’s automobile wire harness company is a supplier of almost all automakers in China, including Tesla.
On the evening of May 9, 2022, there were confirmed cases of COVID-19 at Aptiv A6 plant located on Taibo Road, Jiading District, Shanghai. Hundreds of workers became close contacts, and they were quarantined that night. The factory faced production suspension.
On May 10, Tesla suspended production at Shanghai Gigafactory due to Aptiv’s supply problems.
In 2001, the Shanghai Foreign Investment Commission officially came to an end, with its functions undertaken by the Shanghai Municipal Commission of Commerce. The model of aggressive leadership and government guidance-dominated approach towards attracting foreign investment is ultimately replaced by the institutional building.
[Note: GRR found that the work and responsibilities of the Shanghai Foreign Investment Commission were transferred to the Shanghai Municipal Commission of Commerce in 2008 when the commission of commerce was founded. GRR understand that it is also possible for the commission to exist before 2008 in some other form such as a temporary office.]
For 20 years, multinational companies have been moving their Asia Pacific and China headquarters from Singapore and Hong Kong to Shanghai because of Shanghai's global reputation.
Shanghai has become the hub for the Asia-Pacific headquarters of multinational companies. By the end of 2021, Shanghai was home to 831 multinational companies' regional headquarters and 506 foreign-funded research and development centers. All Fortune 500 have their presence in Shanghai.
In the last 17 years, Shanghai has seen a continuous increase in foreign direct investment. However, in the span of 40 years, the amount of foreign investment declined at least four or five times.
A trace would be found for every decline, because foreign investors are highly sensitive.
In 2021, the leaders of the Pudong Commission of Commerce said to the media confidently: 浦东的营商环境已经好于香港、新加坡等地。Pudong district has a business environment superior to that in Hong Kong, Singapore, etc.
However, this trend seems to be interrupted by the epidemic.
According to official news in Shanghai, the white list of enterprises that can resume work has been updated three times, which includes more than 3,000 enterprises. However, in Shanghai, there are over 70,000 foreign-funded enterprises alone.
It’s been nearly a month since the release of the first white list. [Ginger River: please note that this article was published on May 15] It was reported that the work resumption rate for the first 666 companies is: 95 percent.
[GRR: The white lists fall into several categories according to different fields, namely industrial enterprises, logistics enterprises, and financial institutions. The white lists were published at different stages, and updated days later. Starting from June 1, the white list approval system will be canceled altogether, meaning enterprises not on the previous list could also resume work and production.]
Two days ago, Bosch, a key manufacturer in the automobile supply chain, told the media that production capacity was restored to 30 to 75 percent. That’s a euphemistic statement.
In interviews with the media, foreign investors rarely say anything that might impair unity, but they have their own way of saying things.
On April 18, Onsemi, an American semiconductor company, announced that it would shut down its Shanghai distribution center as Shanghai tightened the epidemic control. Its services will be relocated to Singapore and the Philippines.
Onsemi runs three factories in China. They are located in Leshan in southwest China's Sichuan Province, Suzhou in east China's Jiangsu Province, and Shenzhen in south China's Guangdong Province. And its products are transported all over the world from the global distribution center in Shanghai. Anyone with a good sense can see that the distribution center in Singapore obviously cannot replace the one in Shanghai.
Maybe it is a coincidence. The first white list of 666 companies in Shanghai that can resume work was revealed on the day when Onsemi issued the notice. Onsemi was not on the white list.
A few days later, Onsemi appeared on the second white list of enterprises that can resume work and production. Shortly afterwards, Onsemi clarified in an interview that they have no intention to relocate.
After having been operating in China for all those years, foreign investors have also learned the Chinese way of veiled expressions.
A few days ago, 蔚来汽车 NIO, which already has a secondary listing in Hong Kong, announced its plan to go public in the Singapore Exchange for the third time. [NIO's first listing was on New York Stock Exchange.]
Last month, [方星海 Fang Xinghai] the vice chairman of China Securities Regulatory Commission said at the Bo’ao Forum for Asia that it takes time for foreign investors to learn about China: 我觉得一时的离开也没关系，过段时间还会回来的。"I think it’s all right that they leave for a while. They will be back some time later."
Baoshu said this to himself every time he had a failed love relationship.
Judging from what happened in the previous two years, Shanghai should have been the new home for at least five other new regional headquarters of multinational companies in April. However, the only good news about foreign investment comes from Tesla, that it plans double the size of Shanghai factory.
The supply chain and logistics cost advantages of the Yangtze River Delta are unparalleled in the world, but they do not fall from the sky. Shanghai's respect for foreign investment is one of the core competencies of this international metropolis.
The key to getting things right still lies in what Zhu Rongji and his subordinates said on the night before the establishment of Shanghai Foreign Investment Commission: 外国人是很敏感的，他要看什么人下决心、怎么样的人马、什么方式来办这件事情。
"Foreigners are very sensitive. They want to know who makes the decision, what kind of teams are involved, and in what ways matters will be done."
[GRR: At a press conference [Chinese] on May 29, Shanghai's deputy mayor Wu Qing announced [English] a plan of economic recovery, containing eight aspects, 50 policies. Among them, the current approval system for production resumption (the white list) will be abandoned starting June 1. Detailed measures on stabilizing foreign capital, subsidies for market entities, encouraging consumption and expanding investment will also take effect.