Beijing has made no secret of its plans to shift the economic center of gravity away from Hong Kong toward Shanghai. Considerable public and private resources have been diverted to make this a reality by 2010. Nonetheless, there are many reasons to believe that this goal is unlikely to be met. On many of the most important issues, Shanghai may lag behind Hong Kong by as much as 50 years.
A certain amount of optimism may be excusable due to the considerable momentum behind this goal. First, Shanghai is China's economic powerhouse. With only 1/100 of China's population, it generated over 11 percent of China's foreign two-way trade (over US$38 billion) in 1999. Shanghai also received nearly US$39 billion in contracted foreign investment by the end of 1999 and an additional US$4 billion in fresh FDI is expected this year.
One of the most notable changes during the 1990s is the near-disappearance of Shanghai's traditional industry, textiles. Like most other industrial activities, these enterprises relocated or were closed and replaced by high-rise buildings. Old economy industries are being replaced by enterprises that engage in information technology, pharmaceuticals and biotechnology, ceramics, financial services or commercial activities.
Expansion of services is Shanghai's top development priority with information technology at the top of that list. Internet infrastructure is seen as the key for the creation of an "info-port" in a step toward becoming a global center for trade, commerce and information technology.
Its impressive infrastructure includes an east-west expressway, an outer ring road; the Pudong International Airport with a planned capacity of 100 million passengers per year and most of a second subway line has been completed.
These blessings have boosted Jiangsu province due to its ease of access to international markets from its transportation infrastructure. In attracting foreign investment, and due to aggressive expansion of rural cooperative enterprises, it has the highest aggregate GDP of all provincial administrative areas and one of the highest levels of per capita income.
Shanghai boasts a new city hall, an opera house that is the envy of all other municipalities as well as many offices and residential high rises. These projects contributed to the fact that 17 percent of the world's operating construction cranes were located in Shanghai during 1994 to 1996.
With so much good news, it might seem uncharitable to think that Shanghai could possibly languish a distant second to Hong Kong among Chinese cities. However, it is the very nature of Beijing's attempt to force the issue that dooms its goal.
Despite aggressive building projects, real estate prices and rents for residences and office space initially remained sheltered from market realities. By the end of 1998, vacancy rates in the Pudong New Area were as high as 90 percent. Subsequently, rents fell by up to 50 percent while purchase prices were cut by 40 percent. At present, the vacancy rate is now 50 percent. Even so, Shanghai remains one of the most costly places in the world for executives to live and for international businesses to operate.
Despite some modern conveniences, Shanghai has considerable environmental problems. Suzhou Creek, a tributary of the Huangpu River that cut across Metropolitan Shanghai, is dead. Cleaning this cesspool, dredging its bed and clearing its banks of factories, warehouses and other pollution sources will costs billions of dollars.
For all of Shanghai's physical infrastructure on the ground and on the drawing boards, it will be almost impossible to install the sort of institutional infrastructure that underpin Hong Kong's commercial and financial successes. There is one way for this gap to be closed rapidly. But it would only come from an erosion of Hong Kong's institutions caused by the continued bungling of its current leaders combined with interference by Beijing instead of improvements in Shanghai.
It would be easy to underestimate the importance of Hong Kong in the growth equation for the rest of East Asia. Without continued stability and economic growth in Hong Kong, China is facing a slowdown in its own dash toward material prosperity.
Hong Kong cannot simply be replaced by another trading and financial center either in China or elsewhere. With a market capitalization of over US$480 billion, Hong Kong had the fifth largest stock exchange in the world. It also has the third largest international banking center and the fifth largest foreign exchange market.
Hong Kong's reputation for enforcement of the rule of law provides internationally recognized standards of regulation, so important for China's growing international economy, are the result of more than a century of exposure to English Common Law institutions. Only in Hong Kong are contracts that relate to China enforced. China does not have a credible rule of law to allow legal disputes to be resolved in a non-arbitrary fashion.
In any case, the issue is not whether the rise of one trading and financial center will emerge only at the expense of another. Even with considerable diminution in recent growth trends, there will be room for several other such ports and financial centers in the region. Beijing's insistence on Shanghai reveals that its penchant for planning has not died out.
Christopher Lingle is an independent corporate consultant and adjunct scholar of the Center for Independent Studies in Sydney.
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