Shanghai dangles carrots to lure more foreign investment

As the effect of the global financial crisis starts to spread, investment activities worldwide have gone sluggish, even in China the country that has been the largest recipient of foreign direct investment among emerging countries for 17 years in a row.

The country is going to have over $90 billion of FDI in 2008, Chen Deming, the commerce minister, said in the national commerce work meeting in Beijing in December 2008.

That is still higher than the $74.8 billion capital inflow to the country in 2007. But the monthly capital inflow has started to drop, indicating a trend of slowdown investment activity. It declined by 36.52 percent year-on-year in November to $5.3 billion, according to the Ministry of Commerce.

The decline in investment is mainly caused by two factors. Tight global credit has slowed down investment activity worldwide. And the once-guaranteed appreciation of the yuan has also stopped since the second half of this year, removing one of the key motivations to tap into the Chinese market. Many experts estimate that the decline will continue in 2009.

Thanks to the active investments in the first half of 2008, some cities in China are still doing reasonably well in general. But as the outlook gets grimmer, they have to think of more methods to retain existing investors and to attract newcomers.

Among them is Shanghai, the city that was innovative in appealing to investors even before the crisis. Shanghai is expected to attract $10 billion of FDI in 2008, up by 20 percent year-on-year.

The foreign lure is related to Shanghai's special policies in attracting and retaining foreign investors. As the different regions in China have competed for foreign investment in the recent years, Shanghai has positioned itself as China's multinational business headquarters and its policies include some financial incentives to encourage foreign companies to set up regional headquarters even if the companies are short of capital.

For instance, the Huangpu district of Shanghai offers enterprises registered in the district or with plans to set up its headquarters in the area a subsidy for housing decoration.

If a company rents an office building with an area of over 1,000 square meters for over three years, it can get a subsidy ranging from 500,000 to 1 million yuan. The subsidy rate can be even higher if the area is more than 5,000 square meters.

The local government also gives training subsidies to enterprises that set up their headquarters. It offers to cover 30 percent of a company's training fee for three years running if the headquarters are in Shanghai. According to a local government official, many foreign companies are in a slump, but enterprises have to pay more for training if they want to keep the employees and the training subsidies have been very attractive to companies with plans to invest in China.

Shanghai started to shift its policy on foreign investment several years ago for two reasons.

First, the cost of doing business in the city is getting higher compared to neighboring cities.

Secondly, with limited land and resources to offer it has stopped appealing for all kinds of foreign investments and focused on inviting multinationals to set up their headquarters.

After several years' effort, by the end of November, over 223 multinationals had set up regional headquarters in Shanghai.

The city now has the most headquarters for foreign enterprises on the Chinese mainland. Some companies even set up their global headquarters in Shanghai, among them Intel Channel Products Group and Honeywell Electronic Materials. And a lot of capital came with the large projects. From January to November 2008, the municipal government approved 216 projects with a contract value of $10 million or more.

The strategy has worked well, and has helped the city to attract other investments. The headquarters of multinationals have brought higher demands for professional services. Therefore many foreign invested service companies have entered the city with these multinationals. And that has also enhanced the development of information services, financial services, exhibitions and logistics in the city.

The rent paid by the foreign headquarters has increased the tax income of local government. In areas with the most headquarters, such as Lujiazui and Nanjing West Road, the tax income that the government gets from renting some office buildings is as high as more than 1 billion yuan annually.

It has also changed the structure of FDI in the city. The "third industry", or service industry as it is better known, now take up 73.6 percent of the overall FDI to the city, according to the local commerce authority.

From January to November 2008, the contract value of foreign capital in the financial sector to the city reached $406 million, up by 38.02 percent year-on-year.

Foreign capital in transportation and warehousing industry rose by 4.52 percent to $820 million. Information transmission, computer service and software industry attracted $888 million in foreign capital, up by 32.3 percent than the previous year.

(China Daily 01/05/2009 page9)