Spotlight falls on Shanghai economic transformation

City's slowing economic figures reflect shift to make service sector a new priority, which starts to bear fruits

The economic transformation of Shanghai, China's business hub, is a major issue facing the world's second-largest economy, as members of the country's top legislature and political advisory body meet in early March.

Major economic indicators such as GDP growth and trade volumes outpaced central government targets in the Yangtze River Delta region in 2012, with the exception of Shanghai.

The city has long acted as a hub for the surrounding region, which ranks as the 10th-largest economy in the world.

But the easing of Shanghai's economic output, which grew 7.5 percent in 2012, compared with 8 percent for Zhejiang province and 10.1 percent for Jiangsu province, suggests its dwindling role in leading the regional economic powerhouse.

That argument won added impetus as the city posted a contraction in total trade for 2012 - for the first time in three years - with exports falling 1.4 percent year-on-year, according to data from the Shanghai Municipal Bureau of Statistics.

Under the surface, the economy is undergoing a "painful restructuring process", said Sun Lijian, a professor at the School of Economics at Fudan University in Shanghai.

"Shanghai's development has exhibited the typical pattern of China's shift from a manufacturing-based, export-led economy, to one driven by domestic consumption and the development of services and innovation."

Reading between the lines of the GDP figures, the services sector, including finance, property, tourism and telecommunications, expanded to 1.2 trillion yuan ($192.8 billion) in 2012, up 10.6 percent year-on-year, exceeding its regional peers.

The figure has, for the first time, claimed more than 60 percent of the total economic output, reflecting the increasing pace of the city's transformation into a value-added service-oriented economy, Sun said.

The city has undergone thorough changes following a rallying call to build itself into an international financial center by 2020, which has effectively propelled industrial companies to move to nearby cities and even interior provinces due to economic and environmental concerns.

Such determination was reflected in a speech given by then-mayor Han Zheng at the closing of the 2010 World Expo in Shanghai, recalled Robert Theleen, chairman of the American Chamber of Commerce in Shanghai.

"The mayor thanked everybody for making the Expo a great success, but then he said the city has been through almost a decade of construction and they are going to fill these newly built buildings with modern services. That is where the future lies," Theleen said.

Shanghai's slowing economic figures cannot be regarded as a standalone case, Sun noted. Rather, they reflect the decision to make the service sector a defining priority for the city, which has started to pay dividends within the region.

Jim Mullinax, political and economic section chief at the US consulate general in Shanghai said: "Ten years ago, Shanghai might have been the only and most attractive destination for manufacturing."

"But the concerted efforts to shift the structure of the economy made Shanghai an example for the rest of China in terms of economic rebalancing," he said.

According to Mullinax, part of the shift requires some manufacturing companies to move out and focus on services and high-knowledge types of activities.

The region is destined to become an integrated area, a one-stop shop where companies can set up a site to innovate and design, finance, manufacture and sell products for the domestic market, said Mullinax.

"I think the Yangtze River Delta cities are at different stages of economic development. As manufacturing facilities move from Shanghai to the likes of Suzhou and Nanjing, Shanghai still has the opportunity to develop services that support these industries through various legal and financial services. That's Shanghai's core competence," he said.

Liu Jie, director of the media center at the Suzhou Industrial Park Administrative Committee in Jiangsu province, noticed a paradigm shift in the Yangtze River Delta from a region known mainly as a manufacturing hub into a high value-added, integrated region with various services including logistics, outsourcing and research and development.

"There is a growing dynamic of interaction within the region. Jiangsu no longer serves as Shanghai's hinterland. The Yangtze River Delta region is supporting Shanghai, and vice versa," he said.

To attract investment, zones such as the Suzhou Industrial Park have started to create mechanisms such as centers for small and medium-sized companies, and facilities dedicated to research.

According to Liu, there are competing zones within the Yangtze River Delta and each one has its specialty and agenda, aiming to serve the interplay of the whole region: Shanghai for services and multinationals, Jiangsu for manufacturing and Zhejiang for private companies.

The high-speed railway also became a game-changer because it traverses those three places within an hour, making Shanghai and its surrounding cities a well-developed metropolitan area with a specific division of work, Liu added.

AmCham's Shanghai President Brenda Foster said, as a result, more US companies are expanding from Shanghai to the Yangtze River Delta region, encouraged by policy incentives, lower costs and opportunities to extend their market penetration.

Foster said the transfer is a natural outcome and believes that a growing middle class with an increasing disposable income will drive more businesses to integrate their sales and manufacturing facilities further into the region.

"Shanghai will pass its manufacturing baton to the rest of the region, while it still has an edge in knowledge-based jobs," said Sun. "To that end, it will be a regional win-win story."