BRICS bank adds jewel to Shanghai's crown

City faces competition as Asian headquarter hub

China's financial capital, Shanghai, was thrust into the global spotlight late last week following reports that the city would host the headquarters of the BRICS development bank. Welcoming this new institution will not only cement Shanghai's position at home, it will also surely bolster the city's clout as one of the world's top financial centers.[Special coverage]

Coincidently, the Shanghai municipal government has also recently issued policy supplements which lower the threshold for multinational companies to establish regional headquarters in the city. This emphasis on the "headquarter effect" represents a continuation of government efforts to turn Shanghai into a global financial center that can rival the likes of Singapore, New York and London.

Shanghai's authorities started to aggressively explore ways to attract foreign investment more than a decade ago. In 2002, municipal leaders issued tentative provisions to encourage multinationals to set up regional headquarters in the city. More recently, preferential policies, including subsidies and duty exemptions, were widened to make Shanghai even more attractive as a base of operations.

Specifically, measures rolled out in 2012 made new regional headquarters in Shanghai eligible for 8 million yuan ($1.27 million) in subsidies over three years. Meanwhile, foreign research and development (R&D) centers were favored with duty-free imports on equipment. Financial supports which streamlined cross-border yuan use were also introduced. Later, in 2013, officials rolled out a special fund to help multinationals establish or rent headquarters in the city.

After all this work, Shanghai was able to boast 445 regional multinational headquarters and 366 foreign-funded R&D centers by the end of 2013, more than any other city on the Chinese mainland, according to media reports.

Foreign direct investment (FDI) in Shanghai expanded 7.3 percent from a year earlier in May to $1.62 billion, according to data released by the Shanghai Statistics Bureau in June. Over the first five months, FDI in Shanghai totaled $7.40 billion, up 9.1 percent year-on-year, official data reveal.

As more large multinational companies establish regional headquarters in Shanghai, this will help expand the city's influence, which will in turn lure even more businesses. As this process gathers steam, Shanghai's image on the world stage will surely become even more appealing.

Of course, all of this will bring invaluable benefits to the economy of Shanghai. For instance, with many of the world's largest and most successful companies moving into their backyards, local enterprises will be forced to innovate and accelerate industrial upgrades.

Still though, Shanghai's continued evolution as a hub of commerce and finance faces stiff headwinds. Looking ahead, China's own slowing economy, combined with continued sluggishness elsewhere in the world, could thwart the city's ambitions. More immediately, multinationals need further assurances that Shanghai can provide them with the sort of infrastructure, human resources and cost advantages they need to strengthen their operations.

Failure to stay competitive in changing times could cost the city dearly. Without the right mix of incentives, even greater proximity to China's vast market may not be enough for businesses to stick around. For example, it was reported in November 2013 that General Motors Co (GM) would relocate its international operations headquarters in Shanghai to Singapore. Even though China is home to the world's largest automobile market, GM claimed that its decision was based on a plan to get closer to other key markets like India, the Middle East and Africa. As many pointed out, Singapore makes sense as a regional commercial base considering its business-friendly tax regime, skilled workforce, high levels of English-language fluency and its stringent adherence to the rule of law.

Right now, Shanghai authorities should consider ways to lower operating expenses for multinationals. At the same time, there is also a great deal of space to improve credit systems and enhance protection of intellectual property rights. Ultimately, a fair playing field and a transparent business environment are among the most things for any competitive business.