Recently,FDDI (the Fudan Development Institute) published a policy report under thedirection of Fudan Economics Professor Chen Shiyi (陈诗一). The report laid out the current economic condition of Shanghai,policy initiatives and the future for development of Shanghai in differentmarket sectors. Below is a summary of the 40 plus page report followed by andinterview with Professor Chen.

While Shanghai has emerged as top cityamong Chinese provincial and municipal establishments, its market economy isentering a new phase of development far beyond the rest of Chinas emergingeconomy. Shanghai is beginning to gain global recognition as a major financialcenter, however there are still many developments that should be taken intoconsideration if Shanghai is to gain a competitive edge over other majorfinancial centers around the world, specifically New York, London, and HongKong.

Shanghai’s economic future is conditionalon three market factors: production, increased participation and specificmarket elements. These specific market elements are human resources,technology, financial reform, information and property rights, and resourcereform.

This report provides an overview of each ofthese market elements and a suggested course of action.

I. Human Resources

While Shanghai is very good at HumanResources, there exists a disparity in education levels amongst marketparticipants, as most of Shanghais work force is located in industrialproduction. In terms of the financial workforce, Shanghais financial industrycontains around 110,000 persons; Hong Kong and New York by contrast arecomprised of about 350,000 and 700,000 persons respectfully. Additionally, inNew York and Hong Kong, roughly 10% of the population works in the financialindustry. In Shanghai however, less than 1% of the population work in thefinancial industry.

Special attention should be placed ondeveloping and retaining a talented, globally competitive workforce, as Humanresources are the basis for China and Shanghais future growth. In order to makeshanghai more attractive for talented human capital, the following proposalsshould be considered…

1. In order toattract many of our youth to return from studying abroad, the   city should make relax restrictions on visaand increase access to Hukou.

2. Lowerindividual taxes

3. Build cheaperapartments near cities financial center in Lujiazui for the white-collarworkers.

4. Shanghaishould increase investment in education in order to improve the talent pool andto increase flexibility.

5. Increaseaccess to better healthcare.

II. Technology

Compared with other major financialcenters, Shanghai technology market, which currently composes 10.5% of GDP, isvery much behind. The technology market is the engine of the city and in orderto improve technological development, the Shanghai government must place anemphasis on implementing laws that strictly forbid infringement of intellectualproperty. If there is to be any increase in property this must happen. 

III. Financial Market

Currently, in other developed marketcenters, financial investment is around 70 percent of GDP, in Shanghai howeverthat number is much smaller, a meager 20 percent of GDP.  In order to increase development and allowfull maturity of the financial markets to occur there must be an increase infinancial freedom - specifically, with regards to the internationalization ofthe RMB.  Currently, the RMB cannot beexchanged freely, and this has greatly hindered the Shanghai market. Anothermajor obstacle to growth is the way in which the market has been allowed tomature. Financial markets in New York, London and Hong Kong have evolved slowlyover time, with little government intervention. This freedom has allowed forcreativity and development. The current role, as a heavy regulator, which theShanghai government has assumed has greatly hindered financial marketdevelopment. It should also be taken into consideration that the rights to thefinancial market lie in Beijing, so there is still no guarantee that Shanghaiwill develop safely as a financial center in China.

IV. The Shanghai Service market

In 2010, the Shanghai service marketcomprised of 57% of all GDP. When compared with London and New York whoseservice industry is 85% of GDP, Shanghai is very behind. Except for softwaredevelopment, which is better than Beijing, other service industries are farbehind that of Beijing. In order to develop its service industry market,Shanghai should focus its efforts on developing logistic systems such as ports,airports and transportation centers.

V. Resources

Currently, most of the material resourcesutilized by shanghais heavy industry are imported from abroad - either fromother provinces or from other countries. Shanghai should focus it s efforts on reducingits carbon output through development of renewable energy technologies such aswind and solar.

Interview with Professor Chen Shiyi

Howwill Shanghai’s development contribute to the Yangtze River Delta? Cooperationand synergy effect? E.g. maritime, how to coordinate different harbors in thisregion?

Shanghai’s maritime capability has improvedvery rapidly over the last decade, and while Shanghai is the largest port inthe world there still remains room for improvement - particularly in soft infrastructure.It is important to keep in mind that Shanghai serves as a window to the westernworld and a launch pad for western development - particularly in the YangtzeRiver Delta. While infrastructure developments are important, I believe thefuture lays in Shanghai’s ability to modernize its non-physical assetsparticularly the body of rules and regulations governing these various systems

Shanghaiis building the international financial centre. How are we going todifferentiate from Hong Kong?

The two are really not comparable. WhileHong Kong is a much more mature market, there is still a lot of room for growthin China with regards to the financial market. Shanghai is growing and hasplans to become the center for RMB internationalization. While Hong Kong hashistorically been the hub for Asian investment, much of the data points towardsShanghai. I believe that as the China market matures, legal systems modernizewe will see the historical trends begin to change. Asia is a large continentwith a lot of room for growth.

Financialfreedom vs regulations. Foreign financial institutions are vital for aninternational financial centre, but they have so many restrictions right nowfrom the government, e.g. restricted licenses to carry out full lines of business.How do you see the relationship between the financial freedom and regulations.How to attract more foreign investors?

Currently there are more financialregulations in China than in Hong Kong and the United States, however as I havealready stated, Shanghai is in a much different state of development and theproblems are very different. In Hong Kong, New York, supervision of thefinancial systems is a problem. In Shanghai however, the financial structuresare still in the early stages of development. Implementation of regulationshould be less of a focus as markets are allowed to mature.

Itis stated in the report that a lot of foreign companies having their researchcenters or the core parts manufactured outside China due to the poor IPRprotection. Although Shanghai has put great effort on this, how to furtherprotect the intellectual property right?

It takes time to resolve this problem.While laws have been enacted, it is very difficult to see to it that these lawsbe implemented. As the market matures, I believe that the best way to implementthese policies would be to place larger penalties on manufactures of theseillegal goods, but as I have already said, this takes time.

You(the professor) have done a lot of research in low-carbon economy and newenergy. However, new energies, such as wind and solar energy, are still notthat reliable and more expensive compared to the traditional ones. How toencourage enterprise or the whole society to increase the consumption of newand green energy?

TheUnited States and China are very different with regards to this issue. Industryis Chinas biggest focus right now and the largest emitter.  For a low carbon economy to exist it isnecessary to develop and reform energy pricing based on the market system, notby the government. China has grown and I think it is time to enact anenvironment tax or a carbon tax. It is time for industry to feel pressure toreduce emissions. We cannot continue business as usual. We must use the marketbase on environmental policy rather than base it on the market industry. It istime to collect carbon tax now. In short, Policy must be enacted based on theenvironment and the throughout the market system rather than by administrativepressures.

Wehave heard a lot that we should build our own brands instead of justmanufacturing some low value-added goods. And it’s proposed in the report thatShanghai government should encourage the private enterprises to put moreemphasis on research, any specification? There are some national famous brandsin other provinces, e.g. Huawei, ZTE and Sanyi Zhonggong. Any pressure forShanghai?

Before the 1980’s there are many famousShanghai brands, however in the late 80s these brands began to disappear inShanghai and in China. This is partly due to the fact that reform of stateowned enterprises is slow. In the 1990s many state owned firms wererestructured and competition was limited however, as markets began globalize,and foreign competitors arrived in China, many industries began to feelpressure to streamline and modernize. It has been difficult in recent yearspast for famous Chinese brands to be successful because much of development isstill based on the tertiary sector. When the focus shifts to secondary sector,I believe new brands will emerge.