Is Shanghai facing an industrial transformation challenge?

ShanghaiGlobalisation helps labour and resources flow freely. On the one hand, it causes the dispersal of global trade networks. On the other hand, it also brings about trade concentration, as certain professional services such as corporate accounting, marketing, law, and financing tend to concentrate on a few cities, exactly like the concept of global city that Saskia Sassen proposed. Therefore, in a globalised world, investment needs to be focused on the trade nodes spread around the global market.

On 29 September 2013, the Shanghai Pilot Free Trade Zone (SPFTZ) was established. Close to an international airport and Yangshan Bonded Port Harbor City, SPFTZ is the very first free trade zone in Shanghai and in China. The significance of the creation of this free trade zone is threefold. First, it represents the reform and policy opening-up of China, a reform that allows commercial activities, high-end services, and the offshore financial industry in Shanghai and speeds up Shanghai’s industrial transformation. Second, as a provincial municipality in the Yangtze River Delta, Shanghai’s establishment of a free trade zone will facilitate the development of its nearby cities in Zhejiang and Jiangsu. Third, in the future, features such as capital account convertibility of RMB and the marketization of interest rates will be implemented in SPFTZ, which will further boost the internationalisation of RMB. Nevertheless, does the establishment of SPFTZ indicate that Shanghai is focusing on the high-end service industry to achieve industry restructuring?

The Chinese 2013 Statistical Yearbook indicated that Shanghai’s GDP increased by 7.5% in 2012, the lowest growth of 11 provinces1. In 2012, Shanghai’s tertiary sector grew by 952.796 billion RMB, accounting for 61.6% of the total growth of GDP2. This number is not adequate when compared with other developed countries, whose tertiary industries account for more than 70% of growth. The problem is whether Shanghai can get its industry restructuring right and still have strong development. As economist William Jack Baumol stated, since the service industry grows relatively slowly compared with the manufacturing industry, putting emphasis on the tertiary sector may be detrimental to the overall economy, a dilemma called Baumol’s cost disease. Shanghai is now caught in this situation.

Shanghai has been concentrating on two strategic development models since the 1980s: first on the financial and commercial infrastructure in order to become a major high-end service centre, the other on the manufacturing sector3. When UrbaChina members conducted field research in Shanghai Lujiazui Financial Center, the government officials still stressed the importance of the manufacturing industry for the growth of Shanghai, such as equipment and automotive manufacturing and information industry when Shanghai faces the transformation into a hotspot for the tertiary sector. So, the question here is how Shanghai can successfully complete the transformation.

Producer services can be one of the solutions. It connects the manufacturing industry with the service industry. And the service industry, the main focus in SPFTZ, would need a way to combine the financial market and logistics. However, this model is highly similar to what Hong Kong has been doing. So, how should Shanghai cooperate or compete with Hong Kong? How can these two cities avoid triggering vicious competition between regions? These questions would make for a very interesting potential research topic.

  1. Zhongguo xinwen wang, http://finance.chinanews.com/cj/2013/01-23/4511666.shtml, accessed on 6 May, 2014 []
  2. Shanghai tongji, http://tjj.sh.gov.cn/sjfb/201310/263003.html, accessed on 6 May, 2014 []
  3. Francois Gipouloux, The Asian Mediterranean: port cities and trading networks in China, Japan and southeast Asia, 13th–21st century, Cheltenham: Edward Elgar Publishing, 2011. []

Chi-Han Ai

Ph.D. candidate of EHESS ( École des hautes études en sciences sociales, Paris) focusing on regional economic development in China and Taiwan.

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