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Pudong Development Zone.

ASK a bank to invest in a run-down part of a city, telling them that in future years it will be transformed into a thriving commercial centre, and you are likely to receive a short reply. The losses incurred in London's Docklands, not to mention the worldwide recession, have created a highly cautious attitude among Western investors.

Yet, in a small office on the other side of the world, this is exactly the question being put to investors. More surprising still is the fact that the ambitious scheme masterminded by the Pudong Development office in Shanghai, is receiving serious attention from the foreign investing community. Whilst doubts remain, there is a growing feeling that Shanghai could succeed where London couldn't.

'The most important economic development in China', states the billboard. Above is a colourful montage depicting a tomorrow full of confidence and economic prosperity. Situated in what the authorities hope will become a commercial heartland, the contrast between this futuristic vision and the current landscape could hardly be more stark. Large areas of wasteland, mid-rise blocks of flats, and old wharves, dockyards and warehouses that stretch along the banks of the Huangpu River.

The Pudong Development Project in Shanghai is nothing if not ambitious. To start with, it involves transforming 350 sq km of land, an area half the size of Singapore. The comparison is apt, for it is the desire to emulate the success of Hong Kong and Singapore that has inspired this dream. Li Jianeng, Vice-President of the Pudong Development Office, wants to revive Shanghai so that it becomes 'the centre of the biggest economic and trading area in the West Pacific and we've chosen Pudong as the breakthrough point'.

Historically, it has been Puxi, the area to the west of the Huangpu, that prospered as a result of the city's expansion as a trading port. By contrast, Pudong has always seemed to cower in the shadow cast by the imposing waterfront buildings of the Bund.

But Puxi is bursting at the seams. The downtown area is home to over eight million people and its population is swelled still further by the daily influx of workers. Plans to recapture the city's former glories through industrial expansion simply require more space. So Pudong, just across the river, has been earmarked for the massive infrastructural and economic rejuvenation.

But developers have to face more than just physical reconstruction. Three larger, more complex problems must also be overcome. First, is winning over a still sceptical foreign investing community. Second, is maintaining the necessarily high levels of expenditure when the government is under pressure to control growth. Third, and perhaps most thorny of all, is the need to rid the project of the suffocating level of bureaucracy that has built up over recent years.

The cost of the project, estimated conservatively at $10bn over the first decade, is the most obvious challenge. It comes at a time when city finances are under great strain and inflation and a worsening trade balance are causing anxiety about overheating in the national economy. Much of the money will have to come from overseas, but here the timing could hardly be worse given the worldwide recession and a huge contraction in lending caused by the international banking crisis. And if all this were not enough, the closest international precedent offers no encouragement. The empty office blocks in London's Docklands stand as a costly reminder of the difficulties of trying to impose growth and prosperity on a region that investors have hitherto shunned.

None of these problems seem to have quelled the enthusiasm of the scheme's many champions. Fei Xiaotong, Chairman of the China Democratic League and Vice-Chairman of the National People's Congress, talks in terms of creating a mainland Hong Kong. 'Shanghai should be developed into a centre of trade, finance, information, transportation, and science and technology. It should become the general control room which manages the industrial and agricultural commodities produced in Jiangsu and Zhejiang provinces and in the cities along the Changjiang River'.

What he is describing is close to the Shanghai of the first half of this century. One of the world's most advanced cities and described as the Wall Street of the Orient, Shanghai in the 1930s boasted 168 banks, including branches of 58 foreign banks. It also used to import two thirds of all China's goods and acted as the commercial centre, industrial base and eastern door to the world. Of course, its inherent advantages remain. Shanghai stands on the estuary of China's biggest river, the Changjiang, and acts as the country's gateway to the Pacific. Its 13 million population also possess the same skills and business acumen as their forefathers.

But forty years of neglect has seen it eclipsed by Guangdong Province which has benefited from financial inducements and its proximity to Hong Kong. The authorities recognise that valuable time has been lost. It was not until April 1990 that Premier Li Peng announced the creation of the Pudong New Area. Any attempts at a 'quick fix' have been sensibly resisted -- instead, the plan will stretch over 30 to 50 years, with only 10 sq km to be developed over the first five years.

If the emphasis is long term, the inducements are immediate. Tax on foreign-funded enterprises in the area is as low as 15 per cent. Shanghai Vacuum, having changed its status to a joint venture by taking foreign capital, is one company which will see its tax rate slashed from 55 per cent by the move to Pudong. Other advantages include tax exemption on imported goods and materials, and non-taxable income for foreign businessmen during the first five profit-making years. Such generosity, whilst necessary to attract firms to a less fashionable and hence higher risk part of town, does have its drawbacks. Shanghai's financial contribution to the state is six times that of Guangdong, but its revenues are only 20 per cent higher. With tax receipts bound to be squeezed as the preferential policies are introduced, the imbalance between the two regions can only widen. Central government's assurances that the Pudong project will not be allowed to impact on city finances have not appeased the fears of firms in Puxi that they may have to bear more of the tax burden in order to compensate for any shortfall in revenues.

In spite of these concerns, there is a general optimism that the project will be a success. Hopes were given a major boost last year with the announcement by Hutchinson Whampoa, the Hong Kong conglomerate, that it has secured 50 per cent of Shanghai's container port for $181 mn. In a joint venture with Shanghai Port Authority, Hutchinson will modernise and expand the container terminal to almost double its present capacity by 1995. Part of the deal also includes the newly-formed Shanghai Container Terminal acquiring preferential development rights for a planned container terminal in Pudong.

One feature about Pudong which will have impressed Hutchinson, is careful planning. And here the advantages of a centrally controlled economy in such a project are most apparent. Before commitment, firms need satisfactory transport, power and sewage networks. Recognising this, the Chinese government were able to spend large amounts of money and resources without the assistance of the private sector. Phase One of the project, covering 1992-1997, focuses on installing the infrastructure. Transport is a top priority. A new 15 km-long underground system will be completed by 1994. Half of the 8 km long Huaihai Road, one of the city's busiest commercial streets, has been closed to traffic because of construction work. Phase Two, linking Puxi with Pudong, will begin in 1995.

The Yangpu Bridge will be finished by the end of this year, complementing the Nanpu Bridge in the south which has been carrying traffic since 1991. A 45 km-long inner ring road feeding the Bund area is to be widened to complement the Yanggao Road, the main artery in Pudong which itself was recently completed. Other major transport plans are the Pudong railway line and, most ambitious of all, a second international airport in the south of Pudong. Work on what could become Asia's largest air terminal will start in the second half of the 1990s.

Getting transport links established is seen as a pre-requisite for the massive investments needed later this decade. With financing mostly in place, this hurdle looks like being cleared. The main sources of finance for the big infrastructural projects have come from the World Bank, Asian Development Bank and Japanese government loans. Other sources include the revenue raised from the conversion of state-run factories to private concerns via the Shanghai Security Exchange; nearly $1 bn from the sale of 79 land plots; and domestic investment in Pudong by the Ministry of Aeronautics and the Ministry of Textiles.

It is during the crucial second phase that foreign funds will be needed most. Shanghai officials estimate that $900 mn has been pledged for projects in the export processing zone, $920 mn for commercial buildings in the financial district and $700 mn for projects in the free trade zone. There are 12 joint venture banks and financial institutions which brought in millions of dollars when they registered. And there are companies already set up in Pudong, such as Pilkington, the UK-owned glass company which has a 12.5 per cent stake in a joint venture plant which employs the float glass process. So clearly there is foreign interest, but most of it is still of 'the wait-and-see' variety.

So far, foreign investment has been dominated by overseas Chinese. Some 40 per cent of business visitors to Pudong come from Taiwan and 20 per cent are from Hong Kong. Taiwanese businessmen enjoy the most favourable investment treatment among all overseas investors. And, now that diplomatic relations have been restored, South Korea is expected to be a source of growing involvement. Elsewhere, investors have been more circumspect. Even the relatively small amount of US investment in Pudong has nearly all come from Americans of Chinese origin.

For the time being, more of a problem than attracting foreign investors is the physical task of flying them in. New routes are being established and larger aircraft are being bought. But reform is a slow process and there remains an acute shortage of flights into the city. Likewise, Shanghai's roads are in need of urgent repair, groaning under the weight of masses of pedestrians, cyclists and buses. Rush hour is a scramble -- it is estimated that even if one bus were dispatched every two seconds it would still not be enough to cope with commuter demand. This situation can only get worse as more people are encouraged to relocate to the suburbs and as car ownership rises. Currently there is only one motorised vehicle per 190 Chinese, and just 0.2 per cent of these are privately owned. One source predicts that by the turn of the century, 3-5 per cent of urban Chinese will have their own cars. An increase of such magnitude could put an unbearable strain on an already overburdened system.

High unemployment persists whilst those in work are enjoying generally improving incomes. And with a marked disparity between employee benefits in state and privately-owned firms, pay and welfare support issues need to be monitored carefully if the rumbles of social discontent are not to grow louder.

But it is the persisting problem of bureaucracy that, above all else, threatens to undermine the work of the Pudong Development Office. Already, many property developments have not been able to proceed because of delays in government departments. One local commentator, close to despair, described the problem as an 'epidemic that has no cure'. Many regard it as a manifestation of a city which simply moves slower than the southern provinces. If the bureaucratic shackles cannot be broken, then the essential spirit and urgency that made Shanghai one of the world's most vibrant cities may continue to be suppressed.

Li Jianeng may also have cause to reflect on his unfortunate comment, comparing Pudong's role to Shanghai to that of Docklands to London. As he surveys the recently-built 88-storey skyscraper that has become a monument to Shanghai's future, he may care to spare a thought for that ill-fated and half-empty Canary Wharf building in London.
COPYRIGHT 1993 Contemporary Review Company Ltd.
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Title Annotation:Shanghai development project
Author:Lammie, David
Publication:Contemporary Review
Date:Apr 1, 1993
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