Why Shanghai is so attractive to foreign investment and what others can learn from it

Shanghai is becoming one of the most progressive global cities when it comes to economic opportunity. And that's exactly why it has emerged as a place where people want to to create and do business.

According to an item in the San Gabriel Valley Tribune, Shanghai attracted a heady total of 790,000 foreign investment projects last year. Part of this is due to the fact that China has made it easier for foreign investors to do business there through the 2013 launch of the Shanghai Free Trade Zone, backed by Chinese Premier Li Keqiang. It is one of the first free trade zones in mainland China, and it covers some 46 square miles. 

The zone was launched as a test ground of sorts and has been touted as the most important attempt at economic reform since the establishment of the country's first special economic zone in 1980 in Shenzhen, near Hong Kong.

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Among other thngs, the zone cancels out a number of financial requirements for setting up a company in China, including the minimum registration capital of RMB30,000 (around US$5,000) for limited liability companies, the RMB100,000 (US$15,000) minimum for single shareholder companies and the RMB5 million (US$785,000) minimum for joint stock companies. (Note: These figures were as of 2013 and do not account for inflation.)

In addition, under the free trade zone's new capital registration system, foreign investors are no longer required to contribute 15-percent capital within three months and full capital within two years of the establishment of a foreign invested enterprise.

Also of interest, the sale of video game consoles, banned in China since 2000, is allowed within the zone. Meanwhile, there are still restrictions on Internet. 

Still, it's prompting many foreign investors to rethink and re-look at China. And while U.S. officials try to tout the U.S. as a place to do business, the Chinese are also keen to lure U.S. investment there. 

Officials representing Shanghai were in Los Angeles this week touting the city. “Shanghai has an optimum business environment,” said Jun Gu, vice chairman of the Shanghai Municipal Commission of Commerce. “The city is stable and in a growing phase. We have launched 54 measures to expand trade and 14 of those are for manufacturing.”

As The San Gabriel Valley Tribune wrote, Gu noted that more than 90 world brands now have a presence in Shanghai, which is home to some 1,336 financial institutions.

“We are an international city that is open to the world,” he said. “The transparency and openness of China have increased. And there are 388 foreign investment centers that have been established in China.”

Jiakun Fang, vice chairman of the Shanghai Fengxian Economic Commission, said U.S. investment in Shanghai has been diverse. “By 2014, we had approved more $13 billion in U.S. investment,” he said. “It’s mainly in manufacturing, transportation, rentals and scientific research. Eighty-nine U.S. companies have invested in our district with $1.7 billion in total sales. We have great strength in the manufacture of electronics and telecommunications equipment. We are an up-and-coming player in manufacturing and the high-tech sector.”

Stephen Cheung, president of World Trade Center Los Angeles, said the Shanghai Free Trade Zone has removed barriers for U.S. companies that want to do business in China.

“It’s often difficult to work in China because there are certain types of requirements where you must invest at a certain level,” he said. “This lowers that investment criteria and businesses can also apply for extended visas.”

Cheung said U.S. companies that set up business in Shanghai could also pay less in duties, the taxes on products that are imported. 

Part of the U.S. roadshow by Chinese officials is due in part to the slowing of China's economy. China’s stock market is down about 45 percent since June.

In the hospitality space, though China is still dominated by local hotel brands, U.S.-based and other foreign hotel companies continue to try and crack the Chinese market, both in the luxury space and down market. (A 2012 scholarly paper from UNLV looked to answer the question of why China is currently the number one recipient of foreign investment from foreign multinational luxury hotel companies.)

Incentives gained through trade zones such as the one in Shanghai make it easier to grow and expand there. For hotel companies, the hope is that more zones like Shanghai's will be implemented throughout China, making it more sensible for hotel groups, such as Marriott, Starwood and Hilton, to put in further time and money looking for deals.