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| Executive Travel: Shanghai |
Vital Statistics
Marianne Cotter
06/01/2006
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Shanghai has had a reputation as China’s business epicenter for nearly a
decade,
and certainly since the government officially embraced
private
property rights
in 2000. The city’s economy
has
enjoyed double-digit
growth, in part spurred by the
migration of
assets from government to
private sector hands.
The
state-owned sector’s share
of local GDP
dropped
from 82
percent in 1995 to 61.1 percent in 2004, according
to
the
Shanghai Daily, an English-language newspaper. As this
process continues,
opportunities for investment abound.
TRAVELING WISELY
Shanghai enjoys low crime
rates
and good civic order. No
extraordinary security
measures are
necessary. Pickpockets in tourist areas are
usually the worst of
travelers’
worries. | Foreign Direct
Investment
Foreign investors have pursued
opportunities in
China for some time. In 2000, FDI totaled
$40.72 billion; it
rose to
$60.63
billion in 2004,
where it has plateaued for two
years. This
sudden leveling off
has been a cause of concern,
prompting some
foreign-owned manufacturers to scale
back
operations.
However, in the
first two months of 2006, FDI in China grew
by
nearly 8 percent over
the same period in 2005, which may
indicate a renewed
inflow.
The lion’s share of
FDI goes
into the manufacturing
sector. Most
foreign
companies recruit
labor from rural areas and house
them in
dormitories.
With no
restrictions on hiring or firing workers,
companies can expand and
contract rapidly. Most foreign firms
pay
slightly more than
indigenous ones and
invest
more in training, thereby
attracting a higher-quality work
force.
Access to Capital
A lack of access to capital
remains the
primary
challenge for foreign investors.
Foreigners are barred from
selling shares or
participating in
the bond market. Investors must
finance their operations by
utilizing their own
sources of capital.
The Renminbi
Despite China’s devotion to a free market
economy, its
currency, the renminbi (RMB or yuan), is not
free-floating. Although now based
on a basket of currencies,
it
primarily tracks the U.S. dollar and is tightly
managed by
the People’s
Bank of China, the central
bank. The result is a
currency that is
considered by
many experts to be considerably
undervalued.
“I
think the renminbi is undervalued by about
20 percent,” notes
Nicholas
Lardy, senior fellow at
the Institute for
International Economics. “The
Chinese
government pegs its currency to
the dollar in nominal terms in
a period
in which productivity
growth has been quite
substantial,
making them more
competitive, which in
turn creates a bigger and bigger
trade
surplus.” Lardy,
like others, believes that the United States
will
succeed in cajoling China to
free the renminbi in the
next
five
years.
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