Shanghai free-trade zone

Foreign investors sideline Shanghai's free-trade zone in favour of manufacturing

Funds pour into city's manufacturing at expense of its free-trade zone

PUBLISHED : Monday, 27 January, 2014, 4:24am
UPDATED : Monday, 27 January, 2014, 6:29am

Shanghai's leaders have been served up an embarrassment of riches in the latest figures for foreign direct investment flows into the mainland's commercial capital.

The red faces among city officials stem from the fact that foreign funds have ramped up their exposure to Shanghai's manufacturing sector, despite a freshly minted free-trade zone that is intended as the springboard for efforts to intensify a focus on financial services.

The city received US$3.2 billion of direct investment from foreign manufacturers last year, up 29 per cent from 2012. While flows from overseas institutions into the city's financial services sector were valued at US$13.6 billion last year, the annualised increase was only 7 per cent.

The local statistics bureau conceded yesterday that manufacturing businesses remained attractive to foreign funds as investors in the fields of civil aviation, high-end equipment making and electronics increasingly gravitated to the city, pursuing further growth.

"It proved that Shanghai's manufacturing businesses were still attractive to foreign funds," said Yan Jun, the chief economist with the city's statistics bureau.

However, Yan said the surge in foreign direct investment growth in the manufacturing sector last year was a one-off.

These latest figures did not necessarily mean that industrial businesses in the city were more attractive than the finance sector overall, he said.

Shanghai shifted its focus from manufacturing to finance after it unveiled ambitions to become a global financial centre in 2009. These efforts gained impetus with the launch of the pilot free-trade zone in September last year.

The free-trade zone has been promoted as a vehicle for major financial liberalisations such as convertibility of the yuan under the capital account in order to woo greater inflows of foreign capital.

The central government and Shanghai have yet to announce an official timeframe for implementing the full convertibility of the yuan in the zone.

Shanghai mayor Yang Xiong told the annual meeting of the city's legislature this month the convertibility goal would be achieved in the zone this year.

"The impact from the FTZ development wouldn't be only limited to the zone," Yan said. "It would eventually play a big role in boosting the economic development as financial institutions cluster."

Since 2008, Shanghai, known as the mainland's economic locomotive, has been among the slowest-growing provincial-level regions by economic output.

The city's economy grew 7.7 per cent last year, just 0.2 percentage point higher than its target. Some economists blamed the lacklustre growth on the city's efforts to shift away from manufacturing to finance.