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Mark O'Neill

Economists in Shanghai are warning that the city's growth is  concentrated in too  few industries,  notably vehicles  and property, which proffer only limited benefits to the majority of the city's residents.

The narrow growth model is unsustainable, they say, and the government risks sacrificing Shanghai's long-term competitiveness if the average citizen remains excluded from the city's prosperity.

The fears seem to be confirmed by figures  released on Monday that showed foreign direct investment in the first seven months grew just 1.9 per cent year on year to US$7.15 billion - after years of double-digit growth.

The debate on Shanghai's future was sparked by a recent scathing report by Wang Lianli, a retired auditor  now working at the Dajun Economic Research Institute in Beijing.

Using only official statistics, she found that the floor area in Shanghai occupied by the richest 12.5 per cent was the same as that occupied by the poorest 56.4 per cent.

'The current property structure began with the inequality in the distribution of public housing and has continued in the system of housing funds,' she said. 'However much housing is built, there is no real benefit for ordinary people.'

While Shanghai people have the highest average per capita income in China, their spending power is among the lowest because of the high cost of housing.

The municipal government has bitterly criticised her report and the official media has not dared to publish it. Discussion of China's widening wealth gap touches a raw nerve in a political structure that is still premised on distributing material benefits equally.

But the weaknesses in Shanghai's economic foundations are impossible to ignore, prompting many senior economists  to voice concerns over the  city's economic future. 'Shanghai's economy depends on two pillars - property and cars - and both have entered a period of risk,' said Yang Jianwen, deputy director of the economic research institute at the Shanghai Academy of Social Sciences.

The real estate industry accounted for 7.4 per cent of the city's gross domestic product last year, compared with 3.71 per cent in 1995. The city accounted for 1.3 per cent of China's population last year but 15.9 per cent of its home sales.

Shanghai's vulnerability is underscored by the impact of the slowdown on vehicle and property companies. Huang Qian, general manager of the Shanghai Bo Bang Land Investment Company, said that property prices in the city would fall 10 to 15 per cent over the next three months, due to tighter restrictions since April on bank lending to homebuyers and a second-quarter drop in turnover in the secondary market.

One  early casualty is Shanghai New Huangpu Real Estate Company, an A-share firm, which reported  a drop in revenue of 52 per cent for the first half of the year to 134 million yuan.

Worst hit are companies selling cars, a sector in which slowing sales and a bruising price war have left dealers scrambling for business and manufacturers sitting on swollen inventories.

'Shanghai needs a new industry to take over one of these and act as an engine of growth,' said  Mr Yang. 'For two years, the city leaders have been looking for one.'

Even President Hu Jintao noted Shanghai's growing pains during a visit early this month,  his first  since he took office in March last year.

He stressed the need for Shanghai to be a broad-based economy and to develop finance, trade, shipping and other sectors suitable for an international city.

Last year, the share of the service sector in the city's GDP dropped for the first time since the early 1990s, to 48.4 per cent from 51 per cent in 2002.

This is discouraging news for a city that brands itself as 'a modern international metropolis' and wants to join the select group of global cities that includes London, Paris, Rome, New York, San Francisco, Sydney and Hong Kong.

Such cities have 75 per cent or more of their GDP in services.

Zhang Jun, director of the China Economic Research Centre at Fudan University, said that the city government had made a mistake in giving too much priority to manufacturing instead of services.

'Shanghai should be a financial, trade and service centre for all of China,' Mr Zhang said. 'In this, we serve the whole country. In manufacturing, we are competing with the rest of China.'

Mr Yang said that the city should go for services and creative industries: 'Because it is Beijing that sets policy, we have fallen into the habit of being passive. The city government has not been active enough in preparing for the WTO-mandated opening of the market in banking, accounting, valuation and other services. I see a rapid development similar to that in manufacturing, when it was opened to foreign investment.

'Shanghai has better conditions than anywhere else in China to become a creative centre, for publishing, design and other areas. This industry has grown rapidly in recent years in Taiwan, Hong Kong and Japan. Because it is linked to ideology in China, the government has been cautious. We have not developed it as a proper industry.'

For the moment, the service sector is heavily dependant on property, prices of which are approaching those of the global cities Shanghai aims to catch.

Property here is the most expensive in China, at an average of 5,400 yuan per square metre, having risen 21.4 per cent year on year in the second quarter, despite central bank efforts to slow the sector.

For foreign companies, the risk of a burst of the property bubble is similar to that in Hong Kong in the late 1990s - thousands of families thrown into negative equity and reluctant to spend, and increasing bad debts at banks that are the main financiers of house buying.

Despite these concerns, the average Shanghai resident continues to believe in the myth of rising prices, like his cousin in Hong Kong in the mid-1990s.

Ask any taxi driver in Shanghai and he will tell you to buy an apartment in the city, saying that the government will not allow prices to fall before the World Expo in 2010.



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