CHINA'S ECONOMIC reforms began in the Pearl River Delta but, over the past three years, the Yangtze River Delta has surpassed it to become the biggest exporter and magnet for foreign investment in China. Last year the Yangtze delta overtook Guangdong and further increased its lead in the first half of this year. Its exports in the period were US$125 billion, up 38 per cent over the same half last year and accounted for 37 per cent of Chinese exports. It attracted US$14.5 billion in utilised foreign direct investment, an increase of 19 per cent and 51 per cent of the national total. The Yangtze delta is defined as Shanghai and its two neighbouring provinces of Jiangsu and Zhejiang, and growth took off in 1997 with the moving of Taiwan's information technology industry to the region. The Asian financial crisis put pressure on Taiwan exporters, whose confidence in the island's future was also reduced by political uncertainty. Its electronics industry moved en masse to industrial parks around Suzhou and Kunshan, in Jiangsu province, both about two hours from Shanghai. Japanese producers followed so they could compete against Taiwan companies in the global market, and European and United States manufacturers after them. This turned the Yangtze delta into the biggest production base in the world for electronics products. This flood of expatriates led to a property boom, as developers rushed to build homes, hotels, clubs and other facilities for the new residents, pushing prices closer to those in Hong Kong and Taiwan. The Pearl River Delta opened to the world 10 years before the Yangtze delta. Hong Kong's light industry production crossed the border, causing a price revolution in the products they made. For the past decade, the two regions have been competing with each other, investing heavily in roads, railways and other infrastructure to make them more attractive to foreign and domestic investors. There is fierce competition in the Yangtze delta among different cities, with new areas entering the market with offers of cheaper land and labour. The result has been double-digit growth for more than a decade. The strongest sectors in Shanghai are information technology, financial services, cars, property and petrochemicals, with services accounting for about 50 per cent of the city's gross domestic product. In Jiangsu and Zhejiang, the service sector accounts for about 30 to 40 per cent of GDP, with the most in manufacturing, especially IT, textiles, computer chips, pharmaceuticals, chemicals and machinery. Shanghai wants to position itself as the financial, commercial and logistics capital of China. It was the second-largest cargo port in the world last year, after Singapore, and plans to start operations at the end of this year at the Yangshan deep-water port, being built on an island 35km offshore. The volume of air cargo at the new Pudong international airport is growing at 20 per cent a year and the airport is doubling capacity with a new terminal. It is also striving, successfully, to become the preferred site for multinationals to locate their national or Asia-Pacific headquarters. It also wants to be China's financial capital but is falling further behind Hong Kong. Because the market in Shanghai is trapped in a four-year slump and the issue of new shares has been suspended, mainland companies prefer to issue their shares in Hong Kong, which will report a bumper year by December. A key element in the success of the Yangtze delta is investment by Taiwan. An estimated 300,000 to 400,000 Taiwanese live in Shanghai and have invested perhaps US$10 billion in the city, accounting for about 14 per cent of overseas investment. They are big players in the city's property market. Many are betting on Kuomintang chairman Ma Ying-jeou becoming the president of Taiwan in 2008 and opening direct air, shipping and postal links, which will benefit the Yangtze delta more directly than the Pearl River Delta, with Shanghai only an hour from Taipei by air. Among the factors behind the recent exodus to Shanghai is a series of high-profile murders and robberies of Taiwan people in Guangdong, fuelling a sense among Taiwanese businesspeople that the Pearl River delta is less safe. But the Yangtze delta also has challenges. Several of Shanghai's key industries - vehicles, steel and property - face the threat of overproduction and a bubble. Another is an energy shortage, which has hit the Yangtze delta badly during the past three years, costing an estimated 0.6 per cent of GDP during the peak summer months. Another is social welfare - official estimates say that only one in 10 of the city's four million migrant workers has insurance coverage and only one in three of its permanent residents is covered by the city's pension scheme. As more workers are laid off and the population gets older, the city will have to find a solution to this problem.