Repairing a damaged international reputation

Sometimes referred to as the ‘gateway to the West’, Shanghai suffered a significant setback in the spring of 2022 after experiencing one of the worst COVID-19 outbreaks in Mainland China. This led to the city being cut off from the rest of the country after having already been mostly disconnected from the rest of the world in 2020.

The comprehensive, city-wide lockdown that was imposed resulted in shuttered factories, a collapse in consumer spending and disrupted operations at the world’s largest port. Companies of all sizes struggled to stay afloat, and the 92 per cent of European Chamber members that reported severe supply chain disruptions[1] illustrated the scale of the damage inflicted on Shanghai’s business environment. As a result, the city’s economy suffered greatly, with gross domestic product (GDP) declining almost 14 per cent in the second quarter of 2022.[2]

Just as devastating as the economic toll was the human cost; the city’s 25 million citizens were confined to their homes for a minimum of two months, with many unable to access basic supplies such as food, water and healthcare. Livelihoods were lost as a result, and large numbers of people could not uphold existing financial commitments due to their inability to work. This has severely damaged Shanghai’s international reputation.

While the rest of the world was adjusting to living with COVID-19, China and Shanghai continued to enforce a strict ‘dynamic-zero’ COVID policy. The closure of China’s borders in 2020 had hit foreign companies particularly hard, with many foreign national employees prevented from returning for over two years. While some persisted and eventually returned, many decided to leave the city for good. Small and medium-sized enterprises (SMEs) were impacted disproportionately, as they lacked the resources required to adapt quickly, and many foreign nationals were forced to abandon their businesses altogether. As world-class research and development (R&D) ecosystems rely on an abundance of talent from diverse backgrounds, Shanghai’s shrinking foreign labour pool also poses a real threat to its innovation ambitions.

As many aspects of the business environment disintegrated, business confidence among the international community in Shanghai dropped to an all-time low due to the continued complexity of the evolving COVID landscape and erratic implementation of local policies. This has had a significant negative impact on Shanghai’s aspiration to develop a regional headquarters (HQs) economy, which the city government reiterated under its 14^th Five-year Plan (14FYP). Once seen as a promising hub for regional HQs,[3] Shanghai’s attractiveness had declined over the past decade due to ‘lagging accessibility’[4] – even before the pandemic struck. After the city-wide lockdown was imposed, people-to- people exchanges disappeared almost entirely, and policies made cross-border and even domestic travel extremely onerous. In 2022, stringent travel restrictions were in place for almost three quarters of the year. Singapore has become the leading beneficiary of the cross-border travel restrictions that Shanghai faced,[5] attracting European multinationals to establish regional HQs there. Chinese companies making a strategic shift out of Shanghai could also be seen, with approximately 500 registering in Singapore in 2022.[6]

While the removal of COVID-related restrictions in December 2022 and early 2023 was a welcome decision, the short notice and lack of preparation before the changes led to further disruptions as infection rates among the population skyrocketed. This further damaged global perceptions of the local business environment in terms of predictability and stability – vital considerations for investors when assessing plans for future expansion.

Despite these recent setbacks, Shanghai’s GDP per capita more than doubled over the past ten years, putting it on par with industrialised nations.[7] However, the local government’s objective of developing a truly international city ultimately requires meaningful reforms, including those that can address the regulatory barriers that disadvantage foreign-invested enterprises (FIEs). This will involve: strengthening financial support for SMEs to access credit; continuing to implement policies in the Port of Shanghai that will allow all foreign vessels to carry out international cargo relay; removing thresholds and personnel requirements for the establishment of joint venture (JV) law firms; and creating a roadmap for the internationalisation of the renminbi (RMB).

Shanghai could also benefit significantly from leveraging the Yangtze River Delta (YRD) integration scheme, particularly regarding the green transition and through strengthening intellectual property rights (IPR) protection by sharing resources from its specialist IPR court among regional courts located in the YRD. However, while this large-scale regional integration project has been in the works for the past decade, only half of the Chamber’s Shanghai-based members report having seen progress, let alone having benefitted from it.[8] This represents a missed opportunity, particularly with many European companies able to offer expertise and technology that can support China’s carbon neutrality ambitions.

As Bettina Schön-Behanzin, vice president of the European Chamber and chair of the Shanghai Chapter stated at the launch of the positon paper in February, “Shanghai has a window of opportunity to rebuild the trust eroded over the past three years, particularly following the city’s spring 2022 lockdown. This will not happen overnight, but must be predicated on the Shanghai Government taking tangible steps to build a business environment that is transparent and predictable.” As China’s most ‘international’ city, the world is watching how Shanghai recovers post-zero-COVID for indications of the health of the Chinese economy overall.

To download the Shanghai Position Paper 2023/2024, please visit the European Chamber’s official website: https://www.europeanchamber.com.cn/en/publications-local-position-paper

[1] Data collected during the European Chamber’s Business Confidence Survey in February 2022, and in a flash survey conducted in April 2022; European Chamber Flash Survey, COVID-19 and the War in Ukraine: The Impact on European Business in China, European Union Chamber of Commerce in China, 5^th May 2022, p. 2, viewed 27^th August 2022, <https://www.europeanchamber.com.cn/en/publications-archive/973/Flash_Survey_COVID_19_and_the_War_in_Ukraine_The_Impact_on_European_ Business_in_China>

[2] Xiao, Zibang, Shanghai’s Economy Shrank Almost 14% as Lockdown Took Toll, Bloomberg, 15^th July 2022, viewed 3^rd August 2022, <https://www.bloomberg.com/news/ articles/2022-07-15/shanghai-s-economy-shrank-almost-14-as-lockdown-took-toll>

[3] Based on results in European Business in China Asia-Pacific Headquarters Study 2011, European Union Chamber of Commerce in China, 2011, <https://www. europeanchamber.com.cn/en/publications-asia-pacific-headquarters-study>

[4] Sugiura, Eri, Beijing and Shanghai drop sharply in global attractive cities ranking, Nikkei Asia, 30^th October 2018, viewed 7^th December 2022, <https://asia.nikkei.com/ Economy/Beijing-and-Shanghai-drop-sharply-in-global-attractive-cities-ranking>

[5] Connors, Emma, Singapore Firms as Leading City For Asian HQs, Financial Review, 26^th January 2022, viewed 8^th December 2022, <https://www.afr.com/world/asia/ singapore-firms-as-leading-city-for-asian-hqs-20220126-p59rfi>

[6] Lewis, Leo, & Ruehl, Mercedes, Chinese Companies Set Up in Singapore to Hedge Against Geopolitical Risk, Financial Times, 30^th November 2022, viewed 8^th December 2022, <https://www.ft.com/content/a0c11e3e-ab72-4b4b-a55c-557191e53938>

[7] Yang, Jian, Shanghai’s Sustained Growth Puts It On Par With Developed Countries, Shine, 8^th August 2022, viewed 9^th August 2022, <https://www.shine.cn/news/ metro/2208088950/>

[8] Unpublished local Shanghai data from the European Union Chamber of Commerce Business Confidence Survey 2022, see Chart 12 on Page 30.