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The Future of Shanghai: On Changing Trends, Demographics, and Business Opportunities

SmSh talks with the heads of AmCham and EurCham about Shanghai business, expat population trends, and what makes Shanghai still special in the Post-Covid Era...
2023-07-15 12:00:00

In this strange post-Covid moment we're all living in, everyone's got an opinion on where Shanghai is going and what the future holds. Is Shanghai rebounding after the last few years of isolation and closure? Is official policy heading in a direction that is more so or less so conducive to foreign investment and expansion?

Even just this: Are people still leaving? Are more people coming in? And this is important when it comes to expats/foreign businesses because they play an important role in creating connectivity between nations. So much so, that Shanghai in the past had announced plans to grow the expat population to 800,000 residents (for context, there are about 80,000 foreigners in Shanghai now, with roughly 13,000 of those being senior exectuvies and business owners).

When even hindsight in Shanghai is more often than not less than 20 / 20, the future seems an even murkier proposition.

SmartShanghai had the opportunity to sit down with two gentlemen who might have special insight on the situation, speaking on factors affecting entrepreneurship, foreign investment, and expat demographics in this city: Sean Stein, the former US Consul General and current Co-Chair of China Public Policy at Covington and Chair of the American Chamber of Commerce in Shanghai and Carlo D'Andrea, the President of the European Union Chamber of Commerce Shanghai Chapter, and founder of D'Andrea & Partners Legal Counsel.

Fair warning. It's a long read. There's lots to discuss. Get yourself a coffee. (Or a whiskey, depending on your own view of things).

Read on for an extended chat with the Chair of AmCham and the President of EU Cham about the future of Shanghai.


SmSh: Do you think there will be an increase in job opportunities for expats in Shanghai, now that we're post Zero-COVID?

Carlo D'Andrea: Yes, we do anticipate an increase in job opportunities for foreigners for a few reasons.

First, China's projected growth GDP growth is around 5%. That might not seem like a lot, but in an economy this large, this growth is still large and outpaces most developed countries. For this reason, I am quite bullish.

Second, because many foreigners have left Shanghai, and because of the city's restart, we find that EU companies in certain sectors now have vacancies open that are hard to fill. This will bring a lot of opportunities for foreigners in Shanghai or moving to Shanghai in the short and medium term. I believe that in case foreigners will come to China or they will come to Shanghai, they will find a job because, for many years, we didn't have foreigners so many companies had to localize the business, which has worked in some cases, but not in others.

Sean Stein: From an American businesses perspective there will definitely be an increase in job opportunities for expats, but they won't all come at once. During the Covid era, many expats couldn't get back to China. Companies couldn't fill expat positions. This accelerated localization of many positions, sometimes through ‘battlefield promotions', sometimes through planned, deliberate processes. In some cases, this worked fabulously and exceeded expectations, but that hasn't been every case.

Some companies are now slowly starting to rebalance their workforce and management teams to reintroduce more expats back into the mix, but this isn't a one-way street. We are also seeing companies bringing people from China back to headquarters.

Despite this generally positive trend, there are challenges complicating plans to bring in more expats. One is the economy. Many companies are concerned that China's economic recovery may not come as quickly as hoped and envisioned. This is leading them to hold off on some hiring decisions. Another challenge is a lack of clarity over tax issues, which we'll talk about later.

In terms of when we'll start to see companies posting more job ads, this will likely ramp up during the Summer and into the Fall, so we may be seeing this soon.

SmSh: Sean, what are your thoughts on the American expatriate population numbers and trends for this year?

Sean Stein: Sadly, based on the number of expatriates living in the city, Shanghai is not nearly as international as it once was. The population of Americans peaked in 2016 or 2017 but really took a hit over the last few years. As someone who believes that Shanghai's foreign population is an important part of the city's identity and economic vitality, I think this is really unfortunate. Fortunately, the overall numbers are turning around—but different segments are following their own trends.

One group, the group I am in, is the long-term expats who call Shanghai home. The people who live here and work here, often for many years. Some members of this group decided to move out during the Covid era. Others found themselves trapped outside, unable to get PU letters or renew their visas. It's good to see that many people in this group have been able to return espescially in the 45+ age bracket.

Then there is the expats-on-assignment group. Members of this group work at international schools, language schools, and larger companies and professional service firms. I was in this group when I worked at the U.S. Consulate. The population of this group has stabilized and may be slowly increasing, though it varies from sector to sector.

The last group I'll mention is the university and language students who used to come to China by the thousands. Prior to Covid, there were between 15,000-20,000 of these American students coming to China each year and the benefits for mutual understanding were enormous. I understand there are now fewer than 400 American university and language students in China, primarily at NYU Shanghai and Hopkins Nanjing. Almost no one else has been able to get a student visa. This is bad for China, bad for the United States, and bad for the world. Unless China and the United States take a more active role in encouraging U.S. students to come here for study, the numbers may never recover.

SmSh: Carlo, what about you, what you have seen in the area of expat population trends among Europeans in Shanghai?

Carlo D'Andrea: First, we have seen that the lockdown has really impacted the number of foreigners living in Shanghai. We've done some research on this in the EU Chamber's last position paper. We found that 25% of Germans left during or after the lockdown, and the number of French and Italians registered in the consulates each fell by 20% in 2022. So, we have seen an exodus of expats during the lockdown period. This is a significant loss for China, as foreign nationals are among the best ambassadors to bridge the perception gap with European headquarters. However, since last December when China reversed its Zero-Covid policy, you can see that the city has restarted. Despite the large drop in foreigners to the city, the local government knows that expats contribute importantly to the development of the city. Shanghai is a melting pot, and you have people coming from different countries to bring different ideas and viewpoints to the city. This is important for innovation.

SmSh: Do you think there will be any new policies or incentives for foreign residents living in Shanghai?

Sean Stein: I hope so. The one policy that everyone has their eyes on is tax policy. Many expats rely on a provision in the individual income tax law that allows them to deduct some education and rental expenses from their taxes. That provision will expire are the end of the year. This has major implications for the expat community. The good news is the Shanghai government recognizes the positive contribution the expat community makes to the city and knows this issue is important. We know Shanghai officials are working on a solution. This is reassuring, but the business community still needs to see the details—and they need to see them ASAP because people are deciding now if they will stay or go.

We will also see policies that will make it easier for expats to get visas. The Ministry of Foreign Affairs and the Chinese Embassy in the United States have committed to reducing the backlog of visa applications and reducing the processing time for visas. This will be helpful to many members of the foreign community.

Carlo D'Andrea:One item that may impact trends in the city is the new Prime Minister of China is Mr. Li Qiang, who is well known to be a reformist, considered to be "business friendly" and was previously the party secretary of Shanghai. He is the one who brought Tesla to Shanghai, he is the one who extended the free trade zone and spear-headed the new Lingang Free Trade District in Pudong. And we are already seeing some traction in his wanting to attract more foreign executives and multinational companies to China.

SmSh: Carlo, you mentioned that many companies in the Chamber are starting to bring many senior executives into the city. Why is this?

Carlo D'Andrea: Yes, absolutely. The issue is that you need to be paid to come to China now because before Shanghai was one of the coolest places in the world, now after Covid-19, the lockdown in Shanghai is something that is still remembered from international news. To those living in Shanghai for a while, what I mean is... there seems to be a return to the old "expat package" that was disappearing in recent years. Shanghai is considered a hardship post again, and now companies are incentivizing top talent to come here.

I can say that CEO's in Shanghai are looking to have a positive year, and they are indeed adding a lot of executives from overseas, as well as sending Chinese talent to Europe which was on pause for the last three years. These initiatives will boost confidence and interconnectivity between these two regions leading to more opportunities for those of us here.

However, one thing that is impacting companies right now is knowing that the tax incentives policy for foreigners which was extended in 2021 at the end of December, will be expiring in December of this year. Some companies are waiting to see if the government will further extend or improve tax conditions for foreigners that will help make Shanghai competitive with Hong Kong, Singapore, and Dubai where many expats from Shanghai have relocated to.

SmSh: With the Chamber's ongoing discussions with government agencies, do you believe there are any chances that there will be changes in the visa and work permit policies for foreign residents in Shanghai?

Sean Stein: I know there is a commitment on the part of the Shanghai government to make it easier for expats. During a recent discussion with a Pudong Vice Mayor, for example, he told me unprompted that Shanghai and Pudong understand how important it is to stabilize and increase the number of expats in the city and that they are devising policies to do so.

Carlo D'Andrea: I had the opportunity to meet representatives of the Shanghai Commission of Commerce as well as the Vice Mayor of Shanghai in March, Mr. Hua Yuan. He oversees foreign direct investment and relations to the foreign community, and we had a nice conversation. He actually specified that visa procedures in the future will be simplified further to attract more foreign talent to Shanghai. And we see that China has already restarted Student visas and Business visas.

And for my Chinese friends who may be reading this, wanting to go to Europe, I know they are taking steps to get through this backlog as well. So, this also needs to have a recovery period as well.

SmSh: Okay, that sounds good. But of course, our readers want to be mindful of the realities in Shanghai. Can you tell us a bit about the current challenges to businesses in Shanghai?

Carlo D'Andrea: The approach of EU businesses to the China market is changing. The size and dynamism of the China market mean few are leaving but they are increasingly reassessing how many eggs to leave in the China basket.

The first is with investment competition and investment diversification. Given the size of the Chinese market, as well as its continued growth, European companies want to do much more business here, but at the moment, market barriers can sometimes slow this process. Investment by EU member countries into China is not always equal. Sweden's investments in the US for example, are the same amount of what all EU businesses invest in China. Four countries, Germany, The Netherlands, the UK, and France made up 87% of total investment value into China compared to 69% in the previous ten years. Further demonstrating how investments are concentrated, four big German companies heavily invest into China including automakers BMW, Daimler, and Volkswagen, and chemicals group BASF lead the way in investing in China who alone make up 34% of all European foreign direct investment into China from 2018 – 2021. So, there is less diversification of European investment into the Chinese market, which may frustrate some European citizens wanting to accelerate and expand their businesses in China.

Another challenge is the intellectual property rights environment here in China. This has been a common refrain about China for many years now, but the country has indeed made great strides to make improvements in the areas of Privacy, Data Security, and Intellectual Property. The personal information protection law from 2019 (PIPL) has many similarities in its structure and goals to the European General Data Protection Regulation (GDPR). China revised its Copyright Laws in 2020 to strengthen intellectual property protections as well as made Trademark Law Amendments in 2019 introducing stricter penalties for trademark infringement and improving the protection of well-known trademarks to better promote fair competition in the market. While improvements have been made in these areas, there still is more work to be done, especially in how complex and costly some of these regulations are to implment and maintain. When it comes to Shanghai and developing new technology and innovation, 83% of respondents from our recent Business Confidence Survey said they feel that Shanghai was more attractive than other Chinese cities to established R&D centers.

There are also challenges to the inflows of European capital into China. Last year, BMW completed a deal to acquire shares in their JV partner in Shenyang for around 4.2 billion euros, which was one of the biggest single investments last year. If we take out this one deal, then investment from Europe into China last year decreased by 70% (because the EU had invested in a total of around 10 billion last year).

Finally, there are challenges from the unpredictability of geopolitics. The US-China tensions, which now thankfully seem to be improving, but also the volatility caused by internal stability issues within Russia, as well as Russia's invasion of Ukraine which is really impacting the whole world.

SmSh: That's a lot of challenges. What about your thoughts on opportunities in Shanghai... so people can keep reading this article!

Carlo D'Andrea: On opportunities, yes there are many. The Chinese economy is on track to become the largest economy in the world. So, it is strategically very important for any company that wants to play a global role, to be here in Shanghai. If you are not present in China, then you are missing out.

There are a lot of opportunities in China especially in sectors such as automotive, pharma, medical devices, and chemical among others. In our recent Business Confidence Survey for 2023, Medical Devices and Pharmaceuticals, are two sectors that reported the highest percentage of members reporting missed opportunities.

You know, it's not just about what you're selling, but who's buying. Take the F&B, retail, and FMCG sectors, for example. It's a fact that the consumption levels of Chinese households aren't as high as their US counterparts yet. It's like this - right now, about 38% of China's GDP is consumer spending, while in the US it's more like 68%. This difference is shaking up these industries as we speak.

Now, just think about this: last year, China had the second-largest economy in the world, a GDP of around 16 trillion USD, and it grew by 3%. This year, even a 2% or 3% growth will be like adding an economy the size of Austria on top of what's already there just to put that into perspective.

Also, other good news ... is that some sectors have shown deep resiliency in China, for example, healthcare, new energy, automotive (23 million cars sold last year), chemicals (30% of this industry's growth is attributed to China), pharmaceuticals, and alcohol.

One last thing to mention, which is currently a challenge for China, but may represent an opportunity for foreigners, is the demographic crisis. India for the first time has surpassed China as the most populous country on earth. With China's declining birth rates, this may present an opportunity for China to reform its immigration policies, and welcome more foreigners to settle here permanently.

SmSh: And Sean, what are you seeing in terms of challenges and opportunities this year for Shanghai?

Sean Stein: Let's start with opportunities. Even in slow growth scenarios, China will lift a lot of people out of poverty, creating a lot of economic opportunity. As the saying goes, the next China is China and much of the planet's growth story of the next decade will be written in China. That means there will always be opportunity here in China if you have the right skills, produce or sell the right products, or can provide world-class professional services.

And in part because the economic recovery is not happening as rapidly as China would like, governments at all levels— national, provincial, municipal, and local— are looking at policies to kickstart the economy and incentives to attract investment.

But there are also challenges, some of them quite significant. China, for example, is increasingly focused on national security and, though it doesn't like to use this word, on "de-risking" its supply chains and its economy. In other words, China wants to minimize any potential leverage other countries may have over its economy and to reduce its vulnerability to outside economic pressure such as export controls and sanctions. This leads China to seek self-sufficiency in a growing number of areas and in some cases to develop domestic alternatives to foreign goods and services, creating challenges for many foreign businesses.

SmSh: Sean, should businesses be cautious and conservative in the years ahead, or should they expand and invest in China?

Sean Stein: This is a great question and one that I think a lot of observers don't get right because it isn't binary and there isn't any one right answer. For certain industries, there are good opportunities. In others, the competition is tough, but it isn't an option to not be in the China market for companies that want to be relevant and competitive globally. In other sectors, the headwinds of Chinese industrial policy, strong domestic competition, and other factors make investment more difficult.

So the real, if inconvenient, answer is it depends on the industry and the technology.

SmSh: Carlo, expanding on what Sean mentioned regarding opportunities for certain sectors, what sectors do you think will be most attractive to foreign investors in the post-Zero Covid era in Shanghai?

Carlo D'Andrea: Industries that are heavily reliant on market size and manufacturing capabilities will come to China. For market size, industries such as luxury, FMCG, pharmaceuticals, and professional services will have much to gain in the Chinese economy. Elderly services will benefit as the population continues to age. And medical devices will also have a good spin this year.

Also, sustainable technologies will also see good returns in Shanghai with the central government's commitments to clean energy and sustainability. Green energy industries, electric and hybrid automotive, and other innovative technologies that focus on these goals have huge potential in China. In 2020, President Xi set the goal for China to achieve carbon neutrality before 2060, which implies a huge transformation of China's economy and power grid. This is a huge priority for the EU and in these segments, I see a lot of opportunity for Europe and China to work together. Decarbonization is a key priority for both the Chinese government and European businesses operating in China. From the Business Confidence Survey 2023, three-quarters of members actively pursuing carbon neutrality, with over half of those doing so targeting achieving it by 2030. China's Premier Li Qiang just announced recently, that China will be further accelerating a "green transition".

SmSh: Carlo, what advice do you have for foreign businesses that are considering investing in Shanghai in the post-Zero Covd era?

Carlo D'Andrea: First of all, COME TO SHANGHAI. You should be here. This market, this economy is important and will continue to become more important. Two: Do your homework. Over the years, this has become a more competitive market, so you need to be prepared.

Join Chambers of Commerce, whether you are a small or big company. If you are a small business, please use the EU Chamber's Small-Medium Enterprise Center which provides free news and materials about China.

But really, come. It's important that you are present because there is a great chance to be successful. This year represents China's rebound and recovery from the last three years, and there will be many transformations and opportunities. I mentioned that the foreign population decreased, but believe me, people will begin returning. Indeed, this won't happen overnight. And this is sometimes a problem with some European investors. They invest, and after three or four months they begin to question whether this was a good expansion strategy. Instead, you have to think of China as a medium and long-term investment.

Understand if your product is good for the market. Competition in China continues to increase, so this means doing research on product-market fit beforehand.

If you haven't done so yet, register your trademark in China. And in case you missed it the first time: come to Shanghai.

SmSh: So, Sean, last question. You've lived in a few cities in China, Shenyang, Beijing, and now Shanghai, and you've experienced these places from political and economic perspectives. How does Shanghai compare to other cities in China?

Sean Stein: Whenever people ask me to compare Shanghai with other cities, I like to give an anecdote that, for me, captures what makes Shanghai special. The first was a meeting I had with a very senior Shanghai official. I was the newly arrived U.S. Consul General, and it was customary to arrange courtesy calls with senior government officials around the region shortly after arriving. I will never forget the Shanghai meeting because it was utterly unlike any of the other meetings I'd had. In other meetings, the conversation would always turn to promoting engagement, trade, and investment between the United States and the Chinese locale.

The Shanghai meeting was different.

The official encouraged me to promote education partnerships "to improve the local education environment." He wanted help convincing more professional sports teams to visit. The official was also interested in bringing Broadway musicals to Shanghai, along with artists, museums, restaurants, and more. He was also interested in traffic management and air quality.

At no point did he mention U.S. investment.

When I pointed that out he said "Of course, we would like more investment," but the "best way to attract it is by making Shanghai not only the best place to live in China but in the entire region."

If we can do that, he said, "investment will come because this is where the investors, companies, and talent want to be."

This attitude, more than anything else, I think, is Shanghai's secret sauce. It is what sets Shanghai apart from every other Chinese city and it is why so many of us choose to call Shanghai home.