The spread of the COVID-19 pandemic has caused a huge impact on the international economy and society. The drastic fluctuation in the global capital market reflects the international community’s concern about the safety of industrial chain system. As a Chinese proverb goes, fishes tend to live by water grass and birds often choose to live on fine trees. Under the influence of the global pandemic, the place that can ensure the openness, stability and safety of the international industrial chain to the greatest extent, and provide the most stable production capacity and optimized business environment under regular pandemic prevention and control measures has the core competitiveness to attract the participants in the international industrial chain.

Shanghai, China is such a place. In the first quarter of 2021, Shanghai’s GDP fell by 6.7%, with major indicators such as fiscal revenue, industry, investment and consumption all dropping significantly. However, some economic indicators went up against the downward trend. Manufacturing investment increased by 12.1% and maintained a double-digit growth for nine consecutive quarters; actual inflow of foreign investment was US$4.669 billion, up by 4.5% year on year, and the growth in March was 20.8%. In the first quarter, the added value of financial industry rose by 7.3%, the number of regional headquarters of multinational companies increased to 730, and the number of foreign R&D centers went up to 466. Many foreign-funded companies have voted with feet and chosen to settle in Shanghai. They propose to move production and operation businesses to Shanghai. As the trend of global production factor resources including capital, information, technology, talents, commodities data gathering in Shanghai becomes more clear, the city has already become the “top choice” for the industrial chain layout of multinational companies and the “safe haven” for international capital.

Shanghai has become the “top choice” for participants in the international industrial chain, which was first attributable to China’s “comparative advantage” from a global perspective. Recently, some developed countries have proposed to make industrial entities leave China, causing some Chinese to worry the this may trigger a wave of the global industrial chain moving away from China. Based on rational analysis, we think that this opinion is more hype than reality.

On one hand, China is an internationally recognized “world factory”. Its highly developed real economy has a complete industrial chain and independent system, and its position in the world market is almost unassailable.

On the other hand, under the severe impact of the pandemic, China made an active response, achieved staged victory in the fight against the pandemic and created a precious safe environment for economic development after the pandemic. Therefore, the international industrial chain will shift the center to the Chinese market instead of moving away from it.

China’s global “comparative advantage” also lies in the quality and technological advantages of participants in the industrial chain. The layout of the international industrial chain is strictly restricted by relevant industries, while the quality of the chain determines the development environment and production efficiency of relevant industries. China boasts a strong real economy, especially a strong manufacturing sector, which serves as a solid backbone for the industrial chain. Taking Shanghai as an example, in the first quarter, the investment in its manufacturing increased by 12.1% over the same period last year, 37.3 percentage points higher than the national level. Among them, investment in the six major industries, namely electronic information, fine steel and iron, automobile, petrochemical and fine chemical, equipment complex, and pharmaceutical and biotechnology, grew by 29%, accounting for more than 80% of the total investment in manufacturing. The continuous high-quality development of Shanghai’s manufacturing industry has become an important consideration for participants in the international industrial chain to make deployments in China and beyond.

With the advent of the fourth industrial revolution, new hot fields have continuously emerged in the international industrial chain. In particular, the pandemic has greatly promoted the development of online office and education, and put forward inherent requirements for the application of technologies such as 5G, big data, artificial intelligence and Internet of Things. China has created market scale and accumulated experience for the application of these technologies over a long time of development, which can open up a market for the new round of industrial digitization of the international industrial chain, thus empowering the global industrial chain.

Shanghai has always been a magnet for investment. The primary reason for foreign investment flowing to the city and participants in the international industry chain taking it as the top choice lies in the adsorption effect of the city’s comprehensive advantages, in addition to China’s favorable macro environment.

First, the advantage of openness. The city of Shanghai that was built on openness thrived on openness. Since the reform and opening up, Shanghai has moved a long way from the development and opening up of Pudong to the national strategy of integrated development of the Yangtze River Delta, from the World Expo to China International Import Expo, from the first bonded area to the first pilot free trade zone in the country and Lingang New Area. It has continuously expanded and deepened opening to the outside world and become one of the most influential modern international metropolises in the world today. The total trade volume of Shanghai’s ports accounts for 3.4% of the world’s total, ranking first among cities worldwide. Shanghai has more than 200,000 foreign workers, ranking first nationwide. It will strive to meet the highest international standards and reach the highest level by accelerating the construction of a new open economic system at a higher level and providing support for high-quality enterprises in the international industrial chain to settle in Shanghai with more open and inclusive policies.

Second, the advantage of highland. As a highland for foreign investment in the country, especially under relatively good prevention and control of the pandemic, Shanghai’s attraction for foreign investment has increased continuously, and the energy level of projects has gradually improved. Since the beginning of this year, a number of pioneering and major projects in advanced industries aiming to expand opening up have been launched in Shanghai. For example, Allianz of Germany established a wholly foreign-owned insurance holding company in Shanghai; JPMorgan Chase of United States and Nomura Securities of Japan set up foreign holding securities companies in the city; Jardine Matheson Group invested a total of US$4.5 billion in the new Xuhui Riverside Complex Project; the joint venture project of Nissan and Dongfeng received a total investment of US$800 million; among the 31 regional headquarters and R&D centers of multinational companies that have recently obtained certificates, biomedical enterprises account for 27%, and those in the fields of digital information technology, as well as artificial intelligence and intelligent manufacturing both account for 13%. An increasing number of multinational companies are deploying global resources and key supply chain links, and setting up headquarters organizations that assume more functions in Shanghai.

Third, the advantage of business environment. Shanghai is committed to creating a better business environment and building one of the safest cities in terms of social security with the best public health. This year, it issued the 3.0 Version of the Regulations on Optimizing the Business Environment and Plan for Business Environment Reform. It will take measures to promote the construction of the two networks of “access via one website” and “governance via one website”, spread “Tesla Model” citywide, create a business environment where things can be done with higher efficiency, lower cost and more thoughtful service. To stabilize foreign investment, Shanghai will focus on solving the development problems of enterprises after settling in Shanghai, such as how to retain talents and protect intellectual property rights. These local measures, together with the Foreign Investment Law that came into effect this year, will provide a guarantee for foreign enterprises’ long-term development in China.

Globally, the Chinese market is now the place with the best control over the pandemic and least investment risks. Therefore, it will be highly probable that global resources will flow to the Chinese market in the future. Under this background, following the big trend and shouldering the mission of the times, Shanghai should rely on its leading position in the industry and give full play to the comprehensive advantages to steadily promote the transformation and upgrading of the industrial system and structure, and build an international industrial chain system that plays a leading role nationwide and has global competitiveness, which is of great practical significance. 

(Author: Liu Gongrun, Researcher of China Europe International Business School, and Assistant to the President of CEIBS Lujiazui Institute of International Finance)