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University of Southampton

ABSTRACT: Globalization, rather than being a definite outcome, is a political discourse

embedded in a complicated process. The perception of the coming global era casts a shadow
on economies that are under market transition. Shanghai, the largest city in China, provides a
vivid case for understanding local responses to globalization. The city has seen unprecedented
growth in foreign investment and foreign trade since the adoption of the open door policy in
1978. The key argument of this article is that the influence of globalization does not lie in the
quantity of foreign investment but in the catalytic effect brought about by foreign investment
and foreign trade.

Globalization is not a single causal mechanism but a complex and even contradictory
trend resulting from many causal processes (Jessop, 1999). Its rhetorical power lies in the
illogical conceptualization of capital's capacity for jumping scales in a global world. The
normative definition of local development (Ettlinger, 1999) would reject the assumptions
that globalization is an objective and thus uncontrollable process, that the fate of the city
is determined by its position in a global hierarchy, and that its social spatial structure is
shaped by global forces. In political discourse, globalization is often deployed by those
who justify a particular neo-liberal policy (Short & Kim, 1999). The neo-liberal discourse
of globalization foresees the future of a borderless world, which is questionable and thus
should be contested (Yeung, 1998). Globalization can comprise many processes, including
economic, political, and cultural components (Short & Kim, 1999). Globalization also
involves the spatial integration of economic activities, movement of capital, migration of
people, emergence of information technologies, the formation of supra-national political
organizations, and the spread of values and norms across the world (Marcuse & van
Kempen, 2000). While claims of the placelessness of capital accumulation, hypermobility
of capital, and demise of the nation state are often exaggerated, the process of globaliza-
tion is real (Marcuse, 1997). Behind a glossy discourse is the decline in public power over
economic activity, particularly at the local level (Marcuse, 1997). For example, Rydin

*Direct correspondence to: Fulong Wu, Department of Geography, University of Southampton, Southampton, SO17
1BJ, United Kingdom. E-mail:

JOURNAL OF URBAN AFFAIRS, Volume 25, Number 1, pages 55±78.

Copyright # 2003 Urban Affairs Association
All rights of reproduction in any form reserved.
ISSN: 0735-2166.
56 | JOURNAL OF URBAN AFFAIRS | Vol. 25/No. 1/2003

(1998) discussed how intense competition between local authorities and local partnerships
and the demise of regional strategic planning has forced the local state to play a subsidiary
role and control few meaningful resources allowing it to exercise power. Whereas the
impact of globalization is still unclear, especially regarding whether it creates a new spatial
order (Marcuse & van Kempen, 2000), the transition of advanced capitalism in urban and
regional governance is apparent (Harvey, 1989).
Much of the transition in governance is summarized under the notion of urban entre-
preneurialism (Harvey, 1989). Jessop (1998) portrayed this transition from a regime
perspective as the change from the Keynesian Welfare National State (KWNS) to the
Schumpeterian Workfare Postnational Regime (SWPR). Post-Keynesian urban manage-
ment is characterized by the practice of civic boosterism to modify urban image (Short,
Benton, Luce, & Walton, 1993) or place marketing or promotion (Hall & Hubbard, 1998).
Cox and Mair (1991) suggest that the interests embedded in the local place form the basis
of a localized social structure through which place promotion is conducted. One fre-
quently identified interest lies in real estate, which is spatially fixed. The growth machine
theory emphasizes the alliance of real estate developers and urban politicians to promote
local economic development (Logan & Molotch, 1987). Other studies suggest strong
mayoral leadership as a contributing factor (Clarke & Gaile, 1998). More recent geo-
graphic studies highlight the role of a single political leader such as the mayor of
Barcelona in inventing the new discourse and image of the global city (McNeill, 2001).
In a more general sense, institutional thickness, learning regions, and social networks are
developed to describe the capacity of some cities to engage in collective action to promote
their places (MacLeod & Goodwin, 1999). The tactics, as suggested by Short and Kim
(1999), include packaging an attractive image. Two basic themes of image promotion have
been used (Short & Kim, 1999). The first is the city of work, which is concerned with
attracting business by representing the city as a place of low taxes, cheap and docile labor,
and presenting the image of the city as a pro-business environment. The second theme is
the city at play, which is an attempt to capitalize culture and thus attract capital from
consumers and conventions.
If globalization truly means the expansion of economic activities at a world scale, the
best place to observe such a process would be at its frontierÐthe place where globalization
engulfs the space under its reach. Pacific Asia would be such a location. In End of
Millennium, Castells (1999) used globalization and the state to summarize development
and crisis in the Asian Pacific. The growth of global cities in the Asian Pacific through
mega-projects is the focus of research attention (Olds, 2001). While there is a growing
literature of globalization and global cities in both developed and developing countries
(Lo & Yeung, 1998), the exact impact of globalization on these cities has not been
examined. To some researchers, globalization means both promise and peril (Yeung,
1999). China, as a latecomer in the wave of globalization, is involved in the global
economy. The involvement will obviously be accelerated by China's recent membership
into the World Trade Organization (WTO). The effects of the position of China on urban
development are unclear, largely because China had closed linkages with the capitalist
world market between 1949 and 1979 (Song & Timberlake, 1996). While not to deny the
incredible and important variations exist between China and other Asian countries, China
has begun to follow the successful development of Asian tiger economies in pursuing an
export-oriented development strategy since the late 1980s. Increasingly urban patterns in
China become similar to those found in other Asian cities. Song and Timberlake (1996)
suggest that the consequence would be the emergence of many typical characteristics of
peripheral urbanization such as informalization of the labor market, over-urbanization,
| Urban Development in Shanghai | 57

and urban overcrowding. On the other hand, new features may emerge due to the
integration of the global market. Dick and Rimmer (1998) suggst that the peculiarity of
the Southeast Asian cities is no longer covered under the Third World City thesis and that
it should not be used to exclude the application of the more general theme of urbanization.
In particular, this article attempts to reveal new features of urban development such as the
promotion of locality through market-friendly policy directives that have not been seen
under state socialism.
We began our exploration with Shanghai, the largest city in China. According to
standards in the literature, Shanghai should not be considered a global city. The city
rarely appears in the list of global cities such as New York, London, and Tokyo
(Friedmann & Wolff, 1982; Friedmann, 1995; Sassen, 1991, 1994; Lo & Yeung, 1998;
Marcuse & van Kempen, 2000). Marcuse and van Kempen (2000) explicitly spell out the
distinction between a global city and a globalizing city. The former is often seen as a
matured product, while the latter refers to a city under the influence of global forces. Most
cities belong to the latter category. Marcuse and van Kempen (2000) emphasize,

We call it Globalizing Cities, not Global Cities, because we treat both cities that do and
cities that do not make it into the global cities category, as most commentators define
them. But we also like the title because we view globalization as a process, not a state,
and a process that affects all cities in the world (p. xvii).

Shanghai fits the criteria of a globalizing city. It is under the influence of global forces
such as foreign direct investment and the discourse of globalization is embedded in local
politics. This is best illustrated in the effort to recreate Shanghai as the dragonheadÐ
a global city of China. Remaking Shanghai as a global city appeared as a formal objective
in its urban development strategy in the past two years. Recently, discourse about
Shanghai has begun to appear in sensational journalism, e.g., titles such as ``Far Eastern
Promise'' (Fry, 2000), ``The Shanghai Bubble'' (Ramo, 1998), and ``Field of Dreams''
(Yatsko, 1996). In academic research, attention is now drawn to profound urban changes
in the once largest economic center in China (Wu, 1999; Yeung & Sung, 1996).
Despite its peripheral and frontier location, globalization has had a tremendous impact
on Shanghai. The inflow of foreign capital is unprecedented (Figure 1). In 1996 the
contract value of foreign investment was US $15.14 billion (a substantial increase from
1985) and realized foreign investment was US $7.51 billion. The number of foreign
tourists visiting Shanghai increased from 0.24 million in 1978 to 1.43 million in 1996;

Investment ($ billion)

6.00 Foreign Capital Utilized FDI
85 86 87 88 89 90 91 92 93 94 95 96


The Growth of Foreign Investment, 1985 to 1996

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and the total export value of foreign trade increased from US $2.89 billion in 1978 to
US $13.24 billion in 1996 (Shanghai Statistical Bureau, 1998). A quick glance at the urban
landscape suggests that the impact of globalization is tremendous and pervasive. Adver-
tisements for the commercial goods of multinationals are quickly becoming the dominant
symbols of modern Shanghai (Rose, 1997). In the Lujiazui Finance and Trade Zone,
a new central business district of Shanghai, a new epoch of skyscrapers is beginning. The
Shanghai World Financial Center is expected to be the world's tallest building. The city
plan stipulated that central Lujiazui would become a landmark area as an international
business base for global corporations expanding into the Chinese market.
Does the story of Shanghai fit into a globalization discourse claiming that global forces
are reshaping and determining the urban future? This article attempts to analyze urban
development in Shanghai by focusing on the interaction between global and local forces.
In the section that follows, two aspects of change, globalization and place promotion, will
be discussed. A closer look at the changes in urban governance is provided in the next
section followed by a more detailed analysis of investment structure. The implication of
globalization is examined with regard to changing urban dynamics. In the conclusion
I emphasize that urban development in transitional economies clearly demonstrates that
global forces are conditioned by indigenous political economic change and that an
integrated global-local perspective is needed for understanding urban changes.


Globalization and local development are main themes of a fast growing literature (Amin &
Thrift, 1994; Hall & Hubbard, 1998; Harvey, 1989; Jessop, 1999; Short & Kim, 1999).
No one denies that urban development is still dependent upon local conditions despite
increasing global influences. However, there are qualitative differences among: 1) local
conditions as they appear in classical location theory, 2) the analysis of natural resources
and assets, and 3) the local conditions as crafted by creative place promotion in response
to real and perceived globalization. The literature of place promotion documents the trend
of local development as the reengineering of the place (Ashworth & Voogd, 1990;
Chevrant-Breton, 1997; Cochrane et al., 1996; Hall & Hubbard, 1998; Paddison, 1993;
Short et al., 1993).
In contrast, the primary attention of research into socialist/post-socialist cities has been
on the political and economic reform of socialism (Andrusz, Harloe, & Szeleny, 1996).
Focus on indigenous political economic change is understandable as the reform of
socialism triggered the internal changes. However, system transformations such as deregu-
lation, privatization, and price liberalization in the Eastern European countries have
already set the preconditions for local urban restructuring to be shaped by forces of
contemporary global capitalism (Sykora, 1994). Globalization is such a profound theme
of change that individual countries are now connected and interdependent. Despite
a growing literature on globalization and global cities, inadequate attention has been paid
to transitional economies. The concept of the world city is almost exclusively derived from
the cities at the top of the world urban hierarchy. But the implication of globalization for
those at the bottom of the hierarchy should be considered.
The complexity of how external forces influence local economies lies in the interaction
between the global and the local. In the classic literature of global cities, the external forces
of transnational corporations, global capital, and a new international division of labor are
seen as the major determinants of urban growth (Friedmann & Wolff, 1982). Some recent
| Urban Development in Shanghai | 59

studies have recognized the relative autonomy of local politics in the process of urban
restructuring (Eade, 1997; Knox & Taylor, 1995; Machimura, 1998). This recognition of
the local dimension in the process of globalization is more appropriate for the under-
standing of urban changes in transitional economies because these economies are still at
the periphery of the world economy. The influence of globalization is catalytic in the sense
that it helps to accelerate the transition to a market economy. The understanding of a
global context requires another angle for looking at economic reforms: how the reforms
established the conditions and channels for global forces to penetrate the local space.
The significance of such a global-local perspective lies in a dialectical understanding of
the interaction between the local state and foreign investors. Fainstein (1990) compared
the global perspective and local autonomy perspective in explaining urban restructuring in
advanced capitalist economies and suggested that there could be linkages between the two.
The extent of local entrepreneurship depends on the amount of institutional decentraliza-
tion that occurs in the context of the internationalization of economic competition. To
attribute urban restructuring to either global or local forces is not appropriate. Global
forces cannot play their role in the absence of local changes. Applying an integrated
global-local perspective, Fainstein (1994) investigated the property boom of the 1980s and
the bust of the 1990s in London and New York and discussed how public officials poured
enormous resources into property-led development. Local states and cultures make their
unique impacts on the way in which the built environment is transformed, and particular
urban issues and sites have been reconditioned according to the historical relation to
globalization processes (King, 1993). The change is spatially filtered through and affected
by geography, policies of individual states, and shifts in capital. To an extreme extent,
urban economies can be independent of the fortunes of their nations' economies (Church &
Reid, 1996; Lever, 1997). Studies of urban development in the Asian Pacific illustrate the
dynamic and complex relationship between different geographical scales (Olds, Dicken,
Kelly, Kong, & Yeung, 1999).
The glossy future of world cities and the necessity of participating in the world economy
have been used by local governments to justify a proactive role in urban development. The
peril behind a fast liberalization of regulatory control alone has been revealed recently by
the Asian crisis (Bullard, Bello, & Malhotra, 1998). To what extent have increasing global
forces led to the decline of public power over economic activity (Marcuse, 1997) in a
transitional economy? This question has both theoretical and practical implications.
Because of the diversity of transitional economies, it is unwise to generalize a single
trajectory of the change of the global-local nexus. The history of socialist development
and reform in each country is produced by multiple contingencies.


Global and local forces in post-socialist China are complicated due to the fact that
reform is a historical process. The local force of transformation has been released through
the gradual relaxation of state control over a web of properties such as urban land. Bian
and Logan (1996) highlight how the gradualism of incremental and partial economic
reform formed a new hybrid or segmented economic system in which market coordination
is blended with bureaucratic coordination. In turn, the localization process has created
conditions for the global force to play a greater role. The management of urban land is
a typical example (Dowall, 1994). Before land reform, urban land in China was adminis-
tratively allocated but the actual development was mainly carried out through state
development projects (Yeh & Wu, 1996). In the late 1980s, China began to adopt
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a leasehold system, following the Hong Kong model. According to the new system, urban
land could be leased to developers or users through negotiation, tender, or public auction.
However, most land was leased through negotiation, because the municipality, as
the representative of the state in the new land use system, felt that it could extract the
maximum benefit from negotiated land development. The result of this reform is
the coexistence of leased and administrative land (Yeh & Wu, 1996). The establishment
of the urban land-leasing system has introduced various actors (e.g., foreign investors,
local governments and state-owned enterprises) into the game of urban development.
Because of a web of de facto control and the competition among the central and local
states, it is impossible to attribute the outcome to a single player. In essence, global and
local forces are intertwined.
The economic reform has triggered profound political economic changes in China.
There has been a significant shift of power from the central state to localities. However,
decentralization of state power did not simply break from socialist ideology but stemmed
from political economic necessities. The force behind this transition is a severe fiscal deficit
and the failing state finances of the late 1970s. The state was unable to sustain the rate of
investment through central planning. Due to the introduction of the fiscal contract system,
localities have gained higher levels of autonomy. In fact, a closer look at the decision
making process in pre-reform China would suggest that property rights (the right to derive
economic benefits from the ownership of an asset) have been dispersed (Walder, 1992).
The state work-units were the basic organizers of the socialist economy and undertook a
comprehensive social and economic role (Walder, 1986; Whyte & Parish, 1984). In contrast,
the role of the municipalities was more subsidiary due to the direct relationship between the
state and the enterprises. Economic reform has further redistributed some property rights to
local governments. The establishment of a city-based land management system has further
strengthened the power of municipalities who have gained control over urban land through
authorizing land leasing and granting planning permissions. The rising role of the local state
(in both rural and urban areas) has been well documented (Oi, 1995).
Localization initially was a response to indigenous changes. State-led industrialization
achieved a rapid increase in industrial output at the expense of efficiency. State-owned
enterprises lacked incentives to economize production. The expansion of production
capacity was driven by capital construction investment. Because of the unconstrained
demand for investment, the central budget finally ran into difficulty. The central govern-
ment had to diversify the financial burden to localities but at the same time it had to
transfer more power to localities for revenue generation and mobilization.
Since the 1980s, the conjoined process of globalization, in particular in the form of
foreign investment, has accelerated the momentum of localization. Through a series of
reform and open-door policies, local governments were granted fiscal autonomy and the
responsibility of managing state land. They began to represent the state in negotiating
with overseas investors. Localities now have access to external resources to initiate
investment projects. Foreign direct investment has not only brought about resources
beyond socialist capital circulation but also highlighted the importance of urban space
both as an investment asset and a local political arena.
The implication of globalization to urban governance is that the latter is becoming
increasingly ungovernable, e.g., there is a constant battle over the control of urban land.
Urban space under socialism was developed through state development projects, which
are subordinated to various levels of government. This style of development management
led to a cellular, or self-contained, type of urban development. This characteristic is being
strengthened in significant ways through the introduction of overseas investors. Walder
| Urban Development in Shanghai | 61

(1992) pointed out that the property rights under socialism dispersed across governmental
hierarchies. The management of urban land was reliant upon state production units.
While the state held the nominal right of ownership, control of land was defined through
actual occupancy or tenancy. As a legacy of fragmented urban management, foreign
investors could directly approach actual landowners. Therefore, it has become increas-
ingly difficult to monitor urban land use changes through formal planning procedures.
Further decentralization is needed. In large cities such as Shanghai, Beijing, and
Guangzhou power has been further decentralized to district governments. Since 1990 the
district governments in Shanghai have gradually gained a whole array of administrative
powers, including planning, financial management, maintenance of public works, regulation
of foreign trade, and industrial and commercial administration (Wang & Li, 1997). In
a sense, globalization does not create localities as new political entities but reinforces
fragmentation by providing opportunities for these rights to be capitalized.
The new form of urban governance is characterized by more decentralized, fragmented,
ambiguous, and constantly redefined power relationships between various levels of gov-
ernment. The division of power between the municipal and lower levels such as district
governments varies from city to city. With the involvement of state-owned firms, private
developers, and overseas investors, the urban development process has become increas-
ingly complicated. The outcome of this game-like process is, however, contingent upon the
relative strength and weakness of participants and the local context in which development
takes place. It is under this type of urban governance that development interests can often
mobilize and maneuver local politics to gain an upper hand. By contrast, community
interests are less mobilized due to the lack of local resources and representative mechan-
isms. Traditionally, residents were affiliated to state work-units through which their
interests in development were represented. The state work-units' intermediate role in
interest representation has been seriously undermined. This is due to two reasons. First,
there are more actors in the development processes. Enterprises themselves no longer
undertake housing construction. Instead, they buy commodity housing in the open
market. Therefore, the interest of real estate developers also influences the location of
households. Second, the use of urban land, infrastructure, and other resources needs to be
negotiated with the city and district governments. For example, the right of development
is now being transferred to the local planning authority that can in turn sell the right in a
land market. This has led to competition for land use control, which has raised the
importance of capital in urban development.


To understand the driving forces of urban change in transitional economies, it is vital to
study investment and the circulation of capital. However, this is a difficult task because
capital circulation is complicated by the coexistence of planned and market elements and
the sensitivity of such issues as misused funds and gray incomes. For example, a large
proportion of housing investment now comes from the self-raised funds of state work-
units (Wang & Murie, 1996, 1999). In Shanghai, work units raised 86% of new investment
capital for public housing construction in 1990, a sharp increase from 55% in 1980
(Zhou & Logan, 1996). As state-owned firms gained a high level of autonomy to decide
the use of retained profits, they used production funds inappropriately in property
markets. The short-term behavior is due in part to the fear that they might lose control
of these funds in the future. The misuse of funds may be due to insider control, which
means that the actual controller of the property (managers of state enterprises) makes
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decisions without regard to the interest of the property owner (the state). Evidence
suggests that the operation of real estate as a sideline business is widespread (Zhu,
1999), although the exact method and the amount of capital transference from the circuit
of production to the circuit of property development are largely unknown. Presumably,
both legal and illegal channels may be involved.
Similarly, land revenue is a sensitive issue. Some sources suggest that land-generated
revenue can account for as much as 25 to 50% of local revenue in some cities (Zou, 1998).
In Shanghai approximately US $1.8 billion was raised in 1990 (Chan, 1996), and land
revenue could be as high as 100 billion Renminbi since 1992 (Peng, 1998). However, the
land-related benefit is so sensitive that local governments tried to disguise the actual
figure. As land revenue is shared between central and local governments, the latter
invented various methods to escape taxation from central government, for example
encouraging developers to make in-kind contributions to infrastructure development
instead of capital payments. As a result, it is difficult to trace the movement of capital.
While the income from land is not well documented, it is possible to get relatively
accurate information about investments as these projects are registered with the
government. There is no particular reason why the government should hide the amount
of investment. The method to circumvent the problem is to analyze the structure of
investment and the proportion of investment, e.g., the ratio of infrastructure investment
to gross domestic product (GDP) and the ratio of housing investment to GDP. During the
period from 1978 to 1996, these two ratios increased. The ratio of infrastructure
investment to GDP increased from 0.02 in 1978 to 0.13 in 1996. This suggests that while
Shanghai experienced rapid economic growth in this period, investment in infrastructure
increased at an even faster pace. Similarly, the ratio of housing investment to GDP
increased. Detailed analysis suggests that the change is not driven by private consumption
power but rather through the involvement of state work-units in commodity housing
consumption. In fact, the affordability of commodity housing for state workers is
constrained by the decreasing wage relative to housing investment. The ratio of the total
workforce wage to housing investment decreased from 12.36 to 1.14 during this period.
The ratio of the total workforce wages to investment in fixed assets changed from 1.01 in
1978 to 0.25 in 1996. In comparison with the expansion of investment, these changes
constrained the end-users' affordability in a pure market sense. Commodity housing
produced in this period, was subsidized in one way or another by relaxed control over
the use of collective funds, as many state-owned firms have become property investors
and purchasers.
With regard to the influence of global forces on the local economy, foreign investment
and trade can be compared with the size of the economy including inputs and outputs.
Investment in fixed assets and infrastructure can measure inputs, while the outputs can be
measured by GDP. Investment in fixed assets is referred to as the amount of work done in
the construction and purchase of fixed assets, each expressed in monetary terms (State
Statistical Bureau, 1997). Three aspects of change can be examined. First, the temporal
change can reveal the scale of growth to its baseline value. Using the year 1990 as a
benchmark, Table 1 shows the growth of GDP, investment in fixed assets, infrastructure
investment, foreign investment, and the total export value of foreign trade. The table
suggests significant growth of investment in fixed assets, infrastructure, and foreign
capital. The scale of GDP growth is smaller than that of investment growth, and the
growth of foreign export in comparison with investment is even less significant.
Second, the ratios between these economic values suggest their relative scale of change.
Specifically, these include the ratio of foreign investment in fixed assets and the ratio of
| Urban Development in Shanghai | 63


The Growth of Economic Indicators in Shanghai

Total Export
Infrastructure Investment Foreign Value of
Year GDP Investment Fixed Assets Investment Foreign Trade

1990 100.0 100.0 100.0 100.0 100.0

1991 118.2 130.0 113.7 111.0 107.9
1992 147.3 178.6 157.4 286.9 123.2
1993 199.8 355.7 287.9 407.1 138.8
1994 260.7 504.4 494.6 499.4 170.6
1995 325.5 579.8 705.3 679.2 217.6
1996 383.7 802.2 859.6 962.8 248.8
1997 444.2 874.3 870.8 813.5 276.8

Source. Shanghai Statistics Bureau, 1998.

foreign investment to infrastructure investment. The interpretation of these ratios is not

straightforward. For example, infrastructure expenditures may entail some foreign
investments whereas total foreign investment does not occur only in infrastructure. The
main purpose of the analysis is to contrast the foreign related elements with the total scale
of economic activities. The exchange rate increased from 1.71 in 1981 to 8.29 in 1997
(State Statistics Bureau, 1998). This may create a problem as it could exaggerate the
proportion of foreign investment. Table 2 presents these ratios (adjusted by the exchange
rate) from 1985 to 1997. In general, the ratios increased, which reflects the significant
increase in the initial period (1985 to 1989) and stabilization in the second phase of reform
(1992 onwards). But after 1990 the ratio of foreign investment to investment in fixed
assets decreased until 1996. Similarly, the ratio of foreign investment to infrastructure


Ratio of Foreign Investment to Investment in Fixed Assets and Infrastructure Investment in Shanghai

Foreign Investments to Foreign Investments to

Year Fixed Assets Infrastructure

1985 4.99 25.55

1986 9.32 55.22
1987 18.04 102.94
1988 28.02 185.39
1989 31.02 184.65
1990 20.61 99.11
1991 21.46 90.30
1992 42.58 180.42
1993 34.96 136.12
1994 26.35 124.29
1995 26.46 154.81
1996 31.90 164.60
1997 26.60 127.60

Note. Foreign investment is converted from US$ to Yuan to be comparable with investment in fixed assets and infra-
structure investment, using the actual exchange rate of the year.
Source. Shanghai Statistics Bureau, 1998.
64 | JOURNAL OF URBAN AFFAIRS | Vol. 25/No. 1/2003


Change in Relationship of Foreign Related Activities to GDP in Shanghai

Foreign investment as Export Value as

Year Percentage of GDP Percentage of GDP

1985 0.01 0.23

1986 0.02 0.271
1987 0.05 0.284
1988 0.08 0.264
1989 0.08 0.34
1990 0.05 0.367
1991 0.05 0.349
1992 0.12 0.338
1993 0.12 0.283
1994 0.17 0.389
1995 0.19 0.415
1996 0.21 0.379
1997 0.16 0.364

Note. Foreign investment and export value are converted from US$ to Yuan to be comparable with GDP that is measured
in Yuan, using the actual exchange rate of the year.
Source. Shanghai Statistics Bureau, 1998.

investment showed a pattern of rapid growth in the initial period, decreased in 1990 to
1991, and then increased to the peak in 1992 when real estate began to experience a boom.
Third, the ratio of foreign investment to GDP and the total export value of foreign
trade to GDP (when adjusted by the exchange rate) can reflect the proportion of foreign
related activities to the local economy as a whole. Bearing in mind that Renminbi has been
devaluated since 1981, this can mean that foreign-related activities are exaggerated during
conversion. Table 3 shows these two ratios adjusted by the exchange rate. In 1997, at the
comparable exchange rate, foreign investment was as much as 16% of GDP, and the total
export value of foreign trade accounted for about 36% of GDP. Both have grown
respectively from 1% and 23% of GDP in 1985. The growth of foreign investment was
apparent after 1991, while the growth of export value is less obvious. Foreign investment
firms contributed positively to the growth of trade (Chen, 1999). However, the official
exchange rate is problematic because it tends to understate the purchasing power of the
domestic currency (Lardy, 1992), and thus to overstate the significance of foreign invest-
ment and trade.
From the above analysis, we can reach tentative conclusions about selected features of
urban growth in Shanghai. Firstly, rapid urban development in Shanghai has been mainly
driven by the significant expansion of several types of investment in the form of fixed
assets. These investments entail both infrastructure investment and foreign investment
(including both foreign loans and foreign direct investment). Because of the relatively low
intensity of domestic investment in the 1980s, foreign investment stimulated the expansion
of total investment. The intensity of domestic investment dramatically increased after
the central government decided to develop Shanghai into a strategic economic center
(especially financial and trade) in China. In real terms, the size of foreign investment to
GDP is about 16%. It is not known how much of the investment in fixed assets came from
foreign capital, but the nation-wide figure shows that in 1997 foreign investment
accounted for 10.6% of total investment in fixed assets (State Statistical Bureau, 1998).
| Urban Development in Shanghai | 65

Second, while foreign investment is an important source of capital, rapid urban expan-
sion, especially the real estate boom, was not wholly fueled by foreign capital. This
percentage of foreign investment in total investment overstates the contribution of foreign
investment because the official exchange rate undervalued Renminbi (if the currency is
valued in purchase power). Evidence also suggests that the real estate boom in Shanghai is
not purely fuelled by foreign capital, although the contribution of foreign capital to the
performance of Shanghai's real estate market in the year 1992 to 1993 has been recognized
(Jiang, Chen, & Issac, 1998). While nationally a tight macroeconomic policy was enforced,
Shanghai still managed to increase investment in infrastructure and fixed assets. This
peculiar situation is due to the strategic support Shanghai received from the central state
and local governments' enthusiastic place promotion. Lardy (1998) attributed the real
estate boom to excess lending to state enterprises or various development companies. The
formation of building boom including the excess capacity in fixed assets, luxury villas and
first-class office space has been stimulated by easily obtained bank loans (Lardy, 1998).
The explanation is consistent with Ramo's (1998) observation. Both of them have
drawn attention to the problematic financial system in China as an indigenous factor
behind the boom.
Third, the impact of foreign investment on urban development differs significantly in
different regions. Foreign investment played a role in inducing regional urbanization in
the Pearl River Delta (Sit & Yang, 1997), mainly through labor-intensive export proces-
sing industries. But in Shanghai the profile of investment is more internationally oriented
and is concentrated in a few nodes of development zones such as Shanghai Pudong.
However, Lardy (1996) cautiously reminds us that the quantity of foreign investment
might be overstated. The preliminary evidence appears to confirm that foreign investment
did not occupy a predominant position even taking into account all utilized foreign
capital. In Shanghai, a large proportion of the foreign capital utilized in urban develop-
ment is foreign direct investment in the real estate sector, amounting to US $1.05 billion in
1996 (Shanghai Statistical Bureau, 1998). Investment in the real estate sector stimulated
the establishment of a land market. Therefore, the effect of foreign investment is less
direct, in the sense of creating the new urban landscape as it does in south China. Here, the
importance of Chinese domestic investment should be emphasized. In the next section,
place promotion in Shanghai is examined to draw attention to the role of the central/local
state in the process of globalization.

Place Promotion
Globalization imposes a challenge to urban governance. Similar to cities in advanced
market economies, Shanghai faces a shrinking centrally allocated budget, the growing
inflow of foreign capital, and increasing levels of local economic autonomy. The influence
of economic globalization can be physical (through the presence of multinationals and
foreign capital) and perceived (in the sense of spreading a dominant discourse of entre-
preneurial management). The municipal government of Shanghai has adopted a proactive
role in urban development through place promotion. The promotion strategy includes
a wide range of policies such as the designation of development zones (e.g., Economic and
Technological Development Zones and Free Trade Zones), preferential treatment of
investors, land-leasing instruments to facilitate land use changes, key infrastructure pro-
jects, and direct investment in urban development.
66 | JOURNAL OF URBAN AFFAIRS | Vol. 25/No. 1/2003

Image Enhancement/Entrepreneurial Discourse

The Shanghai Municipal Government used various high-profile conferences, exhibitions
and international planning consultants to promote a new image of Shanghai. In particu-
lar, the planning of the Lujiazui Finance and Trade Zone has attracted wide international
media attention (Olds, 1997). The city also boasts its openness and favorable investment
environment through symbolic urban landscapes. The 460-meter high TV tower (the
Oriental Pearl), along the Huangpu River, presents the image of a booming city. Great
efforts have been directed to improve urban landscapes. New streets have been designed.
For example, Riverside Avenue was built recently for sightseeing and recreation. New
parks, a concert hall, a theatre, a museum, and shopping malls are planned or are under
construction. A cluster of skyscrapers is located in the Lujiazui business district. Shanghai
also uses the Internet to display various new plans and promotional materials. Inter-
national affairs such as Global Forum 99 and APEC 2001 provide a good opportunity
for publicizing a booming city. In the promotion of Shanghai, a new discourse of the
entrepreneurial city has been invented. The discourse portrays the efficiency of local
government in dealing with investors and the overall investor-friendly environment. The
discourse has important effects on the practices in development management. Govern-
ment officials are urged to behave in a way that conforms to the international standard.
The popularity of the global city has shaped Shanghai's policy direction towards more
globally oriented activities, emphasizing economic competitiveness and the new image of
global Shanghai. For example, in recent years, large green spaces have been planned with
the aim of creating the impression of an ecological city. The projects created a movement
of city beautification that competes for resources required to subsidize laid-off workers
and improve poor housing conditions.

Designation of Development Zones

Shanghai was designated by the central government as one of 14 open coastal cities in
1984. Nevertheless, compared with those Special Economic Zones in southern China,
Shanghai had not enjoyed similar preferential treatment in taxation, foreign trade, and
fiscal autonomy until 1990. This is mainly due to Shanghai's strategic importance to the
central government. The city contributed about one-sixth of the state's revenue. There-
fore, caution has been exercised in the opening of Shanghai. Until 1990 Shanghai saw
slower growth than southern China. In 1990, the State Council announced an entirely new
development package. At the core of this package was the designation of the Pudong New
Area that would enjoy an even higher degree of autonomy and preferential treatment,
e.g., foreign banks are allowed to operate Renminbi business in Pudong.
The development of Pudong means the construction of a brand new city in the east of
Shanghai. The area covers 522 km2 and is located to the southwest of the estuary of the
Yangtse River and to the east of the Huangpu River, facing the Shanghai Bund on the
other side. Its massive scale suggests the determination of the central government to
remake Shanghai as a world city. The state has also designated various development
zones in Shanghai. These include Shanghai Minhang Economic and Technological Devel-
opment Zone (ETDZ), Hongqiao ETDZ, Shanghai Caohejing Hi-Tech Park, Lujiazui
Finance and Trade Zone, Jingqiao Export Processing Zone, Waigaoqiao Free Trade
Zone, Zhangjiang Hi-Tech Park, and Xinghuo Development Area. They offer preferential
treatment to foreign investors according to the ``Regulations on ETDZ in Shanghai'' as
well as additional development incentives offered by the state and Shanghai Municipal
| Urban Development in Shanghai | 67

Government. The Waigaoqiao Free Trade Zone is an example of the successful attraction
of foreign investment. Located in the Pudong New Area, Waigaoqiao has enjoyed an
annual growth rate of over 20% in GDP since it was established in 1990. The zone reaped
a 24% rise in GDP on an annual basis to RMB 6.3 billion (US $760.80 million) in 1998,
with sales growing by 19.6% to RMB 44.97 billion (US $5.43 billion) and industrial
output value climbing 43% to RMB 9.6 billion (US $1.16 billion). The zone handled
$2.96 billion in foreign trade last year, with exports reaching US $1.5 billion. The zone
now has more than 1,000 domestically funded enterprises and more than 2,400 overseas
funded enterprises involving $4.44 billion in investment.

Preferential Treatment to Investors

To attract foreign investment, Shanghai has so far promulgated 74 regulations and
preferential treatments for foreign investors. Preferential policies regarding taxation are
made. For example, in the Pudong Area concessions are made to the income tax of foreign
investors, custom duties, and tax for equipment, vehicles, and building materials related to
foreign investment. Shanghai Municipal Government also specified a list of projects and
investment areas that would receive priority support. For example, projects that can
increase exports and gain a share in the world market are encouraged. The government
also seeks foreign investors to set up ventures in the Waigaoqiao Free Trade Zone to deal
with import and export trade, international entrepot, and services for international trade.
Incentives for foreign investors are stipulated but there is more room for negotiation on
a case-by-case basis. In development zones, foreign-invested manufacturing enterprises
can enjoy a 15% reduction in income tax. Enterprises expected to operate for 10 years or
more are exempt from tax in the first two profit-making years. In the following three
years, the tax will be reduced by 50%. Imports of equipment, raw materials, and vehicles
for offices and homes and future product exports are exempt from duties and taxes. In
some development zones, further special treatment is given. For example, in the Songjiang
Industrial Zone in a suburb of Shanghai, it is stipulated that for newly established foreign-
invested enterprises, total investment over or equal to $10 million is exempt from tax for three
years. The stipulation of preferential treatment, however, has two side effects. First, it induced
domestic enterprises to seek cooperation with overseas investors or to register outside the border,
especially in Hong Kong. This strategy was necessary in order to enjoy preferential treatment
(Lardy, 1996). Second, a number of foreign enterprises reported deficits to take advantage of the
tax exemption. Foreign investors are also encouraged to invest in the construction of infra-
structure such as airports, ports, railways, roads, and power stations. Further tax relief is given to
these projects. In Pudong, foreign banks are allowed to operate in Renminbi businesses and
tertiary industries such as production services, finance, and international trade.

Land Leasing Instruments

As a result of property reform, local municipal governments in China began to control
state land through authorizing the lease of the right to use the land (Nan & Xiao, 1992).
This allows local governments to use land-leasing instruments to promote urban develop-
ment. Various promotional strategies are based on providing accessible land to private
developers. In the acquisition of land for redevelopment, municipal governments facilitate
the relocation of existing residents, coordinate development companies to conduct site
clearance, and engage in infrastructure provision. Because the municipal land authority con-
trols the land leasing process, it has a stake in the intensity of development. The role of
68 | JOURNAL OF URBAN AFFAIRS | Vol. 25/No. 1/2003

landowner often contradicts the role of development regulator. Planning goals and the function
of development control are often compromised by the need to generate land related incomes.
The dilemma faced by the city governments is similar to the one under neo-liberal urban
governance in later capitalism. The transition of the latter towards market-sensitive planning
means a predominant consideration for revenue generation rather than relocation of wealth
(Rydin, 1998; Short & Kim, 1999). This redefinition of the role of local governments has
profoundly changed the framework in which various urban policies can be formulated.
The use of land leasing instruments is a significant feature of urban promotional strat-
egies in Chinese cities. In coastal cities such as Guangzhou, Shanghai, and Beijing and in
Shenzhen Special Economic Zones, land leasing has increased since the further opening of
the economy to the world market. The first piece of land in Shanghai was leased in 1988.
From 1988 to 1991, 12 pieces of land were leased (9.8 million square miles). But since 1992,
when Deng Xiaoping made a tour of southern China, the speed of land development has
quickened. The major change in the land use system is from administrative acquisition to
market allocation based on the leasehold market (Yeh & Wu, 1996). In 1992, 205 land
parcels were leased (20.71 million square miles). In 1993, an additional 244 land parcels
(49.33 million square miles) were leased to developers. The number of land parcels and the
space leased in that year were as much as 1.20 and 1.67 times the total of the previous five
years respectively. In 1994, 620 land parcels (19.20 million square miles) were leased, among
which 452 parcels (15.94 million square miles) were leased to inward investors (Shanghai
Statistical Bureau, 1995). Foreign investment represents the major demand for leased land.
Since January 1, 1995, development projects of domestic commerce, tourism, recreation,
finance, service, or commodity housing are required to get land through the market. The
change allowed the local government to gain legal control over developed urban land.
The use of land leasing instruments allows the government to induce urban land use
changes according to its desired direction. The redevelopment of the Bund is such an
example. In the pre-socialist era, the Bund was Shanghai's CBD. Many international
banks were located in the area. After the communist stepped into power, the Bund was
gradually converted into an area of governmental and administrative uses. The Shanghai
Municipal Government attempted to redevelop the Bund into the CBD of Shanghai. The
government promulgated a new regulation to control land use and set up a specific
development company to relocate public offices and to redevelop the area for inter-
national insurance companies, commercial banks, and other international services com-
panies. Among the list of prestigious buildings is the Shanghai and Hong Kong Bank
Building, which was used for the Shanghai Municipal Government. Under the govern-
ment's promotion, the Bund is being redeveloped into an area concentrated with financial
institutions. Since 1992 the number of financial institutions has doubled to 2,700.

Mayoral Office and Development Coordination

The emergence of new urban governance characterized by strong civic leadership and the
establishment of effective local partnerships between public, private, and voluntary sectors
has attracted wide research attention (Alden, Stephen, & Beigulenko, 1998). Shanghai presents
an interesting case for observing this phenomenon. The new generation of Chinese leader-
ship originated from or has connections with Shanghai. President Jiang Zemin and Premier
Zhu Rongji are both Shanghai's former leaders. The mayor of Shanghai, Xu Kuangdi, has
important contacts with new leadership in the central government. As a major political
and economic center, Shanghai continues to occupy a strategic position in China's power
structure. The connection of Shanghai mayors with the political elite in the central
| Urban Development in Shanghai | 69

government continues to strengthen the city's status in the new phase of development. The
central government is determined to develop the city as a financial and trading center of the
Asian Pacific region. The pro-development tradition of city government and the pragmatism
of Shanghai culture cultivated an open attitude towards international investors.
In land acquisition, the mayoral office and various district government offices play an
important role in site clearance. The regulation of land acquisition enables the local
government to relocate residents according to a specified range of compensation. Residents
affected by urban redevelopment are usually compensated but may not receive the market
price. For key development projects, specific administrative offices are set up that are
directly responsible to the mayor. The offices coordinate development and can by-pass the
red tape through resorting to mayoral decisions. Such leadership is very effective in dealing
with a complicated web of interests in land development. For example, in the key project,
the Chengdu Elevation Road, the development office sped up the construction process
by providing critical support to household relocation. The project aimed to ease north-
south traffic congestion by linking the Chengdu Road to the inner ring road system. The
8.45 km long project cut through four major urban districts (Huangpu, Jinan, Luwan, and
Zhabei) and relocated about 180,000 households and thousands of state enterprises
(Wang & Li, 1997). With the support of the development office and its branches in the
four districts, the site was promptly cleared and the project was successfully completed
within two years.

Public Investment in Infrastructure

The role of city government has changed from direct control of municipal enterprises to
the promotion of local growth through infrastructure provision. Infrastructure investment
had been regarded as unproductive before economic reform. The purpose of central plan-
ning was to constrain wasteful investment and to concentrate limited capital on production.
Investment in infrastructure was wasteful from the viewpoint of localities because the state-
owned enterprises turned over the profit to their supervisory government departments.
Local governments obtained investment through a centrally allocated budget and thus
were unwilling to invest in infrastructure. Because the fiscal reform allowed local govern-
ments to retain the revenue collected from locally managed projects, the incentive for
infrastructure investment has been greatly enhanced. The new mode of urban development
means the city government takes a major responsibility for infrastructure provision. Invest-
ment in infrastructure not only generates land-related benefits but also expands the tax
basis. Infrastructure investment in Shanghai jumped from RMB 0.446 billion in 1978 to
37.88 billion in 1996 (Shanghai Statistical Bureau, 1998). In the Eighth Five-Year Plan,
10 key infrastructure projects were proposed. Since then infrastructure investment has
increased at an unprecedented pace. While it is difficult to trace the source of investment,
it is evident that the premium from land leasing is important.


While place promotion reflects the change in tactics of urban management, globaliza-
tion changes the basic mechanism or dynamic of urban development. In this section
I examine the profound changes in accumulation strategy and urban development.
70 | JOURNAL OF URBAN AFFAIRS | Vol. 25/No. 1/2003

State Socialism: Economizing Urbanization and the Productionist City

Under state socialism, economic development was equivalent to industrialization. To
speed up industrialization, the state deliberately adopted a series of policies to constrain
the cost of production factors such as labor, raw materials, and land. This was referred to
as the strategy to economize the cost of urbanization (Chan, 1992). Through planned
allocation of resources, reduction the prices of raw materials, free use of urban land, and
low living standards, the state enabled manufacturing industries to accumulate capital and
expand their production capacities. In other words, the relatively large production cap-
acity was built upon the constrained cost of production factors. Because the costs of labor
and raw materials were constrained, the economy had few incentives to update its
composition of production factors and to change itself from a manufacturing to a service
economy. The organization of the economy was mainly achieved through the administra-
tion system. The path to the post-industrial or service economy was blocked. The state
effectively prevented the capital gained from manufacturing activities from being trans-
ferred into the built environment, or more precisely into unproductive urban infrastruc-
ture and housing development. As the economy pursued a particular style of growth, it
was important to distinguish whether investment was directly relevant to industrial
production or to the creation of infrastructure. Industrial cities like Shanghai both
suffered and benefited from such a development strategy. The negative side of this strategy
is that it delayed infrastructure investment and urban development; but the positive side is
that Shanghai obtained cheap materials and a low labor cost. The profit derived from the
biased socialist price system (the inflated price of industrial products and the depressed
price of raw materials and agricultural products) was turned over to the central state. The
central state then used the capital to expand new production capcity and to subsidize the
production of raw materials and provide urban residents with low-price food and housing.
The prevention of capital inflow into the sphere of consumption, especially the built
environment, was the pillar of the socialist capital accumulation and its division of
labor. The socialist accumulation dynamics meant that Shanghai relied on distorted prices
of production factors. The division of labor between Shanghai and other Chinese cities
was based on the planned mechanism. Hence, despite being a major national economic
base, the city did not evolve into a post-industrial city because manufacturing activities
were profitable and production services were meaningless.
The redistributive policies both at a regional scale and between urban and rural areas
were misread as the socialist ideologyÐthe balance of regional economies, egalitarianism,
and anti-urban development. In fact, behind these policies are the imperatives of socialist
capital accumulation and its internal division of labor. Before the economic reform the
state had successfully prevented limited capital from being wasted in unproductive areas
such as infrastructure, services, housing, and other consumption areas. As part of a
deliberate policy of preventing the sinking of capital in the built environment, the price
of labor and urban space in Shanghai was maintained at levels almost as low as those in
inner regions. Because consumer demand was constrained, the driving force of industri-
alization could not rely on mass consumption. Instead, it relied mainly on the expansion
of heavy industries. As the rise of production costs was blocked, developed cities such as
Shanghai lacked the drive to update their technologies. Because of the stable cost of labor,
these cities did not experience industrial restructuring or the transfer of manufacturing
activities to less developed areas. At the same time, the less developed areas were not
able to survive only by the production of raw materials and thus had to rely on external
fiscal subsidies.
| Urban Development in Shanghai | 71

Socialist Market Economy: Gateway to the Global Economy

and Frontier of Globalization
The economic reform adopted in 1978 was characterized by two key changesÐthe
establishment of a socialist market economy and the opening of the door to the world.
This suggests that external and internal factors are together responsible for socio-
economic changes. The role of the central state in direct resource allocation is diminishing,
more or less due to indigenous reform. But globalization has introduced major changes
into to the dynamics of capital accumulation. Developed along separated trajectories,
production factors and capital accumulation in socialist and capitalist capital economies
have been priced at different levels and according to different principles. This is particu-
larly apparent in ShanghaiÐthe frontier of a rigorously planned economy to encounter the
world market. The connection between subsidized production factors and the production
capacity is broken. To a lesser extent, it was argued in the late 1980s that coastal cities
should rely on the planned mechanism for cheap inputs. A policy encouraging export-
oriented development and the use of foreign capital and materials was proposed to
emphasize the participation in grand international circulation (Fan, 1997). The policy
produced an immediate impact on southern China, especially the Pearl River Delta where
the combination of foreign investment (mainly from Hong Kong) and cheap labor has led
to rapid growth in the export processing and manufacturing sectors (Lin, 1997). The
emergence of manufacturing towns, the loss of agricultural land, the degradation of the
environment (Yeh & Li, 1999), dispersed urbanization patterns (Sit & Yang, 1997), and
the flooding of migrant workers into manufacturing sites are features of the urban
dynamics driven by foreign investment. To a lesser extent, the growth of export-oriented
activities means the confrontation of two different dynamics (foreign capital and migant
workers). Both dynamics have origins outside the region (Eng, 1997) and are not directly
related to socialist capital accumulation.
Until 1990 Shanghai did not benefit from significant foreign investment until 1990 when
the State Council designated Pudong as a new development zone. Shanghai's strong
economic base, its strategic location in the Yangtse River Valley, a relatively better-
trained labor force, and good infrastructure have attracted foreign investment from all
over the world. Joint ventures in Shanghai are characterized by their multinational origins
and high levels of technology. They are also characterized by complex administrative
structures including the headquarters, representative offices, management offices, sales
offices and service centers of firms that have manufacturing activities located in suburban
Shanghai or neighboring provinces. Administrative complexities also entail the presence
of operational offices of service and financial sector firms as well as manufacturing
factories (Rose, 1997). To a certain extent, Shanghai's utilization of foreign investment
reflects stronger international influences than in the Pearl River Delta. The under-priced
production factors in Shanghai are attractive. For example, the government subsidies of
food and housing enables low wages for workers. Moreover, investment in Shanghai
represents more than the simple utilization of cheap labor. Shanghai as a major manu-
facturing center established a network of product distribution before foreign investment
came to the city. This is reflected in its strategic location in the economic geography of the
Yangtze River. It was perceived by developers as having the potential for office develop-
ment, which consequently led to a rise in property prices.
As a legacy of previous urban dynamics, the price of land is lower than it could be given
the intensity of its use and the production capacity it sustains. This is a very attractive
feature, which facilitates a huge potential for price increases. Developers can, therefore,
72 | JOURNAL OF URBAN AFFAIRS | Vol. 25/No. 1/2003

capture under-developed and under-valued urban land and make a profit from land devel-
opment. Since the mid-1990s, Shanghai experienced a period of real estate growth. The
increasing cost of production factors has driven many state-owned enterprises, especially in
the manufacturing sector, into a difficult situation. On one hand, they are facing competi-
tion from joint ventures; while on the other, state-owned enterprises still undertake many
social responsibilities such as housing provision. The wide loss of state enterprises may
indicate the end of socialist capital accumulation. In turn, the driving force of urban
development has shifted from industrial surplus to property-led development.

Global and Local Interaction: Market Signal and Speculative Investment

As mentioned earlier, Shanghai is the frontier where two different types of development
mechanisms coexist. The previous mechanism will continue to affect urban development
until the total collapse of subsidized industrialization. While foreign investment triggered
the increase in land prices, this market signal induced domestic capital to flood into
speculative land development. Because local government and various de facto landowners
can benefit from land development, they have an enormous stake in promoting land
development. The promotion of places through infrastructure investment is merely a less
obvious stimulus to land speculation. The change in urban dynamics is reflected in
increasing foreign direct investment in real estate. In 1996, over a quarter of foreign
investment in Shanghai was in the real estate sector. The realized foreign direct investment
in the real estate sector amounted to $1.053 billion. The government stipulated a range of
preferential treatment for real estate investment, e.g., exemption from investment adjust-
ment tax (a tax levied to adjust the investment direction to specified priorities). In 1997,
the nationwide figure shows that the number of foreign-invested real estate companies
increased to 1,200 and that the number of real estate companies invested from Hong Kong,
Taiwan, and Macao was 3,800. These overseas real estate companies occupied about
20% of the total. In Shanghai, foreign invested real-estate firms accounted for RMB
15.67 billion in the total net value of RMB 55.4 billion (China Real Estate Market, 1996).
The rise in property prices in 1993 and 1994 was significant and further induced industrial
restructuring. State manufacturing industries are facing increases in production costs
and competition from multinationals. The result is a transition from the socialist capital
accumulation through constraining production costs to a new dynamic similar to that of
a market economy. Inner city manufacturing industries are faced with relocation. The
change of land use from the predominant manufacturing to tertiary industry occurred.
This is consistent with the development strategy that promotes production services, finance,
and trade rather than manufacturing activities.
So far, there have been various types of hidden subsidies to labor cost such as highly
subsidized provision of housing from state-owned enterprises. Some employees working in
the private sector can rely on their family or partners for accommodation. Nevertheless,
along with the diminishing role of welfare housing, more and more households have to
purchase housing from real estate markets. The state-owned enterprises rapidly exhausted
their funds available for housing investment. The high rate of housing investment in the
1990s, therefore, cannot be sustained. The rising cost of living will eventually be counted
as a production cost and thus render some manufacturing activities no longer profitable.
The process is very similar to what happened in advanced market economies but over a
shorter cycle. Nevertheless, the price of high quality office accommodations in Shanghai is
comparable to the most expensive in the world. Although many multinationals have
opened branches and offices in Shanghai, the city is still at the bottom of the world
| Urban Development in Shanghai | 73

urban hierarchy. Analysis has suggested that the rapid rise in property prices is a result of
the combined forces of speculative investment and the promotional strategies of the

From the detailed investigation of capital investment in Shanghai, it has been shown
that the role of foreign investment does not lie in its contribution to capital formation
per se but rather in its demonstrable effect on the profitability of using urban space as a
commodity. Foreign investment led to the catalytic remodeling of the price system, which
in turn induced a change in the accumulation strategy. The rapid urban growth and
transformation of Shanghai is not a simple result of imposed globalization from the
outside. This is not to deny the importance of the global force in directing local develop-
ment. But rather, the effect of global forces is conditioned by and filtered through local
structures. As a result, the impact of globalization on urban development is enlarged in
some aspects and diminished in others. This suggests that there is no abstract globalization
process that exists outside the political economy of place. Cities have been the nodes of
realizing a particular accumulation strategy, in both developed and developing worlds.
Therefore, their response to globalization varies as each attempts to maximize the benefits
of globalization in its own manner according to the change in accumulation strategies. As
a result, there is a great diversity among globalizing cities (Kim, Douglass, Choe, & Ho,
1997; Lo & Yeung, 1998; Marcuse & van Kempen, 2000; Yeung, 1998). In the Asian
Pacific, under the umbrella of so-called development states, there are varying strategies
and tactics to meet the challenge of globalization (Castells, 1999). For example, Douglass
(1997) compared the different ways of accommodating multinationals in Taiwan, Hong
Kong, and Singapore. The global imperative does not mean that local forces can only
respond in one way. On the contrary, globalizing cities are actively promoted by their local
agents, especially growth-oriented governments at both national and local levels. The
production of new urban space through mega-urban projects is used as a strategy to
anchor the economy to the world market (Olds, 1997). As a political discourse, globaliza-
tion can be used symbolically or selectively in urban politics as clearly shown in the
globalization of Tokyo (Machimura, 1998).
It is not a new idea that local conditions determine the trajectory of urban development.
Culture, for example, contributes to the distinctiveness of the cities in East Asia (Kim et al.,
1997). The local factor of urban development is, of course, important. However, the
dynamic interaction between the global and the local becomes apparent and is qualitatively
different from the classical notion of local conditions that heavily emphasizes physical and
static features. Localities can modify or even create new conditions to exploit the opportun-
ities brought by globalization. In Shanghai as well as in many other Chinese cities, the grand
picture of a global city is often employed as a symbolic function to legitimize a local
promotional strategy. Shanghai is strategically restructured as a critical space to re-integrate
China into the world economy. However, the story of Shanghai shows more complicated
interactions between the global and the local. The simple logic of increasing mobility of
capital, inter-city competition and place promotion as a local response cannot capture the
complexity of urban development in Shanghai. The influence of globalization is built upon
the political economy of placeÐthe right to control land benefits and land revenue in the
case of Shanghai. This vested interest in land forms a material condition of the new
development strategy. It is undeniable that urban managers can somehow feel competition
from other cities. But explaining urban development as solely based on the notion of
74 | JOURNAL OF URBAN AFFAIRS | Vol. 25/No. 1/2003

inter-city competition may exaggerate the capacity of macro management in routine

bureaucratic activities. What drives aggressive promotion place images and enthusiastic
investment in infrastructures at the more local scale (urban districts, neighborhood offices,
and real estate companies) is an embedded political economy of place, which allows the new
actors to capture the benefits of inflated land prices.
The inflow of foreign investment and the place promotion strategy triggered the real
estate boom in Shanghai in 1993 to 1994. Tracing capital inflows can restore the missing
link between globalization and urban transformation. For a large metropolis like Shanghai,
foreign investment alone is unlikely to constitute the major source of capital formation.
Nevertheless, foreign investment directly contributed to the establishment of the land
leasing system, as it is a genuine customer for a piece of state land. This is very important
at the beginning of land reform as it establishes the profitability of land development. The
sale of urban land to external developers uncovered the fact that land is a valuable and
irreplaceable factor in production and consumption. The burgeoning price of the leased
land exceeds the price of the land allocated through non-market methods (e.g., adminis-
trative allocation). This gap between market price and nominal price, due to the absence
of land markets, began to fuel the engine of urban growth. Because urban land develop-
ment can generate a profit, capital has withdrawn from the production circuit where
competition reduces the monopoly profit of state-owned enterprises and has been redir-
ected to the built environment. The reallocation of resources, however, is far too complex
to be generalized as the transition to a free market (as if there were absolutely free
markets). The fundamental assumption of the economic man in neoclassical urban eco-
nomics is invalid here, because the actors involved in the game of landed property
production have various stakes and incentives (Wu, 1999) and cannot always act ration-
ally according to the market principle. For example, state-owned enterprises in a regime of
flexible budget constraint can divert the profit retained from production to real estate
business. As a landowner, local government is willing to invest in infrastructure to boost
the price of land. Overseas Chinese developers established a wide social network with local
governments to capitalize on cultural affinity and kinship (Hsing, 1996). In many circum-
stances, giant players do not simply follow market trends but are able to manipulate the
market to create favorable conditions. The competition of interests in urban land has
driven the development of urban land to its maximum intensity, similar to the classical
example of the growth machine documented by Logan and Molotch (1987). The game of
development that harnesses local politics to increase land values and to create a consensus
towards growth is being played in Chinese cities. The redirection of investment from
production to real estate further heated the property market until the state finally stepped
in to tighten the macroeconomic policy in mid 1994. Foreign investment, though not the
only source of financing the real estate boom, contributed to an overwhelmingly optimis-
tic atmosphere for property speculation.
Globalization mobilizes a new mode of urban governance. For example, landed inter-
ests now attempt to justify the relaxation of development controls in the name of local
development and the adoption of liberalism in urban management. One important insight
drawn from this research is that Shanghai witnessed the shift in its accumulation strategy
away from the productionist view of economizing urbanization to enhancement of services
provision (gateway of China) and urbanism (image creation and city beautification).
Future studies should examine the change in urban governance, in particular, how
globalization interacts with the legacy of socialist development and how a range of local
institutions such as the system of land use, the administrative system, fiscal relationships,
and urban politics are remolded under globalization.
| Urban Development in Shanghai | 75

ACKNOWLEDGEMENT: This research project was funded by a Chinese Studies Grant from the British
Council. The comments of anonymous referees have been helpful in revision. Any remaining error is solely
the responsibility of the author.

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