Voluntary Report - public distribution

**Date:** 5/18/2006

**GAIN Report Number:** CH6807

CH6807

**China, Peoples Republic of**

**Market Development Reports**

**Shanghai Market Profile**

**2006**

**Approved by:**

![](media/image1.wmf)Ross Kreamer

U.S. Consulate

**Prepared by:**

Ralph Bean

**Report Highlights:**

Continued investment in infrastructure, along with rapid economic
growth, have turned Shanghai into a regional trade and financial
powerhouse. Beyond its own 20 million consumers, Shanghai serves as the
gateway to cities throughout the Yangtze River region and deep into the
interior.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Shanghai \[CH2\]

\[CH\]

**Growing Market, Great Potential**

China's continued economic growth and improved access to imports under
the WTO have helped to underscore the importance of this emerging
market. At the same time, growth in trade has helped to cement
Shanghai's position as the commercial capital of China. With a growing
population, incomes far above the national average and one of the
largest container ports in the world, the city of Shanghai is both a
major market and a key access point to the industrial centers of East
China. It is also a gateway to many of the major cities of China's
interior.

The business climate in Shanghai is more favorable than in most other
major cities in China, and local officials are aggressive in promoting
business development. This pro-business attitude, along with good
infrastructure, explains Shanghai's continued success in attracting
businesses, despite rising costs. In recent years Shanghai has hosted
the Global Fortune 500 Forum (1999), the annual APEC summit (2001), and
won its bid to host the World Expo in 2010. It may also explain why
Shanghai has grown into a key import center for much of East and Central
China. Products imported into Shanghai are redistributed up and down the
coast, and inland to cities as distant as Chengdu and Kunming.

**City on the Sea**

![](media/image2.jpeg){width="2.1020833333333333in"
height="3.136111111111111in"}The name Shanghai literally means 'on the
sea.' The city of Shanghai has made the most of its location between the
edge of the Pacific and the mouth of the Yangtze River to become a
regional trade powerhouse with access to both international markets and
China's interior. Shanghai's history is much shorter than that of nearby
cities, with origins in the European concession ports of the mid 1800s.
The city was quite literally built for international trade, and many of
the concession-era buildings still stand at the heart of the city.
Although Mandarin is the official language, local residents often use
the Shanghai dialect when speaking to each other. In addition to its own
dialect, Shanghai has it's own distinct cuisine and culture. Official
sources describe the climate as a 'subtropical monsoon climate,'
although the average annual temperature is only 17.4°C, with a monthly
high of 39°C and a low of --4.6°C. Average annual precipitation is 931.2
millimeters.

Like Beijing, Chongqing and Tianjin, Shanghai is an autonomous
municipality, combining governmental features of a city and a small
province. Unlike some of the others, the surrounding areas of the
Shanghai district are incorporated into the city's economy, making the
distinction between Shanghai District and the City of Shanghai largely
academic. In fact, the city's economic influence extends far beyond the
district into neighboring provinces. The Shanghai district's population
is now estimated at 20 million. This is a jump of 3-4 million over
previous estimates, although the official population is still estimated
at 17.42 million. The difference is composed primarily of migrants from
the rural areas of China, who do not hold official resident status in
Shanghai. The bulk of unskilled labor and service jobs in the city are
held by rural migrants.

+-------------------------------------+-------+---------+--------------+
| ## Table 1. Shanghai At A Glance    |       |         |              |
+-------------------------------------+-------+---------+--------------+
| Indicator                           | 2003  | 2004    | 2004 Growth  |
+-------------------------------------+-------+---------+--------------+
| Land area (sq. kilometers)          | 6,341 | \--     | \--          |
+-------------------------------------+-------+---------+--------------+
| Population (million)\*              | 20    | \--     | \--          |
+-------------------------------------+-------+---------+--------------+
| GDP (\$billion)                     | 75.58 | 90.09   | 19.1%        |
+-------------------------------------+-------+---------+--------------+
| Average urban disposable income     | 1,797 | 2,017   | 12.2%        |
| (\$)                                |       |         |              |
+-------------------------------------+-------+---------+--------------+
| Foreign direct investment           | 5.85  | 6.54    | 11.8%        |
| (\$billion)                         |       |         |              |
+-------------------------------------+-------+---------+--------------+
| Total value of imports              | 88.9  | 121.3   | 26.7%        |
| (\$billion)\*\*                     |       |         |              |
+-------------------------------------+-------+---------+--------------+
| Total value of exports              | 112.3 | 161.0   | 30.2%        |
| (\$billion)\*\*                     |       |         |              |
+-------------------------------------+-------+---------+--------------+
| \* 20 million is an estimate of     |       |         |              |
| actual population made in 2003 by   |       |         |              |
| Shanghai's mayor. Official figures  |       |         |              |
| are lower, and no update to the     |       |         |              |
| mayor's estimate is available.      |       |         |              |
| \*\*World Trade Atlas. All other    |       |         |              |
| figures are from the Shanghai       |       |         |              |
| Statistical Yearbook, 2005.         |       |         |              |
+-------------------------------------+-------+---------+--------------+

# The Economy

Despite concerns about rising prices, Shanghai's economy continued to
churn ahead in 2004, with a GDP growth rate of 19.1%. According to
Shanghai government statistics, total GDP for the year was \$90.9
billion. Sustained double-digit economic growth has raised the specter
of inflation, and the government took action in 2005 to slow the
economy. Although prices for premium office space continue to rise, the
increases in the cost of housing and food prices have both slowed over
the past year. The government continues to be concerned about
overheating, and new controls on mortgages were a factor helping to
limit price increases in housing by reducing speculative investment, and
overall growth is believed to have been significantly slower in 2005,
with preliminary estimates set at 11.1%. Even with these problems,
Shanghai remains a center for automobile and garment production, and is
continuing to develop as an important center for finance, banking and
insurance.

With an estimated 1.3% of the nation's population in 2004, the port of
Shanghai accounted for nearly 21% of China's total imports and nearly
32% of total exports, as well as accounting for roughly 10.7% of foreign
direct investment. The growth in trade not only reflects the expansion
of markets in East China, but an overall shift toward direct trade, away
from gray market channels. This shift toward direct trade is being
driven by improved access for imported products and declining tariffs
under China's WTO agreement, which has made direct imports easier and
less costly than in the past. Recent government crackdowns on illegal
imports have also made it riskier to rely on gray-market channels.

The municipal government has played an important role in developing
trade and foreign investment, offering a number of preferential policies
and investing heavily in trade infrastructure. The Port of Shanghai tops
all other mainland ports in volume, routinely ranking among the top
three ports worldwide, and the addition of the Yangshan deepwater
facility has helped it to cinch the port's position as number one
worldwide in volume. Air cargo has seen a similar boom, and the air
cargo terminal at Pudong is now the world's busiest. Numerous projects
already underway will continue to ensure that Shanghai's logistics and
transportation capabilities remain among the best in China. Shanghai's
free trade zones (FTZs) such as Waigaoqiao also offer a wide range of
services to importers. Products can enter the FTZ and not pay duty until
it is shipped out. Companies in the FTZs provide a full range of
services including inventory tracking, logistics and cold storage. The
FTZs also offer special tax and tariff advantages for businesses that
add value to imported products prior to shipping them into the Chinese
market. Beyond the FTZs, Shanghai also has a growing population of
specialized distributors that can handle not only logistics and
distribution, but marketing the product as well.

###### The Consumers

Shanghai is one of the wealthiest cities in China, with average annual
incomes nearly equal to the top 10% of China's urban consumers at RMB
18,502 (\$2,312) per capita. The growth in incomes shows no sign of
slowing. In 2004, the average income jumped by nearly 20%, as compared
to 12.2% in 2003. (Note that these income figures are official numbers,
and are considerably lower than most other estimates). Consumption
expenditures have also grown, and borrowing has become more commonplace.
The increase in borrowing is the combined result of rapid privatization
of housing and the growing availability of mortgage loans. As recently
as seven years ago, the majority of homes were distributed through the
workplace or by the government. Now, the bulk of homes are privately
owned.

Shanghai is also home to one of China's largest foreign communities,
with estimates of the total foreign population ranging from 300,000 to
500,000, including 15,000 U.S. citizens. (In an unintentional bit of
irony, the Chinese government lists Taiwanese as foreigners). The city's
cosmopolitan character and affluent population provides it with both
broad exposure to foreign products and the wherewithal to buy them. As a
result, Shanghai's residents often act as trend-setters for the rest of
China. Consumers in Shanghai are very style and brand-conscious, viewing
famous brands as both status symbols and guarantees of quality.
Consumers in this city are more willing than most people in China to
make the tradeoff between price and quality. As a result, high-end
shopping districts such as Nanjing Road or Huaihai Road are crowded with
top-end fashion boutiques such as Ferragamo, and Christian Dior, doing
excellent business despite the availability of low-cost look-alikes and
counterfeits just a block or two away.

![](media/image3.wmf){width="3.6236220472440945in"
height="4.768897637795275in"}

Recent years have seen the emergence of a new consumer demographic
throughout China, particularly in Shanghai. These are the up-and-coming
generation of people who were raised during the years of prosperity, and
are now coming to the fore as independent consumers. Young and affluent,
and typically single children, they are more consumption oriented and
less thrifty than their parents. Their appearance has helped to spawn
the emergence of a 'mall culture' in Shanghai that looks to retail
venues as sources of entertainment as well as places to shop. They are
also more willing to take on debt as a means of financing purchases,
which has helped led to a boom in home and car sales. In terms of food
sales, this group of consumers is helping to drive the movement toward
ready-to-eat and heat-and-eat meals in retail venues. This last trend is
likely to become more pronounced as this generation begins having
children and finds itself short on time.

###### The Food Market

![](media/image4.wmf){width="2.851968503937008in"
height="2.780708661417323in"}Although incomes in Shanghai are relatively
high, Shanghainese still spend a surprisingly high proportion of their
earnings on food. Per-capita food spending in Shanghai tops the nation
in official statistics. (Guangzhou, famous even in China for its
epicures, might actually outspend Shanghai, but does not appear
separately in the statistics). Chinese census data also show where the
differences lay: Shanghainese spend a remarkably large amount of their
income on dining out. A number of factors likely figure into this,
including relatively crowded living spaces (not suitable for
entertaining guests), busy schedules and a gift-giving culture that
emphasizes high-profile entertainment for guests. They also spend more
on aquaculture products (nearly three times the national average for
urban residents) than any other place in China, except neighboring
Zhejiang Province. Anecdotal evidence indicates that much of this, in
both Shanghai and Zhejiang, is accounted for by crab and shellfish,
which are heavily favored in local cuisine. Shanghainese also spend a
relatively large amount on dairy products, with exenditures well over
double the national average. The surprisingly large amount of income
that Shanghai's consumers are willing to spend on food, and the
cosmopolitan culture of the city, makes Shanghai an outstanding
candidate for imported foods.

Food retail is big business in Shanghai. According to Shanghai Census
figures, wholesale and retail sales of food, beverages and liquor and
tobacco amounted to RMB 130 billion (\$16.24 billion) in 2004. Food
shoppers in Shanghai also have a growing variety of venues for spending
their money. Shanghai is a hotbed of retail development, with a wide
range of foreign-invested hypermarkets such as Carrefour, Metro, Lotus,
Trust-Mart, Auchon, and RT Mart, as well as being home to three of
China's top five domestic supermarket chains, Lianhua, Hualian and
Nonggongshang. Shanghai also pioneered the convenience store format in
China, and now has nearly half of all the convenience stores in the
country. Despite the competition, foreign retailers continue to express
interest in Shanghai. Wal-Mart has finally come to Shanghai,
establishing its flagship Nanpu store in late 2005, with plans to open
two more soon. Other foreign retailers including Korea's E-Mart and
Japan's Family Mart have also come to Shanghai. The prize is worth the
competition. Retail sales revenues amounted to RMB 245 billion (\$29.7
billion) in 2004, increasing by 9.5% over the previous year. Tough
competition is putting retailers under pressure to innovate, and
Shanghai-based chains are becoming increasingly sophisticated in their
marketing efforts.

The hotel, restaurant and institutional food sector (HRI) is also
extremely well developed. As noted before, Shanghai's consumers spend a
remarkably large portion of their food dollar on dining out. This,
combined with high incomes and a cosmopolitan atmosphere puts Shanghai
at the cutting edge of China's culinary landscape. While Chinese and
expatriate diners typically have distinct preferences, in Shanghai more
than any other place in China, the two groups are merging into a single
high-end clientele. This group is interested in novelty, and foreign
restaurants and fusion restaurants are more common than elsewhere. There
are slightly over 30,000 registered 'business units' in Shanghai's
catering industry, and probably at least as many go unregistered. Among
this number, there are over 1,000 registered
![](media/image5.wmf){width="2.499212598425197in"
height="2.5200787401574805in"}western restaurants. The emergence of
high-end restaurant chains has become an important trend, particularly
for imported food products, as they demand both high quality and large
volumes. The hotel industry however, continues to serve as a key source
of demand for high-end imported food products. At the start of 2004,
Shanghai was home to 24 five-star hotels. Even so, the city suffers from
a chronic shortage of top-notch hotel space, and a number of new hotels
are under construction. Catering is very much at the heart of Shanghai's
hotel industry, with catering revenues accounting for nearly 1/3 of all
operational revenues and an even larger share of profits. ATO/Shanghai
routinely works with hotels to promote high end products including meat,
seafood and wine.

# Trade Show Central

Shanghai has carved out a niche for itself as a major center for trade
shows. The addition of new, state-of-the-art facilities in Pudong
district has helped further boost this claim. Major upcoming events
include two of China's largest international food shows, Food and
Hospitality China (in November) and SIAL (in May), along with China's
largest wood show, WoodBuild China (in June). There are quite a few
other shows that include agricultural or food products. These include:
Pet Fair Asia (June 2006), the Modern Landscape Design and Construction
Forum (June 2006), the All China Leather Expo (September 2006), the
Shanghai Culinary Exposition (November 2006), Food Ingredients
Asia/China (February 2006), Food Ingredients China (March 2006), Bakery
China (October 2006) and Hortiflorexpo (April 2007). New shows are
appearing at record speed, and not all shows are created equal. U.S.
companies are advised to contact ATO if they are uncertain about the
value of attending one of the lesser-known shows.

# Beyond Shanghai

Shanghai is more than just an immense market. It is also a shipping and
distribution hub for products that move into markets throughout Eastern,
Central and even West China. In addition to excellent logistics
infrastructure, Shanghai boasts a cohort of distributors whose reach now
extends to the furthest corners of the country. Experienced in working
with customs clearance, quarantine and currency exchange procedures, a
growing number of these distributors offer a full range of services to
exporters, taking much of the paperwork and hassle out of exporting to
China.

###### **The Window to a Developed China**

Shanghai's rapid growth has been a boon to cities in the neighboring
provinces of Jiangsu and Zhejiang. Many of these cities are now emerging
as major markets in their own right, with populations in the millions
and per capita incomes far above the national average. As with costs in
Shanghai continue to rise, many industrires have moved to these nearby
cities. In 2003, the city of Suzhou actually overtook Shanghai as a
destination for foreign direct investment. In 2004, Hangzhou was named
by Forbes Magazine as the best place to do business in China, followed
by Wuxi. A brief rundown of the most prominent of these little-known but
important cities is laid out in the following table. For more
information, please see ATO's Emerging City Market reports on the FAS
website.

###### **Gateway to Western China**

Shanghai's influence extends far beyond its neighbors in the Yangtze
delta. Cargoes that pass through Shanghai are often destined for major
cities deep in China's interior.

Although incomes in these areas are often lower than in the coastal
cities, the sheer size of many of these markets makes them tempting.
Many boast a small but fast-growing middle-class with a taste for novel
products and the money to buy them. Tastes in these cities vary widely
and which products will be successful is difficult to anticipate. For
example, at a recent food promotion in Wuhan, (the capital of Hubei
Province) the fastest moving items turned out to be Mexican foods. The
level of development in retail and HRI, not to mention logistics, is
also variable. Kunming, deep in the interior, has an extremely
sophisticated retail sector with investment from Wal-Mart, Carrefour,
Metro, Parkson and numerous other foreign retailers. This is
considerably more development than in Nanjing, despite the fact that
Nanjing has a larger population, higher incomes and is closer to
Shanghai. The regional differences go far beyond incomes and
infrastructure to include local dialects and food culture. Foods that do
well in Shanghai, where the cuisine is typically sweet and mild, may not
do so well in Chongqing, which is famous for plate (and palate)
meltingly hot food. Exporters that are interested in going further
afield are advised to research these markets carefully prior to entering
them.

**Contact Information:**

U.S. Agricultural Trade Office, Shanghai

Suite 331, Shanghai Center

1376 Nanjing West Road

Shanghai 200040

Tel: (86-21) 6279-8622

Fax: (86-21) 6279-8336

Email: ATOShanghai@usda.gov