As Shanghai’s strict lockdown grinds towards its second month, expatriate residents are heading for the exits, a trend that in the long term could threaten the city’s status as a global business hub.
The government’s draconian restrictions have prompted rare rebukes from foreign business groups and resulted in the United States (US) ordering all non-emergency staff at its consulate to evacuate. The British Chamber of Commerce has estimated that international schools are on track to lose 40 percent of their staff by the time the upcoming school year gets under way.
In an online survey targeted at expats earlier this month, 85 percent of the almost 1,000 respondents said they were considering leaving China due to their experience of the lockdown. “This has been a long time coming,” Alex Duncan, founder of Shanghai-based marketing start-up KAWO said. “There has been a huge exodus growing since COVID first began. But this lockdown forced those who’d been considering leaving for a while to make a final decision.”
The trend suggests Shanghai could be following the trajectory of Hong Kong, which has experienced an exodus of foreign residents and businesses amid sharply deteriorating rights and freedoms and a draconian “dynamic zero-COVID” strategy that has cut the city off from the world for more than two years.
With the heaviest concentration of foreign business activity of any city in China, Shanghai’s fate could prove even more decisive to investor confidence and the overall business environment in the world’s second-largest economy.
“Hong Kong was also once a gateway into China for foreign companies, but as China developed… Shanghai became a stronger base for business operations and over 700 foreign companies have regional headquarters in Shanghai today,” Kenneth Jarrett, senior adviser on China at Albright Stonebridge Group explained.
“The foreign business community plays a major role,” Jarrett added. “Foreign companies account for 20 percent of Shanghai’s employment, 50 percent of its R&D, and 67 percent of the trade value of imports and exports, per government statistics.”
Bill Russo, the founder of Automobility, a consultancy focusing on China’s automotive industry, described Shanghai as “irreplaceable” for the foreign business community. “There is nowhere else in China that comes even close for foreigners in terms of a favourable business environment to operate in,” said Russo, stating that China had given a new lease of life to the global automotive market in recent decades.
Russo said he and many other entrepreneurs felt fortunate to have been a part of China’s once-in-a-lifetime economic miracle but the country was losing its lustre. “China had that going for it, and we need to give it credit, but I’m sad to say I’m not sure if it does any more,” he added.
The pandemic is accelerating a longer-term trend. The number of foreigners in Shanghai fell more than 20 percent from 208,000 in 2011 to about 163,000 in 2021. The drop has been even more extreme in Beijing, where the number of foreign residents declined 40 percent since 2010 to about 63,000 last year.
Russo said he was surprised when he drew stares from locals during his last visit to the capital, something that rarely happened when he lived in Beijing between 2004 and 2013.
“You’ve become exotic again,” he said, speculating a similar change could happen in Shanghai.
Jarrett, the adviser at Albright Stonebridge Group, said that while there is reason to be concerned, it remains premature to declare an exodus from Shanghai.
“China is a market of strategic importance and one (most foreign multinationals) have a long-term commitment to,” he said. “We might see an accelerated effort to localise further the ranks of senior management.”
Money flows look to be localising too. China has experienced an unprecedented outflow of foreign capital in recent weeks. A survey by the American Chamber of Commerce concluded most US firms in China have essentially frozen investment plans for 2022.
“This is not only impacting the inflow of foreign capital into China, but we’re also seeing more Chinese start-ups turn away from international markets, where they had gone before, to raise capital domestically,” said Russo. The reshoring of Chinese capital coincides with a growing preference among VC firms for homegrown entrepreneurs.
“There is a pervasive feeling that we (foreign entrepreneurs) no longer bring a unique advantage,” said Duncan, the start-up founder. “That only locals can really succeed in China now.”
Duncan said this shift follows the maturing of China’s domestic market, which now needs less input from international investment than in its heady years of rapid growth. This mirrors the changing character of Shanghai’s service sector, too.
“You certainly wouldn’t set up a business targeting expats these days,” he said. Growing anger and frustration within the foreign business community has done little to shift policy. Despite mounting social and economic costs, Chinese President Xi Jinping has repeatedly defended the “zero-COVID” approach, telling an economic forum last week that the priority must be to “defend people’s lives and health”.
“The issue is to make sure what’s happening now doesn’t become permanent,” Ker Gibbs, who was president of AmCham Shanghai from 2019 to 2021, said.
“Chinese authorities seem to have made their decision on how to manage COVID, and there’s little we can do to influence that.”
“I tried hard to get them to view COVID as a shared global problem… COVID doesn’t see borders, and neither do vaccines…” Gibbs added. “China should have approved a high efficacy mRNA vaccine a year ago, without regard for where it came from. Now they’re stuck.”
Jarrett said the best hope business groups have is being able to convince authorities to tweak, rather than abandon, the controversial policy in order to minimise the economic disruption. On Monday, authorities said they plan to shift to more targeted enforcement of restrictions in smaller zones around confirmed cases.
“Thus, you’ll see that the chambers (of commerce) are offering specific suggestions about logistical obstacles and the movement of people as well as providing the government with a reality check on those measures in place that may not be working as intended,” he said.
Duncan said that there did not appear to be a consistent position within the government on the need to retain foreign businesses and talent.
“The Shanghai Foreign Investment Bureau is not happy with the situation and still wants to keep Shanghai open and remain a vibrant, multicultural global centre on par with say New York or Paris,” he said, but they “are up against more restrictive agencies, like immigration”. Russo, a New Yorker, said Shanghai had lost the allure that once reminded him of his native city.
“If anything is tragic about the last couple of months, it is that the pearl has lost its shine,” he said.
“People are going to places where they have the best chance of living life as it was before, they are trying to go back to normal. We’re not sure what it will be like on the other side and we’re not there yet… but if this is (China’s) new normal, many more will leave.”