FINANCIAL CRISIS HITS SHANGHAI EXPATS HARD

UNCLAS SECTION 01 OF 03 SHANGHAI 000275

SENSITIVE
SIPDIS

DEPT FOR EAP/CM
USDOC FOR ITA/MAC/OCEA - SZYMANSKI
TREASURY FOR OASIA - HAARSAGER, WINSHIP

E.O. 12958: N/A
TAGS: ECON SCUL CASC CH
SUBJECT: FINANCIAL CRISIS HITS SHANGHAI EXPATS HARD

REF: SHANGHAI 259


1. (SBU) Summary: The effects of the global financial crisis
are leading many in Shanghai's expatriate community to return
home ahead of schedule just as Shanghai ramps up for the 2010
World Expo. Shanghai has approximately 150,000 expats who work
for many of its 40,000 foreign-invested projects. Multinational
companies who are seeking to cut costs are sending expats home
or asking them to accept reduced benefits packages. End summary.


2. (SBU) Often called the "New York of China," Shanghai prides
itself on being an international center for trade, finance,
logistics and shipping, and has ambitious plans to expand those
international roles. According to Shanghai Municipal officials,
there are more than 150,000 expatriates living and working in
Shanghai, making it the most "foreign" of cities in China. Of
these, approximately 22,000 are U.S. citizens. Shanghai has
over 5,500 U.S.-invested projects, including such large
companies as General Motors (in a highly profitable joint
venture),Intel, GE, Kodak, and UPS. U.S.-invested companies in
Shanghai account for approximately one-eighth of the total of
40,000 foreign-invested projects in Shanghai. There are signs
that the global financial crisis, and the concomitant slowdown
in China's economy and trade, has impacted the expat community
here. Anecdotal evidence and recent, non-scientific surveys of
the expatriate community in Shanghai indicate that Shanghai's
foreign population is decreasing and changing just as Shanghai
ramps up for the 2010 World Expo. That six-month event (May 1
-- October 31, 2010) is expected to bring as many as sixty
million domestic visitors and ten million foreign visitors to
Shanghai.

Shanghai's Economy from Go-Go to Slow-Slow
--------------


3. (SBU) According to official statistics, in 1Q 2009,
Shanghai's GDP grew only 3.1 percent, down from the 7.2 percent
growth in the 4th quarter of 2008. Shanghai's economic slowdown
is largely attributed to the city's traditional dependence on
exports and comes after 16 years of year-on-year double-digit
growth that ended in 2007; 2008 GDP growth still exceeded 9
percent. According to a Human Capital Group's recent survey of
more than 300 human resource directors and general managers at
foreign-invested firms in Shanghai, 78 percent reported that
their company and workforce were being significantly affected by
the global financial crisis.

On the Down Side of the Sine Curve
--------------


4. (SBU) An American lawyer who has lived and worked in Shanghai
for 24 years describes the recent outflow of expatriates as the
worst she has ever seen. It is not the first expat exodus she
has seen, however. She described the size of Shanghai's
expatriate community as being analogous to a sine curve with ups
and downs over time.


5. (SBU) Multinational companies send expatriates to Shanghai to
provide management and technical expertise not available here in
China, she observed. These expatriates come on expensive
"expat" packages that often include such perquisites as
financial bonuses, rent in appropriate housing (usually at least
USD 6,000 per month in gated "foreigner" compounds),a car and
driver (about USD 13,000 per year),tuition for kids (USD 22,000
per year),annual vacation tickets and trips back home, along
with the usual relocation costs. After a few years, management
located outside of China starts to question the value of these
expensive expatriates and downsize their complement. Then, over
time the companies realize that the services and skills of the
locally-engaged staff do not live up to expectation and send
expats back to "fix up the problems."


6. (SBU) As another contact with 15 years in Shanghai's
manufacturing sector said, "The problem is developing a mediocre
local supplier to an acceptable global supplier. Amongst local
hires, there is a basic lack of understanding of the work ethics
and business environment outside of China. As long as Chinese
don't get this, companies will need expats to do the work.
Those companies that are sending people home now will be
bringing them back in a couple of years."


SHANGHAI 00000275 002 OF 003


Expats, Half-pats, and Returning Chinese
--------------


7. (SBU) In addition to the expatriates working for large
multinational companies and recruited from abroad (and who
generally are recipients of the generous expat package listed
above),Shanghai companies have also attracted a large
population of expatriate workers who are recruited locally.
These are known here in Shanghai as "half-pats" since their
salary and benefits package are often very adequate, but much
lower than their externally-recruited colleagues. These expats
often live more on the local economy in apartments designed for
Shanghai's upper middle class. These "half-pats" are often
younger and less experienced than those on expat packages and as
a result may be single or newly married and not yet have
children they want to enroll in one of Shanghai's large
assortment of very expensive international schools. "Half-pats"
often include returning Chinese students (often with advanced
degrees) who come back to China and are willing to work for
multinationals on local wages.


8. (SBU) Several expats who are leaving Shanghai this summer
told Econoff that their companies, attempting to cut costs,
offered them the option to stay in Shanghai on a "local
package." One such individual, employed by Intel, said she was
offered a reduced-benefit package that included her housing
allowance and children's schooling, but did not include a driver
or relocation costs back to the United States. She opted to
take her family back to the United States.


9. (SBU) Several Chinese-American or Chinese who had studied
abroad and returned to Shanghai told Econoff that the departure
of many on expat packages was a great opportunity for them to
get jobs here in Shanghai. Working for multinationals -- even
on a local package -- comes with the cachet and higher salary
they feel they deserve after studying overseas.

"The Koreans Are Gone"
--------------


10. (SBU) The Shanghainese Korean community was especially
hard-hit by the onset of the global financial crisis in late
2008 as the Korean Won fell steeply against the U.S. Dollar.
Press reports indicated in March 2009 that more than 10,000
Koreans had left Shanghai in the preceding several months. A
teacher at an international school that had many Korean students
told Econoff that "the Koreans are all gone." An administrator
at another international school said that 38 of 41 Korean
families withdrew their children from school and abruptly left
Shanghai over the 2008-2009 winter school break.

Impact on International Schools
--------------


11. (SBU) Econoff spoke with administrators or admissions
officers at twelve of Shanghai's international schools as a way
to unscientifically measure changes in the expat community. All
schools reported that they were seeing a higher-than-normal
departure rate this summer, as measured by those students that
had paid re-enrollment fees. Most first-tier schools reported
that they expected their Fall 2009 enrollment to either decrease
by five percent or remain flat. Second-tier schools reported
that their enrollments were falling, though most were not
willing to reveal by how much. Several first-tier schools said
that they were making up for departures through transfers of
students from the second-tier schools. Most schools reported
that they had been experiencing double-digit year-on-year growth
over the past five years, with one school having been growing at
15 percent per year. Maintaining a flat enrollment therefore
actually was a decline, said one admissions officer.


12. (SBU) Another school principal with more than 10 years in
Shanghai observed that that "during the Asian financial crisis
in 1997 it took 15-18 months before schools in Shanghai started
noting downward trends in enrollment as companies' losses
mounted." Given the expense in moving expats, companies appear
likely to be willing to weather short-run losses and wait to see
if economy picks back up, she added. The rapid departure of the
Korean students from her school, she said, came as a big
surprise, however she expects that the expat community will

SHANGHAI 00000275 003 OF 003


stabilize over the summer. Despite this, her school had raised
re-enrollment fees to USD 5,000 in order to encourage only those
who were truly coming back to Shanghai after the summer break to
sign up for class in Fall 2009 so that the school could plan
appropriately.

Some Staying and Betting on the Future
--------------


13. (SBU) Not all ex-pats leave China, however, when they lose
their jobs or benefits packages with multinational firms. Some
are betting on China's future and are choosing to remain in
Shanghai at their own expense, hopeful of being well-positioned
when the uptick comes. After being released by her company, one
ex-pat manager moved her family into local housing and enrolled
in full-time Chinese language courses while her husband found
work as a teacher to maintain some income. The non-profit team
that is organizing the USA Pavilion for the World Expo has
actually benefitted from the slowdown because it has enabled two
experienced American executives to devote themselves full-time
to the effort. One of them had been sent to China with his
family by a major American advertising company in early 2009,
but then was told that his China position was being abolished.
He had the option to return to the United States to take a
domestic position, but did not want to move his school-age
children twice in the same year.

Comment
--------------


14. (SBU) The Shanghai Municipal Government appears sensitized
to the departure of many of its expatriate residents as it ramps
up for the 2010 World Expo and it recently convoked Shanghai
Consular Corps representatives for an "unprecedented" meeting on
improving Shanghai's service environment for foreigners
(reftel). Word on the street, falling rental prices in
expatriate-only gated communities and anecdotal evidence
suggests that the global financial crisis, China's economic
slowdown, and multinational companies' needs to cut cost to
maintain competitiveness are impacting Shanghai's expatriate
community. For expats remaining in Shanghai, however, the news
is not all bad -- rents are falling significantly (for example,
the Consulate has renegotiated its housing leases for an overall
savings up to 15 percent) and, as one long term resident
observed, it no longer takes him as long to get a table at his
favorite watering hole.
CAMP