LETTER FROM SHANGHAI

BY ANTON GRAHAM

The Asian financial crisis has helped to boost the income of the top stratum of local society

I SHOULD declare my interest right up front: I am one of the investors in a bar and restaurant in Shanghai called Park 97, a joint venture with Hong Kong's 97 Group. From the day it opened in late 1997, it was one of the coolest places in the city, and business has been steadily good over the past eighteen months, pretty full on most nights, bursting at the seams on good weekend evenings.

The surprise was that we got a completely different clientele than we expected. We assumed foreign residents of Shanghai and foreign visitors would make up at least 70% of the business, with local Chinese making up the rest. In the event, it's been the other way round.

There's a paradox here that everyone is spotting at once: the Shanghai economy is on a downward trend under the impact of the Asian financial crisis, but the consuming power of the Shanghai people continues to surge.

The expat-package foreigners who filled the bars and restaurants of Shanghai circa 1996 are gradually going home and being replaced either by younger foreigners on local salaries or local people who are quickly gaining the skills necessary to take on senior management positions. For all businesses aiming at that market, it means a quick shift in gears.

"With the increase in local buying power and consumers becoming mote sophisticated, any business which is here for the long term has to take account of the load market," American Chinese entrepreneur Adrian Chen told me.

He said that the Asian financial crisis has in a strange way helped to boost the income of the top stratum of local society with has the buying power to frequent the bars and restaurants of Shanghai's nightlife.

"The overall buying power is affected by what's going on obviously, but for people who are educated their income is stable," he said. In fact, when the joint venture companies cut costs, they tend to get rid of the expatriates which means better positions and salaries for local people."

Bars and restaurants which two years ago were aiming squarely at the foreigner market are now shifting their focus to the Shanghainese market. Restaurants which would once have tried the trick of trying to attract foreign residents as a way of getting Shanghai locals to pay Attention are now bypassing that whole ruse and directing their marketing campaigns directly at the local market.

In the longer term, it had to happen. After all, the numbers are something like 30,000 foreigners to 15 million Chinese in this city. You do the maths. But the speed with which this shift is occurring is taking many service-oriented businesses by surprise. Take Gino's spaghetti and cappuccino restaurant in Xujiahui, which has at least a dozen branches around the city. Western food, around 60 yuan for a set dinner . Two years ago, business was so-so at best. Now, the place is packed, and not a white face in sight. Major hotels in the Shanghai region, in Suzhou and Hangzhou for instance, have to learn from this. Many are pretty empty these days. They were planned and built several years ago with foreign businessmen and tourists in mind. But the businessmen are concentrated in Shanghai and foreign tourist groups are not as numerous as they were. The marker is changing, and it's not a temporary shift.

For the tourist hotels of Suzhou and Hangzhou, the long-term answer is clearly to shift the focus entirely to the domestic trade. It requires a psychological wrench by management and will inevitably result in many changes. But it could become a matter of survival. The fact is hotels stand a better chance of maintaining high occupancy rates by courting wealthy Chinese businessmen from Kunming than itinerant engineers from Hamburg.

One major four star hotel in Shanghai reports that over the Chinese New Year period, more than 70% of guests were Chinese from other parts of China, dramatically up from last year.

"That's the way it's going, more and more locals," said Daniel Foa, manager of the Casj restaurant and bar which opened about a year ago in the former French Concession area of Shanghai. "The foreigners, particularly the expat types, are drifting away." Casj is a western restaurant and prices are reasonable but certainly not cheap by local standards. It's the sort of place that would have been pretty much exclusively foreign two years ago.

"Chinese like to come and show their money" said Foa. "Also, foreigners tend to have larger apartments and very often like to stay at home these days. For the Chinese. coming out is a new experience."

Several foreign-style bars and restaurants which have opened up in recent months have aimed themselves squarely at the Chinese market and have reaped the benefit as long as prices are viewed by local people as being reasonable.

There is also a growing sense that private enterprises will grow in the months and years ahead. The National People's Congress session in March added guarantees to the Constitution for privately-held assets, and there is a widespread and growing understanding that the massive problems with the bankrupt state enterprises and unemployment will not be solved by foreign investment alone. Local Chinese entteprenurial potential will have to be employed, despite the uncertain long-term political implications. And the flow-on from that is more and more seriously well-off Chinese people with funds, confidence and growing sophistication.

Anton Graham is a writer and consultant in Shanghai.