Until recently, Hong Kong and Singapore have been the most attractive destinations for foreign investment in Asia. But Shanghai is changing the old order.

Global foreign direct investment (FDI) flows are no longer unaffected by the growth stagnation in the West. In 2012, these inflows plunged to less than US$1.4 trillion, lower than in 2006. Last year saw also another remarkable reversal. For the first time, FDI from emerging and developing economies surpassed that from developed nations.

Regionally, FDI trends have benefited primarily Hong Kong and Singapore in the past. But things are changing with the rise of Shanghai.

FDI stocks illuminate historical trends, whereas FDI flows reflect more current trends.

In terms of FDI stocks, Hong Kong, in the past three decades, has been the most attractive FDI destination in Asia. Except for the cyclical fluctuations, FDI stocks have soared in Hong Kong since the late 1990s, amounting to more than US$1.4 trillion in 2012, as opposed to US$830 billion in China’s mainland and US$680 billion in Singapore.

In China’s mainland, the first special economic zones were initiated in Guangdong Province, which benefited Hong Kong. Shanghai’s reawakening started in the early 1990s with the development of Pudong. But even in the 2000s, the financial benefits of rapid double-digit economic growth accrued primarily to Hong Kong, not to Shanghai, due to the closed financial system. Today, Shanghai is a major destination for FDI.

The story of FDI flows, which herald the future, is different. In terms of FDI flows, there has been a remarkable divergence since 2011. Last year FDI flows in China’s mainland amounted to US$121 billion, whereas those in Hong Kong plunged almost US$20 billion, to US$75 billion.

In turn, FDI flows in Singapore climbed to US$57 billion — over US$2 billion more than the rest of Southeast Asia combined.

What about Shanghai? Since 2005, FDI to Shanghai has almost doubled to US$15.2 billion. Last year, FDI flowing into Shanghai was up 21 percent year-on-year, whereas FDI to China slipped by 4 percent and global FDI plunged 18 percent.

In industrial China, the bulk of FDI goes into manufacturing. But in Shanghai’s more advanced economy, over 83 percent of FDI goes into services.

Due to different statistical sources, comparisons between the three Asian cities can only be tentative, but there seems to be a reset in FDI flows into these cities. Last year, FDI flows to Hong Kong fell by more than 20 percent, whereas inflows to Shanghai increased by over 20 percent. This is a drastic shift.

Second, since Hong Kong has been the largest source of overseas investment in Shanghai, it seems that some FDI flows that used to come via Hong Kong are moving directly to Shanghai.

Third, Hong Kong remains a leading global financial hub. In June 2013, it topped the ranking of international financial centers by FDI in the financial services. In this ranking, however, Hong Kong was followed by Shanghai, Beijing and Singapore, respectively. Competition is catching up.

Fourth, as Shanghai’s free-trade zone takes off, that will reinforce the city’s future as a global center for trade and finance. In contrast, Hong Kong and Singapore reaped their free-trade benefits a long time ago.

Fifth, other major projects contribute significantly to Shanghai’s FDI flows. For instance, Disneyland Shanghai’s first phase will cost US$3.8 billion and the theme park is slated to be open in 2014. Major investors in Shanghai come from Japan, Singapore, the US and Germany.

In the past half a decade, FDI inflows have been fueled by quantitative easing (QE) in the US, Europe and Japan. The unwinding of that QE will begin in the fall. That’s when global cities need robust domestic growth potential, which Shanghai has. Hong Kong and Singapore depend more on the ailing West.

Finally, the free-trade plans in Shanghai go hand in hand with reforms in the financial sector. If, as now anticipated, the yuan will become convertible by the mid-2010s, it would further accelerate FDI in Shanghai.

Dr Dan Steinbock is research director of International Business at the India China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore).