Shanghai Seeks to Reclaim Former Glory : Commerce: European-style homes are being razed to make way for office buildings.

Shanghai is in a frenetic race to shed its drab socialist trappings and recover its former glory as Asia’s financial and commercial center.

Two years ago, leaders of China’s largest city announced ambitious plans to make Shanghai an international financial and commercial center by 2010, restoring its long lost status as the “Pearl of the Orient.”

Although some foreign financiers and businessmen initially were skeptical, many now say the idea may not be far-fetched, although they predict it will not happen until at least 2020.

Already, changes can be seen on jam-packed Nanjing Road, the main shopping district, where neon lights and chrome storefronts entice customers into foreign-based retailers like Benetton’s and Hang Ten.

Entire blocks of European-style homes that in the first half of the century were part of the foreigner-only districts are being razed to make way for office buildings.

Construction is everywhere: under the ground, for a subway system; above ground, for housing and office space, and in the air, for elevated highways that in some places stack up four tiers high.

The city looks and sounds like a gigantic construction zone. Dozens of cranes and the shells of high-rises poke up from the skyline. Already congested traffic has been even more snarled by road work--the seven-mile trip to the airport from downtown can take up to 2 1/2 hours.

Lifelong residents facing eviction have staged numerous but fruitless protests. Their despair is shared by American lawyer Norman Givant, a 10-year resident who mourns the widespread destruction of turn-of-the-century architecture in the name of progress.

“I think they are making the same mistake as Singapore, destroying the character of the city when that is the attraction of the city,” he said.

In the 1920s and 1930s, Shanghai was Asia’s greatest city--equal to Paris, London and New York in glitter and sophistication.

When the Communists took power in 1949, they destroyed Shanghai’s role in international finance, but the city remained the nation’s industrial and commercial center. For decades, Shanghai was China’s cash cow, forced to turn over 80% of its revenues to the central government, which redistributed it to less wealthy areas of the country.

As a result, Shanghai had little to spend on itself. Shanghai residents felt cheated as their city crumbled while loosened government controls allowed the fishing village of Shenzhen to flourish into a booming city on the border with Hong Kong, 800 miles to the south.

Even senior leader Deng Xiaoping has admitted he should have picked Shanghai instead of Shenzhen 15 years ago for China’s first foray into capitalism.

“For China to achieve international status in the financial sector depends principally on Shanghai,” Deng was quoted as saying by the People’s Daily, the Communist Party newspaper, in a Jan. 3 report.

Government directives alone, however, cannot guarantee the creation of an international financial center. Much depends on China’s international reputation and on Shanghai’s ability to lure foreign financiers and businessmen.

For the most part, business executives have shown little concern about the Communists’ clampdown on democracy activists and other trappings of a one-party state, such as surveillance of foreigners.

More important, foreign business people say, is that China develop its commodities markets, liberalize its stock and financial markets, modernize banking and strengthen the legal system.

The government says it is doing just that, but has given no timetable. It also has been saying for years it intends to make the Chinese yuan a fully convertible currency on world markets.

Outsiders say another key step is for China to bring its banking system up to Western standards.

“Handwritten records and non-computerized (service)--this is the same sort of banking that existed in the 1890s,” said John Crossman, manager of Jardine Fleming Securities Ltd.

Even if the government allowed foreign banks to engage in currency dealings, thereby forcing local banks to improve and modernize services, it would take at least five years to bring Shanghai’s banking sector up to par, Crossman estimated. Without that competition, it could take much longer.

Shanghai’s securities markets have had growing pains, the most recent being a bond futures scandal in late February that caused the government to suspend trading. Authorities discovered irregularities in frenzied trading of a popular state bond that pushed trading volume to record heights.

Li Jiange, vice chairman of the China Securities Regulatory Commission, said the government would strengthen controls on exchanges and brokerages and also speed legislation to regulate trading.

Just as important is a legal framework that both protects and encourages international participation. One of the recent high-profile disputes that has shaken confidence in doing business in China involves the Shanghai subsidiary of China International Trust and Investment Corp.

Four employees, trading illegally on the London Metals Exchange, owe $40 million to leading London metal brokerages that extended credit lines. But the Chinese firm has balked at paying, arguing it was not wholly responsible.

The Chinese tendency to charge foreigners top dollar for goods, space and services also could hinder Shanghai’s transformation.”

Costs in Shanghai can be as high as in New York or Tokyo. Office rent is the fifth highest in Asia despite decidedly inferior support services and infrastructure.

But signs are encouraging. In the first 11 months of 1994, 927 foreign companies opened Shanghai offices, expanding the foreign business community by about half. Among them were more than 40 of the world’s 100 biggest multinationals and more than 20 branches of international banks.

The deluge has resulted in a dearth of office space and housing. Some foreign executives live in their offices to cut costs and commuting time.

Despite the problems, business people say they are thrilled by the challenges of Shanghai.

Justin Breheny, who works for ANZ Bank, said he has his company’s best job. “I just can’t think of another place in the world where there is so much change happening and so many exciting prospects.”