The city of Shanghai, China's principal though faded commercial hub, will open its doors to more foreign activity as part of a plan to draw investors and rebuild, its mayor says.

The centerpiece of its redevelopment is an industrial complex in Pudong, across the Huangpu River, which skirts the southern edge.The central government is backing the idea with US$6.5 billion in grants and loans over the next five years, according to Mayor Zhu Rongji.

"We aim at an area of 135 square miles to provide a smoother flow of merchandise and entrepot trade," he told an investment seminar here.

He promised that Pudong would be a free port with preferential tax benefits, a stock exchange to generate funds and a "flexible" policy on land leases.

In addition to straightforward investment, "foreign businessmen will be permitted to engage in tertiary industries like banking and retailing," Mayor Zhu said Tuesday.

Only four overseas banks have branches in Shanghai - Hongkong & Shanghai Banking Corp., British-based Standard Chartered Bank PLC, Bank of East Asia Ltd. of Hong Kong and Oversea Chinese Banking Corp. of Singapore - because they were there before the 1949 Communist revolution.

Mayor Zhu indicated that more banks would be permitted to operate, though he gave no timetable.

Another speaker, Zhu Xiaohua, vice president of the People's Bank of China, the central bank, said a score of foreign banks already have applied to open branches in Shanghai.

He said the central bank "has not given Shanghai a quota of how many foreign banks may be allowed in. All will be admitted if they fulfill our criteria."

Anthony Russell, managing director of Hongkong Bank's China services, said this would helpthe city revive its financial sector. But he implicitly criticized Shanghai's 50 percent profit tax levied on foreign bank branches, compared with 15 percent in southern China's special economic zones.

Shanghai dwindled in importance in the 1980s as the liberal economic policies then in force boosted such southern dynamos as Guangdong and Fujian provinces. Both are home to special economic zones and were granted considerable latitude in business.

Guangdong also benefits from its location abutting Hong Kong, while Fujian attracts substantial interest and money from Taiwan, just across the strait.

Mayor Zhu is spending several days here in an attempt to whip up new enthusiasm for his city, a principal port and longtime industrial center.

Those who've been there argue that as well as banking services, it needs a host of things, including a means to clean up the Huangpu River's serious pollution, better transport for factories and workers and sharper management.

"I can assure you that Shanghai's political situation is stable and that it is safe to invest there," the mayor said. "We afford overseas investors ample opportunities and a wide scope of options.

"Foreign businessmen can, making use of available infrastructure and buildings, invest in starting plants, developing lots in Pudong or bring in capital funds coupled with specific projects," he said.

The city's blueprint says overseas business can invest in airport development, railroad links and power stations as well.

Stephen Cheong, chairman of the Federation of Hong Kong Industries, cautioned against pushing the Pudong plan too fast and urged authorities to

allow overseas investors to raise money locally.

This could conflict with China's overall austerity campaign, which has left many Shanghai factories near collapse because of lack of funds and raw materials, not to mention customers.

Mayor Zhu got a rough ride from the local press when he arrived. Shanghai took the lead in cracking down on pro-democracy demonstrators last year - though it stopped well short of the military force used later in Beijing - and many protesters remain in jail.

The mayor said it is "historically logical" for Shanghai and Hong Kong to ''attain joint prosperity by making full use of each other's strengths . . . supplying each other with complementary services."

Many of Hong Kong's entrepreneurs fled Shanghai with virtually nothing after the 1949 takeover. China has pledged to leave business alone in the colony, which it regains from Britain in seven years.