Shanghai is cheap and beautiful, but it can be a cultural wasteland and the expats a bunch of overpaid finance pricks. Beijing is a better place, more funky almost hippie city, and it's got culture up the wazoo.
I live in Shanghai right now and the successful startups that are BASED here are all chinese clones of popular US companies, like Youku.com(you tube), baidu.com (google), taobao.com(Ebay/amazon), QQ (social networking) etc. Some cool startups who work here but have offices in other countries are Indochino.com (Custom Made high quality mens wear), Chinese learning companies, etc.
There is also a pretty decent tech scene here with some good meetups (we just had a barcamp, ruby conf and Geeks on a Plane)
Living is inexpensive, you could live for about 250-500 USD fairly easily if you enjoy the local food and drink the $.5 Tsingtao beer.
The issue with Shanghai is it seems pretty tough to bring money in and out if you are focusing on Chinese Customers though and can be expensive to get work visas, offices (the gov makes foreigners get expensive offices), good workers. The labour can be cheap, but like everywhere you get what you pay for.
I am moving back to Vancouver, BC next month where there is also an epic startup culture growing, even with some past hiccups. But if it wasn't for the company I am with right now, I would be staying here and may still come back to start something in the next few months. I do recommend Shanghai for a good startup city for sure.
