In 1865, Shanghai was opened up as a port for use by Foreign Traders, soon growing to house commercial communities from all the major trading nations, and actually becoming a Municipality in 1854. By this time, the trading community became dissatisfied by the service operated by the Imperial Post Office, and the limitations of the British Post Office at Hong Kong; so by 1863, a new service was inaugurated by the Municipality.
Mail was carried free for 'subscribers' and was unfranked, but individual pre-paid mail was also accepted. In 1866, the 'Dragon' design stamps were introduced to indicate pre-payment. These were printed in type set in sheets of six.
The local post system expanded greatly, so that by 1896, every Treaty Port had either its own Municipal Post or an Agency for the Municipal Posts. This challenge to the Imperial system and the loss of revenue, caused the Imperial Government to issue a decree in 1897. It forbid all ships operating in Chinese water from accepting any mail; this was with the exception of mail from the Imperial Post Office.
The inability to exchange mail between the various Municipalities, led to the system being closed down after only a few more months. The Imperial Post Office was an extension of the Customs service, which carried mail for foreign legations. Under a British Inspector General, it had sufficiently grown to take over the entire Postal system. With the issue of its own stamps in 1878, the Imperial P.O. adopted the same Dragon motif as used on the Shanghai stamps.