Shangri-La is in Yunnan Province. The second town with this name is in Sichuan, and known as the gateway to Yading National Park. Zhongdian was renamed Shangrila for marketing reasons, however, signs in bus stations still use Zhongdian.
Historically, this area was part of the old Tibetan province of Kham but the Qing Dynasty made it administratively part of Yunnan Province in the 18th century. Today, the town is split between Tibetan and ethnic Han residents, as well as a fair smattering of Naxi, Bai, Yi and Lisu, with the surrounding countryside almost entirely Tibetan.
While the crass name change in 2001 was a sign of the desire for increasing mass tourism a la Lijiang, the town has nowhere near Lijiang's crowds, and it's still possible to experience the area's Tibetan heritage and see gorgeous countryside in near isolation.