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The town is split between Tibetan and Han Chinese residents, as well as a fair smattering of Naxi, Bai, Yi and Lisu, with the surrounding countryside 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 got nowhere near Lijiang's crowds, and it's still possible to experience the area's Tibetan heritage and see gorgeous countryside in near isolation.
Zhongdian was renamed Shangrila for marketing reasons. Signs in bus stations still use Zhongdian. There is also a third name in Tibetan, Gyelthang. The original Shangrila, from James Hilton's novel The Lost Horizon, was a (fictional) hidden paradise whose inhabitants lived for centuries. Hilton (who never went to China) located his Shangri-La in the Kunlun mountains. However, elements of his story were apparently inspired by National Geographic articles about various places in eastern Tibet (including Zhongdian); hence China's rationale for claiming the name.