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Cablegate: Zhejiang's Yiwu: Bearing the Brunt of Global Economic

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DE RUEHGH #0313/01 2210523
ZNR UUUUU ZZH
R 080523Z AUG 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7043
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHOO/CHINA POSTS COLLECTIVE
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7614

UNCLAS SECTION 01 OF 02 SHANGHAI 000313

SENSITIVE
SIPDIS

TREASURY FOR OASIA/INA/CUSHMAN AND WINSHIP
DEPT FOR EAP/CM

E.O. 12958: N/A
TAGS: ECON PGOV ELAB ETRD KIPR ENRG CH
SUBJECT: ZHEJIANG'S YIWU: BEARING THE BRUNT OF GLOBAL ECONOMIC
FORCES

SHANGHAI 00000313 001.2 OF 002


1. (SBU) Summary. Zhejiang's Yiwu is home to one of the
largest wholesale markets in the world. During a July 21 visit,
the Consul General discussed the impact of global economic
trends on Yiwu with Yiwu Party Secretary Wu Weirong and Mayor He
Meihua. In addition, the CG visited Huahong Home Decoration, a
privately-owned Chinese company supplying picture frames and
other decorations to the United States. Huahong's CEO explained
how inflation, burgeoning labor costs, high transportation
costs, RMB appreciation, and the downturn in the U.S. economy
are buffeting the company. As a result, Huahong is taking
dramatic measures to reduce its work force, hedge currency, and
cut input costs. Party Secretary Wu said Huahong's difficult
circumstances are shared by many other small and medium
enterprises in Yiwu and elsewhere in Zhejiang. Yiwu will begin
publishing an IPR white paper in April of 2009. End Summary.

Yiwu's Economy: A Picture Worth A Thousand Words
--------------------------------------------- ----

2. (SBU) Huahong Home Decoration Company CEO Wang Aixiang
painted a bleak picture of the home decoration export market.
Huahong's biggest customers include American chains such as
Michael's, Home Depot, and Target, and exports to the United
States represent 70 percent of the firm's revenue. As the U.S.
economy soured, particularly the real estate market, sales for
home furnishings have plummeted. Huahong's sales have
contracted by twenty percent over last year. Wang also
estimated that in the current climate, 30 percent of China's
home decoration companies that rely on exports to the United
States would go belly up. He also predicted the downturn would
last a minimum of two to three years.

3. (SBU) Wang lamented that high fuel prices, RMB appreciation,
inflation, and increasing labor costs are all eating into
Huahong's margins. As the RMB appreciates, the company is
increasingly feeling the pinch. Its orders are largely
denominated in dollars and U.S. buyers are unwilling to absorb
the additional costs due to those several factors. Although
Huahong is using hedging instruments to soften the blow, the
company has lost "big money" due to RMB appreciation. In
addition, basic expenses have grown over the past year by 16
percent and credit is very "tight" and interest rates high.
Huahong has raised its prices somewhat, but only by 5 percent.
Huahong sources much of its material locally, and many of the
basic material costs are rising at a rapid clip. Since the
majority of Huahong's business is in the United States,
exploding transportation costs have also undermined its
business. Wang noted that the average price of container
shipments to the U.S. West Coast has jumped from USD 1,500 to
USD 2,000 within the last year. Huahong has also taken a series
of measures to cut costs such as cutting out "middlemen"
traders, laying off workers, and switching to lower cost
materials. For example, the company has switched from producing
wooden frames to plastic frames made from recycled material.

Labor Contract Law's Price Tag
------------------------------

4. (SBU) According to Wang, the Labor Contract Law that went
into effect on January 1 of this year has increased the
company's labor costs by 20 percent. This increase in the cost
of labor, along with the other economic factors, has forced the
company to reshape the size of its workforce. Huahong has cut a
vice president and several mid-level managers as well as a large
number of factory workers. Before the rough times began, the
company employed 2,000 full-time workers and had a network of
over 20,000 temporary workers. The company has now shrunk to
1,600 full-time workers and rarely uses the temporary hires.
The average wage of the full-time workers is roughly USD 300 per
month and the company has scaled back benefits to the bare
minimum.

5. (SBU) Wang suggested that workers are beginning to "rethink"
the benefits of the new Labor Contract Law. Before, they saw
that foreigners have certain rights, and they "began to demand
the same." However, they did not realize that these increased
demands might bring less employment opportunities as companies
have had to scale back. Previously, workers would "hop between
jobs" without thinking twice. Now companies are more reluctant
to take on workers because of the law and current economic
conditions, reducing the number of jobs available. Wang said
the government is also just beginning to wake up to the problem
as more people are put out of work, adding the government needs
to pay more attention to the problems of small and medium size
businesses such as his. However, he said Yiwu generally has a

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good business environment and the local government is generally
"service oriented."

Not the Only One with Economic Troubles
---------------------------------------

6. (SBU) In a separate meeting, Yiwu Party Secretary Wu Weirong
emphasized that Huahong is not alone in its problems; many
companies in the area are facing similar challenging
circumstances. Inflation, spiraling transportation prices, and
the RMB appreciation are taking a toll on Yiwu's economy. In a
subsequent meeting, Mayor He added that Yiwu's economy was
particularly vulnerable because 60 percent of the city's economy
depended on trade. Many businesses in the area are simply not
able to cope with the rapid changes in the economy and are being
forced into bankruptcy. Wu acknowledged that unemployment is an
increasing problem, but the government is seeking to solve the
problem by finding other ways to develop the economy,
particularly by stimulating domestic demand.

7. (SBU) When asked, Wu agreed that China's tightened visa
issuance policy during the Olympics has had an effect on Yiwu's
economy and wholesale markets. However, he quickly added that
the general economic downturn in the world economy was a much
bigger factor. (Comment: A subsequent visit to Yiwu's normally
bustling Commodity Wholesale Market revealed a dearth of buyers.
The shopkeepers all lamented the lack of foreign buyers for the
past few months and attributed the problem to China's visa
restrictions.) Wu described a new effort the city is unfolding
to attract more business to its wholesale market. The wholesale
market is now expanding from its traditional base of
Chinese-made goods to products imported from around the world to
be sold in the market. The vision is to make the Yiwu Wholesale
Commodities market a "market for the world." The CG
subsequently visited the newly built U.S. section of the market,
which largely consists of U.S. wines.

Yiwu Announces IPR White Paper
------------------------------

8. (SBU) Party Secretary Wu took the opportunity of the CG's
visit to announce Yiwu would begin producing a yearly
intellectual property rights (IPR) protection white paper. He
said that the idea came from the CG's suggestion during an
earlier meeting, noting that the regular publication of a white
paper would "allow foreigners to know what Yiwu is doing to
protect IPR." Yiwu will publish the first IPR white paper
before April 2009. Wu noted this decision also demonstrates
that the Chinese Government takes IPR very seriously and is part
of Zhejiang Province's plan to promote innovation through strong
IPR protection. This is "100 percent our own requirement" Wu
noted, emphasizing that China's protection of IPR is in its own
interest. (Note: When the CG later mentioned the white paper in
his meeting with the Mayor, Mayor He seemed unfamiliar with this
plan.) Mayor He emphasized that Yiwu is making a great effort
to curb the counterfeit trade, noting the city has set up a
special IPR tribunal which combines administrative, civil, and
criminal cases. While it was difficult to ensure Yiwu is 100
percent compliant on IPR, it is making every possible effort,
the Mayor asserted.

An "Old Friend" of Yiwu
-----------------------

9. (SBU) Party Secretary Wu also reviewed the close cooperation
and exchanges between the Consulate and Yiwu over the past three
years and welcomed further cooperation. He noted that he met
the CG eight times, and said there were many other opportunities
for economic and cultural exchanges with the Consulate.

Yiwu's Support for the Sichuan Earthquake Victims
--------------------------------------------- ----

10. (SBU) According to Wu, Yiwu has been active in giving
support to the victims of the Sichuan earthquake. The Yiwu
Government gave official donations and 99 percent of individual
party members made contributions. Many cadres were also
dispatched to assist in the quake-stricken area.
JARRETT

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