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Cablegate: Jiangsu Economy Slowing in Face of Global Crisis

VZCZCXRO7202
RR RUEHCN RUEHGH
DE RUEHGH #0490/01 3150915
ZNR UUUUU ZZH
R 100915Z NOV 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7311
INFO RUEHHK/AMCONSUL HONG KONG 1680
RUEHCN/AMCONSUL CHENGDU 1520
RUEHSH/AMCONSUL SHENYANG 1512
RUEHGP/AMEMBASSY SINGAPORE 0181
RHEHAAA/NSC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7910
RUEHBJ/AMEMBASSY BEIJING 2260
RUEHGZ/AMCONSUL GUANGZHOU 1491
RUEHIN/AIT TAIPEI 1313

UNCLAS SECTION 01 OF 03 SHANGHAI 000490

SENSITIVE
SIPDIS

STATE FOR EAP/CM
TREASURY FOR AMBASSADOR HOLMER, WRIGHT AND TSMITH;
TREASURY FOR OASIA/INA - DOHNER, HAARSAGER/WINSHIP;
TREASURY FOR CUSHMAN
TREAUSRY FOR IMFP SOBEL. MOGHTADER
NSC FOR WILDER AND LOI
STATE PASS CEA FOR BLOCK
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN

E.O. 12958: N/A
TAGS: CH ECON EFIN KIPR
SUBJECT: JIANGSU ECONOMY SLOWING IN FACE OF GLOBAL CRISIS

1. (SBU) Summary: Government officials and researchers in East
China's Jiangsu Province are increasingly concerned about the
adverse impact of the global economic slowdown on the province,
particularly its large export sector. Achieving more robust
domestic consumption to offset the decline in external demand,
however, will take time because of long standing structural
weaknesses which promote high savings. Although government
officials are generally confident Jiangsu will weather the
current economic storm, researchers at the provincial academy of
social sciences highlighted what they believe are exploitative
elements of the U.S.- China economic relationship. End summary.

Jiangsu Government: Econ Restructuring Will Take Time
--------------------------------------------- --------

2. (SBU) Jiangsu exporters, particularly textile manufacturers,
have suffered from the slowing global economy, according to
Provincial Government Deputy Secretary General Wang Quan.
Meeting November 5 with the Treasury Department's Special Envoy
for the U.S.-China Strategic Economic Dialogue (SED) Alan
Holmer, Wang indicated the provincial government would take
measures to assist ailing small and medium enterprises.
Although Wang stressed that the provincial government supports
the Central Government's policy of encouraging firms to target
China's domestic market, as it is unrealistic to expect or even
desirable for the previous high growth in exports to continue,
he observed that promoting robust domestic consumption would
take time. He agreed that supporting exporters in response to a
cyclical downturn can be at odds with China's medium-term goal
to rebalance growth, but stressed the importance that
rebalancing occur at a politically acceptable pace.

3. (SBU) Deputy Director of the Jiangsu Foreign Trade and
Economic Cooperation Department Zhao Jin noted foreign-invested
firms generate 76% of Jiangsu's exports and, as a result, face a
major challenge in reorienting their production away from the
international marketplace and toward domestic consumers. When
asked whether the Jiangsu authorities are conditioning
assistance to exporters on operational restructuring, Wang cited
efforts to improve product quality and efficiency, including
through purchases of more advanced foreign equipment but did not
elaborate on how these steps would strengthen the domestic
orientation of the companies receiving assistance.

4. (SBU) Despite the recent turmoil, the United States has been
China's reference point for modernization of its financial
system, Wang stressed. Because China's capital account remains
largely closed, Chinese firms still have relatively little
experience with modern finance. Wang hoped U.S. financial firms
would establish branches in Jiangsu in the future and that
Jiangsu financial firms might eventually establish U.S.
operations. In reviewing the lessons of the U.S. financial
crisis with the Treasury delegation, Wang believed China would
soon be taking steps such as creating deposit insurance to set
an explicit limit to the government's guarantee of China's
banks. China is also reviewing the efficacy of its fragmented
financial regulatory system.

IPR Protection Important for Province
--------------------------------------------- --

5. (SBU) On the question of intellectual property rights (IPR)
protection, Wang stressed violations of IPR are a problem for
large Chinese firms looking to establish brands as well as for
foreign firms. China's lack of internationally recognized
brands has kept the value-added of Chinese produced goods low in
comparison to their foreign competitors. Wang said Jiangsu has
implemented a "famous brand strategy" to address this, which
includes strengthened IPR protection. Foreign Trade and
Economic Cooperation Department Deputy Director Zhao added
Jiangsu has three IPR complaint centers established by the
Ministry of Commerce and a special court to litigate IPR-related
suits. Jiangsu's efforts to build its service industries,
notably the outsourcing of software development, demanded the

SHANGHAI 00000490 002 OF 003


province take measures to improve IPR protection, he stressed.

Real Estate Concerns
--------------------------------------------- --

6. (SBU) Wang expressed concern over real estate prices in
Jiangsu. Although housing sales were still rising, the rate of
increase had slowed considerably and the potential exists for a
substantial fall in real estate prices. Prices, however, have
remained stable so far as most buyers have been purchasing homes
for their own use and not for speculation. Tax revenue growth
has also slowed, signaling a slowdown overall in provincial
economic growth. Provincial Financial Department Director Pan
Yonghe indicated, despite the declining economic indicators,
that because the banking system still remained highly liquid and
China's fiscal position is strong, the government has the means
to support the economy.

Jiangsu Researchers Skeptical of USG, Corporate Motives In Econ
Downturn
--------------------------------------------- --

7. (SBU) Jiangsu is likely facing two to three years of "strong
economic challenges" as a result of the current global economic
downturn, researchers from the Jiangsu Academy of Social
Sciences (JASS) told Ambassador Holmer November 6. Currently,
the value of Jiangsu's exports has surpassed the value of its
GDP, said one researcher, making the province vulnerable to the
slowdown in export growth that is already forcing substantial
numbers of the province's small and medium-size exporters out of
business. This in turn will affect China's national economy,
since Jiangsu accounts for 11 percent of China's GDP.

8. (SBU) The scholars are not optimistic that Jiangsu will be
able to quickly transform its economic structure to better
offset these challenges. First, reorienting the Jiangsu economy
to higher value added output is difficult because the Jiangsu
labor force has a low educational level that cannot be changed
in the short term. Second, Jiangsu officials have fewer options
for funding technological transformation because the Central
Government leaves the province only 48 percent of the revenues
it collects. Third, new labor protections means workers cannot
be simply laid off without social security payments. Fourth, a
large component of the Central Government's stimulus program
(RMB 2-4 trillion) is targeted at new railroad construction.
This is investment, and will not directly stimulate the
consumption needed for more balanced economic growth.

9. (SBU) Note: The JASS scholars said that their institute has
unique access to the Jiangsu Communist Party Secretary and
Governor because JASS holds biannual conferences in which their
research is presented directly to those and other top provincial
officials. End note.

10. (SBU) One scholar questioned why Microsoft was turning the
computer screens of suspected pirated Windows XP users black and
postulated a ploy by Microsoft to push consumers to use its
Vista operating system. (Note: According to Yahoo! Tech,
Microsoft in late October began using information from its
online software updating process to detect suspected pirated
operating system copies and turn the PC desktop screens black
every 60 minutes. End note.)

11. (SBU) One researcher observed many ordinary Chinese, in
fact, feel U.S. pressure on China is unfair because they believe
China suffers from its trade with the United States. Chinese
workers manufacture products for export to the United States
that are better than those sold in China's domestic market. The
factories that produce these goods, however, pollute China's
environment and are heavy energy users. Then, the local
currency value of foreign exchange earnings from the export
sales are whittled down by appreciation of the Chinese currency.
A third scholar cited a popular expression, "When the U.S.
economy gets a cold, the global economy has to take the

SHANGHAI 00000490 003 OF 003


medicine." In the view of another researcher, the housing price
bubble created by the U.S. financial system, the hollowing out
of U.S. manufacturing despite its technological edge, and
Americans' excessive debt-fueled consumption underlies the
present turmoil. The strong complementarity of the U.S. and
Chinese economies, however, though a source of trade friction,
also means the countries must work together.

12. (U) Beijing Financial Attache David Loevinger has cleared on
this cable.
SCHUCHAT

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