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Cablegate: (Sbu) Zhejiang Seeking to Restructure As Economic Growth

VZCZCXRO0177
RR RUEHCN RUEHGH
DE RUEHGH #0518/01 3311151
ZNR UUUUU ZZH
R 261151Z NOV 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7376
INFO RUCPDOC/USDOC WASHINGTON DC 0022
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASH DC
RUEHBJ/AMEMBASSY BEIJING 2310
RUEHSH/AMCONSUL SHENYANG 1555
RUEHCN/AMCONSUL CHENGDU 1563
RUEHGZ/AMCONSUL GUANGZHOU 0022
RUEHHK/AMCONSUL HONG KONG 1726
RUEHIN/AIT TAIPEI 1356
RUEHGP/AMEMBASSY SINGAPORE 0188
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7978

UNCLAS SECTION 01 OF 03 SHANGHAI 000518

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: ECON EFIN ELAB PGOV SOCI CH
SUBJECT: (SBU) ZHEJIANG SEEKING TO RESTRUCTURE AS ECONOMIC GROWTH
DOWNTURNS

1. (SBU) Summary. Zhejiang Province is not likely to suffer a
long-term economic downturn as a result of the global financial
crisis, agree several Consulate contacts, but Zhejiang officials
are seeking to use the current challenges to encourage firms to
gradually restructure away from export dependence. Our
interlocutors pointed to two causes of the economic
deceleration: tight monetary policies and a slowdown in export
growth as demand overseas fades. The worst conditions are
likely to hit between the end of the year and June 2009, the
interlocutors generally agreed. Businesses are asking workers
to take salary freezes and cuts, and when faced with no choice
are temporarily suspending production and sending workers home.
End summary.

============================
Zhejiang Hoping Economic Crunch Will Pass . . .
============================

2. (SBU) A conviction that business conditions in Zhejiang
Province will turn around by the middle of 2009 is driving
economic decisionmaking in the province, we find, based on
interviews with a variety of officials, scholars, and business
leaders during November 19-20. Pan Guangen, director of the
banking affairs department of the Zhejiang Provincial Government
Financial Affairs Office, reflected a sentiment repeated at
almost all meetings that the fourth quarter of this year through
the first half of next year would be the hardest period. Most
interlocutors also connected the eventual turnaround with the
impact of the Central Government's putative RMB4 trillion
economic stimulus program.

3. (SBU) Our interlocutors point to two factors in the economic
downturn: 1) The government's crackdown on credit in the first
half of 2007. Zhejiang Financial Affairs Office's Pan frankly
criticized the People's Bank of China (PBOC) for maintaining a
tight monetary policy for too long. Now "the plane has landed,
and can't take off again," said Pan; banks are afraid to lend to
small and medium-size enterprises (SMEs), and several large
enterprises have been hit with liquidity problems. Zhou Dewen,
President of the Wenzhou SME Development and Promotion
Association, also said that the government's macroeconomic
controls were responsible for the deceleration in Wenzhou's
economic growth in the first half. 2) The global financial
crisis, and the accompanying downturn in import demand by
China's trade partners. PBOC Hangzhou Subbranch President Zhou
Yeliang said that "there has been a large impact from the
financial crisis on Zhejiang, especially in light of the
province's export dependence." Wenzhou SME Association's Zhou
said that, following June, there has been a direct impact from
the global crisis on exports.

4. (SBU) Several of our interlocutors expressed confidence that
Zhejiang's SME exporters could quickly refocus on the domestic
market. Zhejiang's companies are more nimble than Guangdong's,
said Gao Jianming, vice president of the Zhejiang Provincial SME
Bureau, because they are predominantly Chinese owned, while many
of Guangdong's are joint ventures dependent on the foreign
partner for marketing and distribution. PBOC's Zhou said that
Zhejiang's manufacturers focus on everyday use products, which
have great growth potential among domestic consumers. In
addition, private enterprises dominate in Zhejiang, said PBOC's
Zhou, making them more competitive under tough market conditions.

============================
. . . While Indicators Show Difficulties Mounting
============================

5. (SBU) Most interlocutors agreed that export orders were
plummeting, a fact that is not yet reflected in official
statistics. Zhejiang Financial Affairs Office's Pan made one of

SHANGHAI 00000518 002 OF 003


the most extreme estimates we heard, saying that export orders
in the province have fallen by 40% without specifying the time
period. Zhejiang Provincial SME Bureau's Gao said that total
orders were down 4.9% at this October's Yiwu trade fair of
export-oriented consumer goods. Christmas goods orders have
been especially impacted, said Jin Chuanshi, Executive Dean of
the Zhejiang University's College of Economics.

6. (SBU) ) Shaoxing City was identified by several of our
contacts as the epicenter of the impact of the global trade
slowdown in Zhejiang. Shaoxing is heavily dependent on textile
and apparel exports, said Wenzhou SME Association's Zhou, and
also has a higher concentration of foreign-invested firms. When
asked where exports have been hit the hardest, Zhejiang
Provincial SME Bureau's Gao immediately suggested Shaoxing as an
example.

7. (SBU) PBOC's Zhou said that Zhejiang's GDP growth in the
first nine months was 10.6%, down 4.1 percentage points from the
same period last year. Investment growth during the period was
around 20%, 4.5 percentage points lower than the previous year,
although this number should be further deflated for raw
materials cost increases. Export growth was 24.3%, off 4.9
percentage points. Industrial profits growth was down 8.4
percentage points. Government revenue growth was greater than
20%. Zhejiang University's Shi estimated that 10% of the
province's enterprises have gone out of business. Among hardest
hit in Zhejiang have been auto parts manufacturers and ship
builders, due to downturn in demand during the crisis, said
PBOC's Zhou.

============================
Businesses Responding by Cutting Production and Staff
============================

8. (SBU) Most Zhejiang businesses have responded first by
asking for wage freezes or cuts and then by temporarily closing
down production and sending workers home, agreed our
interlocutors. Zhejiang SME Bureau's Gao said that SME
employers were asking workers to accept lower salaries. Wenzhou
SME Association's Zhou and Wang Yibin, Assistant to the
President of the Wenzhou Management Science Academy, said that
it was not uncommon for businesses to make under-the-table deals
with workers to get around the higher compensation requirements
imposed by the new Labor Contract Law. Wang further emphasized
that migrant workers from other provinces did not want employers
to comply with the law, since under it workers and employers
paid into the local retirement system but these accounts are not
portable back to the home province.

9. (SBU) Zhejiang SME Bureau's Gao said that most enterprises
want to continue operations, but at a reduced scale. Workers
are being sent home on vacation, with some even being told to
stay home until the end of the 2009 Lunar New Year holidays,
which will last from late January to early February. This
would minimize the impact of the economic growth slowdown on
social stability, he offered. Besides, for farmers from
Zhejiang it would not be such a bad deal, since they could go
back to their villages and draw stipends of RMB20 a day, Gao
said.

============================
Zhejiang's Exporters Losing Confidence in Overseas Markets
============================

10. (SBU) U.S. and other overseas importers are no longer to
be trusted, agreed Wenzhou SME Association's Zhou and Wenzhou
Management Science Academy's Wang. Zhou said that orders for
Wenzhou's major exports such as lighters and eyeglasses are down
30%. In addition, 8%-10% of orders are being cancelled before

SHANGHAI 00000518 003 OF 003


delivery, and it is becoming increasingly more common for
exporters not to be paid for goods. "It used to be that you
could trust the importers," said Zhou; now, some exporters even
refuse to take letters of credit for orders, for fear that the
transaction will be caught up in a bank failure.

11. (SBU) Zhejiang SME Bureau's Gao said that, according to
his contacts among SME managers, U.S. consumers are no longer
spending as freely -- "they are learning how to cut costs, just
like Chinese consumers," he joked. As an example, he said that
one local SME retailed its costume jewelry in the United States
through its own outlet. Where once 75% of customers would make
purchases in the range of $100-$200 per visit, now only 25% of
customers made purchases, which average $50 per visit. Gao said
that he had heard U.S. consumers no longer purchase new
draperies when moving homes, but instead take their old ones
with them.

============================
Comment
============================

12. (SBU) Our Zhejiang interlocutors were unanimous in assuming
that the worst of the economic growth slowdown would pass in the
coming seven to eight months, and appeared not to have
considered the risk that export growth could continue to slide
in the second half of next year. In addition, our contacts were
convinced that China's domestic market would continue its strong
growth, especially with a boost from the Central Government's
high-profile economic stimulus program; none suggested that the
additional governmental outlays under the stimulus might be much
less than advertised. Zhejiang Provincial SME Bureau's Gao
also cited government subsidies -- including subsidies for banks
providing funds to SMEs and tax breaks for struggling firms --
as mitigating factors and indicated further government supports
could be forthcoming.
CAMP

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