Cablegate: 30 Years of Reform and Opening in Guangdong - Retreat To


DE RUEHGZ #0732/01 3570918
R 220918Z DEC 08




E.O. 12958: N/A
SUBJECT: 30 Years of Reform and Opening in Guangdong - Retreat to
Economic Statism?


(U) This document is sensitive but unclassified. Please protect
accordingly. Not for release outside U.S. government channels. Not
for internet publication.

1. (SBU) Summary and comment: Guangdong Province, where China's
economic transformation began, is in a celebratory mood publicly,
but behind the scenes, everyone - from top government and business
leaders to think tankers whose job it is to peer into the future -
is fretting over the meaning of 30 years of Reform and Opening and
an uncertain economic future. The overriding theme in south China
(for now) is the triumph of private entrepreneurship over
state-ownership and the dramatic increase in living standards for
the people of the province. But the global economic downturn has
exacerbated trends that were already under way (especially the
closing of many SMEs and a decline in job opportunities); there also
appear to be significant disagreements among leaders within the
province and between some provincial and national leaders, if
reports are true of Premier Wen Jiabao's unhappiness with Party
Secretary Wang Yang's desire to proceed with his "double transfer"
policy. All of which makes for a very interesting upcoming year,
with high stakes politically for those involved: playing for time by
retrenching vs. playing for the future through innovative practices.

2. (SBU) Comment: Fear of unemployment and possible social unrest
has led some academics and other observers to predict that there
could be a resurgence in the role of state-owned enterprises (SOEs)
in the future, largely for social stability reasons, but also
because state credit institutions will be most comfortable with the
limited risk of loaning to SOEs. How likely that might be is
unclear, given how far south China has come in shaking off
state-owned, but not necessarily state-supported, industry. We
think that the next stage of development in the area is more likely
to be based on technology and financial services, with the accent on
high-value-added products and innovation. Still, Guangdong may be
at a turning point; we only wish our crystal ball would give us some
guidance on whether the Pearl River Delta (PRD) will more closely
approximate the commercial strategies of the Yangzi River Delta,
with a globally connected community, or be the answer to a trivia
question about which once vibrant area used to be the locus of
economic development in China. End summary and comment.

(U) This is part a two cable report. A companion cable (septel)
examines the political meaning of Guangdong's celebration of the
30-year anniversary of Reform and Opening.

Guangdong Celebrates

3. (SBU) Guangdong is putting its best foot forward as it celebrates
the 30 years of reform and opening. Every major Guangdong media
outlet, from TV networks to Internet media and newspapers, has
joined the propaganda push to remind people of how well they have
fared under the far-sighted stewardship of the Communist Party. The
government and academic institutions have also sponsored forums to
mull over the meaning of the anniversary. The message is
congratulatory - Reform and Opening has been an unparalleled success
in improving the lives of the people of Guangdong. However, at a
time of growing economic difficulty, further liberalization and the
future structure of Guangdong's economy are less clear.

Better Lives for All Citizens

4. (U) A Guangdong government vast exhibition commemorating the
Reform and Opening achievements at the former site of the city's
famous biannual Canton Trade Fair takes great pains to demonstrate
the tangible economic benefits. The 60,000 visitors who walk
through the exhibit each weekend are treated to displays that show
primitive farming conditions, "clunky" household appliances and meal
vouchers from 1978-79. But that's all past, as subsequent displays
highlight the emergence of Guangdong's modern cities and advanced
transportation links, widely available consumer appliances and
electronics on a par with those sold in advanced western economies,
and sporting and cultural achievements culminating with the
province's Olympic medal winners. There are also renditions of
Guangzhou's plans for the Asian Games, which it will host in 2010.

5. (U) The celebration of Reform and Opening focuses on the
provincial leadership's "people first" policy (septel). There have
been major economic accomplishments to be sure, with growth in GDP
and trade volume, but more importantly, the people have benefited.
Guangdong life expectancy in the last 30 years increased from 71.2
years in 1978 to 75.3 now, and infant mortality rates fell from 34.7
deaths per thousand births to 6.25 today, or less than half the
national average. Per capita incomes for both farmers and urbanites
have increased at a staggering rate, from RMB 193 in 1978 to RMB
5,450 today, and from RMB 412 to RMB 17,699, respectively. In
addition, literacy rates have climbed from 75 percent to 96 percent,
and the number of Guangdong's college graduates has surpassed 5
million, unimaginable in the aftermath of the Cultural Revolution
when the country's schools were closed and a generation of students
was sent to the countryside as laborers. Even those of our local
contacts who are most critical about human and labor rights and who
believe some of what has been accomplished could have been done
differently, acknowledge that life is better and the move toward
private enterprise and investment (with government support and
incentives in many cases) has played an instrumental role.

6. (U) Expansion of consumer choice is another major benefit that
has been highlighted in the celebration. Despite China's rash of
product safety scandals for products ranging from pet food to toys
and milk, improvements in the quality, selection and price of
products and services are dramatically better than in 1978.
Guangdong Province has emerged as both the richest and the second
most populous province, with local residents purchasing and driving
the most cars and using the most cell phones of any province in the

"Capital of Reform and Opening"

7. (SBU) Guangdong Province's leading role in 30 years of Reform and
Opening was inevitable and will continue for the next 30 years,
according to the narrative commonly repeated in the province's
official circles. Guangzhou Party School Vice Chairman Wang
Yongping recently told econoffs that the city had always been a
pioneer of reform and opening, not just in the past 30 years but for
the previous two millennia. He cited proximity to Hong Kong and
Macau as well as travel along ancient sea trade routes; a culture
open to trade and experimental government policies; and a long
history of progressive economic exchange even when the country was
"closed" to outside interactions as factors that meant Reform and
Opening was unstoppable in Guangdong.

Economic Downturn Opens Door to Naysayers

8. (SBU) Nevertheless south China's economic future is today a hot
subject for doubters, dissenters and detractors who are increasingly
voicing concerns about the direction and policies of the past 30
years, and more importantly, the way forward. Peng Peng, a
researcher at the Guangzhou Academy of Social Sciences, said the
criticisms primarily focus on two areas. First, many opponents
claim that the policies have not only failed to achieve the goal of
common prosperity, but have in fact been instrumental in creating
the huge wealth gap between the rich and poor. Second, according to
Peng, many dissenters view the environmental impact and excessive
resource consumption as evidence that China's economic growth is
unsustainable in its current form.

9. (SBU) At the same time, a spate of foreign-invested factory
closures has attracted widespread media attention throughout south
China, starting in late summer and growing steadily through the fall
(refs B and D). Unemployment rates among factory workers and other
labor groups rose faster than could have been foreseen six months
ago, and fear of social unrest among the unemployed has gripped
leaders at all levels. Recent media reports have suggested that
there is some level of disagreement between provincial and central
leadership on how much support should be provided to the small- and
medium-sized enterprises that have felt the brunt of the global
economic downturn. Guangdong Party Secretary reportedly wants to
allow "backward productive forces" to die, consistent with his
"double transfer" policy aimed at forcing labor-intensive industries
out of the PRD. Meanwhile, Premier Wen Jiabao has been portrayed in
the reports as the champion the struggling SMEs.

10. (SBU) Long-term solutions to these problems remain unclear, but

many business and academic leaders in south China argue that without
a reliable social safety net for China's population, domestic
consumption will never increase to a level that can effectively
rebalance the economy away from export-led growth. Citizens
currently have little incentive to increase consumption if their
personal savings are the only viable substitute for a nonexistent
social safety net. This perception has been reinforced by some
official media portrayals of western profligacy as the number one
cause of the current economic downturn.

Resurgence of State-Owned Enterprises?

11. (SBU) It this set of circumstances that leads Sun Yat-sen
University Economics Professor Lin Jiang to believe that the
government's role in south China's economy will expand in order to
ensure stable employment for millions of workers and keep students
in school longer. In a conversation with econoff, Lin predicted
that despite the privatization and closure of thousands of
state-owned enterprises (SOEs) in recent years, an opposite trend
would emerge, with the government directing funds and projects to
SOEs in large part to raise employment levels. At the same time,
Lin speculated that universities and graduate schools would also be
expanded and students would be encouraged to continue attending
school after completing their undergraduate programs as a way to
temporarily stem the tide of unemployed college graduates.

Capital Flooding into State-Owned Enterprises

12. (SBU) South China financiers also told us they have noticed a
trend towards larger and stronger SOEs as China's fiscal stimulus
package and more relaxed lending policies have funneled large
amounts of capital to them. One international banker told us that
in the current economic environment, loans to SOEs are a better risk
than lending to SMEs. Another banker told us he believes that SOEs
are receiving the most attractive terms on new financing, in part
because state-owned bank employees might perceive a potential SOE
default as less threatening than a private-enterprise default if
risk management officers later ask why a particular loan was
approved. News reports indicate that state-owned banks like China
Construction Bank have agreed to underwrite provincial and local
government policy loans and stimulus efforts, further demonstrating
the government's reliance on state firms to step in and help
stabilize south China's economy before the downturn becomes more

Comment: Two Steps Back, Then Step Forward?

13. (SBU) The real economic challenge facing China's leaders is how
to continue economic liberalization at the same time as maintaining
strong growth during the downturn. As academics and policy makers
grapple with this dilemma, it appears that local authorities have
already begun grasping at the only tools they have available to spur
growth - the remnants of the state-controlled economy.

14. (SBU) One view is that heavy reliance on SOEs could be a
short-term crutch until local and provincial governments feel more
secure about their economic, and by extension, their political
security. As the recent economic volatility stabilizes, policies
less reliant on state-owned economic entities could then be
reintroduced. On the other hand, with social harmony increasingly
valued and leaders uncomfortable with free market forces, some may
see the SOEs as more effective tools in addressing long-term
problems such as unequal income distribution and the lack of a
social safety net. In addition, many policy makers and Party
members may benefit from the retrenchment of SOEs. The danger for
private enterprise (mirrored perhaps by the opportunity for
government managers) is that it may prove difficult to turn back
toward the private sector when the current economic cycle returns to
a positive direction.

15. (SBU) As one international banker told us, an SOE's monopoly
advantages can be leveraged to produce a "good enough" economic
scorecard in the short term, but will never spur the improvements
and innovations that will yield long-term economic growth. In
addition, the government has long called for expansion of the
service sector, but the same banker contended that such a
development would only be possible after greater deregulation, not
more, an approach that would directly challenge the resurgence of

SOE power and influence. There is little argument here about
short-term problems and the long-term direction China should be
moving in, which is greater reliance on market signals, a larger
domestic market for consumers and more policies that help those less
fortunate through difficult economic times. The problem is, as
always, getting from the short term to the long term in a way that
supports a leadership whose legitimacy resides in its ability to
deliver the economic goods.


© Scoop Media

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