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Cablegate: Economic Crisis Crimping Revenues of Zhejiang Export Hub

VZCZCXRO7585
RR RUEHCN RUEHVC
DE RUEHGH #0581/01 3660611
ZNR UUUUU ZZH
R 310611Z DEC 08
FM AMCONSUL SHANGHAI
TO RUEKJCS/SECDEF WASHDC
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHGP/AMEMBASSY SINGAPORE 0205
RUEHIN/AIT TAIPEI 1441
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8105

UNCLAS SECTION 01 OF 02 SHANGHAI 000581

SENSITIVE
SIPDIS

TREASURY FOR AMB HOLMER/WRIGHT/TSMITH
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP/CUSHMAN
TREASURY FOR IMFP -- SOBEL/MOGHTADER
USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA
NSC FOR WILDER/LOI
STATE PASS CEA FOR BLOCK
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN
STATE PASS CFTC FOR OIA/GORLICK

E.O. 12958: N/A
TAGS: CH ECON EFIN EINV ETRD PGOV
SUBJECT: ECONOMIC CRISIS CRIMPING REVENUES OF ZHEJIANG EXPORT HUB

SHANGHAI 00000581 001.2 OF 002


1. (SBU) Summary: Slowing economic activity in Ningbo, a major
port in Zhejiang Province, is leading to much lower revenue
growth, which in turn will impact Central Government finances,
according to the chief economist of the local planning
commission. Ningbo's growth is on a declining trend, and the
economist predicts it will decline to a 10 percent annual rate
in 2009; especially worrying is slowing export growth.
Enterprises are facing liquidity problems as bank loans and
foreign investment become scarce, so Ningbo is planning a
stimulus program that could consume a large proportion of local
revenues, said the economist. End summary.

2. (U) Ningbo has the second largest GDP among cities in
Zhejiang Province, accounting for approximately 18 percent of
the total. Ningbo's GDP in 2007 was RMB343.3 billion
(currently equivalent to US$50 billion) and grew at an annual
rate of 14.8 percent; in the first half of 2008 it grew at an
11.4 percent rate. The Port of Ningbo, a natural deepwater port
and one of China's oldest ports, now handles approximately 7
percent of China's total trade volume. Ningbo is China's second
biggest port in tonnage and fourth largest in containers. In
2007, Ningbo's exports grew 33 percent and imports grew 35.7
percent.

============================
Lower Revenue Growth in Ningbo . . .
============================

3. (SBU) Slowing economic activity in Ningbo is leading to much
lower revenue growth, Ningbo Municipal Development and Reform
Commission Chief Economist Zhan Rongsheng told Econoff on
December 10, 2008. Ningbo government revenues generally grow 20
percent annually, said Zhan, but through October this year,
growth fell to 15-16 percent; the year end figure will probably
reach only 15 percent.

4. (SBU) Ningbo's overall economic growth is on a declining
trend, said Zhan. He predicts that GDP growth will fall to 10
percent in 2009, with a slower first half and a rising second
half. Zhan estimated that Ningbo's 2007 fiscal income was over
RMB70 billion (currently equivalent to US$10.21 billion), with
additional off-budget income of RMB10 billion (US$1.46 billion)
coming mostly from land transfers to property developers.
(Note: Land sales are likely to stall as property developers
trim back projects in the face of lower real estate demand. End
note.)

5. (SBU) There are some worrying signs for exports, said Zhan,
potentially putting further pressure on government revenues.
Overall Ningbo exports grew 25 percent in the first 10 months
over the same period last year, on particularly strong sales
growth to new markets in the Middle East and Africa; however,
exports to the United States fell 2 percent in the same period.
(Note: In November, overall exports contracted by 1.1 percent,
of which new and high technology product exports contracted 11.3
percent , according to the Ningbo Statistical Bureau. End note.)

============================
. . . Will Directly Impact Central Government Coffers
============================

6. (SBU) Because Ningbo is a "city with subprovincial-level
status" (fushengji chengshi), Ningbo's lower revenue growth will
mean lower revenue income for the Central Government. Ningbo
negotiates its contribution to state coffers with the Central
Government, bypassing the provincial capital of Hangzhou,
explained Zhan. In 2007, for instance, Ningbo handed over
around 60 percent of on-budget revenues to the Central
Government, he said.

7. (SBU) As part of its special status, Ningbo makes only a
nominal contribution to provincial revenues, said Zhan. The
municipality transfers a negotiated, fixed amount to the
provincial capital of Hangzhou for use in poor areas of
Zhejiang. Zhan estimated that this amount amounts to much less
than 5 percent of the city's annual budget. However, Zhan said
that Greater Ningbo is further divided into the city center,
which has the subprovincial-level city status, and the outer

SHANGHAI 00000581 002.2 OF 002


counties, which are managed by the province. Taxes from the
outer counties are part of the provincial budget.

8. (U) (Note: Nationwide in China there are 15 subprovincial
level cities, mostly provincial capitals. Cities with this
status that are not provincial capitals are Dalian, Ningbo,
Qingdao, Shenzhen, and Xiamen. Zhan said that as part of its
special status, top Ningbo officials are directly appointed by
Communist Party Organization Department. In addition, Ningbo is
a city specifically designated in the state plan (jihua danlie
shi), said Zhan. This status gives Ningbo some independent
economic planning authority. End note.)

============================
Corporate Finance Getting Pinched
============================

9. (SBU) Banks are afraid to give loans and foreign investors
are not increasing their local stakes, Zhan said, putting
strains on corporate finance. Very few foreign invested
companies in Ningbo are from the United States -- most are from
Japan, Taiwan, and Hong Kong, explained Zhan. Of these, Taiwan
and Hong Kong investors were simply maintaining their stakes
(Zhan thereby implied that Japanese investors were drawing down
their stakes). Overall, capital outflows are not large, said
Zhan, since foreign-invested firms in Ningbo are still making
money. (Comment: November's export contraction probably
changes this picture. End comment.)

============================
Planning a Local Economic Stimulus
============================

10. (SBU) Ningbo is planning a RMB80 billion (US$11.67 billion)
stimulus plan over the coming two years to combat the economic
growth slowdown, said Zhan. About one-third of the capital will
come from the Ningbo municipal budget. In addition, there will
be investments by state-owned companies, bank loans (zhengfu
yinhang rongzi), and bank loans with local government guarantees
(zhengfu juzhai). Zhan explained that the latter was basically
local borrowing from banks, although the funds had to be
approved and granted by the National Development Reform
Commission. Ningbo authorities anticipate that the RMB80
billion will be matched by private capital of RMB300 billion
(US$43.78 billion), said Zhan.

11. (SBU) The RMB80 billion stimulus will be spent on 7 areas,
said Zhan: 1) subsidized housing construction, 2) major
infrastruction, 3) energy conservation and environmental
protection projects, 4) improving people's living standards, 5)
rural construction, 6) large-scale industrial projects, and 7)
major urban public services.

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

12. (SBU) Ningbo's finances are a microcosm of the opposing
forces that will come into play in the export-oriented coastal
provinces of the Shanghai Consular district in coming months.
Booming urban areas that in the past have made disproportionate
contributions to Central Government revenues will most likely
argue that they need to retain a larger proportion of their tax
intake to fund local economic stimulus plans. Already in
Ningbo's case, the local government by Zhan's calculation
currently retains only approximately RMB38 billion of its on-
and off-budget income (RMB28 billion of taxes and RMB10 billion
from land sales); as economic growth slows, however, these
levels are likely to come under pressure. On the other hand,
Ningbo is planning to kick around RMB26 billion of municipal
funds over each of the next two years into the stimulus measures.
CAMP

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