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Cablegate: From Rural to Urban, Part 1: Industry Finds a New

DE RUEHGZ #1192/01 1930914
O 120914Z JUL 06





E.O. 12958: N/A
SUBJECT: From Rural to Urban, Part 1: Industry Finds a New
Home in Qingyuan

REFERENCE: A) Guangzhou 18102; B) Guangzhou 93

(U) This document is sensitive but unclassified. Please
protect accordingly.

1. (U) Summary. Qingyuan, Guangdong Province's largest and
fastest-growing prefecture, is in the middle of an
industrialization boom that will have far-reaching
consequences for its urban and rural populations. The Pearl
River Delta (PRD) is no longer as cost-competitive as it
once was due to a lack of land, energy and water shortages,
and rapidly rising wages. Consequently, factories are
packing up and moving out. Qingyuan, which lies outside of
the PRD, has been successful in courting these factories.
Many of the industries that are calling Qingyuan home are
notorious polluters, however, including chemical and
ceramics companies. These companies also operate on a low
margin and will likely leave Qingyuan once its wages rise
too high -- a trend that is already starting to happen.
Only with a long-term development strategy, perhaps hinging
on its bourgeoning eco-tourism industry, can Qingyuan avoid
a painful hangover down the road. End summary.

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2. (U) Econoff and EconPolAsst recently visited Qingyuan
prefecture, a predominantly rural area stretching from
central to north Guangdong Province. The southern reaches
of Qingyuan, home to the majority of the population and
industry, are only two hours from Guangzhou by bus.
Qingcheng City, the largest city in Qingyuan with half a
million people, served as our base as we visited nearby
factories and more distant villages in southern Qingyuan.
This cable explores the nature of Qingyuan's rapid
industrialization and its long-term impact. Septel will
discuss the concerns of the rural population as they face
this incoming tide of industry and urbanization.

Feeding Off the Pearl River Delta

3. (U) The sidewalks of Qingcheng's business district at
night are overflowing with young and old residents browsing
retail stores that sell the latest clothing styles and
electronics. Though the per-capita GDP of Qingyuan is only
about 40 percent of the Guangdong average, the urban
residents of Qingcheng are doing well and are spending their
money. This prosperity is relatively new, however -- only
in the last few years has Qingyuan changed from being a
backwater to the fastest growing prefecture in Guangdong
(Qingyuan's GDP grew at 23.3 percent in 2005). Qingyuan
also has the province's fastest growing industrial output,
fixed asset investment, retail sales volume, utilization of
FDI, gross industrial output, and foreign trade volume.

4. (U) The reasons for this growth are largely geographic:
Qingyuan lies just north of the Pearl River Delta (PRD), the
center of South China's manufacturing industry that sweeps
from Hong Kong to Guangzhou to Macau. Despite continued
strong economic growth, the PRD is facing energy and water
shortages, rising wage levels, and a land crunch (Reftel B).
Factories -- especially low-margin, labor-intensive ones --
are finding that their operations are no longer cost
competitive and are looking to relocate. Indeed, during the
two years after the Beijing-Zhuhai highway opened, 170
Guangdong factories moved to southern Hunan Province, which
borders Guangdong to the north. Twenty percent of new
investment in Jiangxi Province, another bordering province,
has come from Guangdong.

5. (U) Qingyuan has made attracting these migrating
companies its mission. It pitches its low land prices,
offers tax incentives, waives water and administrative fees,
and offers generous awards to agents that bring investment.
An agent can earn up to RMB 100,000 (USD 12,500) by bringing
in a large investor. An industrial park representative we
spoke with said Qingyuan has attracted 1,600 industrial
projects in the last three years, most of which came from
the PRD. With a salesman's self-assuredness, he touted the
geographic and financial advantages of his park and listed
its many satisfied customers. Provincial authorities have
helped bring investment to Qingyuan as well, as they are

GUANGZHOU 00021192 002 OF 003

eager to keep investment within Guangdong. In the case of a
30,000-employee electronics factory owned by Yi Li Group,
which recently moved from Dongguan to Qingyuan, Guangdong
authorities facilitated the move by negotiating a deal
wherein Dongguan and Qingyuan equally share the new
factory's tax revenue.

6. (SBU) As an example of how busy Qingyuan officials are in
their efforts to attract investment, Post has on two
separate occasions in 2006 been denied in our requests for a
series of meetings with Qingyuan offices, apparently because
they were accommodating visiting investors. A group of
Australian investors were visiting when we last made a

But How Long Will the Good Times Last?

7. (SBU) Qingyuan is booming, but if recent history is any
guide, its time at the top will be fleeting. Shoetown --
Nike's first OEM manufacturer in China -- recently moved
from Guangzhou to Qingyuan because it ran out of room to
expand and was facing rapidly rising wages. Indeed, the
Guangzhou minimum wage has risen from RMB 450 (USD 56) per
month in 2003 to RMB 684 (USD 86) in 2006. And PRD cities
are reportedly considering wage hikes of 17-42 percent in
2006, which would bring Guangzhou's minimum wage to RMB 800
(USD 100). In the Qingyuan Shoetown factory, the starting
take-home pay is RMB 650 (USD 81) per month. (Company
payments, which include insurance and pension contributions,
bring the total to RMB 1220 [USD 153].) With the rush of
new factories to Qingyuan, however, this wage will not stay
competitive for long. Most of the laborers and factory
workers that we spoke with in the area earn RMB 700-900 (USD
88-113). A large banner outside what appeared to be a
textile factory in Qingyuan offered RMB 900 (USD 113) as a
starting salary.

8. (U) A reliable supply of labor is not assured either, as
many of the workers in Qingyuan's factories are migrants.
The Shoetown manager said the majority of his employees come
from inland provinces, such as Hunan, and only 30 percent
are locals. These migrant laborers have more options than
in the past, when Guangdong was the only place in China for
factory jobs. Better wages and working conditions have
convinced large numbers of laborers to travel to the Yangzi
Delta and other industrializing regions instead. Indeed,
Qingyuan's Yi Li electronics factory has reportedly only
been able to find enough workers to fill half of its 30,000
openings, and a large banner outside the factory gate
announces job opportunities.

9. (SBU) So how long before these new factories, faced with
the same problems that forced them to leave the PRD --
including rising wages and energy shortages -- decide to
move to new and cheaper locales? Five years at the most,
according to the Shoetown manager. By that time, he said,
his factory will likely relocate further inland, or possibly
outside of China, to India, Vietnam, or Indonesia.

The Down Side: Pollution

10. (U) With a new emphasis on sustainable development and
innovation in China's 11th Five-Year Plan, PRD officials are
more willing to see polluting factories depart in order to
make room for clean and high-tech companies. For example,
approximately 1,000 PRD factories (including those involved
in electroplating, dyeing, and paper-making) will reportedly
need to comply with stringent new safety and environmental
requirements by the end of 2006 or be forced to leave.
Investors, including many from Hong Kong, are resigned to
the fact that PRD officials are serious this time, and are
looking to places outside of the PRD to invest -- Qingyuan
being one.

11. (U) Qingyuan has seen a large number of ceramics
factories open in the last couple of years. These factories
emit high levels of pollutants into the air and use clay
stripped from nearby hills -- both of which we witnessed

GUANGZHOU 00021192 003 OF 003

during our stay. A recent Hong Kong study identified
ceramics factories and automobiles are the two largest
contributors to pollution in the Guangzhou area.

12. (U) In addition, local environmental authorities in
Qingyuan and other less developed areas in South China, who
are mindful of the importance of this new investment, have a
reputation as being lax in their enforcement. In December
2005, a smelting factory in northern Guangdong's Shaoguan
discharged 1,000-tons of cadmium-carrying waste into the
Beijiang River during facility maintenance, forcing Qingyuan
cities to use back-up water supplies (Reftel A). Officials
took five days to notify the public about the incident, and
the owner of the offending smelter told the press that any
number of factories along the river could have been

Eco-Tourism Firms Find a Foothold

13. (U) Qingyuan is scenic area, blessed with forested
mountains and abundant rivers. It is also home to a small
but successful eco-tourism industry. Prefecture maps and
hotel pamphlets tout the area's white-water rafting, and a
mountain not far from Qingcheng has an "adventure" hiking
trail, complete with chain bridges and pulley swings.
Workers were clearing a road through a bamboo forest on a
mountain north of Qingyuan that will provide access to a
nearby river for rafting. Another successful venture is a
3,000 mu (494 acre) farm outside of Qingcheng, run by an
overseas Chinese from Malaysia, which charges visitors RMB
25 (USD 3.13) to pick a variety of native and exotic fruits
and vegetables.

14. (U) Eco-tourism is a dependable long-term industry for
Qingyuan, and tourists will continue to grow as the PRD and
other areas of South China become more interconnected.
Nevertheless, industrial development and pollution threaten
to extinguish eco-tourism in its infancy, at least in the
south where the majority of development is taking place.
The mountainous north, which has less appeal to industry and
more pristine land, stands to benefit greatly if these types
of enterprises can attract enough customers.

Comment: A Hard Bargain

15. (SBU) Qingyuan's breakneck industrialization is bringing
prosperity to a formerly poor, agricultural prefecture.
Jobs are now abundant, and wages are rising. For companies,
Qingyuan is a good compromise: it is located within two
hours of Guangzhou and offers numerous investment
incentives. Qingyuan's good times may be short-lived,
however, as these factories are by no means wedded to it --
as the Nike manager said, within five years some of them
will move again, taking their jobs with them and leaving
behind abandoned buildings and polluted air and water.
Migrant laborers from the interior will follow the factories
elsewhere. Those who stay behind will need to figure out a
more sustainable model for economic growth.


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