Cablegate: Slow Progress in a Tough Neighborhood: Economic And

DE RUEHGZ #0786/01 1930522
R 120522Z JUL 07







E.O. 12958: N/A
SUBJECT: Slow Progress in a Tough Neighborhood: Economic and
Political Change in South China over Four Years

REF: A) Guangzhou 670; B) Guangzhou 631; C) Guangzhou 627; D)

Guangzhou 622; E) Guangzhou 620; F) Guangzhou 564; G) Guangzhou 559;
H) Guangzhou 544; I) Guangzhou 462; J) Guangzhou 421; K) Guangzhou
353; L) Guangzhou 322; M) Guangzhou 301; N) 06 Guangzhou 17422; 0)
06 Guangzhou 15624; P) 05 Guangzhou 32823; Q) 04 Guangzhou 30943 and
others; R) 06 Guangzhou 32442


1. (SBU) Summary and Comment: This cable by Guangzhou's departing
Economic/Political Section Chief is a brief look at south China
after four years, how it has developed economically, the pluses and
minuses, challenges and potential, where it's going in the future.
The Pluses: South China and particularly the Pearl River Delta
(PRD), the world's factory floor, have succeeded economically beyond
any Communist apparatchik's wildest dreams. The economy is
accelerating even more rapidly due to China's WTO accession and is
expanding vertically and horizontally. A middle class and a
domestic market are taking shape. A well-developed transportation
network links province to province and city to city, enabling
inter-provincial commerce to blossom and manufacturing to slowly
move inland. The Pan-PRD and the Closer Economic Partnership
Agreement (CEPA) initiatives have expanded cooperation between a
number of Chinese provinces and Hong Kong and Macau.

2. (SBU) The Minuses: Such rapid expansion has come with
environmental and social costs. Energy is at a premium, air quality
has deteriorated, water is in short supply; these are all serious
constraints. Corruption is rampant despite government efforts to
crack down. Income gaps between rich and poor, urban and rural, and
coastal and inland, continue to exist with little-to-no improvement
in sight. And there has been little movement on local political

3. (SBU) COMMENT: The income gap, while important, does not seem as
important as the opportunities available to advance oneself
economically. When those opportunities decline because of
corruption, arrogance, pollution, or poor management, the average
person will react and demonstrations - of which there are likely far
more than reported in the press or of which we hear about from
word-of-mouth - follow. The Party and the government still have
difficulty accommodating dissent and generally crack down on or
whitewash incidents. Civil unrest remains largely at, and is dealt
with by, the local level and does not threaten Party control. In
the absence of major social upheaval or revolution, neither of which
appears likely, any reforms would appear to occur first in the Party
and gradually move out to society. The hope, as always, is that as
society changes, the Party and government will change too. Looking
down the road, barring major outside shocks, such as war, depression
or global pandemic, south China's robust economic growth should
continue. End Summary and Comment.

What Has Changed: Rapid Economic Growth
in all Directions

4. (SBU) South China's economy has expanded rapidly in size, as well
as vertically, with rising levels of technology, and horizontally,
by expanding inland and gradually abroad (ref C). Due to the
crowding out of land and insufficient labor, water, and power in the
PRD, governments at all levels in Guangdong are focusing their
efforts to attract FDI on capital intensive, small footprint, high
technology firms. Labor-intensive investment and low-value-added
firms are no longer welcome in the Pearl River Delta area of some 30
million-plus people and there has been a conscious effort to move
them out. They are free to go inland to Guangdong's second and
third tier cities or into Guangxi and Fujian's less developed areas.

5. (SBU) What has made this possible is the horizontal growth of the
economy, through the rapid construction of an interstate toll road
system and a provincial road network in each of the provinces in
south China. This development is mirrored, at least to some extent,
in the rest of China (refs A, F, and G). What used to take 7-12
hours to cross now takes only 3-4 hours as bridges span rivers and
tunnels cut through difficult mountain terrain. Air and sea ports,
rail lines, and inland waterways are also being upgraded and
expanded. Many of the larger labor-intensive factories are not yet

GUANGZHOU 00000786 002 OF 004

moving out of the PRD, however, when they expand their operations,
they generally find themselves looking elsewhere. Less risk-averse
investors are opening new factories and offices in western
Guangdong, in Guangxi, and further north and west. On the regional
level, a healthy competition between the PRD and the Yangtze River
Delta (YRD) exists, and Hong Kong and Macau continue to integrate
economically with South China.

6. (SBU) In the past few years, the central government has given
its blessing to state-owned enterprises and private firms to invest
abroad, with Guangdong-based firms often taking the lead (ref D).
This stronger China is beginning its outward march for resources and
markets, gradually flexing soft power muscles in Asia and Africa,
but not necessarily in the United States. The consulate has
recently emphasized our new "Invest America" plan, but we've
attracted few questions about what the benefits of doing so will

WTO - A Major Factor in Economic/Legal Changes
----------------------- ----------------------

7. (SBU) While not the only factor, China's entry into the WTO and
subsequent five-year transition period (which ended in December
2006) brought dramatic growth in foreign trade and was a major
factor in changes in China's commercial and legal framework.
Numerous barriers to market opening remain; new non-tariff barriers
have been thrown up as tariffs have fallen, such as local standards
and sanitary and phyto-sanitary issues.

8. (SBU) WTO-led transparency, while slow at first, is expanding in
the legal field with the government seeking public comments on draft
laws and regulations. At times, foreign businesses have been asked
for their opinions. In fact, the local Amcham was criticized for
appearing to trying to protect certain practices that would seem
beneficial to them, but not to the average worker, in the new labor
law. While limited in scope, the trend is toward greater
transparency. People in south China, especially the PRD and more
economically advanced areas have become more aware that they have a
voice in government that deserves to be heard, a development with
long-term potential for influencing government decisions. There
appears also to be greater awareness of environmental, political,
and economic matters, even the outside world, despite censorship and
clamps on media. Today, moreover, with the environmental focus in
the 11th Five-Year Plan (2006-2010), officials are supposed to be
evaluated not only on their economic performance, but also on how
"green" that performance is.

Development of a Middle Class and a Domestic Market
----------------------------- ---------------------

9. (SBU) At the same time, rapid growth has caused average incomes
to rise, leading to the creation of a new class recently identified
by the China Academy of Social Sciences (without calling it a middle
class). Three years ago, we could not get meetings to discuss the
emergence of a middle class. This concept is still somewhat
divisive, as a "middle class" cuts through the middle of society and
conflicts with the Chinese concepts of a "xiao kang she hui"
("moderately well-off society" - a unitary whole) and the
development of Hu Jintao's idea of a "Harmonious Society." In
Guangzhou and Shenzhen, as well as many secondary and even tertiary
cities in south China, this already moderately wealthy society (by
Chinese standards) has begun to consume products, have leisure time,
and avail itself of travel, both internal and international. New
malls are sprouting up like wildfire; Guangzhou reportedly has
Asia's largest shopping center - Grand View Mall. Middle class
Chinese have something they own and something to protect and it will
be an unwise government that seeks to roll that back, even in the
interest of spreading the benefits of wealth around. Chinese in
general have high rates of cell phone and internet use.

10. (SBU) Since everything is manufactured here, Chinese have access
to the latest technology. South China two years ago surpassed Hong
Kong as the world's largest purchaser of high-end luxury vehicles.
The housing market is booming and there are plenty of buyers. The
travel market is expanding rapidly and increasingly large numbers of
Chinese are traveling abroad. The number of sporting activities has
grown and will continue to generate interest in the run-up to the
Beijing Olympics, as well as Shanghai's and Guangdong's major
sporting events in 2010 (the Asia Games will be in Guangzhou in
2010). All of this activity offers opportunities to U.S.
manufacturers, service providers, and the sports and entertainment

GUANGZHOU 00000786 003 OF 004


11. (SBU) The growth of a robust domestic market will help to even
out some of China's economic inequities, spread the wealth, and
encourage the development of inland industries more oriented to the
domestic market. The Pan-PRD and the Closer Economic Partnership
Agreement (CEPA) programs have expanded cooperation among a number
of Chinese provinces and Hong Kong and Macau. Still, with the bulk
of the population living closer to the coast, the majority of
industrial development is likely to stay in that area.

What has Not Changed: The Dark Side -
Costs of Economic Growth
----------------------------------- -------------------

12. (SBU) South China's rapid expansion has come with environmental
and social costs that are mirrored across China. Economic growth
without regard to environmental considerations has fouled the water,
soil, and air and raised social costs, a fact only recently
acknowledged and occasionally acted upon by the central government.
Electric power is in short supply; despite robust construction it is
hard to keep up with the dramatic growth in demand (ref B) and power
outages and rolling black/brownouts are not infrequent in some
areas. Companies increasingly resort to small, inefficient, and
highly polluting power generators to maintain their manufacturing
schedules. Electric power shortages can be resolved with new
construction and energy inputs; however, water is a different issue.
The water is not only highly polluted, but the shortage of potable
water in many areas and of water for agricultural and industrial
uses will continue to act as a serious constraint (ref P). Labor
shortages and abuses are regularly reported (refs M and J).
Counterfeiting and piracy are rife, while government crackdowns,
though numerous, are ineffective. At the same time, the government
is focused on building its own intellectual property rights (IPR)
and national brands (not a bad thing), but is also using IPR "abuse"
as a tool to extract business secrets from multinational

13. (SBU) Official corruption continues to be rampant despite
government efforts to crack down, weakening the legitimacy of the
Party. Politically, the government still responds to embarrassing
disclosures using tit-for-tat tactics, e.g. attacking local American
company labor practices or the safety of U.S. agricultural imports
to demonstrate that the problem is not China's alone (ref J) and
sometimes even giving the Chinese companies a free pass as the
foreign companies are taken to task.

The Poor and Civil Unrest

14. (SBU) The poor are still impoverished, despite recent attempts
to build a "new countryside" and they have seen little improvement
in their lives to date. Income gaps between rich and poor, urban
and rural, and coastal and inland continue to exist with little to
no improvement in sight. Rapid urbanization and industrialization,
often tainted by corruption, create stresses, particularly regarding
land acquisition. The urban-rural income gap remains at a 3:1 ratio
virtually regardless of location. The gap, while often cited as a
key element in civil unrest, does not seem as important as a
person's opportunities to move up the economic ladder. When those
opportunities are closed off because of corruption, arrogance,
pollution, or poor management, the average person will react,
leading to numerous incidents of mass demonstrations, some which end
in violence. Much of our reporting has been on the conflicts and
trade-offs among economic gain, wild West-type development, corrupt
practices, and official connivance in business chicanery:
environmental protests (Xiamen public against a chemical factory -
ref E); land acquisition and inadequate compensation (Dongzhou's
violent protests - refs L, K, and O); and out and out corruption
(Taishi and Gurao - ref H). All of these incidents have remained
localized, there is no pattern connecting them, and the Party
remains comfortably in control at present. In the absence of major
social upheaval or revolution, neither of which appears likely, any
reforms will have to occur in the Party first and only gradually
move out to society.

The Party Comes First

15. (SBU) Through all of this growth, the Communist party has tried
to keep up with the changes and professionalize its cadre by adding

GUANGZHOU 00000786 004 OF 004

business administration and management courses to the Party School
syllabus (ref Q). Some of the newer cadre are sophisticated and can
see change in its multiple dimensions, unlike the more
ideologically-driven old guard. Despite continued party control,
the government in many ways has show an impressive ability to adapt
to rapid changes. It has been slow to react to some issues, such as
labor rights, but is anticipating others, such as the aging
population and the need for a better social security system and even
a health system. On the political side, things do not appear to
have improved much. There is talk of democratizing within the Party
but there remains little democracy for the masses, grassroots
experiments aside. Apart from exceptions for Olympic press
coverage, media controls and censorship remain strong, and have
strengthened under the Hu/Wen regime. There is little tolerance for
dissent in south China; it's clear that this is a politically
backward area, focusing on economic advancement at the cost of
advancing new ideas that could provide significant alternatives to
the way things are done, including business ideas (ref N). Official
rhetoric emphasizes nationalism and territorial integrity, though
where Taiwan fits into the overall equation is exceedingly complex,
given ties of affinity and, in some locations, dependence for
economic gain.

Comment: Continued Growth but Questions Remain
----------------------------- ----------------

16. (SBU) In the long run, the south China economic machine should
continue to gallop along at approximately 10-12 percent annual
growth. A stronger domestic market should help cushion south China
manufacturing from an outside shock, though with the current heavy
reliance on exporting, a severe shock would greatly affect business
and labor here. Despite structural weaknesses of uneven development
and income inequities, there does not appear to be a reason, barring
a U.S. or global depression, major war, or pandemic outbreak (that
could easily originate in south China) that would stop this growth.
But with the expectation of a better standard of living about all
that the Party has to offer, serious social problems could occur if
that hope disappears.


© Scoop Media

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