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Cablegate: Export Processing in the Prd Hit with New Deposit

VZCZCXRO8876
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0952/01 2360809
ZNR UUUUU ZZH
R 240809Z AUG 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6398
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASH DC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC

UNCLAS SECTION 01 OF 02 GUANGZHOU 000952

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD EINV ECON PGOV CH HK TW
SUBJECT: Export Processing in the PRD Hit with New Deposit
Requirement


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

1. (SBU) SUMMARY: On August 23, China started requiring export
processing firms to pay large deposits, which could have a
substantial negative impact on businesses in the Pearl River Delta
(PRD). Hong Kong and Taiwan industry associations in southern China
have expressed serious concerns about the new policies. (Note: Few
U.S. investors will be affected. End note.) To adapt to the new
requirement, local authorities have encouraged export processing
companies to shift to high-tech and high-value-added products, move
to western or central China, or target China's domestic market. END
SUMMARY.

New Deposit Requirement for Export Processing
---------------------------------------------

2. (SBU) On July 23, 2007, China announced a new deposit requirement
for export processors that make labor-intensive products in China's
coastal provinces (Beijing, Fujian, Guangdong, Hebei, Jiangsu,
Liaoning, Shandong, Shanghai, Tianjin, and Zhejiang). Effective
August 23, enterprises in these areas are required to pay guarantee
deposits when they register export processing contracts for any
products which appear on a list 1,853 labor-intensive commodities.
"The List of Commodities Restricted for Processing Trade" includes
certain plastic goods, furniture, textiles and other consumer goods.
The deposits will be forfeited if the contracts are not fulfilled.
This move is part of China's efforts to move labor-intensive
industries out of the more developed coastal regions and to rein in
its growing trade surplus.

Guangdong Firms Bear the Brunt of the New Requirement
--------------------------------------------- --------

3. (SBU) Statistics show that, of 90,000 enterprises engaged in the
production of the blacklisted products in China, 70,000 are located
in Guangdong. These firms employ more than 160,000 people and
produced 69 percent of Guangdong's export in 2006. Many have
complained that the new policy will have a negative impact on their
cash flow and profit margins. According to a report released by the
Greater Pearl River Delta Business Council (GPRDBC) in July, RMB
appreciation, fierce market competition, and newly lowered export
tax rebate policies narrowed profit margins for export processors to
10 percent. GPRDBC estimates that paying additional deposits could
increase costs by 20 to 30 percent and will likely force many small
and medium sized enterprises (SMEs) to close down or relocate to
central or western China. Large, financially strong enterprises may
be capable of paying the deposits, but will still find it more
difficult to stay profitable.

Hong Kong and Taiwan Investors Feel the Pinch
---------------------------------------------

4. (SBU) Liu Zhanjing, Vice Chair of the Federation of Hong Kong
Industries (FHKI) claims that over 40,000 Hong Kong-owned factories
in the PRD will be affected by the new deposit requirement. GPRDBC
predicted in its July report that 55 percent of these enterprises
would face financial difficulties due to the new requirement. The
Hong Kong Chamber of Commerce estimated that 1,500 Hong Kong-owned
processing companies would be forced to shut down their operations
in the PRD, resulting in the loss of 370,000 jobs in Guangdong and
another 10,000 jobs in Hong Kong's logistics and service sectors.

5. (SBU) The new requirement will likely have a strong impact on
Taiwan investors as well. Wu Zhenchang, Chair of the Guangzhou
Taiwanese Businessmen Association, said only 12 percent of the
Taiwan-owned enterprises in Guangzhou had the capacity to pay the
extra costs created by the new policy. He indicated that 40 percent
of Taiwan-owned enterprises might have to relocate their
manufacturing facilities. Similarly, Huang Zhiming, Chair of
Shenzhen Taiwanese Businessmen Association, said most of the 4,000
Taiwan companies in Shenzhen would be affected. He commented that
some firms might have to leave the mainland or shut down their
factories. (Note: In contrast, few U.S. investors in southern China
will be affected by the new deposit requirement. U.S. investment is
more concentrated in technology- and capital-intensive industries.
End note.)

Go High-Tech, Go West, or Go Local
----------------------------------

6. (SBU) To adapt to the new policy, local authorities have
suggested three options for southern China's export processors. The
first is to shift from labor-intensive export processing to
manufacturing high-tech and high-value-added products. The second
recommendation is to move export processing operations to central or
western China. The third choice is to give up the export business

GUANGZHOU 00000952 002 OF 002


and target the domestic market. SMEs complain that the cost of
upgrading to high-tech or high-value-added manufacturing is too
great. Local media reports estimate that the moving export
processing facilities to inland regions could increase
transportation costs by 7 percent. Instead, it appears that some
Hong Kong and Taiwan companies have chosen to shift their focus to
the domestic market. Many of these firms are reportedly changing
their business license registration type from "processing trade" to
"wholly-owned foreign enterprise" in order to get better access to
the mainland market.

JACOBSEN

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