Cablegate: China: Ambassador Holmer Meets with Shenyang American

DE RUEHSH #0222/01 3270745
R 230745Z NOV 07




E.O. 12958: DECL: N/A

1. (SBU) SUMMARY: In a lunch meeting with Ambassador Alan Holmer,
American business leaders in Shenyang expressed worry about the
appreciation of the Renminbi and the weakness of the dollar, while
admitting that the lower dollar did offer some competitive
advantages, especially against European competitors. The executives
praised the quality of the local labor supply but said that rising
labor costs, coupled with the stronger RMB presented problems. Most
expressed optimism about the economic outlook for Northeast China.

2. (U) Ambassador Alan F. Holmer, the U.S. Treasury Department's
Special Envoy for China and the Strategic Economic Dialogue (SED),
in Shenyang on November 13 met with managers of several of the
larger American enterprises in the city. In attendance were Mr.
Dennis Adams, General Manager of Tyco Safety Products Shenyang; Mr.
Bi Lequn, Chef Executive Officer of GE China Liaoning; Mr. Ivan
Kwok, Boeing Program Site Leader in Asia; and Mr. Charles Li, Plant
Manager Pepsi Cola Bottling Company Shenyang. Mr. Dan Wright and
Mr. Chris Winship of the Department of Treasury, the Consul General
and Econoff also attended.

Weak Dollar Poses a Challenge
3. (SBU) Ambassador Holmer began the conversation by asking what
challenges American businesses in the region faced. Three of the
four representatives cited weakness in the dollar and appreciation
of the Renminbi as having a major impact on their operations. Mr.
Adams pointed out that Tyco primarily sources its inputs locally but
also sources many items from Germany. Thus, the appreciation of the
RMB increases costs, as does the dollar's weakness compared to the
Euro. This effect is heightened by the fact that most of Tyco's
production is sold in the United States. Mr. Adams said that, while
the Euro rate is an issue, his company is most worried about the
appreciation of the RMB. When Ambassador Holmer asked what impact
an additional appreciation of the RMB by 5 to 14 percent would have,
Mr. Adams expressed his personal view that the company would likely
seek a new location outside of China-possibly in Vietnam.
Ambassador Holmer commented that members of Congress expected that a
twenty percent appreciation in the RMB would send jobs back to the
United States-not to Vietnam.

4. (SBU) Similarly, GE's Bi Lequn cited RMB appreciation as a
problem. Because GE sourced USD 100 million worth of inputs
locally, he said the appreciation of the RMB has had a substantial
impact. He also noted, however, that the impact of the dollar's
depreciation on the price component of U.S.-sourced inputs had a
somewhat compensating effect. And Mr. Bi said that GE was
experiencing some benefit from the strong Euro, which has driven up
the price of the Siemens products that compete directly with GE in
the China market. Even in the face of a continued appreciation of
the RMB, Mr. Bi concluded, GE would remain and continue to expand
because China is simply "the market" for these goods.

5. (SBU) Another problem facing GE's financial arm is the lack of
regulations governing non-bank financial entities in China's system.
In an effort to overcome this obstacle, he reported that GE had
invited Chinese regulators to America and arranged meetings for them
with U.S. regulators. Mr. Bi said that GE was working with
Shenyang's Huachen Brilliance Automotive to establish a
joint-venture automotive financial service that would provide loans
to dealers, fleet buyers and retail customers.

6. (SBU) Mr. Ivan Kwok of Boeing said that Boeing's situation is
much different from that of GE and TYCO due to the fact that Boeing
sources more than ninety percent of its inputs from the United
States. The aircraft manufacturing concerns with which Boeing has
contracts perform value-added processing and the finished product is
then shipped back to the United States. Thus, the value of the RMB
relative to the dollar has little impact on Boeing's operations

Future of the Northeast

7. (SBU) In response to Ambassador Holmer's query concerning what
incentives draw U.S. businesses to China's Northeast, the most
common response was that labor costs were low, the labor supply was
good, and the tax treatment was favorable (no tax the first two
years and reduced rates for the next two according to Mr. Adams).
Mr. Kwok pointed out that labor quality is high and labor costs are
much lower than, for example, Shenzhen. He cited Foxconn's planned
construction of a factory that will employ 40,000 people as evidence
that major businesses are beginning to move to China's Northeast.

8. (SBU) Mr. Kwok told Ambassador Holmer that Boeing did not fear
Chinese competition in the aircraft market. He said that, while
China was seeking to develop its domestic aircraft manufacturing
industry and had developed its first domestic commercial jet, the

SHENYANG 00000222 002 OF 002

ARJ21, China still had a way to go in developing the industry. Mr.
Kwok pointed out that China has been an aircraft manufacturing
country for a long time and would want to develop a full range of
domestic aircraft production, befitting its newfoundstature as a
major power.

9. (SBU) All of the business representatives said that intellectual
proprety rights (IPR) violations involving their products were very
rare. Mr. Adams went on to say that in the event counterfeit items
were encountered, the government enforcement actions were helpful,
timely and pretty effective. None of the representatives offered
any comment on the potential leadership impact of former Liaoning
Party Secretary Li Keqiang's move to the central government,
claiming they had had no dealings with him.


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