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Cablegate: South China Reporting Officers Conference, September 24-27,

DE RUEHGZ #0590/01 2830920
R 090920Z OCT 08 ZDK




E.O. 12958: N/A


1. (U) Summary: The September 24-27 2008 South China Reporting
Officers Conference - with participation by officers from Embassy
Beijing, Consulate General Shanghai, Consulate General Hong Kong,
the American Institute in Taiwan (AIT), and Consulate General
Guangzhou - addressed four main themes: regional integration and
development strategies, whither cross-Strait relations , the
Strategic Economic Dialogue (SED) in south China, and economic and
other challenges to Chinese provinces south of the Yangzi. The
participants emphasized the importance of examining local
perspectives on national level policies and priorities and how the
latter are actually interpreted "on-the-ground." End Summary.

Regional Integration - Cooperation and Competition
--------------------------------------------- -----

2. (SBU) The first conference session, on "Regional Integration,"
highlighted the competition in south China among provinces that are
desirous of expanding economic linkages with one another while
looking for a larger share of the economic pie for themselves.
ConGen Hong Kong Econ/Poloff underscored the shifting impact of
Guangdong's development and its growing competition with Hong Kong
in some service sector industries, notably port operations.
Nevertheless, Hong Kong maintains its advantage in rule of law and
financial services, which continue to attract international
investment. In addition, Hong Kong Econ/Poloff noted that a growing
focus on labor and environmental protection in the Pearl River Delta
is hitting Hong Kong businesses hard, resulting in many enterprises
looking to other parts of China and Southeast Asian countries, such
as Vietnam, to relocate. However, participants pointed out that
Guangdong still benefits from its highly developed supply chains and
infrastructure, compared to other areas of China and Southeast Asia,
as well as access afforded to China's increasingly open domestic

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3. (SBU) Shanghai Econoff described some of the trends in financial
sector reform and the challenges facing reform efforts, including
the recent U.S. financial crisis and the sinking value of the
dollar. Trends include the reform of regulatory bodies, with a
focus on shifting more authority from Beijing toward Shanghai, as
well as innovative initiatives such as the raising of foreign equity
caps. In addition, monetary incentives are being offered to attract
professionals to financial centers. Participants also discussed the
expansion and political implications of Chinese investment in the
U.S. market, in light of the economic downturn.

4. (SBU) AIT Econoff noted that cross-Strait economic opening was
moving forward on several fronts: tourism, the establishment of
frequent charter flights, the increase of Chinese students studying
at Taiwanese universities, and likely further liberalization of
direct shipping. China remains the predominant destination for
Taiwan external investment, and is unlikely to change despite some
diversification into Southeast Asian markets. AIT Econoff said
Taiwan contacts reported that as many as 30,000 Taiwanese-owned
enterprises have shut down in the Pearl River Delta (PRD) due
primarily to rising costs. Taiwan investment continues to be strong
in the Yangzi River Delta. Some Taiwan investors have indicated
they are considering relocation to Southeast Asia, where
supply-chain management conditions are reportedly improving.

Cross-Strait Relations - Intl Space Still a Problem
--------------------------------------------- ------

5. (SBU) Conference participants from Beijing and Taipei agreed that
expansion of Taiwan's international space would be a contentious
issue even as cross-Strait relations improve under the Ma Ying-jeou
administration. According to the AIT Deputy Director, Taiwan's new
leadership has brought stability to the cross-Strait relationship
and much potential for further opening. However, further economic
opening will be easier than expanding Taiwan's international space
or addressing other issues that touch on sovereignty and security.
Taiwan's ruling Kuomintang (KMT) believes Taiwan has made major
compromises in cross-Strait policy and the ball is now in Beijing's
court. Embassy Beijing Poloff agreed that one of the main points of
contention between Beijing and Taiwan was the expansion of Taiwan's
role on the international stage, including its interest in
participating more fully in the World Health Organization (WHO).
Beijing Poloff pointed out that President Hu Jintao had
significantly softened his rhetoric on cross-Strait relations,
though there was considerable discussion on how rhetoric will
translate into political changes.

6. (SBU) From Hong Kong and Macau's perspective, cross-Strait
relations are mainly an economic concern. ConGen Hong Kong
Econ/Poloff said that increased ties between Taiwan and mainland
China were expected to have the greatest impact on Macau. As direct
cross-Strait transportation opens further, the number of Taiwan
travelers transiting Macau, which currently make up approximately
47% of Macau's air travelers, will decrease significantly. ConGen

GUANGZHOU 00000590 002 OF 002


Shanghai Econoff commented that Taiwan businesses in Shanghai simply
hoped that the status quo continues and political stability further
enhances the investment environment. ConGen Guangzhou Econ/Poloff
noted that the more challenging environment in the PRD for Taiwan
investors would likely affect cross-Strait and U.S.-Taiwan-China
trade flows, but it was not likely to have much impact on
cross-Strait political ties.

The Strategic Economic Dialogue and South China
--------------------------------------------- --

7. (SBU) Embassy Beijing Econoff described the SED process and
current status of discussion. He commented that the Ten-Year
Framework on Energy and the Environment would help institutionalize
the SED process. The SED will have an impact on south China to the
degree that local officials, NGOs, and enterprises implement
projects on key SED issues such product safety, environmental
protection/energy efficiency and transportation reform.

Greater China Challenges

8. (SBU) Guangzhou Congenoffs also highlighted some of the
challenges facing the PRD that have broader implications for U.S.
interests in Greater China: labor issues, intellectual property
rights (IPR) and environmental protection. ConGen Guangzhou Poloff
commented that the region's labor market was changing due to rising
wages and China's new Labor Contract Law. Companies must work
harder to recruit skilled employees while workers are becoming more
proactive at exercising their rights. Unions and NGOs are more
engaged in organizing labor, which has in some cases led enterprises
to crack down. ConGen Guangzhou's IPR Officer pointed out that
enforcement was the main IPR concern in south China compared to
Beijing's focus on policy. Regulations are enforced inconsistently
and local officials lack the will and capacity to take action
against infringement. ConGen Guangzhou Econoff pointed out that a
growing interest in environmental protection in Guangdong was driven
by a desire for higher living standards. In general, south China
continues to face challenges with regard to local implementation of
national environmental and energy efficiency goals.

Exploring the PRD: Welcome to the World's Factory Floor
--------------------------------------------- ----------

9. (SBU) The following day participants visited Shenzhen's Huawei
and Foxconn companies. The visit to Huawei, China's leading
producer of telecommunications equipment, included a campus tour,
and a briefing with top-level management. A senior Huawei executive
told us that the firm is still looking to strengthen investment
relations with the United States and is in the process of getting
its Washington, D.C., government relations office up and running.
At Foxconn, the Taiwan-invested contract manufacturer of consumer
electronics goods and components, participants saw the sprawling
manufacturing campus that employs approximately 270,000 and toured
testing labs. According to a senior Foxconn executive, the
manufacturing giant is looking to expand its operations in the areas
of nanotechnology, and to strengthen its joint design/manufacturing
relations with leading brand-name companies, such as Apple. It is
drawing down employment at the Shenzhen facility to focus on design
and other high-end processes there as it expands manufacturing in
other parts of China and in Southeast Asia.

10. (U) This cable was coordinated with Embassy Beijing, Consulate
General Shanghai, Consulate General Hong Kong, and AIT.


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