Cablegate: China's Economy: Hoping for the Best in The

DE RUEHBJ #4327/01 3301048
P 251048Z NOV 08





E.O. 12958: N/A

Summary and Comment

1. (SBU) SUMMARY: Government officials and
businesspeople in Western China's Xinjiang and Ningxia
minority autonomous regions do not yet see a large
impact from the slowing economy, and although they are
concerned, some are also hopeful that their unique
development circumstances may provide some protection.
Resource-based industries are seeing limited immediate
impact so far, and weakening export demand is expected
to have less effect given exports' smaller role in
local economies. Although details of the Central
Government's fiscal stimulus package remain unclear,
local officials in Xinjiang hope for an investment-led
boost in an economy where infrastructure already plays
an important role. END SUMMARY.

2. (SBU) COMMENT: The size of the economies in
Xinjiang and Ningxia are relatively small (among
China's 31 provincial-level administrative entities,
Xinjiang's GDP ranks 25th and Ningxia's 29th).
Xinjiang and Ningxia also have few export-oriented
businesses and rely heavily on Central Government
fiscal transfers and investment associated with
China's Great West Development Strategy. Although
this provides some cushion from a global economic
slowdown, Ningxia and Xinjiang are also large oil,
coal, and mineral producers and their poor rural
populations rely on outside sources of income that may
be threatened by slower economic growth. Although our
contacts have not seen a large-scale return of migrant
workers to date, the slowing economy's full impact may
not be fully apparent until the Chinese New Year
holiday in late January when migrant workers return
home and may or may not return to jobs elsewhere in
China. Increased infrastructure investment itself may
boost overall economic growth in Ningxia, Xinjiang,
and other inland provinces, but other measures focused
on supporting consumption and livelihoods of lower
income populations are also important to monitor given
the government's increasing concerns about social
stability. END COMMENT.

Economic Downturn's Impact: Limited So Far

3. (SBU) Emboffs visited the Ningxia Hui Autonomous
Region October 15-17 and the Xinjiang Uighur
Autonomous Region November 10-14. Xinjiang officials
said there were ongoing government meetings about the
economy and the government's fiscal stimulus package.
They provided a generally sanguine picture on the
impact of the global and domestic economic downturn.
Wang Guoming, Director of the Xinjiang Poverty
Alleviation Office, claimed that the Xinjiang economy
was not suffering yet and that new construction
projects were starting almost weekly and many
companies from coastal and central China were still
investing in energy and infrastructure projects.

4. (SBU) According to Habai Matai, Vice Director of
Xinjiang's Foreign Trade and Economic Cooperation
Bureau, the broader economic outlook for Xinjiang was
largely unchanged and the local impact would be less
than other provinces. Habai Matai said that worsening
economic circumstances in Central Asian economies such
as Kazakhstan were hurting trade, and that many
Xinjiang-Central Asian joint venture and construction
projects are on hold. But Habai Matai also noted that
trade with many Central Asian countries was still
small, and that poor business environments,
particularly in Tajikistan, limited China's trade and
investment in the region. Zhu Zi'an at the Xinjiang
Development and Reform Commission (XJDRC) said
Xinjiang's trade with the United States, particularly
exports, dropped dramatically over the last year. But
according to Zhu, Xinjiang firms are generally not
internationally oriented and are therefore not as
likely to be hurt by a slowdown in the global economy.

5. (SBU) In an October 16 meeting with the Ningxia
Development and Reform Commission, local government

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economists said RMB appreciation was hurting exports,
but that the impact on Ningxia will be small. They
also commented that in the long term RMB appreciation
will force companies to be more competitive and
contribute to rebalancing the economy toward domestic-
led, cleaner growth. Ma Zongyu, an economist with the
Ningxia Statistical Bureau, was also concerned about
the global economy and the impact on exports, but said
China, and especially Ningxia, is not yet a completely
open economy so the impact may be limited. He said
Ningxia in particular is likely to suffer less and he
was still confident about overall growth prospects.
(Note: In a recent news report, however, officials
paint a more difficult picture of Ningxia's economic
prospects. End Note.)

6. (SBU) According to XJDRC's Zhu, real estate in
Xinjiang did not start to boom until about six months
ago, and is now probably at its peak. Because the
financial sector is less developed in Xinjiang,
according to Zhu, speculation has been much less, and
prices have only increased 25 percent. Average real
estate prices are relatively inexpensive and roughly
equivalent to those in Zhengzhou City, Henan and
Changsha in Hunan. In Karamay, according to city
officials, real estate has been stable; it did not
boom and now is not expected to fall. Karamay
residents, according to officials, mostly did not buy
apartments as speculative investments.

--------------------------------------------- ---------
Business Perspectives: Despair, Hope, and Opportunity?
--------------------------------------------- ---------

7. (SBU) Dr. Liu Gang, Deputy CEO at TBEA, a Xinjiang-
based electrical power equipment and cable
manufacturer with operations in Liaoning, Sichuan and
Shandong, noted growing inventories among his
competitors and said the slowdown in the real estate
market is hurting demand for TBEA products used for
wiring and structural reinforcement. Liu expects the
impact of the global and domestic economic slowdown on
TBEA will be delayed. Liu explained that TBEA, unlike
textile firms, is not as susceptible to as lower
overseas demand. Liu also hopes that government
fiscal expenditures on railroads and power generation
will help boost business. But he is also concerned
that a longer 3-5 year prolonged slowdown is also
possible, in which case TBEA would be hurt by reduced
demand for power consumption. Liu also said that
TBEA's solar power business was seeing a sharp drop in
demand from the United States and Europe, although
some of the impact is being moderated by long-term

8. (SBU) Liu claimed that TBEA is not laying off any
workers, and is using this period to restructure its
workforce by hiring graduates in engineering and
technical fields. The company will reduce hiring this
year and recruit at fewer, higher quality universities.
Liu said he expects to have more choice this year for
top students than in the past.

9. (SBU) Emboff also spoke to a computer security
software salesperson whose company was expanding its
business in Xinjiang. He said the economy does not
present a big problem yet for his company because it
has a large domestic market share. He explained that
as large companies face tighter competition in a
tougher economic environment they actually try to
expand market share and hire more sales people. But
administrative and support staff faced possible job
loss if his company moves to cut costs, he added. A
small processed food wholesale distribution manager in
Urumqi told Emboff that business is very bad and that
consumers are not spending, but Emboffs did not hear
or see other signs of falling consumption in Urumqi or

Rural Migrant Labor: Okay for Now

10. (SBU) Nurmuhanmad, Director of the Xinjiang
Agriculture Bureau's Foreign Economic Cooperation

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Department, said the Xinjiang government is working to
raise rural incomes and address poverty by moving
labor (laodongli zhuanyi) out of the agriculture and
into service and industry jobs either in towns or
cities. Poverty Alleviation Office officials in
Xinjiang and Ningxia conduct training programs to
prepare rural residents to take advantage of
employment opportunities in coastal cities. The
Ningxia Poverty Alleviation Office also links
graduates of its vocational training programs with
prospective employers in coastal cities.

11. (SBU) According to Wang Guoming of the Xinjiang
Poverty Alleviation Office, the remittances from
migrants workers from Xinjiang working in major
coastal urban areas are significant, and add to
housing construction and consumption in Xinjiang rural
communities. Xinjiang migrant workers, according to
Wang, mostly work in restaurants or run small
individual businesses selling raisons or other
Xinjiang products. Wang surmised that these jobs
involve non-discretionary spending that is less likely
to suffer from lower demand as the economy slows.
Xinjiang Foreign Affairs Office contacts said they had
not heard news of migrant workers from Xinjiang
loosing jobs or returning to the region. In Karamay,
according to city officials, most migrant workers are
engaged in manual labor and construction work, as well
as services and small individual businesses (getihu).
They claim that an unemployment wave (shiyechao) is
not net yet evident.

12. (SBU) As part of Ningxia's effort to raise rural
incomes, the Region's Labor Bureau also buys train
tickets and makes arrangements for rural residents to
travel to Xinjiang each fall to pick cotton, according
to Ningxia Poverty Alleviation Office officials.
Farmers from Ningxia as well as Sichuan, Gansu,
Shaanxi and elsewhere earn 3000-4000 RMB for a two
week stint per year, and cotton harvest wages are
rising due to the dearth of workers. (Note: According
to Railway Bureau passenger statistics an estimated
663,000 temporary cotton workers worked in Xinjiang
during the 2008 harvest. End Note.)

13. (SBU) Despite the current shortage of temporary
cotton laborers and increasing wages, a number of
contacts said falling cotton demand and mechanization
may threaten this source of supplemental rural income
in the future. Officials at Xinjiang's Agriculture
and Animal Husbandry bureaus worried that the demand
for Xinjiang-produced cotton will fall as textile
factories close in coastal China as well as other
export markets such as Pakistan. They explained that
Xinjiang produces one-third of China's cotton, and
one-half of Xinjiang farmers' income is from cotton
production. They also noted that the impact will
likely be greatest in Uighur-dominated Southern
Xinjiang, the source of most of Xinjiang's cotton.
(Comment: The cotton sector is heavily subsidized.
Although demand is slumping, the government is looking
to protect the cotton sector by raising the floor
price for state cotton procurement and increasing
cotton purchases for the national cotton reserve. End

14. (SBU) According to Wang Gongjun, Brigade Leader of
the 136th Construction and Production Corps (CPC, or
"bingtuan") Farm near Karamay, over the next few years
his brigade will gradually stop using migrant cotton
pickers during the harvest season as they increase
mechanization. Wang claimed that other CPC cotton
farms across Xinjiang are moving in the same direction,
but officials at the Xinjiang Construction and
Production Corps Development and Reform Commission
said that the mechanization process will be gradual
and require more time to play out across the region.
(Comment: Although the numbers of migrant workers who
supplement their income by picking cotton in Xinjiang
is small compared to those working in factories, over
time this trend could have an impact on rural
communities in a number of poor inland provinces. End

--------------------------------------------- ---

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Infrastructure: Waiting For the Next Gravy Train
--------------------------------------------- ---

15. (SBU) Contacts in Xinjiang highlighted the
important role that Central Government infrastructure
investment and state-owned enterprises play in the
economy, especially given the smaller role of foreign
direct investment. In Ningxia, Agricultural and Animal
Husbandry Bureau officials also highlighted the
importance of Central Government fiscal transfers that
Ningxia receives as a minority region. The Ningxia
Development and Reform Commission's Yu Dengbo said
Ningxia also benefited from the Great West Development
Strategy, particularly in the areas of infrastructure,
environmental programs, and education. He explained
that Central Government fiscal transfers comprise 30 to
40 percent of the Region's government budget.

16. (SBU) A number of contacts said they expected the
Central Government stimulus package to boost
infrastructure investment further, and also cited
rural and social safety net expenditures as a likely
target for more funding. Karamay's Vice Mayor Zhao
Wusheng said he hoped a number of nearby
infrastructure projects planned or under way (e.g.,
train lines and highway upgrades linking Karamay to
cities to the South and North) would get more funding,
along with education and other social programs. Zhao
also said he thought more funding would go to central
and western china development strategies.


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