Cablegate: Dongguan Officials Express Optimism but Acknowledge


DE RUEHGZ #0719/01 3460857
R 110857Z DEC 08




E.O. 12958: N/A
SUBJECT: Dongguan Officials Express Optimism But Acknowledge
Economic Challenges

REF: A) Guangzhou 618, B) Guangzhou 692, C) Guangzhou 696, D)
Guangzhou 715

(U) This document is sensitive but unclassified. Please protect
accordingly. Not for release outside U.S. government channels. Not
for internet publication.

1. (SBU) Summary: Government officials in Dongguan, a major
manufacturing center in the heart of the Pearl River Delta between
Guangzhou and Shenzhen, are doing their best to put a positive spin
on the city's economic prospects. They express hope that Dongguan's
growth in 2009 will be comparable to 2008 levels -- running at 15.1
percent in the first ten months -- and challenged the notion that
factories in the city are closing down in larger numbers than in
previous years. Nevertheless, they acknowledged the effects of the
global financial storm that's hitting this export-reliant region
earlier and harder than most other parts of China, saying that
Dongguan has never before faced such a severe situation. They
described various steps the city is taking in coordination with
central and provincial officials to shore up the economy. The
officials also indicated that Dongguan is encouraging
labor-intensive export processing firms to stay in the area and
upgrade rather than move to more remote areas of the province as
envisioned in Guangdong Party Secretary's "double-transfer" policy.
The tone of the officials differs significantly from that of
investors in the city (ref D), but it's clear they agree on one key
issue: Dongguan is facing tough times ahead. End summary.

2. (SBU) Comment: Some media reports and Consulate contacts have
suggested that there is a significant difference of opinion between
Guangdong Party Secretary Wang Yang, who has spearheaded the "double
transfer" campaign, and central government senior leadership,
particularly Premier Wen Jiabao, on what steps if any the government
should take to aid failing SMEs in the Pearl River Delta. Wang Yang
has been quoted calling the closed firms "backward productive
forces" and said it was good that they were closing. Central
government officials appear more concerned about the threat to
social stability these closures and subsequent unemployment could
represent. Wang Yang may face resistance from above and below with
municipalities like Dongguan eager to keep firms that might
otherwise be targeted for relocation. This internal debate will
likely continue with significant impact on Guangdong's economic
policies as well as Wang Yang's political future. End comment.

Hoping for Stable Growth Levels

3. (SBU) Despite media reports of widespread factory closures,
migrant workers returning home in large numbers and enterprise
concerns about falling orders (confirmed by the December 10
announcement that China's export declined in November by 2.2 percent
nationally), Dongguan Development and Reform Council (DRC) Deputy
Director Wang Zhaohong told us that growth in the city has remained
stable and showed good momentum. He believes that Dongguan could
see growth next year at about the same level as this year. In the
first ten months, Dongguan's economy grew at 15.1 percent, 2.4
percentage points lower than last year's but still higher than the
projected 14 percent, according to Wang. He cited other positive
data, including 21.5 percent growth in the city's retail sales,
export growth of 14.3 percent and growth in utilized FDI of 16.7
percent. Dongguan Bureau of Foreign Trade and Economic Cooperation
(BOFTEC) Deputy Director Fang Jianbo offered some of the same
statistics in presenting a similar case for why Dongguan's prospects
didn't look too bad.

4. (SBU) DRC's Wang also argued that the number of factories that
have shut down in Dongguan was about the same as in previous years.
He pointed out that the number of foreign-invested enterprises
(FIEs) in Dongguan was stable at about 15,000. According to
government statistics more companies have opened in Dongguan this
year than closed, he said. (Note: Per ref D, other contacts have
criticized government data on factory closures, arguing that they
only count companies that have completed the necessary paperwork to
formally de-register. End note.) BOFTEC's Fang asserted that even
though more than 600 FIEs shut down during the first ten months,
this was not unusual and the annual average was 744 closures. He
noted that of the 37,000 FIEs that have been established in Dongguan
since 1978, 21,000 have eventually closed.

Unable to Ignore Difficulties and Hard Times Ahead
--------------------------------------------- -----

5. (SBU) However, Wang acknowledged that Dongguan had never before
faced such severe challenges. He noted that the difficulties had
preceded the global financial crisis as central government policies

that removed benefits for export processing industries further
exacerbated rising wages and increases in other input costs. Wang
believes that Dongguan is being hit harder than any other part of
Guangdong Province because of the high concentration of
labor-intensive export manufacturers.

6. (SBU) Wang predicted industrial output would fall in the coming
months as many factories downsize, restructure and search for new
business models. BOFTEC's Fang said that the number of FIEs might
fall by 100 in December and again as many in January. Even as he
speculated that more small and medium-sized enterprises (SMEs) would
likely close in early to mid-2009 if orders don't start to rise and
costs continue to grow, Fang pointed out that previously closed FIEs
had recently reopened in three different Dongguan townships.

Ready to Help

7. (SBU) China's government is taking steps at various levels to
help SMEs survive the crisis, according to DRC's Wang. Dongguan is
following the lead of the central and provincial governments by
implementing a stimulus package of its own worth RMB 140 billion
(about USD 20 billion). Wang told us that the municipal government
had sufficient funds available for the package. He also described
the city's "six one-billion" campaign to allocate up to RMB 1
billion to provide support to SMEs in six target areas -- research
and development, start-ups, industrial upgrading, interest payments,
waivers of administrative fees, and tariff guarantee deposits. In
addition, Fang pointed out that the city was setting up an early
warning system to warn of potential factory closures and was
considering a new unemployment insurance scheme. He said that the
city government's efforts had contributed to Beijing's decision to
restore VAT rebates for exports and other policies beneficial to
SMEs in Donnguan.

"Double Transfer" Going Nowhere

8. (SBU) Contrary to the Guangdong provincial government's strategy
of moving labor-intensive manufacturing away from the Pearl River
Delta area to less developed parts of the province, both the DRC and
BOFTEC officials said Dongguan plans to encourage these firms to
upgrade their manufacturing technology and products but not to
relocate. Wang said that a few companies had moved to more remote
areas recently but called the number insignificant. He and Fang
each highlighted elements of the "six one-billion" plan as part of
the city's effort to encourage firms to upgrade. Fang told us that
BOFTEC also facilitates registration as wholly-owned foreign
enterprises (WOFEs) without administrative fees to better allow
local FIEs to access the domestic market.

Making Sense of the View from Dongguan

9. (SBU) Comment: Investors and officials in Dongguan each present
substantially different views of the economic situation facing this
important manufacturing center (ref D). The numbers and the tone
differ, but it's clear that both sides are deeply concerned about
what might be around the corner. Projections of growth and positive
numbers aside, the government officials acknowledge that these are
very challenging times and are quick to describe the steps they're
taking to aid firms. The Dongguan investors have praised the
responsiveness of the local government to their concerns. None of
the parties involved have a clear picture of what lies ahead. Even
if perfect statistics were available, the level of uncertainty about
the future would remain high. Businesses are largely focused on
getting the help they need that will carry them through the Lunar
New Year holiday in late January 2009. Officials have based their
positive scenarios on export orders starting to recover in the
spring. How deep and how long will the economic downturn be in
China's export markets are key questions that cloud Dongguan's
economic future.


© Scoop Media

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