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Cablegate: Stimulus Boosting Growth, Shanghai Analyst Tells Codel

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RR RUEHCN RUEHGH
DE RUEHGH #0362/01 2310405
ZNR UUUUU ZZH
R 190405Z AUG 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8215
INFO RUEHBJ/AMEMBASSY BEIJING 3017
RUEHCN/AMCONSUL CHENGDU 2158
RUEHGZ/AMCONSUL GUANGZHOU 0616
RUEHHK/AMCONSUL HONG KONG 2324
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RUEHBK/AMEMBASSY BANGKOK 0211
RUEHJA/AMEMBASSY JAKARTA 0020
RUEHLO/AMEMBASSY LONDON 0023
RUEHML/AMEMBASSY MANILA 0088
RUEHBS/USEU BRUSSELS 0009
RUEHBY/AMEMBASSY CANBERRA 0043
RUEHHI/AMEMBASSY HANOI 0026
RUEHMO/AMEMBASSY MOSCOW 0056
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8866

UNCLAS SECTION 01 OF 04 SHANGHAI 000362

SENSITIVE
SIPDIS

DEPT FOR EAP/CM, H
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, ALTBACH
DOC FOR ITA/MAC - DAS KASOFF, MELCHER, SZYMANSKI, COUCH, LEHRMAN
TREASURY FOR OASIA - DOHNER/HAARSAGER
MANILA FOR ADB USED

E.O. 12958: N/A
TAGS: ECON EINV ENRG PREL OVIP BOEHNER JOHN CH
SUBJECT: STIMULUS BOOSTING GROWTH, SHANGHAI ANALYST TELLS CODEL
BOEHNER

(U) This message is sensitive but unclassified. Not for
distribution outside USG channels.

1. (SBU) Summary: China's economy is likely to achieve the
Central Government's 8 percent growth target this year, a
Shanghai-based investment bank analyst told CODEL Boehner on
August 11. However, much of the growth is a result of Beijing's
economic stimulus measures, which are non-transparent and
potentially could lead to large non-performing loans in the
medium term. The analyst also noted concerns about China's high
unemployment and high public debt. End summary.

2. (SBU) A six-member Congressional delegation led by House
Minority Leader John Boehner (R-OH) met with Standard Chartered
Bank China Research Head Stephen Green August 11. The
delegation also included Dan Boren (D-OK), Jo Bonner (R-AL),
Dave Camp (R-MI), Tom Latham (R-IA), and Greg Walden (R-OR). In
addition to the session with Standard Chartered's Green, the
delegation visited the Semiconductor Manufacturing International
Corporation (SMIC) and met with members of the American Chamber
of Commerce in Shanghai.

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


China's Economy is Picking Up Speed...


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

3. (SBU) Green cited several alternative indicators to support
his main point that China's economy is taking a turn for the
better. Year-on-year growth in the freight index, for example,
fell to negative 10 percent in early 2009, but is now on an
upward trend, reaching 5 percent growth by May. The turnaround,
given China's continuing negative export growth, has been
especially clear in domestic container activity: movement of
containers through inland river ports rose almost 30 percent
year-on-year in May, while that of coastal ports remained in the
negative 10 percent range.

4. (SBU) Green said electricity production and Standard
Chartered's industrial output index also indicate the recovery
is underway. However, he noted there is a divergence in these
two series. (Comment: Other analysts have noted that
electricity production may no longer be an accurate indicator of
Chinese economic activity. End comment.) While year-on-year
electricity production growth fell sharply negative in October
2008 and remained negative until May 2009 -- a U-shaped
recession -- Green's analysis of industrial activity shows a
more V-shaped recession, with a quick recovery in February 2009.
According to Green, at one point there was a 20 percent gap
between electricity production and industrial activity.

SHANGHAI 00000362 002 OF 004

5. (SBU) According to his analysis of other non-traditional data
sets such as freight activity or electricity production, Green
said he is confident the Chinese government will be able to meet
its 8 percent GDP growth target by the end of the year.
Standard Chartered's forecast is 8.5 percent GDP growth this
year, ticking up to 8.9 percent in 2010 as a result of
continuing stimulus measures, and then pulling back to 8.1
percent in 2011. Green described these forecast figures as
conservative compared with some other investment banks, which
project a return to double-digit growth by 2010.

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


...Thanks to Beijing's Stimulus Spending


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

6. (SBU) Seventy to eighty percent of China's recent growth is
a result of Beijing's economic stimulus measures, estimated
Green. However, he cautioned that it is difficult to know
exactly because the spending under the stimulus plan is not well
defined. Beijing first announced a RMB 4 trillion
(approximately USD 587 billion) package in October, and local
governments then submitted wish lists of over RMB 20 trillion.
Over the past several months, said Green, the Central Government
approved tranches of projects likely to amount to significantly
more than RMB 4 trillion.

7. (SBU) In addition, said Green, approximately half of the RMB
7 trillion (approximately USD 1 trillion) in new bank lending
during the first half of the year contributed to stimulus
projects. In the medium to long term -- starting in five years
or so -- about half of the new lending from banks over the past
several months is likely to go bad, said Green. The banks at
present feel that they have a government guarantee on these
loans, since they were responding to government pressure to lend
to stimulus-related projects. However, said Green, no one knows
what will happen when the projects are completed and they prove
not to be economically viable, with little or no return on
investment.

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


Social Problems: Unemployment...


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

8. (SBU) Green said that his best guess is that the urban
jobless rate is currently around 10 percent of the total urban
workforce. He said that he has no confidence in the official

SHANGHAI 00000362 003 OF 004


unemployment statistics, which he characterized as "the worst
numbers out there" because of their failure to account for
unemployment in the migrant worker population. (Note: On
August 4 the State Council Information Office announced that
registered urban unemployment in the first half of the year
remained stable at 4.3 percent. End note.) The stimulus
package will not necessarily improve the employment situation
because there is a mismatch between the export-processing jobs
lost in the downturn and the jobs created by the stimulus
program, Green said. For example, export processing jobs are
usually held by young women aged 18-25 years, but few of these
would be able to transition to working on infrastructure
projects.

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


...And High Public Debt


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

9. (SBU) Green told CODEL Boehner Chinese interlocutors often
express concerns about the size of the U.S. budget deficit and
overall U.S. government debt, but he responds to these concerns
by pointing out China's budget and debt numbers are actually
closer to those of the United States than most people realize.
For instance, China's deficit this year is around 4 percent of
China's GDP. Since most of the economic stimulus financing is
being routed through the banking system rather than the national
budget, however, the deficit also should take into account the
Chinese bank-financed stimulus. In this case, Green stated, the
percentage of GDP rises to 9 or 10 percent, very close to the
U.S. deficit numbers as a percent of U.S. GDP. Likewise,
China's public debt is approximately 20 percent of China's GDP,
but if contingent liabilities -- including the likely
non-performing loans resulting from the stimulus program -- are
included, China's public debt rises to 80 or 90 percent of GDP,
comparable to U.S. figures.

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

Businesses Riding Stimulus Wave

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

10. (SBU) Businessmen supported Stephen Green's conclusions,
telling CODEL Boehner the stimulus package clearly has boosted
growth in the short-term but may be harmful in the long-run.
Officials at the Semiconductor Manufacturing International
Corporation (SMIC) said production in SMIC's Shanghai factory
dropped to a low point of 30-40 percent of capacity by the
beginning of 2009. During the first half of the year, however,
SMIC has benefited from a surge in China's domestic spending as
a result of the stimulus, and the factory is now producing at 70
percent capacity. An American construction company
representative told Congressman Bonner that many small

SHANGHAI 00000362 004 OF 004


infrastructure companies also benefited directly from the
stimulus package. Also in line with Green's analysis, a
corporate lawyer cautioned, however, that the surge in bank
loans is not sustainable and could lead to large numbers of
non-performing loans.

-------


Comment


-------

11. (SBU) Stephen Green is a trusted, long-time contact of the
Consulate. In his analysis, he tends to rely heavily on
statistics, and thus he has wrestled with the many thorny
questions raised by China's economic statistics reporting
system, which clearly resonated with the visiting Congressional
delegation. His forward-looking critique and perspective on
Beijing's stimulus measures emphasized the importance of
utilizing non-traditional data sets in order to compensate for
unreliable Chinese figures.

12. (SBU) CODEL staff cleared this report.
CAMP

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