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Cablegate: Boosting Chinese Domestic Consumption Problematic, Say East

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ZNR UUUUU ZZH
R 041116Z SEP 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8254
INFO RUEHBK/AMEMBASSY BANGKOK 0224
RUEHBJ/AMEMBASSY BEIJING 3050
RUEHRL/AMEMBASSY BERLIN 0013
RUEHBS/USEU BRUSSELS 0021
RUEHBY/AMEMBASSY CANBERRA 0051
RUEHCN/AMCONSUL CHENGDU 2188
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0646
RUEHHI/AMEMBASSY HANOI 0038
RUEHHK/AMCONSUL HONG KONG 2353
RUEHJA/AMEMBASSY JAKARTA 0032
RUEHLO/AMEMBASSY LONDON 0031
RUEHML/AMEMBASSY MANILA 0101
RUEHMO/AMEMBASSY MOSCOW 0071
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHNE/AMEMBASSY NEW DELHI 0061
RUEHOT/AMEMBASSY OTTAWA 0039
RUEHFR/AMEMBASSY PARIS 0010
RUEHRO/AMEMBASSY ROME 0014
RUEHUL/AMEMBASSY SEOUL 0546
RUEHGH/AMCONSUL SHANGHAI 8905
RUEHSH/AMCONSUL SHENYANG 2179
RUEHIN/AIT TAIPEI 1982
RUEHKO/AMEMBASSY TOKYO 0757

UNCLAS SECTION 01 OF 04 SHANGHAI 000380

SENSITIVE
SIPDIS

DEPT FOR EAP/CM
NSC FOR LOI, SHRIER
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN
USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP
TREASURY FOR IMFP -- SOBEL/CUSHMAN
STATE PASS CEA FOR BLOCK
STATE PASS CFTC FOR OIA/GORLICK
MANILA FOR ADB USED

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV PREL CH
SUBJECT: BOOSTING CHINESE DOMESTIC CONSUMPTION PROBLEMATIC, SAY EAST
CHINA FINANCIAL CONTACTS

1. (SBU) Summary: China's decentralized investment approval
process aids the entry of foreign businesses into the China
market, in the view of ConGen contacts in Shanghai's financial
sector. However, problems with official approval of investment
projects and the varying quality of government cadres impede the
process. In the longer term, China's plans to develop the
service sector and advance domestic consumption will be hindered
by the government's unwillingness to embrace political opening
and rural land reforms. The contacts also commented on recent
corruption cases and the Rio Tinto case, using the latter as an
example of what can happen when a foreign company publicly
embarrasses the Chinese leadership. End Summary.

2. (SBU) ConGenOffs met with four financial sector contacts on
August 27. Two of the contacts are investment advisors, one
focused on the securities markets and the other facilitating
Sino-foreign mergers and acquisitions. Another is the chief
economist of a foreign financial firm. The fourth heads a
joint-venture securities firm.

============================
Local Governments Make Deals
============================

3. (SBU) While China presents the image of a unified foreign
investment approval system, the reality is that local
governments in East China have great leeway to approve projects,
according to these financial professionals. Local authorities
have many reasons to say yes to investments, but central-level
officials have many more reasons to say no. Some central-level
officials openly admit that their hands are tied, one said, and
privately advise him to reconfigure deals so that they can be
approved by local authorities without review from the center.

============================================= ===========
Government Officials Not Cut From the Same Cloth Anymore
============================================= ===========

4. (SBU) Government officials vary widely in capacity and
predisposition. One contact said that, in the Central
Government, there was a higher quality in the "C's," referring
to the relatively new commissions such as the China Banking
Regulatory Commission, than in the "M's," the ministries. He
was impressed with the quality of government officials with whom
he had recently served for several months on a Central
Government-sponsored legal reform advisory committee. These
present and former officials were willing to debate the issues
at length, maintaining articulate and informed positions. He
said government officials come in all stripes these days, from
market-oriented to protectionist and nationalistic.

==========================================
Corruption Crackdown Politically Motivated
==========================================

5. (SBU) The financial professionals viewed recent

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anti-corruption cases in the Chinese media as posturing by the
Communist Party ahead of the 60th anniversary of the founding of
the People's Republic of China on October 1. (Note: The
contacts were referring to the case of Huang Guangyu, the
founder of the Gome electronics chain, who was detained in
November 2008, and to the August 2009 news that several
high-ranking officials had been detained in an investigation
into criminal gangs in Chongqing, among others. End note.) One
suggested that the authorities needed to launch periodic
crackdowns on corruption to sate the anger of the masses over
official misdeeds. He did not see major corruption cases
breaking in Shanghai, since Party Secretary Yu Zhengsheng has
been very good at keeping in Beijing's good graces, and would
not cross Hu Jintao like former Shanghai Party Secretary Chen
Liangyu did before his downfall in 2006.

============================================= =========
China Slowly Moving Towards Domestic Consumption . . .
============================================= =========

6. (SBU) There was some debate over whether China is moving
towards an economy driven by domestic consumption. Those who
agreed pointed to the vast changes over the past ten years in
the landscape for Chinese retail consumers. In the 1990s, for
example, the securities market advisor said, foreign retailer
Carrefour was "a freak show" for most Chinese, but now business
is booming at Carrefour hypermarkets in Shanghai, with Chinese
buying mainly locally produced products. The investment advisor
said second- and third-tier cities are bursting with consumption
activity. And the securities firm executive said his company is
recommending to clients to buy into consumption-related stocks,
including automobiles and white goods, because of the
potentially strong medium-term growth. The macroeconomist,
however, offered a contrarian analysis, saying that most of the
government-led economic stimulus measures announced in late 2008
had been misguided, flowing into unneeded infrastructure rather
than helping push domestic consumption.

=============================================
. . . But Services Sector Growth Stymied . . .
=============================================

7. (SBU) Nonetheless, China faces some hurdles regarding
domestic consumption growth. One contact said, ultimately,
service sector growth is restricted by lack of political reform.
The Central Government understands it would need to permit
enhanced political freedom and a loosening of control over
political debate before the service sector can take off.
However, the leadership is unwilling to take these steps, even
though it means sacrificing the development of China's service
sector. (Note: This connection has been made by other analysts
in light of the recent Green Dam incident, in which the Ministry
of Industry and Information Technology attempted to place
controls on domestic computer access to the internet. End
note.)


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============================================= ======
. . . And Rural Incomes Restricted by Land Policies
============================================= ======

8. (SBU) Rural land reform is needed to stimulate greater
domestic consumption and growth, according to the securities
firm executive and the investment advisor. However, many
officials fear that providing peasants with the right to sell
land use rights would go badly, with discontented and eventually
landless peasants ripe for social unrest. The government
assumes that the peasants would sell away their land use rights
for too little compensation, said the securities firm executive,
but he thought that peasants are smarter than that. Chinese
officials draw an analogy with the social unrest involving
state-owned enterprise employees in the late 1990s, who were
paid for early retirement, but began protesting a few years
later to get another payout. There was general agreement that
the internal jockeying prior to the 18th Party Congress in 2012
would make all players very conservative on this front.

==================
The Rio Tinto Case
==================

9. (SBU) The Rio Tinto case was raised as an example of the
dangers a foreign firm faces if it crosses the Communist Party.
Rio Tinto's real problem had been to humiliate publicly the
Chinese leadership, the macroeconomist said. Beginning in early
2009, he explained, the Chinese side attempted to take the lead
in negotiations over international iron ore prices, claiming
this right as the single biggest purchaser of iron ore
worldwide. However, commodity prices began to rise again, and
one by one importers in other Asian countries agreed to pay
higher prices. At this point, rather than giving the Chinese a
face-saving way out, Rio "twisted the knife" by demanding China
agree to a higher price, and "made the Chinese leaders look
stupid in public." The arrests and charges of stealing state
secrets, in this context, are the Chinese side's "negotiating
tactics."

10. (SBU) In actuality, said the macroeconomist, what Rio did
is common practice in the industry. Other companies take the
same Chinese officials out to the same restaurants; by the Rio
standard they could also be prosecuted. (Note: According to
Western media, Chinese officials raided Rio Tinto's Shanghai
offices on July 5 and detained four employees, who are being
investigated for bribing Chinese steel industry officials during
iron ore price negotiations. On August 11, Chinese prosecutors
formally charged the Rio Tinto employees with infringing trade
secrets and bribery, without raising the more serious charges
involving state secrets. End note.)

=======
Comment
=======


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11. (SBU) These contacts see clearly the linkage between
political and economic reform, and the unfortunate likelihood
China's leaders will back away from any initiative in this
regard until after the 18th Party Congress in 2012. This could
begin to have a tangible impact on East China's economic growth,
especially given the Shanghai government's goal to develop its
service sector to counteract the export downturn and, by 2020,
to turn the municipality into an international financial center.
CAMP

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