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Cablegate: Exports to Remain Pillar of Guangdong's Economy

VZCZCXRO4231
RR RUEHCN RUEHGH
DE RUEHGZ #0613/01 3030546
ZNR UUUUU ZZH
R 300546Z OCT 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1056
INFO RUEHGZ/CHINA POSTS COLLECTIVE 0312
RUEHBJ/AMEMBASSY BEIJING 0838
RUEHGH/AMCONSUL SHANGHAI 0248
RUEHCN/AMCONSUL CHENGDU 0249
RUEHSH/AMCONSUL SHENYANG 0258
RUEHHK/AMCONSUL HONG KONG 0320
RUEHIN/AIT TAIPEI 0233
RUEAIIA/CIA WASHDC 0295
RUEKJCS/DIA WASHDC 0291
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC 0109
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC 0009
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0175
RUEHRC/USDA FAS WASHDC 0007

UNCLAS SECTION 01 OF 03 GUANGZHOU 000613

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD ECON EIND PGOV CH
SUBJECT: Exports to Remain Pillar of Guangdong's Economy

Ref A) Guangzhou 528, B) Guangzhou 237, C) Guangzhou 218, D) 08
Guangzhou 406

1. (SBU) SUMMARY: With the global economy showing signs of recovery,
Guangdong province is reassessing its export market orientation and
attempting to make structural adjustments to expand its domestic
market in light of the global economic downturn, according to
Guangdong contacts who met with representatives from the Department
of Treasury's Strategic and Economic Dialogue (S&ED) Office and
ConGenoff in late September. However, Guangdong government
officials stressed that exports will continue to be an important
part of the province's economic development. Several contacts
pointed out numerous challenges that lie in the way of repositioning
industries in China to serve the domestic market. END SUMMARY.

Exports Will Continue to Be a Key Economic Engine
--------------------------------------------- ----

2. (SBU) Although Guangdong must not be too reliant on the export
market in light of the economic downturn, the province will continue
to maintain its export orientation, according to Deputy Secretary
General Xie Pengfei of the Guangdong Center for Development Research
(CDR). Xie told U.S. Treasury representatives and ConGenoff that if
Guangdong has the ability to take a share of the global export
market, it should certainly do so. Xie also said exports will
continue to be important to Guangdong because economic globalization
is here to stay. After the full benefits of China's economic
stimulus plan have been felt, Xie believes China's economic growth
will continue in the export sector, even as it turns more attention
to expanding domestic demand. In sum, Xie said that China will not
give up exports.

Eggs Not In One Basket
----------------------

3. (SBU) Deputy Secretary General Xie said that his province sees
the global economic downturn as a result of over expenditure by
developed economies that will force economic models to change in
both developed and developing economies. The contraction of foreign
demand will cause China's export-oriented posture to change, he
said. Guangdong's economy will undergo structural changes to
diversify its portfolio with the goal of increasing domestic demand
and warding off any negative impact from future global economic
slumps. Likewise, executives from Lung Cheong International
Holdings Ltd., a Hong Kong toy manufacturer operating in Dongguan,
said in a separate meeting that the industry cannot depend solely on
exports, believing that China's domestic market has great potential.
C.M. Leung, managing director of Lung Cheong, is pleased to see
that the local and provincial governments are taking steps to expand
the domestic market.

Government Lending a Hand to Expand Local Demand
--------------------------------------------- ---

4. (SBU) Deputy Secretary General Xie shared some of Guangdong's
plans for new policies to increase domestic demand. Their approach
is to analyze the different components of "demand" as it relates to
Guangdong, such as technical infrastructure investment, social
safety net, education, urbanization, and consumer demand. A full
report will be released by the end of October, and a meeting will
convene at the end of the year to announce the implementation of a
strategy to expand Guangdong's domestic demand. Xie expects that
Guangdong, with full support from the central government, will
implement such a strategy prior to other provinces. He also
anticipates that the central government will push forward a similar
policy at the national level after Guangdong executes its strategic
plan.

5. (SBU) In addition, Guangdong is also taking steps to help local
businesses tap the domestic market. The province held its first
Foreign Invested Enterprises Commodities Fair in June 2009 in
Dongguan. The fair aimed to help foreign-invested companies in
Dongguan develop marketing channels with major distributors and
retailers in China like Wal-Mart and Alibaba. According to Dongguan
Today, a local news website, the amount of purchases resulting from
the event reached RMB 31.6 billion (US$ 4.6 billion), including
sales in home appliances, consumer electronics, clothing and
accessories, toys and gifts, home accessories, and chemical
products. Mr. Leung of Lung Cheong felt that the fair enhanced

GUANGZHOU 00000613 002 OF 003


business relationships between manufacturers, distributors, and
retailers, but he did not provide any tangible examples of sales
that resulted from the fair. However, he commented that the toy
industry had sent a letter to Guangdong Party Secretary Wang Yang
asking that the fair be made an annual event.

Structural Adjustments, Easier Said Than Done
---------------------------------------------

6. (SBU) Mr. Leung raised two issues that hindered companies like
his from selling domestically. First, the distribution system for
goods is complex and not particularly well-formed, making it
difficult for companies to establish strong sales and logistics
networks. Second, large Chinese department stores often have
stringent product requirements, while smaller retailers are lax on
quality and protection of intellectual property, allowing for poor
products and knock-offs to enter the market. These conditions
inevitably create disincentives for established manufacturers to
sell domestically, said Leung.

Signs of Export Recovery
------------------------

7. (SBU) Businesses in Guangdong expressed cautious optimism when
asked about the outlook for export recovery, which could diminish
the emphasis placed on efforts to redirect the economy toward
domestic demand. Mr. Leung said that the export-oriented toy
industry has slowly stabilized and firms saw some orders return for
the 2009 Christmas season. One of the largest foreign-invested
shipping companies in the region estimated 2% growth for 2010 after
seeing a loss of US$500 million so far in 2009, according to a
senior executive. The company has observed some increase in volume
in the third quarter, but warned that seasonality should not be
mistaken for growth. Though the company does not expect to bounce
back in 2010, it does hope to come close to breaking even.

8. (SBU) The general manager of a large container terminal operating
in Dongguan echoed similar views, noting that his company
experienced some volume pick-up in late summer of 2009, but has not
yet returned to a growth track. However, he said that the shipping
industry has already seen the "trough" of the economic slump, but
only time will tell how long the recovery will take. Professor Feng
Subao, deputy research director at the China Development Institute
(CDI) in Shenzhen, also cited indicators of economic upturn,
pointing to electronics manufacturer Foxconn's return to full-scale
operations and the recovery of the mobile phone market. Feng
explained that Shenzhen's economic cycle is 3-6 months ahead of the
nation and 1-2 months ahead of the rest of the Pearl River Delta
(PRD), so he sees Shenzhen's recovery as a sign of greater
recovery.

Guangdong's Double-Transfer Policy Also Faces Obstacles
--------------------------------------------- -

9. (SBU) Although CDR's Xie highlighted the success of Guangdong's
double-transfer policy, which moves labor-intensive industries out
of the PRD to less developed areas while encouraging investment in
services and advanced manufacturing industries in their place (ref
D), academics at CDI noted the challenges the policy has faced. Xie
claimed that the effectiveness of the policy is already obvious,
manifested in the quickened pace of industrial development in
regions such as northern and eastern Guangdong. Such transfers, he
explained, have opened up space in the PRD to develop high-skilled
and high-tech industries. However, Xie added that most of the
transferred companies are export firms, while the proportion of
domestic-oriented companies is low.

10. (SBU) However, Professor Feng of CDI explained that despite the
intentions of the double-transfer policy, many companies in reality
had not moved to areas designated by the government. Due to the
lack of infrastructure and conveniences in the designated rural
areas, companies often prefer cities outside Guangdong, like those
in Hunan (Changsha), Hubei (Wuhan), Guangxi, and Northeast China.
Also, actual transfers have been few because many businesses either
stopped operations or went bankrupt during this latest economic
slowdown. Dr. Hu Zhenyu, also of CDI, identified other challenges
including the lack of skilled labor in designated areas or the
unwillingness of skilled labor to move with factories and the lack
of local government experience to assist new industries in their

GUANGZHOU 00000613 003 OF 003


regions. Hu believes that adjustments in industrial structure will
ultimately be driven by the market and will take 20 years or more,
comparing the transition to China's last 30 years of economic
reform.

GOLDBECK

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