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Cablegate: Optimism Returning to Manufacturing Heartland of the Pearl

VZCZCXRO0846
RR RUEHCN RUEHGH
DE RUEHGZ #0626/01 3100801
ZNR UUUUU ZZH
R 060801Z NOV 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1083
INFO RUEHBJ/AMEMBASSY BEIJING 0864
RUEHGH/AMCONSUL SHANGHAI 0265
RUEHSH/AMCONSUL SHENYANG 0275
RUEHCN/AMCONSUL CHENGDU 0266
RUEHHK/AMCONSUL HONG KONG 0338
RUEHGZ/CHINA POSTS COLLECTIVE 0329
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0192
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC 0312
RUEKJCS/DIA WASHDC 0308

UNCLAS SECTION 01 OF 03 GUANGZHOU 000626

SENSITIVE
SIPDIS

STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/LEE
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER
STATE PASS SAN FRANCISCO FRB FOR CURRAN
TREASURY FOR MOGHTADER

E.O. 12958: N/A
TAGS: ECON ETRD EINV PGOV CH
SUBJECT: Optimism Returning to Manufacturing Heartland of the Pearl
River Delta

Ref: A) Guangzhou 613, B) Guangzhou 598, C) Guangzhou 397, D) Hong
Kong 1898

(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: Things are looking up for Dongguan, the export
manufacturing powerhouse at the heart of the Pearl River Delta. A
year ago business leaders in the city raised dire alarms of
impending factory closures and massive layoffs. During meetings
last month, contacts told the Consul General that conditions have
stabilized with export orders improving again and a tighter labor
market. The local government has taken steps to help firms tap the
domestic market, but industry leaders representing Hong Kong
investors believe obstacles remain that will keep many firms focused
on export sales. End summary.

Situation Stabilizing
---------------------

2. (SBU) A year after dire predictions of factory closures and mass
layoffs left local businesses and officials concerned about economic
stagnation and social unrest, the economic outlook has dramatically
improved in the export manufacturing center of Dongguan. Leaders of
the Dongguan Association of Enterprises with Foreign Investment (DG
FIE Association), whose members are mostly Hong Kong-invested
companies, told the Consul General during an October 16 visit that
the situation had now stabilized as indicated not only in Customs
statistics but also in the association member surveys and recent
sales results at the executives' own factories. Chu Kwok Kai, the
association chair, pointed out that Dongguan's total export value
for the January-September 2009 period was down approximately 21%
from a year ago, but rising sales in recent months led the
association to predict exports would finish the year down just
16-17%. Eddie Leung, the association's honorary chair, noted that
comparing 2009 to 2008 wasn't very useful because 2008 was actually
a very good year overall. He said that 2009 exports would only be
down about 7% from 2007 (ref B).

3. (SBU) Leung further commented that expected factory closures
around the Chinese New Year holiday had failed to materialize. The
association had predicted that 3,000 - 4,000 factories would close
by February-March 2009; but by the time March rolled around, it was
clear that many companies had figured out how to survive the crisis
and were doing better. Leung said that official figures showed that
about 2,000 firms had shut down in Dongguan but noted that the vast
majority were very small companies.

4. (SBU) Other contacts in Dongguan share the view of the DG FIE
Association. Dongguan Mayor Li Yuquan told the Consul General that
the public impression that many FIEs had moved out of Dongguan or
shut down during the global financial crisis was mistaken. He said
the number of firms that had left Dongguan during 2008 was actually
lower than in a typical year. Li emphasized that the Dongguan
government at all levels had been proactive about helping companies
survive the crisis.

5. (SBU) Vice President Liu Minzhong of Nine Dragons, the world's
second largest paper company, said that his firm had chosen to close
several manufacturing lines for maintenance around the end of 2008
because of the impact of the global financial crisis on sales.
However, since February things have "pretty much returned to
normal," he said. Whereas government officials had previously
visited the firm every week to monitor its status during the crisis,
Liu noted that the visits had stopped around June/July 2009. He
explained that Nine Dragons had actually increased capacity by 20%
between 2008 and 2009 but was still able to sell all its output,
albeit at lower margins.

Labor Market Tightening
-----------------------

6. (SBU) Balance has also returned to Dongguan's labor market,
according to Mayor Li. He said that once again it had become
difficult for firms to recruit workers, which he said was typical

GUANGZHOU 00000626 002 OF 003


during the busy summer months from July to October. The DG FIE
leaders echoed his comments, saying that layoffs had been fewer than
expected during the downturn with many companies reducing hours
instead of cutting employees. They reported that, with business
improving again, many companies said they couldn't hire enough
workers. Nine Dragons' Liu also indicated that turnover at the
firm's factory had started to return to pre-crisis levels after
dropping substantially during the early part of the year. He noted
that many factories in Dongguan had reopened or resumed higher
levels of production while some migrant laborers were choosing to
stay in their hometowns due to strong local economic growth.

Domestic Market Growth Helping Some
-----------------------------------

7. (SBU) DG FIE Association leaders praised the Dongguan municipal
government's recent exposition to help export manufacturers in the
city to tap the domestic Chinese market (ref A). Chairman Chu said
that association members were able to get exhibit space at the
exposition free of charge and that the municipal government
subsidized up to 50 percent of printing costs for promotional
materials distributed at the event. However, Leung also noted the
obstacles that make it difficult for many firms to transition away
from reliance on export markets, especially value-added-tax rebates
that continue to make export processing more profitable. He also
pointed out that export manufacturers don't have the relationships
they need to develop marketing channels within the domestic market.


8. (SBU) Nine Dragons, on the other hand, has become increasingly
reliant on the domestic Chinese market as the global downturn has
reduced export demand. Liu told the Consul General that exports had
previously accounted for about 44% of revenue but now accounted for
less than 10%. He said that business in less-developed parts of
China, especially Guangxi and Hunan, was booming for the paper
firm.

Double Transfer Gets Mixed Reviews
----------------------------------

9. (SBU) In response to the Consul General's question on the
progress of Guangdong's double transfer policy, which aims to move
labor-intensive factories and migrant labor populations, Dongguan
Mayor Li emphasized that the policy benefited firms that transfer
but no companies were forced to move. He said the policy was based
on market rules and claimed that enterprises with investment worth
RMB 100 billion (about US$15 billion) had already chosen to move to
other cities in Guangdong. However, Leung of the DG FIE Association
said that most companies were willing to stay in Dongguan despite
government incentives to move. According to Leung, the government
has been relatively hands-off about encouraging firms to transfer
their operations except in the cases of specifically targeted
industries like highly polluting electro-plating factories in the
city center. Liu of Nine Dragons said that his firm's factories had
not been affected by the double transfer policy because it qualifies
as a high-tech industry due to its advanced industrial process. He
emphasized that moving to less-developed areas would not make
business sense because the firm depends on economies of scale to
keep costs low.

CEPA Starting to Bring Service Industries
-----------------------------------------

10. (SBU) The DG FIE Association leaders also reported that they had
begun to see more Hong Kong investment in Dongguan in service
industries, in part due to the expansion of the Closer Economic
Partnership Agreement (CEPA) (ref D). Leung said that Hong Kong
logistics firms, in particular, had been active in expanding into
Dongguan. The association has added 20-30 new members from the
logistics industry, he said, noting that they had formed a separate
logistics industry association under the umbrella of the DG FIE
Association two months earlier. In addition, Leung said the Hong
Kong Chamber of Commerce in Guangdong had recently added an
accounting sector sub-division to its organization. Medical and
legal services firms, however, do not appear to be expanding into
the area, according to Leung.

GUANGZHOU 00000626 003 OF 003

GOLDBECK

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