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Cablegate: China's 106th Canton Fair Shows Gradual Export Recovery

VZCZCXYZ0006
RR RUEHWEB

DE RUEHGZ #0627/01 3100926
ZNR UUUUU ZZH
R 060926Z NOV 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1086
INFO RUEHGZ/CHINA POSTS COLLECTIVE 0332
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0195
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC 0115
RUEAIIA/CIA WASHDC 0315
RUEKJCS/DIA WASHDC 0311

UNCLAS GUANGZHOU 000627

SIPDIS

Dept for EAP/CM and EAP/INR
State pass USTR

E.O. 12958: N/A
TAGS: ETRD ECON KIPR PREL EINV CH
SUBJECT: CHINA'S 106TH CANTON FAIR SHOWS GRADUAL EXPORT RECOVERY

REF: A) GUANGZHOU 626, B) GUANGHOU 613, C) GUANGZHOU 290, D) 2008
GUANGZHOU 648, E) 2008 GUANGZHOU 249

(U) This document is sensitive but unclassified. Please protect
accordingly.

1. (U) Summary: Guangzhou's semi-annual Canton Fair concluded its
106th installment this week and reported that Chinese export orders
continued to strengthen. However, orders have not recovered to
pre-financial crisis levels, highlighting the need for China to
further restructure the economy from an export orientation to one
that relies more heavily on domestic demand. IPR complaints surged
almost 50% this session, when compared to the 105th session, and
authorities determined that a greater number of firms infringed
others' IP than at either of the previous two sessions. About a
dozen U.S. exhibitors occupied small booths in the International
Section during the first of the fair's three phases. End Summary.

Evidence of Slow, But Continued Export Recovery
--------------------------------------------- --

2. (U) Press reports announced that total attendance for the 106th
China Import Export Commodities Fair (Canton Fair) had increased
13.7% by its close on November 4. A total of 188,170 visitors
visited the fair, with a 16.2% increase in the value of orders
placed when compared to the April 2009 session (ref C), but still
down 3.4% from the 104th session in October 2008 (ref D). The total
value of orders was US$30.47 billion, which represented continued
recovery for three of China's largest export markets, Europe, the
Middle East and the United States, accounting for US$9.33 billion,
US$4.26 billion and US$4 billion, respectively. More surprising
were a 98% increase in orders from Brazil, to US$1.07 billion, and a
19.9% decline in orders from ASEAN countries, to US$1.55 billion.

3. (U) Private enterprises - mostly small and medium enterprises
(SMEs) - continued to dominate the majority of deals signed by
Chinese exporters, accounting for US$19.59 billion or 64% of the
total, according to media reports and statistics released by Canton
Fair organizers. China's State Owned enterprises (SOEs) garnered
US$5.75 billion, or approximately 17% of the total, and Foreign
Invested Enterprises (FIEs) signed US$5.23 billion, also
representing approximately 17% of the deals signed. The order
totals for each of these vendor categories all experienced
double-digit growth at this session of the fair.

4. (U) Almost all product sectors attracted increased orders at the
106th fair, a marked turnaround from last spring when all but three
sectors experienced declining orders. Mechanical and electrical
products continued to represent the largest proportion of orders at
44.6%, followed by light industrial products, which accounted for
32.04% of the total. Orders for these two dominant sectors each
increased between 15-20% at this session of the fair. However,
despite the increases, media reported that orders showed signs of
softening, both with smaller individual orders and shorter-term
contracts, suggesting that long-term order recovery could take more
time. On the other hand, orders from "emerging" sectors like
traditional Chinese medicine (TCM) and green energy products showed
impressive growth at the 106th fair, but order volumes for these
sectors remained limited to less than one per cent of the total at
US$36 million and US$30 million, respectively.

Domestic Consumption, Anyone?
-----------------------------

5. (U) Several media reports focused on the question of domestic
substitution for flagging exports, but highlighted challenges to
this transition. (Refs A and B described similar challenges
reported by business leaders.) According to the news reports,
Canton Fair exhibitors intent on shifting from export orders to
domestic demand face a key structural obstacle in how they accept
orders and do business - foreign buyers typically pay a 30% deposit
on export orders and accept all inventory-related risks if any of
the product does not sell after delivery. However, domestic buyers
are unwilling to pay the order deposit and customarily have the
option of returning unsold wares to domestic suppliers after a
pre-agreed sales period, placing most of the inventory risk on
manufacturers rather than domestic retailers who might order their
products for resale. These factors led to a disappointing turnout
at the "Export-for-Domestic-Sale Business Matchmaking Section" and
prompted local media to conclude that most producers remain more
interested in attracting export orders whenever possible.

IPR Complaints
------------------

6. (U) IPR infringement continued to be a hot topic for exhibitors,
buyers and fair organizers. The 106th session saw a 21.8% increase
in IPR complaints, to 710 cases, when compared with the 105th
session. There were 1,113 firms involved in the complaints, an
increase of 48.6%, and authorities determined that 689 of the
accused firms had infringed others' IP, an increase of 43%. Among
the total number of IP complaints, 68.1% involved patent issues at
this session of the fair.

U.S. Exhibitors See Opportunities; Lament Absence of U.S. Pavilion
--------------------------------------------- -

7. (U) The CG visited U.S. exhibitors' booths in the fair's
International Section on opening day, October 15. About a dozen
small U.S. firms, mostly from the San Francisco area, were making
their debut at the fair, seeing it as an opportunity to introduce
their firms to China. Pointing to adjacent Italian and Turkish
pavilions that featured lavish decorations, and reportedly sponsored
by those governments, U.S. exhibitors lamented the absence of an
American counter-part. Representatives of one U.S. firm said this
was their third year at the fair, and that, while they hoped to
build their China business, it was international buyers from other
regions such as Europe, Africa, and the Middle East that made
participation attractive and lucrative in terms of orders.

GOLDBECK

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