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Cablegate: Odd Numbers: Explaining Jiangsu's Provincial Economic Data

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RR RUEHCN RUEHGH
DE RUEHGH #0451/01 3130954
ZNR UUUUU ZZH
R 090954Z NOV 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8372
INFO RHMFIUU/104MSF BARNES ANGB MA
RUEHBJ/AMEMBASSY BEIJING 3157
RUEHCN/AMCONSUL CHENGDU 2275
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0732
RUEHHK/AMCONSUL HONG KONG 2440
RUEHLO/AMEMBASSY LONDON 0043
RUEHML/AMEMBASSY MANILA 0128
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHUL/AMEMBASSY SEOUL 0600
RUEHGH/AMCONSUL SHANGHAI 9031
RUEHSH/AMCONSUL SHENYANG 2266
RUEHIN/AIT TAIPEI 2065
RUEHKO/AMEMBASSY TOKYO 0811

UNCLAS SECTION 01 OF 04 SHANGHAI 000451

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: ODD NUMBERS: EXPLAINING JIANGSU'S PROVINCIAL ECONOMIC DATA

REF: A. A. Shanghai 444
B. B. Shanghai 436
C. C. Shanghai 156

1. (SBU) Summary: Jiangsu Province economic growth figures do
not add up -- provincial GDP growth is well above national
average, while key indicators such as exports and electricity
production have declined. Jiangsu's reported figures also
outshine the province's neighbors Shanghai and Zhejiang, even
though the global financial crisis has hit exports similarly
hard in all three jurisdictions. Local interlocutors offer a
variety of explanations, including shifts in the location and
composition of manufacturing within the Yangtze River Delta
region and the effects of an infrastructure and real estate
boom, particularly in Jiangsu's less-developed north. Some
observers, however, also admit that local governments have
padded their statistics for political reasons. End Summary.

==========
Background
==========

2. (SBU) EconOff traveled to Nanjing, the capital of Jiangsu
Province, October 22-23 to meet with local academics, government
researchers, and businesspersons to gauge local economic
conditions. Although the contacts presented is a picture of
province-wide economic growth (ref A). However, they also
raised serious concerns about the accuracy and consistency of
Jiangsu's economic data, which are described below.

============================================= =======
Jiangsu Province Growing Faster than Neighbors . . .
============================================= =======

3. (SBU) In the first three quarters of 2009, Chinese
statistics show that Jiangsu Province grew substantially faster
than its two neighbors in the Yangtze River Delta, Shanghai and
Zhejiang Province: Jiangsu rang in 11.7 percent GDP growth,
compared with the same period the previous year, while Zhejiang
reported its growth to be 7.7 percent and Shanghai, 7.1 percent.
Inland Anhui Province, which is experiencing a boost from the
Central Government's stimulus policy (ref B), posted 12.9
percent growth. China as a whole claimed growth of 7.7 percent
in the first three quarters. The high reported growth in
Jiangsu especially ruffles feathers in Shanghai, which is coming
in lower than the national average for the first time since
1991, while Jiangsu reports figures much higher than the
national average.

============================================= ============
. . . Even Though Exports and Electricity Output Are Weak
============================================= ============

4. (SBU) Jiangsu's relatively high reported GDP growth comes at
a time when it faces pressures similar to Shanghai and Zhejiang
in tumbling demand for exports. According to China Customs
data, in the first three quarters of 2009 exports from Jiangsu
were down 21.7 percent over the same period in 2008, more than
Shanghai's decline of 21.1 percent and Zhejiang's decline of
15.1 percent. (Comment: Trade data probably is less susceptible
to manipulation by government officials, since it is supposed to
reflect the movement of actual goods. However, there are some
problems with Chinese trade data, including phantom exports
reported to claim value-added-tax rebates, and over- and
under-invoicing of exports as a cover for unregistered
cross-border capital movements. End comment.)

5. (SBU) Provincial electricity production figures also
indicate that Jiangsu industry has been facing headwinds in the

SHANGHAI 00000451 002 OF 004


wake of the global export downturn. Chinese National Bureau of
Statistics (NBS) data for the first three quarters of 2009 show
that electricity production in Jiangsu is down by 2.09 percent
compared with the same period in 2009. The same data for
Shanghai show a drop of 5.94 percent, and for Zhejiang a drop of
1.1 percent. By way of contrast, Anhui Province, with reported
GDP growth much higher than Shanghai and Zhejiang, reported much
more significant electricity production growth during the
period: 19.69 percent.

============================================= =================
Locals Claim Jiangsu Benefitting from Industry Transfer . . .
============================================= =================

6. (SBU) When presented with this seeming paradox,
interlocutors in Nanjing offered a variety of explanations. One
commonly raised factor was the transfer of industrial production
from the more coastal areas of the Yangtze River Delta (YRD) --
Shanghai in particular -- to Jiangsu. Hu Guoliang, deputy
director of the Economic Research Institute of the Jiangsu
Academy of Social Sciences (JSASS), said that Shanghai is in a
transition period during which industrial production as a
portion of GDP is being downsized, while the service sector is
being built up. However, he said, Shanghai's services are still
not developed enough to compensate for the drop off in
industrial output during the global financial crisis. Shanghai
will hold on to a portion of its manufacturing base -- such as
some precision instruments, chemicals, and shipbuilding -- but
the small textile and chemical factories are moving elsewhere in
the YRD and beyond, he said.

7. (SBU) Nanjing University Business School professor Shi
Xiancheng, who has studied enterprise restructuring, agreed with
this trend, noting as one example that Shanghai Automotive
Industry Corp. was cutting costs by shifting parts procurement
to Nanjing Automobile Corp. (Note: JSASS's Hu said that
Jiangsu's costs are 60 percent lower than Shanghai's. See ref
A.) Data reported by Jiangsu Province on industrial production
may provide support for this industrial transfer theory: in the
first three quarters, Jiangsu's industrial value-added output
rose 13 percent over the same period the previous year, while in
Shanghai it fell 1.9 percent, and in Zhejiang it rose only 3
percent.

============================
. . . Catch-Up Growth . . .
============================

8. (SBU) A second factor mentioned by several interlocutors is
that Jiangsu is growing faster because it is starting from a
lower base. That is, Jiangsu, especially in the north, is still
picking the low-hanging fruit of early economic development,
such as moving labor off of overpopulated farms and into
industrial production. Wu Min, chief economist of the Nanjing
Municipal Development and Reform Commission (Nanjing DRC), for
example, said that the current spate of government and corporate
investment is particularly effective in northern Jiangsu.
(Note: See ref C for details on these trends in the northern
port of Lianyungang. End note.)

9. (SBU) Some contacts noted that -- as Jiangsu grows more
prosperous -- industries there are moving up the value-added
ladder, and are becoming more efficient and productive. Jiangsu
firms are becoming more likely to use higher technology and
lower proportions of energy and raw materials, said Prof. Zhao
Shudong, head of Nanjing University's International Economics
Department. In fact, these interlocutors noted that this could
explain, in part, the province's lower electricity usage.

SHANGHAI 00000451 003 OF 004


(Comment: It is doubtful that this gradual industrial shift
could explain the sharp divergence in the ratio of electricity
production growth to unit of GDP growth in the first three
quarters. End comment.)

============================================
. . . Industrial Development Planning . . .
============================================

10. (SBU) Government support is a third factor used by Nanjing
contacts to explain the strong growth of Jiangsu. Sheng Li, the
deputy general manager of Everbright Bank's Nanjing Branch,
noted that local governments have subsidized shipbuilding firms
in the province, allowing them to finish off ships under
construction even if the orders for the ships have been
cancelled. JSASS's Hu said Jiangsu is emphasizing development
of ocean shipping, biopharmaceuticals, logistics, agricultural
biotechnology, and clean energy such as wind and solar power
(see ref A). This may be reflected in Jiangsu's reported strong
growth in fixed asset investment during the first three
quarters, compared with the same period last year -- 25 percent
-- much higher than Shanghai's 12.1 percent and Zhejiang's 13.7
percent.

============================================= =======
. . . And the Resulting Growth in Consumer Spending
============================================= =======

11. (SBU) Several of the Nanjing economists noted that higher
GDP growth was feeding into higher household consumption,
although they offered scant evidence of this. JSASS's Hu
pointed to a high contribution of consumption to GDP growth in
the first three quarters, but in China's GDP reporting system
this figure also includes government procurement (see ref A).
NBS household survey findings also tend to discount household
consumption as a major driver of the high reported Jiangsu
growth compared with its neighbors. In urban areas, Jiangsu's
reported expenditures per capita grew 9.55 percent in the first
three quarters, while they grew at similar rates of 7.79 percent
in Shanghai and 8.23 percent in Zhejiang.

12. (SBU) Among rural households, there may be some support for
this claim, since Jiangsu's reported cash expenditure per capita
in rural areas grew 5.38 percent in the first three quarters,
compared to 4.82 percent in Shanghai and 1.23 percent in
Zhejiang. However, the Jiangsu figure fell below the reported
national growth in rural cash expenditures of 7.35 percent.
Also, rural household expenditure growth rate, as with the urban
figures, was less than Jiangsu's provincial GDP growth rate in
the same period, suggesting that it was not a key factor in
growth.

============================================= ==========
But Some Also Admit There is "Water" in the Statistics
============================================= ==========

13. (SBU) When pressed, a few interlocutors admitted that local
officials probably padded their statistics to look good --
called adding "water" (shui fen). One senior economist passed
this off, saying that some padding was inevitable, but what
mattered was whether real growth was above 7 percent in order to
maintain social stability. An academic who has studied Jiangsu
enterprises said that some businesses and local governments
probably had worked together to give a false impression of
higher economic growth in 2009. In late 2008, he said,
officials and firm executives realized that the economy was in a
tailspin, and that they would not be blamed for low growth. At
the same time, he said, they anticipated that when the economic

SHANGHAI 00000451 004 OF 004


winds changed, they would be under pressure to show a local
turnaround. Thus, some began to underreport local economic
growth, "saving" this to boost results in 2009. Comment: This
could help explain how industrial value-added increased while
electricity production did not.

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

14. (SBU) A visit to Nanjing reveals a striking surge in
infrastructure and real estate construction, offering at least
superficial confirmation that the economy is growing, even if
only as a result of investment spending. (Note: Ref C also
highlights this theme of growth led by a government-directed
industrial and infrastructure plan in northern Jiangsu. End
note.) Sidewalks and streets are being torn up for additional
subway construction, even as some stations are being finished to
reveal broad intersections with expensive-looking tooled-metal
finishing touches above ground and sleek, modern subway
entrances underneath. One meeting brought EconOff to the newly
established "University Town" on the city's northeastern
outskirts, where twelve institutions of higher learning stretch
for miles around, as observed from the top of one university's
gleaming new 14-story administrative building.

15. (SBU) This economic activity supports the view of one
contact that Jiangsu is growing sufficiently for officials in
many localities to meet the expectations of their superiors, and
to stave off social unrest. But at the same time it underscores
the lopsided nature of this growth (see also ref A). In this
light, the concerns about padding of economic growth figures in
Jiangsu add further doubts about the sustainability of the
current Jiangsu economic growth pattern. More generally, the
suggestions that economic data continues to be manipulated for
political ends serve as a reminder to treat all Chinese
statistics with skepticism.
CAMP

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