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Cablegate: Growth Returns to Guangdong with Rising Domestic Demand And

VZCZCXRO7637
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0711/01 3640327
ZNR UUUUU ZZH
R 300327Z DEC 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1226
INFO RUEHBJ/AMEMBASSY BEIJING 0987
RUEHGH/AMCONSUL SHANGHAI 0337
RUEHSH/AMCONSUL SHENYANG 0347
RUEHCN/AMCONSUL CHENGDU 0338
RUEHHK/AMCONSUL HONG KONG 0401
RUEHOO/CHINA POSTS COLLECTIVE 0409
RUEATRS/DEPT OF TREASURY WASH DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC 0379
RUEKJCS/DIA WASHDC 0375

UNCLAS SECTION 01 OF 02 GUANGZHOU 000711

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: Growth Returns to Guangdong with Rising Domestic Demand and
Ongoing Efforts at Industrial Upgrading

GUANGZHOU 00000711 001.2 OF 002

Ref:

(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: Officials in Guangdong are declaring victory over
the global financial crisis's impact on the trade-dependent
province's economy. They point to projections that growth for the
province will exceed 8% for the year after falling to a 30-year low
in the first quarter. Our contacts attribute much of the success to
the government's stimulus package and rising local demand. However,
officials and business leaders alike acknowledge that state-owned
enterprises (SOEs) have benefitted disproportionately from the
stimulus and more needs to be done for (SMEs). Guangdong's efforts
to move labor-intensive industries out of the Pearl River Delta
(PRD) to make room for more advanced industries have continued and
will likely strengthen as the economy continues to improve. End
summary.

Growth Returning to Guangdong
-----------------------------

2. (SBU) After the chilling effect of the global economic downturn
on Guangdong's trade-dependent economy, growth is returning with
vigor to the province, according to local government, academic and
business contacts. Guangdong Development and Reform Commission
(GDDRC) Deputy Director Cai Yunge recently explained to the
Minister-Counselor for Economic Affairs visiting from Beijing that
2009 first quarter growth was just 5.8% -- almost nine percentage
points lower than the provinces growth in 2007 and the lowest rate
in the past 30 years. The impact of the global downturn was
particularly severe in Guangdong because the province relies so
heavily on trade, Cai said. He pointed out that Guangdong's total
foreign trade was 155% of the province's GDP in 2007, 89 percentage
points higher than China as a whole. Moreover, Cai noted that the
U.S. market, which suffered dramatically from the downturn,
accounted for 40% of Guangdong's exports. But the resurgence in
growth has been strong. Cai said Guangdong's growth in the third
quarter reached 8.6%. Guangdong Academy of Social Science (GDASS)
President Liang Guiquan told the Consul General on December 4 that
he expected the province's growth to be 8.5% for the year overall.


3. (SBU) Businesses in the province also report improving
performance. American Chamber of Commerce in South China President
Harley Seyedin told us that power consumption in the province had
rebounded since April, orders for member companies were improving
and that the local labor market was showing signs of shortages
again. Seyedin highlighted that one foreign-invested manufacturer
of electronic components had recently announced that it would hire
6,000 new workers due to increased orders and another 10,000 after
the Lunar New Year holiday in February 2010. FedEx separately told
us that cargo volumes at its Guangzhou Asia-Pacific hub were
returning to to pre-downturn levels. Guangzhou-based China Southern
Airlines Chief Economist said that the firm expected its revenue
growth for the year to be 10.8%.

Taking Steps to Stimulate Demand
--------------------------------

4. (SBU) Stimulating domestic demand has been a key component of the
province's strategy emphasized by provincial government
interlocutors. GDDRC's Cai claimed that Guangdong was ahead of most
provinces in its programs to increase demand. No effort had been
spared to promote sales of automobiles, household appliances, real
estate and information technology products, according to Cai, who
pointed out that retail sales in the province had gone up 16.2% from
January through October 2009. He also reported that the province
would allocate RMB 2.37 trillion (about US$350 billion) for 222
investment projects from 2008 to 2015. For the first ten months of
2009, investment had already totaled RMB 303 billion (about US$45
billion), he said. GDASS's Liang echoed Cai's comments on the
province's efforts to increase demand. Noting the strong increase
in retail sales, he said consumers were willing to spend despite the
global financial crisis. Liang also explained that much of the

GUANGZHOU 00000711 002.2 OF 002


government's investment spending was going toward infrastructure
development. He believes the next stage for efforts to stimulate
demand should be directed toward SMEs, which create more employment.


5. (SBU) However, Standard Chartered Branch Manager Irving Law
called for additional action. He argued that expanding domestic
consumption would require changing the habits of Chinese people to
save less and spend more. The government needs to reform pension
schemes and the medical care system to make people feel more secure,
according to Law. He believes that further expansion of domestic
consumption is critical to China's economy because U.S. demand for
China's exports going forward will not be sufficient to drive growth
the way it did in the past.

SOEs Benefit at SMEs' Expense
-----------------------------

6. (SBU) Many observers in south China continue to point out that
stimulus policies have favored SOEs at the expense of struggling
SMEs. Guangzhou Academy of Social Sciences (GZASS) President Li
Jiangtao told us that most of the money in the stimulus money went
to SOEs because they were seen as a safer investment. However, Li
identified local efforts aimed at addressing the problem: the
Guangzhou municipal government is working on a plan to select one
high-tech enterprise from each district in the city to receive RMB 5
million (about US$740 million) in support. (Comment: Li indicated
that SOEs would also be eligible to apply for the support,
suggesting that, depending on implementation, this measure may not
do much to fix the imbalance. End comment.) GDASS's Liang also
emphasized the need to encourage SME growth, noting that the city of
Foshan had seen 13% growth this year in part because of the strong
contribution from SMEs. But Liang did not elaborate on what local
governments should do to promote the sector.

7. (SBU) Standard Chartered's Law argued that SOEs did not have
enough good projects to fully absorb stimulus funding. He
speculated that much of the money had gone into real estate and the
stock market, raising the risk of bubbles. Law said that SMEs
continue to have difficulty finding financing, estimating that only
one-third have formal relationships with commercial banks. The
other two-thirds, he said, rely on underground banks or apply for
personal loans in the name of the owner.

Moving up the Value Chain
-------------------------

8. (SBU) Guangdong will use the impact of the global economic
downturn to further drive efforts to upgrade industry in the PRD,
according to GDASS President Liang. Cai of the GDDRC emphasized
successful efforts to upgrade Guangdong's industries that had had a
positive environmental impact. He explained that Guangdong had
closed inefficient, heavy-polluting steel mills with total capacity
of almost 10 million tons in 2009 so far, as well as cement plants
with 43 million tons of capacity and heavy-polluting power plants
capable of generating 10.8 megawatts of electricity. Although
Standard Chartered's Law suggested that industrial upgrading efforts
and Guangdong Party Secretary Wang Yang's complementary "double
transfer" policy to move labor-intensive, low-tech industry out of
the PRD had been placed on the back burner during the downturn, he
believes they will take priority again as the economy rebounds.

JACOBSEN

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