Cablegate: South China Economic Analysts Predict Continued Reliance On

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DE RUEHGZ #0077/01 0410835
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R 100835Z FEB 10
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1374
INFO RUEHOO/CHINA POSTS COLLECTIVE 0462
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RUEHCN/AMCONSUL CHENGDU 0389
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RUEAIIA/CIA WASHDC 0430
RUEKJCS/DIA WASHDC 0426

UNCLAS SECTION 01 OF 02 GUANGZHOU 000077

SENSITIVE
SIPDIS

STATE FOR EAP/CM, EAP/EP, EEB/TPP, S/P, INR/EAP, DRL
STATE PASS FEDERAL RESERVE
STATE PASS USTR CHINA OFFICE
LABOR FOR ILAB - LI

E.O. 12958: N/A
TAGS: ETRD EIND ELAB PGOV PREL SENV ECON CH HK
SUBJECT: South China Economic Analysts Predict Continued Reliance on
Exports, Exchange Rate Stability

REF: A) 09 Guangzhou 237; B) 08 Guangzhou 406

GUANGZHOU 00000077 001.2 OF 002

(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 and comment: Although China is making gradual
progress towards greater economic diversification, cheap exports
will continue to drive growth in the near term, according to
comments made by local economic analysts during a conversation with
the Consul General, visiting Deputy Director of the China Desk and
Beijing Poloff on January 26. The recovery of overseas orders and
the return to profitability for regional industries have not
translated into higher wages for most workers, meaning that real
estate and automobile prices are unaffordable for most local
consumers. As new technology and higher value-added industries
emerge, the recent multi-year import surge may lose some steam as
firms develop local alternatives and cease importing higher-priced
foreign goods. End summary and comment.

-----------------------------
EXPORTS STILL TOP BREADWINNER
-----------------------------

2. (SBU) Guangdong Citibank Branch President Peter Qiu told us that
despite thin margins and regulatory pressures to relocate out of
their traditional Pearl River Delta base (refs A and B), low
value-added manufacturing industries recovered enough in 2009 to
continue operations. Neither domestic demand for surplus goods
originally produced for export nor high-tech manufacturing output
have been robust enough to reverse south China's reliance on
export-oriented growth in the near term. Qiu commented that the
government could be expected to take a more cautious approach to
infrastructure stimulus, but it would likely continue with efforts
to stimulate domestic consumption.

3. (SBU) While exports continue to be the major source of growth in
China, there are also signs that a recent multi-year import surge
may taper off as local production increasingly displaces imports.
Price Waterhouse Coopers Partner Alfred Leung highlighted heavy
machinery as an example of a good that was until recently imported
but is now increasingly produced locally. Qiu affirmed this
analysis, noting that the displacement of exports to China from
Southeast Asian countries had become a source of friction.

--------------------------------------
EXCHANGE RATE DEFENSE KEY TO STABILITY
--------------------------------------

4. (SBU) Leung also commented that the defense of the current
renminbi exchange rate should be seen as an effort to maintain
economic stability rather than as a barrier to imports. Local oil
and gas prices have been allowed to almost double in the last four
years, even as domestic automobile sales surged in 2009 and wages
failed to increase at the same rate as real estate prices, according
to Leung. The resulting economic situation looked "almost like the
economy is overheating," he said.

---------------------------------------
SHIFTING MIGRATION, ENERGY USE PATTERNS
---------------------------------------

5. (SBU) Both Qiu and Leung said labor shortages had begun to
develop in Guangdong-based manufacturing industries such as textiles
and shoes towards the end of 2009. Flat wages, increased living
costs and improved transportation infrastructure connecting
manufacturing centers with newly developing inland areas have all
caused a shift in migrant labor patterns such that laborers are now
more likely to consider staying close to their rural hometowns than
relocate to the Pearl River Delta. Guangdong Oil and Gas
Association Secretary General Helen Liang added that energy
consumption patterns also indicated a gradual migration of
industrial output from traditional coastal centers to more inland
areas. Liang said energy consumption had not recovered to
pre-recession levels in the Pearl River Delta, but that inland areas

GUANGZHOU 00000077 002.2 OF 002

were showing signs of sustained growth.

6. (U) This cable was coordinated in draft with EAP/CM and Embassy
Beijing.

GOLDBECK

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