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RR RUEHCN RUEHGH
DE RUEHGH #0444/01 3061041
ZNR UUUUU ZZH
R 021041Z NOV 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8362
INFO RUEHBJ/AMEMBASSY BEIJING 3147
RUEHCN/AMCONSUL CHENGDU 2267
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0724
RUEHHK/AMCONSUL HONG KONG 2431
RUEHLO/AMEMBASSY LONDON 8778
RUEHML/AMEMBASSY MANILA 0123
RHEHAAA/NSC WASHINGTON DC
RUEHUL/AMEMBASSY SEOUL 0595
RUEHGH/AMCONSUL SHANGHAI 9019
RUEHSH/AMCONSUL SHENYANG 2258
RUEHIN/AIT TAIPEI 2057
RUEHKO/AMEMBASSY TOKYO 0806

UNCLAS SECTION 01 OF 05 SHANGHAI 000444 
 
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: JIANGSU PURSUES INVESTMENT-FUELED GROWTH DESPITE CENTRAL 
CONCERNS ABOUT FUTURE RISKS 
 
¶1.  (SBU) Summary:  With little regard for Central Government 
concerns about investment bubbles or overcapacity, Jiangsu -- 
East China's largest province -- is tapping a locally funded 
government stimulus program and lending to large firms to rack 
up impressive growth figures even as net exports remain a drag. 
This lopsided dependence on investment means that only limited 
progress has been made on sparking domestic consumption as a 
major economic driver.  Looking forward, the current investment 
binge will be difficult to wind down before a rise in industrial 
overcapacity and inefficient infrastructure presents new 
problems, including more nonperforming loans.  End Summary. 
 
========== 
Background 
========== 
 
¶2.  (SBU) EconOff traveled to Nanjing, the capital of Jiangsu 
Province, October 22-23, 2009, to meet with local academics, 
government think-tank researchers, and businesspersons to gauge 
local economic conditions.  As described below, a picture 
emerged of province-wide economic growth, but with serious 
concerns about the long-term sustainability of this growth. 
Note that several contacts raised questions about the accuracy 
and consistency of Jiangsu's economic data, which are covered in 
septel. 
 
============================================= 
Exports are Slowing, Leaving Investment . . . 
============================================= 
 
¶3.  (SBU) Overall, the province officially grew 11.7 percent in 
January-September, according to statistics released by the 
Jiangsu Bureau of Statistics on October 23, a full 5 percentage 
points higher than the 7.7 percent national growth recorded in 
the same period.  With exports still a net drag on economic 
growth -- down 22.7 percent in the first three quarters of 2009 
compared with the same period last year -- Jiangsu is relying on 
investment and consumption.  Hu Guoliang, deputy director of the 
Economic Research Institute of the Jiangsu Academy of Social 
Sciences (JSASS), said that in the first half of the year, 
investment accounted for 54.5 percent of GDP growth, consumption 
58.9 percent, and net exports -13.4 percent.  (Note: In China's 
GDP accounting, consumption includes government spending.  End 
note.) 
 
¶4.  (SBU) Wu Min, chief economist of the Nanjing Municipal 
Development and Reform Commission (Nanjing DRC) said the Nanjing 
municipal government had set aside RMB60 billion for public 
investment stimulus spending, which was intended to draw in 
another RMB250 billion in matching funding from enterprises and 
banks.  (Note:  Approximately US$8.8 billion and US$36.6 
billion, respectively.  End note.)  She noted that Nanjing would 
not be able to fund large projects such as its subway system 
through tax revenues alone, and therefore has four publicly 
sponsored investment platforms through which it can borrow 
money, including two major ones called the Nanjing 
Communications Construction Investment Control Stock (Group) 
Co., Ltd. and the Nanjing Urban Construction Investment Holding 
(Group) Co., Ltd.  Wu said investment by government and industry 
was particularly instrumental to the 
faster-than-provincial-average growth in northern Jiangsu. 
 
¶5.  (SBU) In addition to government-directed investment, some 
interlocutors pointed to market factors driving investment into 
Jiangsu's manufacturing base.  Prof. Zhao Shudong, head of 
 
SHANGHAI 00000444  002 OF 005 
 
 
Nanjing University's International Economics Department, noted 
Jiangsu continues to attract the greatest foreign direct 
investment (FDI) of China's provinces.  (Note:  In 2008, Jiangsu 
took in over US$25 billion in FDI, accounting for over 23 
percent of China's total.  End note.)  Several contacts pointed 
to companies consolidating their production in Jiangsu, to take 
advantage of lower costs.  JSASS researcher Hu pointed out 
Jiangsu is similar to Shanghai in terms of public order and 
labor quality, but that costs can be 60 percent lower in 
Jiangsu, due to lower rents and lower labor costs -- especially 
lower salaries for managers.  In fact, many of the contacts saw 
this as a natural process of manufacturing capacity leaving 
Shanghai and flowing into Jiangsu and elsewhere in the Yangtze 
River Delta.  (Note:  See septel for more on how this process 
might explain, in part, Jiangsu's higher GDP growth.  End note.) 
 
¶6.  (SBU) Jiangsu government officials and firm managers are 
especially focused on investing in new energy technologies in 
order to maintain Jiangsu's lead in this sector.  This is an 
example of Jiangsu's strong science and technology research 
base, said Zhao, which has pushed Jiangsu up the value-added 
production ladder and allowed it to better survive the crisis 
than Guangdong, where factories are more concentrated on 
low-value-added processing.  As an example, he pointed out 
government and corporate leaders have come together to create a 
large-scale wind farm in Nantong that will eventually produce 
more power than the Three Gorges Dam.  Sheng Li, the deputy 
general manager of Everbright Bank's Nanjing Branch, which has 
operations through Jiangsu, said she sees strong competitiveness 
in Jiangsu's solar and wind power production, as well as 
electronics such as flat-screen display panels.  JSASS's Hu said 
Jiangsu is emphasizing development of ocean shipping, 
biopharmaceuticals, logistics, agricultural biotechnology, and 
clean energy. 
 
========================================== 
. . . and Consumption to Drive the Economy 
========================================== 
 
¶7.  (SBU) Jiangsu's consumption contribution of 58.9 percent to 
provincial GDP growth in the first half is one of the highest 
levels reached in the past 20 years.  While part of this is 
government consumption, the Nanjing interlocutors also pointed 
to rising consumption by private households -- in particular, 
purchases of real estate.  Chen Xinghan, chair of the board of 
Chixia Development and president of the Jiangsu Real Estate 
Association, said she was surprised by the demand for 
residential housing spurred by the Central Government's 
incentives introduced at the end of 2008, which included greater 
leniency for second home purchases, higher mortgage underwriting 
by banks, and adjustment of land prices by local governments. 
Chen said more than 50 percent of domestic consumption in 
Jiangsu is related to real estate, including 35 percent for new 
housing and 10 percent for existing housing.  Altogether, she 
said, 56 industries depend on real estate for growth.  (Note: 
The Nanjing Municipal Statistical Bureau reported sales volume 
for residential real estate was up 111.8 percent in the first 
three quarters.  End note.) 
 
¶8.  (SBU) Some other sectors are also showing high growth in 
retail sales, say the contacts.  Nanjing DRC's Wu pointed out 
sales of private vehicles in Nanjing was up over 30 percent in 
the first three quarters.  Sang Naiquan, an economist at Nanjing 
University of Finance and Economics (NUFE), said Jiangsu's 
export-dependent electronics industries were taking advantage of 
 
SHANGHAI 00000444  003 OF 005 
 
 
the Central Government's tax breaks under the "Household 
Electronics to the Countryside" program to sell into rural 
markets.  (Note:  Household disposable income grew 10.7 percent 
in urban areas and 10.1 percent for rural ones in the first 
three quarters, according to Jiangsu official data.  End note.) 
 
============================================= === 
Concern That State Interference is Growing . . . 
============================================= === 
 
¶9.  (SBU) Despite the rosy picture painted on GDP growth, 
interlocutors expressed some concerns the state sector was 
becoming too dominant in Jiangsu's growth pattern.  Nanjing 
University's Zhao said state-owned enterprises are not as 
efficient at using investments.  He cited U.S. economist Paul 
Krugman, saying that sometimes this money is used to buy 
worthless garbage.  This was part of the trend of "government 
[involvement in the economy] increasing, private [economic 
activity] decreasing" (guojin, mintui), said Zhao.  At the same 
time, Zhao warned against over generalizing, noting, for 
instance, that the trend of SOEs taking over private firms 
through mergers and acquisitions is only temporary. 
 
¶10.  (SBU) Everbright's Sheng agreed large companies, including 
many SOEs, are gaining ground, but did not see the trend 
subsiding.  China's industry is undergoing consolidation, she 
said, and in 2-3 years, the province's large firms will have an 
even greater market share, giving them market power.  She said 
it remains hard to channel funds to small- and medium-size 
enterprises (SMEs), despite Central Government policies, since 
SME loans have much higher verification and monitoring costs. 
SMEs have dropped as a share of Everbright Nanjing's loan book, 
because SME lending has held steady while lending to large firms 
has grown sharply. 
 
¶11.  (SBU) However, contacts also pointed out that SOEs form 
part of Jiangsu's competitiveness.  Everbright's Sheng said 
Jiangsu has a greater ability to resist economic risk, implying 
SOEs can draw on government support in hard times.  In addition, 
the government is able to implement economic policy more 
effectively through SOEs through better control over SOE 
investment, she said.  Nanjing University economics professor 
Shi Xiancheng noted the academic literature is mixed on whether 
SOEs can be efficient producers, while colleague Chen Baomin 
said Jiangsu's greater government involvement in the economy 
leads to better public goods than in Zhejiang. 
 
============================================= 
. . . Which Could Lead to Overinvestment . . . 
============================================= 
 
¶12.  (SBU) With market signals for investment distorted by the 
large economic stimulus flows, investment in Jiangsu is less 
likely to scale back in the face of emerging signs of 
overcapacity in some industries, agreed all the Nanjing 
interlocutors.  Many raised the real estate industry in this 
context.  NUFE's Sang said, for instance, the Central Government 
wants to control the real estate market, but local governments 
are eager for some inflation in this market, as it supports 
their income from land sales.  Local governments are following 
this course even though it reduces the buying power of ordinary 
households and thereby increases social tensions, said Sang. 
Chixia's Chen said that the rapid increases in real estate 
prices are propelled in part by the government's loose monetary 
policy, which has channeled funding to businesses that have 
 
SHANGHAI 00000444  004 OF 005 
 
 
nowhere to invest the money but in real estate and the stock 
market.  Chen also warned that local governments could become 
too reliant on the real estate sector, although she was more 
sanguine that housing purchase incentives would be allowed to 
expire at the end of 2009, helping dampen demand in 2010. 
 
¶13. (SBU) The Nanjing contacts said that while overinvestment 
could lead to deflation in final goods prices, it could also 
lead to inflation in key inputs and upstream commodities. 
NUFE's Sang said the government must chose the proper balance 
between stimulus-led economic growth and managing inflation 
expectations.  He warned that the highest inflation ordinary 
households can support is 20 percent -- which is the high point 
reached during the period of economic reforms.  Inflation causes 
instability because it essentially takes from poor savers and 
gives to rich owners of capital.  Nanjing DRC's Wu Min also put 
inflation at the top of her list of concerns in the coming year. 
 
========================================= 
. . . And Future Financial System Strains 
========================================= 
 
¶14.  (SBU) Some contacts offered warnings about problems with 
record bank lending in China this year, which has been directed 
by the government to support its stimulus program.  (Note:  As 
of September, bank lending in China had risen 149 percent over 
the same period the previous year.  End note.) 
Nanjing University's Zhao said bluntly, "China has paid a large 
price for the financial crisis, and not all the impacts have yet 
emerged."   He worried that the financial cost could become more 
pronounced as China enters into a period of rapid population 
aging and loses some economic growth momentum. 
 
¶15.  (SBU) NUFE's Sang said the short-term risk with the lending 
surge is that liquidity flowed into speculation, but that the 
real problem is medium- and long-term loans.  While the National 
Development and Reform Commission (NDRC) has dispatched people 
to monitor the projects, said Sang, local government management 
of projects will play a key role in generating an appropriate 
return on investment.  Everbright's Sheng said her bank has 
already exceeded the China Banking Regulatory Commission's 
guideline of setting aside 150 percent of nonperforming loans as 
a provision for possible future losses -- Everbright Nanjing is 
currently provisioning at 190 percent. 
 
============================================= ======== 
But Jiangsu Still Hoping to "Win" the Investment Race 
============================================= ======== 
 
¶16.  (SBU) Despite these potential problems, one of the most 
frequently heard comments was that Jiangsu should continue 
aggressively to develop its industries -- even those among 
industries declared by the NDRC to have overcapacity -- because 
increased market share would position it better for the coming 
industry shakeouts.   (Note:  On October 15, the NDRC named 
steel, cement, plate glass, coal-chemicals, polycrystalline 
silicon, and windpower equipment as the focus of its crackdown 
on overcapacity industries.  It also warned of obvious 
overcapacity in aluminum, shipbuilding, and soybean pressing 
industries.  End note.) 
 
¶17.  (SBU) Everbright's Sheng said that Jiangsu wind and solar 
power equipment companies were planning to increase their 
capacity to widen their current low-cost advantage; already, 
China's top eight solar panel companies are based in Jiangsu, 
 
SHANGHAI 00000444  005 OF 005 
 
 
she noted.  JSASS's Hu said that the current overcapacity in 
wind and solar power results from a demand shortfall, since 
final goods prices remain high.  Increased production scale will 
bring down prices, and stimulate demand, he said.  Nanjing DRC's 
Wu said that wind and solar power equipment manufacturing 
capacity on which investment has already started should be 
completed.  She pointed to a possible motivation for local 
governments to continue investing in the sector, saying, "It is 
impossible to get rid of projects that are already in place." 
 
¶18.  (SBU) Underlying many of these statements was a sense that 
Jiangsu -- and in particular its capital, Nanjing -- should not 
play second fiddle in the region, and should be left alone by 
the Central Government to develop the local economy.  JSASS's Hu 
said that Shanghai wants to be the "dragonhead" in the Yangtze 
River Delta, with Jiangsu and Zhejiang as the wings.  However, 
Jiangsu's economy is bigger than Shanghai's, so why should it 
take the supporting role?  Hu and NUFE's Sang noted that Nanjing 
Municipality serves as a natural center for an economic region 
that stretches into Anhui. 
 
======= 
Comment 
======= 
 
¶19.  (SBU) Despite the Central Government this fall launching 
efforts to reel back local government investment, the lack of 
incentive in Jiangsu to comply is obvious.  All signs point to 
officials across the province vigorously protecting local growth 
sources, including both real estate as well as industries with 
officially designated overcapacity. 
 
 
 
¶20.  (SBU) At the same time, aside from the possible bubble 
reinflating in the residential real estate sector, there is 
little evidence that Jiangsu officials are encouraging private 
consumption.  In fact, disposable household income growth 
continues to lag provincial GDP growth, with the result that 
household consumption -- if measured separately from government 
consumption, with which it is lumped together in the Chinese GDP 
accounting system -- is most likely falling as an overall share. 
CAMP