VZCZCXRO9301
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3786/01 3191017
ZNR UUUUU ZZH
P 151017Z NOV 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 2110
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BEIJING 023786 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4420 
STATE PASS USTR FOR STRATFORD, WINTER, ALTBACH 
STATE PASS CEA FOR BLOCK 
TREASURY FOR OASIA/CUSHMAN 
USDA/ERS FOR LOHMAR, TUAN, SYLVANA LI 
USDOL FOR ILAB 
 
E.O. 12958:  N/A 
TAGS: ECON EAGR ELAB PGOV SOCI CH
SUBJECT: CONSUMPTION LAGGING IN HUBEI'S NEW COUNTRYSIDE 
 
SUMMARY 
------- 
 
¶1. (SBU) In rural Hubei Province, incomes remain low and 
government policies have failed to boost consumption, 
according to Provincial Government officials.  Local 
governments are facing a financial crunch due to loss of 
tax revenue and increasing pressure to provide compensation 
to farmers for land that is seized for public works and 
development projects.  Hubei's economy is still highly 
agricultural, but non-farm income earned in Wuhan, other 
Hubei cities, and in China's coastal areas is increasingly 
important.  Efforts to launch the Central Government's New 
Socialist Countryside initiative have been largely limited 
to training local officials and building model villages. 
END SUMMARY. 
 
TRAVEL TO HUBEI 
--------------- 
 
¶2. (SBU) Econ Macroeconomic Unit Chief, Econoff, Econ 
Assistant, and Conoff traveled to Wuhan, Hubei Province, 
from October 31 to November 2.  Emboffs met with Provincial 
Government officials at Hubei's Development and Reform 
Commission, Foreign Affairs Office, Bureau of Land 
Resources, Statistics Bureau and Academy of Social 
Sciences.  They also discussed rural issues with an 
American businessman who sells wind turbines in rural Hubei 
and the Assistant Mayor of Chi Bi City. 
 
SHARE OF INCOME FROM NON-FARM ACTIVITIES INCREASING 
--------------------------------------------- ------ 
 
¶3. (SBU) Hubei's rural residents derive a growing share 
(approximately 40 percent) of their income from non-farm 
sources, according to Sun Xiaohong at the Hubei Provincial 
Development and Reform Commission (HPDRC).  Many of Hubei's 
rural residents have migrated to factory jobs in Guangdong 
Province, Fujian Province, and Shanghai and their 
remittances remain an important contributor to rural 
incomes, Sun said.  A researcher at the Hubei Academy of 
Social Sciences (HASS) said that he believes the number of 
farmers moving to the cities is growing rapidly. 
 
¶4. (SBU) Remittances notwithstanding, Hubei's rural per 
capita income is RMB 3099 (less than USD 400), below the 
national average rural income of RMB 3254.  Low incomes and 
high precautionary savings mean that one year after the 
Central Government launched the New Socialist Countryside 
initiative to improve living standards in non-urban areas, 
Hubei's Provincial Government is struggling to achieve its 
goal of boosting consumption in rural areas, according to 
Sun.  The HASS researcher added that a stark contrast 
exists between Wuhan, which is attracting large 
international retailers such as Wal-Mart, and Hubei's 
countryside, where branded companies are unwilling to 
venture due to a low rate of consumption. 
 
HUBEI'S NEW COUNTRYSIDE PROMOTING MODELS OVER SUBSTANCE 
--------------------------------------------- ---------- 
 
¶5. (SBU) Hubei's top economic priority in 2006 was the 
improvement of rural livelihoods, with extensive focus 
given to training local government officials on rural 
policy and social service delivery.  The province placed 
even greater emphasis on building 500 model villages in 
Hubei Province to exhibit high standards of health and 
sanitation, education, and culture and demonstrate an 
overall improvement in farmers' livelihoods, Sun 
said.  HPDRC coordinates government bureaus' model village 
projects, but Sun could not say what percentage of the 
Provincial Government's New Countryside budget is allocated 
to model villages.  (Note:  The day after we met with Sun, 
an editorial in the China Daily criticized model villages 
as an example of local government leaders looking for 
"political achievements to boost their chances of promotion 
(and) make profit for themselves."  End Note.) 
 
PUBLIC FINANCE CRISIS LOOMING 
 
BEIJING 00023786  002 OF 002 
 
 
----------------------------- 
 
¶6. (SBU) Sun said that Provincial Government officials face 
a looming public finance crisis created by the elimination 
of the agricultural tax for rural residents.  Consequently, 
county governments in Hubei Province, like counties in 
other areas of China, are contending with a drop in tax 
revenue without a parallel reduction in obligations to 
provide increased social services such as health care and 
education that are important components of the Central 
Government's New Socialist Countryside initiative.  Wu 
Zhengyu, Assistant Mayor of Chi Bi City near Wuhan, told 
Econoff that the public finance crunch is particularly 
acute in the rural areas of his district and is a common 
problem at the grass-roots level.  The elimination of the 
agricultural tax has benefited farmers and attracted back 
to the countryside many rural dwellers who had temporarily 
left their farms, but now local governments lack funds to 
provide services, and there are no signs that the Central 
or Provincial Government will provide additional funding to 
make up the shortfall. 
 
HUBEI'S LAND COMPENSATION DILEMMA 
--------------------------------- 
 
¶7. (SBU) Another factor in Hubei Province potentially 
threatens to exacerbate the government's financial 
shortfall.  According to Provincial Government officials, 
compensation required for farmers from whom government 
bureaus seize land for public works and development 
projects is likely to increase rapidly.  Zhang Jianren, 
Vice Director, Hubei Provincial Bureau of Land Resources, 
cited three reasons for the disproportionate pressure on 
Hubei to offer land compensation to rural residents: 
 
--the Provincial Government's intention to abide by the 
Central Government's recently announced directive on 
compensation for hydropower and water projects and provide 
the maximum level of compensation to farmers; 
 
--the Provincial Government's plan to increase the 
province's urbanization rate to 50 percent by the end of 
the Eleventh Five-Year Plan (in 2010), which will require a 
significant number of new road and water projects that will 
necessitate additional land seizures; and 
 
--the continued pressure on local government officials in 
Hubei Province to follow through on resettlement 
commitments to the 260,000 people relocated by the Three 
Gorges Dam project in the western part of the province. 
 
COMMENT 
------- 
 
¶8. (SBU) What we saw is in line with the views of many 
observers:  Wuhan, China's fifth-ranked city by population, 
is enjoying sufficiently rapid growth and investment so as 
to possibly join Beijing, Shanghai, and Guangzhou as one of 
China's few first-tier cities.  The expansion of Wuhan and 
nearby up-and-coming cities in Hubei like Chi Bi is an 
important adjunct to the coastal cities for the 
countryside's excess labor supply.  Reliance on this kind 
of successful urban growth is likely to continue -- 
policies to promote rural-urban balance notwithstanding -- 
because efforts to boost standards of living and 
consumption in the countryside are clearly flagging. 
 
RANDT