VZCZCXRO9818
RR RUEHGH RUEHVC
DE RUEHCN #1250/01 3420534
ZNR UUUUU ZZH
R 080534Z DEC 06
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC 2322
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC 0015
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHCN/AMCONSUL CHENGDU 2794

UNCLAS SECTION 01 OF 02 CHENGDU 001250 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PLEASE PASS FEDERAL RESERVE SYSTEM FOR WARSH AND FRB SAN 
FRANCISCO FOR CURRAN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV SENV CH
SUBJECT: FEDERAL RESERVE LOOKS AT SOUTHWEST CHINA DEVELOPMENT 
PROSPECTS 
 
CHENGDU 00001250  001.2 OF 002 
 
 
¶1. (SBU) Summary.  A Federal Reserve delegation visited Chengdu 
from November 28-30.  According to local government leaders, the 
economies of Sichuan and Chengdu will continue to grow rapidly, 
although environmental protection is a concern.  Representatives 
of smaller U.S. businesses operating in Chengdu complained of 
lack of government transparency and human resource problems. 
End summary. 
 
¶2. (U) Federal Reserve System Governor Kevin Warsh, San 
Francisco Federal Reserve Bank (SFFRB) President Janet Yellen, 
SFFRB International Research Group Vice President Reuven Glick, 
and SFFRB Group Vice President and Deputy for Banking 
Supervision and Regulation Teresa Curran visited Chengdu 
November 28-30 to meet with local officials and to discuss 
economic prospects for China's southwest with representatives of 
U.S. businesses. 
 
------------------------- 
HARMONY, HARMONY, HARMONY 
------------------------- 
 
¶3. (SBU) Sichuan Development and Reform Commission (SDRC) 
Director Xie Hong used the term "harmonious" at least three 
times during his description of the provincial and central 
government's plans for the area's economic development.  He said 
that Chengdu was not "representative" of the province generally, 
noting that Sichuan's population was heavily rural.  Therefore, 
authorities needed to ensure that the benefits of economic 
development were spread fairly throughout society, so 
development could be both "sustainable" and "harmonious," said 
Xie.  Strict environmental protection was also necessary to 
ensure "harmony between man and nature."  Asked about the 
province's efforts to attract FDI, Xie acknowledged that to 
succeed the province must "do better than Shanghai or Beijing." 
 
¶4. (SBU) On the question of province's revenues, SDRC Finance 
Director Guo said that local taxes and fees were sufficient to 
cover approximately one-half of the province's expenditures, 
with the rest coming from the central government.  She explained 
that the province received revenues from the central government 
both in the form of refunds of taxes paid by local and 
provincial authorities, and in the form of direct payments. 
 
-------------------------------------- 
BUT NOT JUST HARMONY, ALSO CONTENTMENT 
-------------------------------------- 
 
¶5. (SBU) Chengdu Executive Vice Mayor Liu Peizhi outlined the 
factors driving the city's recent growth, which he stated had 
averaged 13 percent per year over the previous five years.  He 
seemed particularly proud of one result, which was an increase 
in the city's fiscal revenues from 36 billion RMB (approx. USD 
4.5 billion) in 2005 to a projected figure of 43 billion RMB 
(approx. USD 5.4 billion) in 2006.  He claimed that only seven 
percent of the city's economy was based on agriculture, while 
heavy industry accounted for over 41 percent, the remainder 
coming from "tertiary" industries, including the service sector. 
 However, he admitted that the city's logistics sector was 
"lagging."  Summing up Chengdu's advantages, he said that it was 
a "happy place to be," due to its "harmonious society" and the 
ability of its residents to "live and work in peace and 
contentment." 
 
¶6. (SBU) Asked about environmental concerns, Liu pointed to 
water pollution on the upper Yangtze as one of his primary 
worries.  With heavy population pressure along the river's upper 
stretches and tributaries, Liu said that it was almost 
impossible to stop the discharge of untreated wastewater, even 
though modern treatment plants have been built.  Following the 
meeting, a Foreign Affairs Office (FAO) representative tried to 
downplay Liu's comments about Chengdu's environmental problems. 
 
-------------------------------------- 
THE U.S. BUSINESS COMMUNITY SOUNDS OFF 
-------------------------------------- 
 
¶7. (SBU) At a luncheon event organized by AmCham Sichuan, local 
representatives of U.S. businesses aired their concerns over the 
province's business environment.  With heavy representation from 
U.S. SMEs, attendees complained of difficulty getting commercial 
credit from local banks, and problems in dealing with China 
Customs and agricultural inspection services.  The transparency 
of government decision-making was a common grievance, along with 
human resource problems.  One representative of a firm 
manufacturing precision instruments said that he had to spend up 
to 50 percent of his time on personnel issues, while in the 
 
CHENGDU 00001250  002.2 OF 002 
 
 
United States he would expect to spend less than ten percent of 
his time on such matters. 
 
¶8. (SBU) The delegation visited Intel's assembly and packaging 
facility in Chengdu to meet with managers.  Intel Chengdu's 
Chief Financial Officer David Schmid told the delegation that 
the main reason for locating the plant there was to take 
advantage of low labor costs (which he said were one half to two 
thirds those of Shanghai) and to be closer to the firm's markets 
in southeast Asia.  He added that the plant had experienced a 
very low rate of confidentiality or trade secret violations, 
which he attributed to a low turnover rate and to good business 
practices.  Unlike the SME attendees at the lunch event, Schmid 
had few complaints about government transparency, China Customs, 
or the availability of credit. 
 
---------------------------------- 
FRANK TALK FROM THE NEW HOPE GROUP 
---------------------------------- 
 
¶9. (SBU) New Hope Group Chairman Liu Yonghao gave the delegation 
a brief history of his firm's rise from selling bicycles and 
watches in 1982 to its present status as one of China's leading 
agribusiness concerns (it also has finance, chemical, and 
construction divisions).  His major concerns for the continued 
development of southwest China's economy included the quality of 
its workforce, along with the need to improve the 
transportation, energy, and logistics sectors.  He called U.S. 
investment in China's banks "very positive." Asked about his 
worries for China's overall political and economic future, Liu 
said that stability was the most important thing, but that 
continued market opening and political reform were necessary to 
maintain that stability.  He added his view that the economy 
(and especially the agricultural sector) remained vulnerable to 
"external shocks" such as SARS and avian influenza. 
 
------- 
COMMENT 
------- 
 
¶10. (SBU) Concerns over workforce quality, the environment, the 
banking system, and social stability are hardly unique to 
southwest China.  However, transportation and logistics problems 
as well as local government attitudes seem to remain significant 
obstacles to the area's development.  In the short term at 
least, large investors here will likely continue to enjoy 
significant advantages over SMEs in their dealings with local 
officials. 
BOUGHNER