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DE RUEHCN #0088/01 0950638
ZNR UUUUU ZZH
R 050638Z APR 07
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC 2427
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHCN/AMCONSUL CHENGDU 2944

UNCLAS SECTION 01 OF 03 CHENGDU 000088 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM AND EB 
TREASURY FOR TAIYA SMITH 
 
E.O. 12958: N/A 
TAGS: ECON EAGR EFIN KIPR PGOV SENV CH
SUBJECT: SED ENVOY HOLMER SEES WESTERN CHINA'S DEVELOPMENT 
CHALLENGES 
 
CHENGDU 00000088  001.2 OF 003 
 
 
1.(SBU) Summary.  Treasury Department Special Envoy to the 
Strategic Economic Dialogue (SED) Ambassador Alan Holmer visited 
the western China cities of Xi'an and Chengdu from March 3 
through March 6.  Visits to nearby rural communities in both 
provinces underscored how poverty alleviation projects can only 
go so far in improving living standards: most obvious wealth in 
such communities comes from residents securing non-rural income 
by obtaining work in nearby urban areas or in China's coastal 
provinces, enriched by the manufacturing of goods destined for 
foreign markets.  End summary. 
 
2.(SBU) Ambassador Holmer, accompanied by Deputy Chief of Staff 
Taiya Smith, U.S. Embassy Beijing Minister-Counselor for 
Financial Affairs David Loevinger, and Beijing Econoff David 
Meale visited Xi'an on March 3-4, and Chengdu on March 4-6. 
Also accompanying Ambassador Holmer were three Beijing-based 
officials from the Ministry of Finance. 
 
-------------------------------- 
EXPOSURE TO VILLAGE LIFE IN XIAN 
-------------------------------- 
 
3.(SBU) Vice Governor Zhao Zhengyong expressed appreciation to 
Ambassador Holmer that Shaanxi Province was his first stop in 
China outside of Beijing.  Zhao reviewed for an extended period 
of time a wide array of publicly available data about the 
province and then discussed tourism development, emphasizing 
local pride in Shaanxi's cultural offerings.  Zhao also 
underscored the importance to Shaanxi of its extensive network 
of correspondent relationships with provinces and states 
throughout the world, including Minnesota in the U.S.  Holmer 
saw first-hand the commercial links between Shaanxi and the 
United States when he visited a Janssen pharmaceutical plant the 
following day (Janssen is a Belgian subsidiary of Johnson & 
Johnson). 
 
4.(SBU) To further understand Shaanxi's rural challenges, 
Ambassador Holmer visited the village of Gongwang, approximately 
90 minutes from the center of Xi'an.  Local officials 
representing the village, township, and county levels told him 
that 308 of the village's 1,027 residents could be classified as 
impoverished, but that overall living standards were on the 
rise.  The fundamental impediment to poverty alleviation, they 
said, is a shortage of arable land.  Shaanxi's per-capita 
farming area is 0.7 mu, less than one-eighth of an acre. 
Holmer's interlocutors observed that living standards are far 
worse in the nearby mountainous areas, which cover the majority 
of Shaanxi Province.  Central Government policies supporting 
higher-value agriculture, along with subsidies for school fees 
and expanded rural medical care, are all positive factors in 
improving lifestyles.  All that said, one participant pointed 
out that even though there are now in theory an adequate number 
of teachers for Gongwang's students, there are absenteeism 
issues among them, reflecting their chronic health problems. 
 
5.(SBU) Ambassador Holmer walked through Gongwang, talking at 
random to villagers, with questions focusing on how outside 
employment is boosting their incomes.  Many villagers, he 
learned, seek part-time work in nearby urban areas when time 
permits.  It was clear that the phenomenon of "surplus labor" 
migrating to coastal areas is not widespread in this part of 
Shaanxi.  However, in one dramatic case, a 24-year-old cook who 
had been working in Hangzhou (Zhejiang Province) proudly showed 
Holmer the new house he was building next door to the 
dilapidated home occupied by his parents.  He said the 
opportunity to work in Hangzhou had not only improved the life 
of his family in Gongwang, but had also given him sufficient 
status to ask (and receive) permission from his fiancee's father 
to marry his daughter, a success that had come his way just the 
previous day. 
 
----------------------------- 
THE RABBIT KING AND HIS COURT 
------------------------------ 
 
¶6. (U) In a rural area outside of the small western Sichuan town 
of Dayi, Ambassador Holmer visited farmers who had benefited 
from a poverty alleviation project managed by the NGO Heifer 
Project International (HPI).   Thanks to HPI's initiative, the 
farmers in and around Dayi are now raising substantial numbers 
of rabbits, and earning badly needed cash as a result.  An HPI 
representative said that there are now 17,000 beneficiary 
families in and around Dayi, and 1.8 million rabbits are raised 
there every year. 
 
7.(U) After touring the farmer's houses and visiting the rabbit 
 
CHENGDU 00000088  002.3 OF 003 
 
 
raising pens, Ambassador Holmer met with a group of farmers, 
many of whom had traveled substantial distances to see him.  A 
typical story was that of a young woman named Zhang Mingshan, 
who said that the 500 rabbits she had raised and sold to a 
nearby processing plant in 2006 earned her RMB 3500 (USD 450) in 
net profit. 
 
8.(U) Ambassador Holmer then met with Ren Xuping, who has become 
famous as the "Rabbit King" due to the size of his rabbit 
rearing operation and his media prominence.  Ren gave the 
Ambassador a tour of his operation, which covers 70 mu (8.4 
acres), and includes pens holding many thousands of rabbits. 
Ren emphasized that he planned to expand his sales of rabbit 
meat overseas, and noted the European Union appeared to be a 
particularly lucrative market.  At the same time, he emphasized 
his concern for his neighbors and his desire to see them 
participate in the benefits of his expansion.  He also claimed 
he had donated breeding rabbits to North Korea and Nepal, hoping 
to contribute to the alleviation of poverty in those countries. 
 
9.(SBU) Asked about the profitability of his operation, Ren 
claimed that in 2006 he had made RMB 50 million (USD 6.4 
million) in gross profit, and RMB 4 million (USD 513,000) in net 
profit.  He stated he paid no taxes on most of his operation, 
since it had been classified as a poverty alleviation project, 
but he had to pay a value added tax on the processing stage in 
which rabbit meat was turned into sausage.  Ren stated 80 
percent of his profits were reinvested into his operation, with 
ten percent held as a capital reserve, and another ten percent 
going to HPI's poverty alleviation center. 
 
10.(SBU) Asked for his opinion on the area's greatest 
development needs, Ren mentioned transportation infrastructure 
and environmental protection as most pressing.  In response to 
an inquiry about the quality of the area's drinking water, a 
local official claimed there was a major rural area drinking 
water safety project underway, and he expected 100 percent of 
the area's rural population to receive potable water within the 
next four years.  The project supposedly requires an investment 
of RMB 10 million (USD 1.28 million) per year. 
 
-------------------------- 
IRRIGATION AND HEALTH CARE 
-------------------------- 
 
11.(SBU) Provincial officials took Ambassador Holmer on a tour 
of the ancient Dujiangyan irrigation project, which has been 
developed into a major tourist destination.  Afterwards, the 
delegation visited the Zhongxing Township Hospital, a relatively 
large and clean facility specializing in delivering heath care 
to rural residents.  The doctor leading the tour said the 
hospital employed 40 doctors and 57 nurses, and claimed he had 
never heard of any AIDS cases coming through the facility. 
After a brief look at the traditional Chinese medicine clinic, 
the Ambassador toured the remainder of the facility.  One clinic 
was labeled "family planning," and when the Ambassador asked 
about the frequency of abortions, the doctor responded 
(improbably) that the hospital performed "very few," relying 
instead on birth control education. 
 
--------------------- 
PROVINCIAL LEADERSHIP 
--------------------- 
 
12.(U) The Ambassador participated in a courtesy visit and an 
official banquet hosted by Sichuan Provincial Vice Governor Wang 
Huaichen, whose portfolio includes tourism and statistics.  Wang 
noted Sichuan had lagged behind other areas of China in 
attracting FDI, and claimed the province's rough terrain 
contributed to uneven development patterns.  While he expressed 
concern over the province's urban-rural income gap, he insisted 
the province provided an excellent environment for foreign 
investment. 
 
13.(U) The next day, the delegation met with Sichuan Great 
Western Development Office Director Mr. Yang Shizuo, who 
outlined the basics of China's Great Western Development 
Initiative (GWDI), which he said applied to 71 percent of 
China's territory.  Critical elements of the GWDI, according to 
Yang, were the need to increase cash income in rural areas, 
greater attention to energy generation (especially hydropower 
and natural gas development), and improvement of the area's 
transportation infrastructure.  To accomplish these and other 
GWDI objectives, Yang listed seven goals: (1) reconstruction of 
rural villages; (2) greater assistance to migrant workers; (3) 
improvement of village-level education, and especially 
 
CHENGDU 00000088  003.2 OF 003 
 
 
vocational training; (4) greater attention to public health 
issues; (5) an increase in the quantity and quality of social 
services; (6) an increase in FDI; and (7) increased construction 
of roads and highways. 
 
14.(SBU) Ambassador Holmer raised several important points with 
Yang, including the need to improve the area's climate for FDI. 
Most basic was the need to improve rule of law, including better 
dispute resolution and increased protection for IPR.  Customs 
clearance procedures needed to be made more "customer friendly." 
 Business community concerns such as better international 
schools and western-style health care were also important.  And 
of course, the SED itself was aimed at opening China's financial 
markets, while civil air negotiations could help the province in 
its efforts to improve transportation links.  Finatt Loevinger 
also mentioned the desirability of exchange rate reform, which 
would remove distortions in China's investment climate, and 
ultimately bring more FDI to China's western areas. 
 
------------------------------------------- 
THE AMERICAN BUSINESS COMMUNITY HAS ITS SAY 
------------------------------------------- 
 
15.(SBU) At a lunchtime meeting with local representatives of 
U.S. businesses (mostly SMEs) hosted by Sichuan AmCham, the 
Ambassador discussed the purposes and accomplishments of the 
SED, and detailed the points he had made during his trip west on 
issues such as rule of law, logistics and customs clearance 
procedures, and governmental transparency.  Attendees spoke 
frankly about the challenges of doing business as SMEs in 
China's western areas.  In addition to subjects such as customs 
procedures, transparency, and lack of high-quality international 
schools, several attendees complained of difficulties 
encountered in hiring qualified staff.  Another common concern 
was China's corporate income tax structure, and especially the 
post facto cancellation of a three percent discount in the rate 
applied to Foreign Invested Enterprises (FIEs).  Later, the 
Ambassador toured Intel's assembly and packing facility just 
outside Chengdu, which at USD 450 million is the largest 
U.S.-invested project in Sichuan. 
 
------- 
COMMENT 
------- 
 
16.(SBU) Although many of the rural areas visited had no doubt 
been carefully prepared by local authorities in advance of the 
delegation's visit, the contrast with China's (relatively) 
wealthy coastal areas remained striking.  As the delegation 
stressed to local officials, these contrasts to a great extent 
reflect distortions caused by Central Government policies.  The 
absence of open financial markets and the consequences of an 
inflexible exchange rate system are not Beijing issues alone. 
 
17.(U) This cable has been coordinated with Embassy Beijing, and 
has been cleared by Ambassador Holmer. 
BOUGHNER