VZCZCXRO9355
RR RUEHCN RUEHGH
DE RUEHGH #0297/01 1381002
ZNR UUUUU ZZH
R 181002Z MAY 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 5821
INFO RUEHBJ/AMEMBASSY BEIJING 1076
RUEHCN/AMCONSUL CHENGDU 0637
RUEHGZ/AMCONSUL GUANGZHOU 0619
RUEHHK/AMCONSUL HONG KONG 0745
RUEHIN/AIT TAIPEI 0515
RUEHSH/AMCONSUL SHENYANG 0641
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC 0152
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 6222

UNCLAS SECTION 01 OF 03 SHANGHAI 000297 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EEB, AND INR/B 
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, ALTBACH, READE 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN 
FRANCISCO FRB FOR CURRAN/GLICK/LUNG; NEW YORK FRB FOR CLARK/CRYSTAL/MOSELEY 
STATE PASS CFTC FOR OIA/GORLICK 
CEA FOR BLOCK 
USDOC FOR ITA DAS KASOFF, MELCHER AND OCEA/MCQUEEN 
TREASURY FOR OASIA - DOHNER/CUSHMAN 
TREASURY FOR IMFP - SOBEL/MOGHTADER 
NSC FOR KURT TONG 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV PINR CH
SUBJECT: YANGTZE RIVER DELTA ECONOMIC INTEGRATION 
 
REF: A. 06 SHANGHAI 7027 
 
     ¶B. SHANGHAI 177 
 
(U) This cable is sensitive but unclassified and for official 
use only.  Not for distribution outside of USG channels. 
 
¶1. (SBU) Summary: In a meeting on April 19, Shanghai scholars 
told visiting Embassy ECON M/C that local and central Government 
plans called for further integration of the Yangtze River 
Delta's (YRD) transportation and communications infrastructure 
and greater coordination of environmental controls.  Shanghai 
Party Secretary Xi Jinping had the experience (as former 
Zhejiang Party Secretary) and political connections to spur 
implementation of YRD integration plans.  China's central 
government lacked the macro-economic tools to stabilize and 
regulate stability of China's economy.  China would be cautious 
on liberalizing its financial sector since Chinese financial 
institutions were not yet ready to compete with international 
firms.  End summary. 
 
¶2. (SBU) Visiting Beijing ECON M/C met with Shanghai Academy of 
Social Sciences (SASS) Executive Vice President Zuo Xuejin, SASS 
Economic Institution Director Chen Jiahai, and Shanghai Jiaotong 
University Antai Economic and Management College Professor Pan 
Yingli on April 19.  These academics engaged in a lively 
discussion on China's financial services sector issues, economic 
integration of Shanghai and other YRD cities, and the political 
and economic ramifications of then newly-appointed Shanghai 
Party Secretary Xi Jinping. 
 
--------------------------------------------- ----- 
Integrating Transportation, Environment and Social 
Safety Net Policies 
--------------------------------------------- ----- 
 
¶3. (SBU) Note: The YRD comprises the triangular-shaped territory 
of Shanghai, southern Jiangsu and northern Zhejiang provinces 
where China's Yangtze River empties into the East China Sea. 
Crisscrossed with canals for irrigation and transportation, the 
YRD historically was one of China's most agriculturally rich and 
densely-populated areas.  In modern times, the YRD, together 
with the Pearl River Delta Region and the Beijing-Tianjin-Bohai 
Region has been one of China's three engines of economic growth. 
 Currently the YRD, led by Shanghai, surpasses all other regions 
in terms of GDP according to statistics from the Chinese 
National Statistical Bureau.  See Ref A, and previous, for other 
reports on the YRD.  End note. 
 
¶4. (SBU) SASS professor Chen Jiahai said that the National 
Development and Reform Committee's (NDRC) 11th Five Year Plan 
envisaged long-term development of the YRD.  As defined by the 
central government, the sixteen major cities of the YRD were: 
(in Jiangsu Province) Nanjing, Suzhou, Wuxi, Changzhou, 
Zhengjiang, Nantong, Taizhou; (in Zhejiang Province) Hangzhou, 
Ningbo, Shaoxing, Yangzhou, Jiaxing, Huzhou, Zhoushan, Taizhou; 
and, Shanghai. 
 
¶5. (SBU) Chen said that the plan called for integration and 
coordination in transportation, environment and communications. 
This would include such areas as airports, high-speed railway, 
ports, pollution mitigation and environmental control in the 
Yangtze River and Tai Lake, he said.  The plan also called for 
an integrated social security system to allow for a more 
free-floating population within the YRD.  Chen added that the 
Ministry of Transportation's plan should lead to a better 
integration of the road and water-borne transportation systems 
in Zhejiang, Jiangsu and Shanghai. He also noted that several 
cities in the much poorer and less-developed neighboring Anhui 
Province had also expressed interest in being considered part of 
the official YRD region. 
 
--------------------------------------------- ------------- 
Shanghai Party Secretary Has Power to Spur YRD Integration 
 
SHANGHAI 00000297  002 OF 003 
 
 
--------------------------------------------- ------------- 
 
¶6. (SBU) SASS Executive Vice President Zuo said that he, like 
other academics, was still taking the measure of Shanghai Party 
Secretary Xi Jinping.  Zuo said that Xi's experience in 
 
SIPDIS 
Zhejiang, China's main locus of private enterprise, could lead 
to more development of the private (as opposed to state-owned) 
economy in Shanghai.  He also said that Xi was expected to 
advocate strengthening YRD economic integration and cooperation 
and increasing the importance of the YRD region.  Zuo noted that 
previous Shanghai leadership had been wary of too much YRD 
integration since this would have raised concerns from the 
central leadership of the formation of a rival power base.  Xi's 
apparently strong political relations with President Hu Jintao 
meant that he would be able to propel the YRD's integration. 
 
--------------------------------------------- ---- 
China's Lacks Effective Macro-Economic Controls 
--------------------------------------------- ---- 
 
¶7. (SBU) Jiaotong University Antai Management College Professor 
Ms. Pan Yingli said that the central government remained 
concerned about opening up the financial services sector to 
foreign competition.  The government was particularly concerned 
that China's excess liquidity problem could impact the stability 
of the Chinese economy.  Foreign financial institutions that 
entered China would increase capital inflows, and further worsen 
China's liquidity problem.  She said that the lessons from the 
Asia financial crisis in 1990s were still very fresh in the 
minds of Chinese government leaders. 
 
¶8. (SBU) Pan believed that the People's Bank of China (PBOC) 
lacked effective tools to control China's overheated economy. 
Since April 2006, PBOC had hiked the required reserve ratio 
eight times, raised the interest rate three times, and 
repeatedly used open-market operations and window guidance to 
choke off some of the bank lending and cool down the economy. 
None of these efforts had any effect.  Pan opined that PBOC was 
increasingly unable to use interest rate hikes since it was also 
trying to limit overseas capital inflows.  Higher interest rates 
would provide further incentives to foreign capital coming into 
China to speculate on the continued RMB appreciation.  (Note: 
The official deposit interest rate in April was 2.79 percent, 
whereas the CPI in March was 3.3 percent so that the real 
interest rate (after tax and inflation) was approximately 
negative 1 percent.)  Beijing ECON M/C responded that a 
free-floating, market-based foreign exchange rate would help 
alleviate the capital inflow problems and also give PBOC more 
ability to use macro-economic measures such as interest rates to 
control the economy. 
 
--------------------------------------------- ------ 
Chinese Financial Institutions Not Ready to Compete 
--------------------------------------------- ------ 
 
¶9. (SBU) Additionally, Chinese financial institutions were 
undergoing a reform process, but their existing systems and 
practices were not yet compatible with, and had failed to 
respond to, the globalization of the market.  The central 
government believed that it needed to liberalize slowly to 
protect Chinese financial institutions from too much 
competition.  Pan also noted that Chinese Securities Regulatory 
Commission (CSRC) was not yet able to provide supervision of the 
market.  She said that the many recent stories about insider 
trading and price manipulation in the stock market demonstrated 
that the China Securities Regulatory Commission (CSRC) lacked 
effective enforcement tools.  ECON M/C responded by noting the 
benefits that greater foreign participation in the financial 
services sector would bring, such as increased competition and 
product innovation, and improved management practices.  He also 
noted that many of these benefits would likely contribute to 
improving the regulatory environment as well by introducing 
 
SHANGHAI 00000297  003 OF 003 
 
 
global best practices in market supervision. 
 
¶10. (SBU) One approach to develop China's corporate bond market, 
Pan said, would be for the Ministry of Commerce to allow 
foreign-invested companies in China to issue corporate bonds. 
This also would provide one mechanism to partially address 
China's excess liquidity problem.  Pan also suggested that China 
should consider allowing foreign joint venture fund management 
companies to offer individualized investment, or discretionary 
fund management, plans for high net-worth Chinese since this 
would help Chinese domestic financial institutions learn 
advanced risk management and investment management skills. 
 
---------------- 
Biographic Notes 
---------------- 
 
¶11. (U) Zuo Xuejin: Born in October 1949, Zuo is the Executive 
Vice President of Shanghai Academy of Social Sciences and the 
President of the Academy's Institute of Economics.  Zuo obtained 
his doctoral degree from the University of Pittsburg in USA and 
was Notestein Fellow of the American Population Council in 1989. 
 His research area focuses on population economics, migration 
and urbanization, and employment and social security.  Zuo has a 
number of publications including "China's Population and 
Employment", "Private Economy and Development in Middle and 
Western China", "Research on Shanghai's Health Care System 
Reform", and "Township Health Care System Reform: the Function 
of Government and Market".  He is fluent in English. 
 
¶12. (U) Chen Jiahai:  Chen's research at the Shanghai Academy of 
Social Science Department focuses on trade, development, and 
regional economic development and reform policies.  Chen wrote 
several academic books on the financial relationship between 
Shanghai and the Central government, the development policies of 
the Pudong New Area, and inter-provincial trade and economic 
relations.  Chen was also involved in the drafting the academic 
version of the eleventh Shanghai Five-year Plan.  Chen Jiahai 
was born in 1951 and obtained a bachelors degree from Fudan 
University Department of Economics. 
 
¶13. (U) Pan Yingli: Pan has been a professor at Shanghai 
Jiaotong University Antai Economic and Management College since 
¶2005.  Before that, Pan worked in East China Normal University's 
Finance Department.  Pan serves as an advisor to the Shanghai 
government, and was reportedly the drafter of Shanghai's 11th 
Five-year Plan research project on building Shanghai into an 
international financial center.  She is also Director of the 
China International Economics Association, Director of China 
International Finance Association Director, and a guest 
professor at Shanghai's Fudan University, East China Politics 
and Law University and Macao Science and Technology University. 
JARRETT