VZCZCXRO0149
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0786/01 1930522
ZNR UUUUU ZZH
R 120522Z JUL 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6244
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 04 GUANGZHOU 000786 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4420/ITA/MAC/MCQUEEN 
 
STATE ALSO PASS USTR 
 
USPACOM FOR FPA 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV CH
SUBJECT: Slow Progress in a Tough Neighborhood: Economic and 
Political Change in South China over Four Years 
 
REF: A) Guangzhou 670; B) Guangzhou 631; C) Guangzhou 627; D) 
 
Guangzhou 622; E) Guangzhou 620; F) Guangzhou 564; G) Guangzhou 559; 
H) Guangzhou 544; I) Guangzhou 462; J) Guangzhou 421; K) Guangzhou 
353; L) Guangzhou 322; M) Guangzhou 301; N) 06 Guangzhou 17422; 0) 
06 Guangzhou 15624; P) 05 Guangzhou 32823; Q) 04 Guangzhou 30943 and 
others; R) 06 Guangzhou 32442 
 
THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED.  IT SHOULD NOT BE 
DISSEMINATED OUTSIDE OF U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC 
FORUM WITHOUT THE WRITTEN CONCURRENCE OF THE ORIGINATOR.  IT SHOULD 
NOT BE POSTED ON THE INTERNET. 
 
¶1.  (SBU) Summary and Comment: This cable by Guangzhou's departing 
Economic/Political Section Chief is a brief look at south China 
after four years, how it has developed economically, the pluses and 
minuses, challenges and potential, where it's going in the future. 
The Pluses: South China and particularly the Pearl River Delta 
(PRD), the world's factory floor, have succeeded economically beyond 
any Communist apparatchik's wildest dreams.  The economy is 
accelerating even more rapidly due to China's WTO accession and is 
expanding vertically and horizontally.  A middle class and a 
domestic market are taking shape.  A well-developed transportation 
network links province to province and city to city, enabling 
inter-provincial commerce to blossom and manufacturing to slowly 
move inland.  The Pan-PRD and the Closer Economic Partnership 
Agreement (CEPA) initiatives have expanded cooperation between a 
number of Chinese provinces and Hong Kong and Macau. 
 
¶2. (SBU) The Minuses: Such rapid expansion has come with 
environmental and social costs.  Energy is at a premium, air quality 
has deteriorated, water is in short supply; these are all serious 
constraints.  Corruption is rampant despite government efforts to 
crack down.  Income gaps between rich and poor, urban and rural, and 
coastal and inland, continue to exist with little-to-no improvement 
in sight.  And there has been little movement on local political 
reform. 
 
¶3. (SBU) COMMENT: The income gap, while important, does not seem as 
important as the opportunities available to advance oneself 
economically.  When those opportunities decline because of 
corruption, arrogance, pollution, or poor management, the average 
person will react and demonstrations - of which there are likely far 
more than reported in the press or of which we hear about from 
word-of-mouth - follow.  The Party and the government still have 
difficulty accommodating dissent and generally crack down on or 
whitewash incidents.  Civil unrest remains largely at, and is dealt 
with by, the local level and does not threaten Party control.  In 
the absence of major social upheaval or revolution, neither of which 
appears likely, any reforms would appear to occur first in the Party 
and gradually move out to society.  The hope, as always, is that as 
society changes, the Party and government will change too.  Looking 
down the road, barring major outside shocks, such as war, depression 
or global pandemic, south China's robust economic growth should 
continue.  End Summary and Comment. 
 
What Has Changed: Rapid Economic Growth 
in all Directions 
--------------------------------------- 
 
¶4. (SBU) South China's economy has expanded rapidly in size, as well 
as vertically, with rising levels of technology, and horizontally, 
by expanding inland and gradually abroad (ref C).  Due to the 
crowding out of land and insufficient labor, water, and power in the 
PRD, governments at all levels in Guangdong are focusing their 
efforts to attract FDI on capital intensive, small footprint, high 
technology firms.  Labor-intensive investment and low-value-added 
firms are no longer welcome in the Pearl River Delta area of some 30 
million-plus people and there has been a conscious effort to move 
them out.  They are free to go inland to Guangdong's second and 
third tier cities or into Guangxi and Fujian's less developed areas. 
 
 
¶5. (SBU) What has made this possible is the horizontal growth of the 
economy, through the rapid construction of an interstate toll road 
system and a provincial road network in each of the provinces in 
south China.  This development is mirrored, at least to some extent, 
in the rest of China (refs A, F, and G).  What used to take 7-12 
hours to cross now takes only 3-4 hours as bridges span rivers and 
tunnels cut through difficult mountain terrain.  Air and sea ports, 
rail lines, and inland waterways are also being upgraded and 
expanded.  Many of the larger labor-intensive factories are not yet 
 
GUANGZHOU 00000786  002 OF 004 
 
 
moving out of the PRD, however, when they expand their operations, 
they generally find themselves looking elsewhere.  Less risk-averse 
investors are opening new factories and offices in western 
Guangdong, in Guangxi, and further north and west.  On the regional 
level, a healthy competition between the PRD and the Yangtze River 
Delta (YRD) exists, and Hong Kong and Macau continue to integrate 
economically with South China. 
 
¶6.  (SBU) In the past few years, the central government has given 
its blessing to state-owned enterprises and private firms to invest 
abroad, with Guangdong-based firms often taking the lead (ref D). 
This stronger China is beginning its outward march for resources and 
markets, gradually flexing soft power muscles in Asia and Africa, 
but not necessarily in the United States.  The consulate has 
recently emphasized our new "Invest America" plan, but we've 
attracted few questions about what the benefits of doing so will 
be. 
 
WTO - A Major Factor in Economic/Legal Changes 
----------------------- ---------------------- 
 
¶7.  (SBU) While not the only factor, China's entry into the WTO and 
subsequent five-year transition period (which ended in December 
2006) brought dramatic growth in foreign trade and was a major 
factor in changes in China's commercial and legal framework. 
Numerous barriers to market opening remain; new non-tariff barriers 
have been thrown up as tariffs have fallen, such as local standards 
and sanitary and phyto-sanitary issues. 
 
¶8.  (SBU) WTO-led transparency, while slow at first, is expanding in 
the legal field with the government seeking public comments on draft 
laws and regulations.  At times, foreign businesses have been asked 
for their opinions.  In fact, the local Amcham was criticized for 
appearing to trying to protect certain practices that would seem 
beneficial to them, but not to the average worker, in the new labor 
law.  While limited in scope, the trend is toward greater 
transparency.  People in south China, especially the PRD and more 
economically advanced areas have become more aware that they have a 
voice in government that deserves to be heard, a development with 
long-term potential for influencing government decisions.  There 
appears also to be greater awareness of environmental, political, 
and economic matters, even the outside world, despite censorship and 
clamps on media.  Today, moreover, with the environmental focus in 
the 11th Five-Year Plan (2006-2010), officials are supposed to be 
evaluated not only on their economic performance, but also on how 
"green" that performance is. 
 
Development of a Middle Class and a Domestic Market 
----------------------------- --------------------- 
 
¶9.  (SBU) At the same time, rapid growth has caused average incomes 
to rise, leading to the creation of a new class recently identified 
by the China Academy of Social Sciences (without calling it a middle 
class).  Three years ago, we could not get meetings to discuss the 
emergence of a middle class.  This concept is still somewhat 
divisive, as a "middle class" cuts through the middle of society and 
conflicts with the Chinese concepts of a "xiao kang she hui" 
("moderately well-off society" - a unitary whole) and the 
development of Hu Jintao's idea of a "Harmonious Society."  In 
Guangzhou and Shenzhen, as well as many secondary and even tertiary 
cities in south China, this already moderately wealthy society (by 
Chinese standards) has begun to consume products, have leisure time, 
and avail itself of travel, both internal and international.  New 
malls are sprouting up like wildfire; Guangzhou reportedly has 
Asia's largest shopping center - Grand View Mall.  Middle class 
Chinese have something they own and something to protect and it will 
be an unwise government that seeks to roll that back, even in the 
interest of spreading the benefits of wealth around.  Chinese in 
general have high rates of cell phone and internet use. 
 
¶10. (SBU) Since everything is manufactured here, Chinese have access 
to the latest technology.  South China two years ago surpassed Hong 
Kong as the world's largest purchaser of high-end luxury vehicles. 
The housing market is booming and there are plenty of buyers.  The 
travel market is expanding rapidly and increasingly large numbers of 
Chinese are traveling abroad.  The number of sporting activities has 
grown and will continue to generate interest in the run-up to the 
Beijing Olympics, as well as Shanghai's and Guangdong's major 
sporting events in 2010 (the Asia Games will be in Guangzhou in 
2010).  All of this activity offers opportunities to U.S. 
manufacturers, service providers, and the sports and entertainment 
 
GUANGZHOU 00000786  003 OF 004 
 
 
industries. 
 
¶11.  (SBU) The growth of a robust domestic market will help to even 
out some of China's economic inequities, spread the wealth, and 
encourage the development of inland industries more oriented to the 
domestic market.  The Pan-PRD and the Closer Economic Partnership 
Agreement (CEPA) programs have expanded cooperation among a number 
of Chinese provinces and Hong Kong and Macau.  Still, with the bulk 
of the population living closer to the coast, the majority of 
industrial development is likely to stay in that area. 
 
What has Not Changed: The Dark Side - 
Costs of Economic Growth 
----------------------------------- ------------------- 
 
¶12. (SBU) South China's rapid expansion has come with environmental 
and social costs that are mirrored across China.  Economic growth 
without regard to environmental considerations has fouled the water, 
soil, and air and raised social costs, a fact only recently 
acknowledged and occasionally acted upon by the central government. 
Electric power is in short supply; despite robust construction it is 
hard to keep up with the dramatic growth in demand (ref B) and power 
outages and rolling black/brownouts are not infrequent in some 
areas.  Companies increasingly resort to small, inefficient, and 
highly polluting power generators to maintain their manufacturing 
schedules.  Electric power shortages can be resolved with new 
construction and energy inputs; however, water is a different issue. 
 The water is not only highly polluted, but the shortage of potable 
water in many areas and of water for agricultural and industrial 
uses will continue to act as a serious constraint (ref P).  Labor 
shortages and abuses are regularly reported (refs M and J). 
Counterfeiting and piracy are rife, while government crackdowns, 
though numerous, are ineffective.  At the same time, the government 
is focused on building its own intellectual property rights (IPR) 
and national brands (not a bad thing), but is also using IPR "abuse" 
as a tool to extract business secrets from multinational 
corporations. 
 
¶13.  (SBU) Official corruption continues to be rampant despite 
government efforts to crack down, weakening the legitimacy of the 
Party.  Politically, the government still responds to embarrassing 
disclosures using tit-for-tat tactics, e.g. attacking local American 
company labor practices or the safety of U.S. agricultural imports 
to demonstrate that the problem is not China's alone (ref J) and 
sometimes even giving the Chinese companies a free pass as the 
foreign companies are taken to task. 
 
The Poor and Civil Unrest 
------------------------- 
 
¶14.  (SBU) The poor are still impoverished, despite recent attempts 
to build a "new countryside" and they have seen little improvement 
in their lives to date.  Income gaps between rich and poor, urban 
and rural, and coastal and inland continue to exist with little to 
no improvement in sight.  Rapid urbanization and industrialization, 
often tainted by corruption, create stresses, particularly regarding 
land acquisition.  The urban-rural income gap remains at a 3:1 ratio 
virtually regardless of location.  The gap, while often cited as a 
key element in civil unrest, does not seem as important as a 
person's opportunities to move up the economic ladder.  When those 
opportunities are closed off because of corruption, arrogance, 
pollution, or poor management, the average person will react, 
leading to numerous incidents of mass demonstrations, some which end 
in violence.  Much of our reporting has been on the conflicts and 
trade-offs among economic gain, wild West-type development, corrupt 
practices, and official connivance in business chicanery: 
environmental protests (Xiamen public against a chemical factory - 
ref E); land acquisition and inadequate compensation (Dongzhou's 
violent protests - refs L, K, and O); and out and out corruption 
(Taishi and Gurao - ref H).  All of these incidents have remained 
localized, there is no pattern connecting them, and the Party 
remains comfortably in control at present.  In the absence of major 
social upheaval or revolution, neither of which appears likely, any 
reforms will have to occur in the Party first and only gradually 
move out to society. 
 
The Party Comes First 
--------------------- 
 
¶15.  (SBU) Through all of this growth, the Communist party has tried 
to keep up with the changes and professionalize its cadre by adding 
 
GUANGZHOU 00000786  004 OF 004 
 
 
business administration and management courses to the Party School 
syllabus (ref Q).  Some of the newer cadre are sophisticated and can 
see change in its multiple dimensions, unlike the more 
ideologically-driven old guard.  Despite continued party control, 
the government in many ways has show an impressive ability to adapt 
to rapid changes.  It has been slow to react to some issues, such as 
labor rights, but is anticipating others, such as the aging 
population and the need for a better social security system and even 
a health system.  On the political side, things do not appear to 
have improved much.  There is talk of democratizing within the Party 
but there remains little democracy for the masses, grassroots 
experiments aside.  Apart from exceptions for Olympic press 
coverage, media controls and censorship remain strong, and have 
strengthened under the Hu/Wen regime.  There is little tolerance for 
dissent in south China; it's clear that this is a politically 
backward area, focusing on economic advancement at the cost of 
advancing new ideas that could provide significant alternatives to 
the way things are done, including business ideas (ref N).  Official 
rhetoric emphasizes nationalism and territorial integrity, though 
where Taiwan fits into the overall equation is exceedingly complex, 
given ties of affinity and, in some locations, dependence for 
economic gain. 
 
Comment: Continued Growth but Questions Remain 
----------------------------- ---------------- 
 
¶16.  (SBU) In the long run, the south China economic machine should 
continue to gallop along at approximately 10-12 percent annual 
growth.  A stronger domestic market should help cushion south China 
manufacturing from an outside shock, though with the current heavy 
reliance on exporting, a severe shock would greatly affect business 
and labor here.  Despite structural weaknesses of uneven development 
and income inequities, there does not appear to be a reason, barring 
a U.S. or global depression, major war, or pandemic outbreak (that 
could easily originate in south China) that would stop this growth. 
But with the expectation of a better standard of living about all 
that the Party has to offer, serious social problems could occur if 
that hope disappears. 
 
GOLDBERG