VZCZCXRO8876
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0952/01 2360809
ZNR UUUUU ZZH
R 240809Z AUG 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6398
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASH DC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC

UNCLAS SECTION 01 OF 02 GUANGZHOU 000952 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD EINV ECON PGOV CH HK TW
SUBJECT: Export Processing in the PRD Hit with New Deposit 
Requirement 
 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly. 
 
¶1. (SBU) SUMMARY: On August 23, China started requiring export 
processing firms to pay large deposits, which could have a 
substantial negative impact on businesses in the Pearl River Delta 
(PRD).  Hong Kong and Taiwan industry associations in southern China 
have expressed serious concerns about the new policies.  (Note: Few 
U.S. investors will be affected.  End note.)  To adapt to the new 
requirement, local authorities have encouraged export processing 
companies to shift to high-tech and high-value-added products, move 
to western or central China, or target China's domestic market.  END 
SUMMARY. 
 
New Deposit Requirement for Export Processing 
--------------------------------------------- 
 
¶2. (SBU) On July 23, 2007, China announced a new deposit requirement 
for export processors that make labor-intensive products in China's 
coastal provinces (Beijing, Fujian, Guangdong, Hebei, Jiangsu, 
Liaoning, Shandong, Shanghai, Tianjin, and Zhejiang).  Effective 
August 23, enterprises in these areas are required to pay guarantee 
deposits when they register export processing contracts for any 
products which appear on a list 1,853 labor-intensive commodities. 
"The List of Commodities Restricted for Processing Trade" includes 
certain plastic goods, furniture, textiles and other consumer goods. 
 The deposits will be forfeited if the contracts are not fulfilled. 
This move is part of China's efforts to move labor-intensive 
industries out of the more developed coastal regions and to rein in 
its growing trade surplus. 
 
Guangdong Firms Bear the Brunt of the New Requirement 
--------------------------------------------- -------- 
 
¶3. (SBU) Statistics show that, of 90,000 enterprises engaged in the 
production of the blacklisted products in China, 70,000 are located 
in Guangdong.  These firms employ more than 160,000 people and 
produced 69 percent of Guangdong's export in 2006.  Many have 
complained that the new policy will have a negative impact on their 
cash flow and profit margins.  According to a report released by the 
Greater Pearl River Delta Business Council (GPRDBC) in July, RMB 
appreciation, fierce market competition, and newly lowered export 
tax rebate policies narrowed profit margins for export processors to 
10 percent.  GPRDBC estimates that paying additional deposits could 
increase costs by 20 to 30 percent and will likely force many small 
and medium sized enterprises (SMEs) to close down or relocate to 
central or western China.  Large, financially strong enterprises may 
be capable of paying the deposits, but will still find it more 
difficult to stay profitable. 
 
Hong Kong and Taiwan Investors Feel the Pinch 
--------------------------------------------- 
 
¶4. (SBU) Liu Zhanjing, Vice Chair of the Federation of Hong Kong 
Industries (FHKI) claims that over 40,000 Hong Kong-owned factories 
in the PRD will be affected by the new deposit requirement.  GPRDBC 
predicted in its July report that 55 percent of these enterprises 
would face financial difficulties due to the new requirement.  The 
Hong Kong Chamber of Commerce estimated that 1,500 Hong Kong-owned 
processing companies would be forced to shut down their operations 
in the PRD, resulting in the loss of 370,000 jobs in Guangdong and 
another 10,000 jobs in Hong Kong's logistics and service sectors. 
 
¶5. (SBU) The new requirement will likely have a strong impact on 
Taiwan investors as well.  Wu Zhenchang, Chair of the Guangzhou 
Taiwanese Businessmen Association, said only 12 percent of the 
Taiwan-owned enterprises in Guangzhou had the capacity to pay the 
extra costs created by the new policy.  He indicated that 40 percent 
of Taiwan-owned enterprises might have to relocate their 
manufacturing facilities.  Similarly, Huang Zhiming, Chair of 
Shenzhen Taiwanese Businessmen Association, said most of the 4,000 
Taiwan companies in Shenzhen would be affected.  He commented that 
some firms might have to leave the mainland or shut down their 
factories.  (Note: In contrast, few U.S. investors in southern China 
will be affected by the new deposit requirement.  U.S. investment is 
more concentrated in technology- and capital-intensive industries. 
End note.) 
 
Go High-Tech, Go West, or Go Local 
---------------------------------- 
 
¶6. (SBU) To adapt to the new policy, local authorities have 
suggested three options for southern China's export processors.  The 
first is to shift from labor-intensive export processing to 
manufacturing high-tech and high-value-added products.  The second 
recommendation is to move export processing operations to central or 
western China.  The third choice is to give up the export business 
 
GUANGZHOU 00000952  002 OF 002 
 
 
and target the domestic market.   SMEs complain that the cost of 
upgrading to high-tech or high-value-added manufacturing is too 
great.  Local media reports estimate that the moving export 
processing facilities to inland regions could increase 
transportation costs by 7 percent.  Instead, it appears that some 
Hong Kong and Taiwan companies have chosen to shift their focus to 
the domestic market.  Many of these firms are reportedly changing 
their business license registration type from "processing trade" to 
"wholly-owned foreign enterprise" in order to get better access to 
the mainland market. 
 
JACOBSEN