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UNCLAS SECTION 01 OF 02 GUANGZHOU 000406 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/LEE 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER 
STATE PASS SAN FRANCISCO FRB FOR CURRAN 
TREASURY FOR MOGHTADER 
 
E.O. 12958: N/A 
TAGS: ECON PGOV ELAB SMIG PHUM EINV CH
SUBJECT: Effort to Move Factories and Migrant Workers from Pearl 
River Delta Faces Obstacles 
 
 (U) This document is sensitive but unclassified.  Please protect 
accordingly. Not for release outside U.S. government channels. Not 
for internet publication. 
 
¶1. (U) Summary:  He could have called it the "Out with the Old" 
policy, but instead Guangdong Party Secretary Wang Yang recently 
announced a ?Double Transfer? policy to move both labor-intensive 
industries and migrant laborers to less-developed areas of 
Guangdong, or out of the province entirely.  This is part of the 
province's ambitious campaign to upgrade industries in the Pearl 
River Delta (PRD).  Many municipal governments in the PRD are 
opposed to this plan, because they fear the high-tech and service 
industries envisioned by Wang will be slow to develop, and the drop 
in tax revenues will have an impact on program and welfare planning. 
 A lack of suitable infrastructure for more advanced industries in 
the PRD, the Delta's persistent advantages as a manufacturing base 
and certain central government polices - like the labor contract law 
and the limitations on foreign investment in service industries 
-will also present challenges to the success of the campaign.  End 
Summary. 
 
?Empty the Cage and Replace the Old Bird with a New One? 
--------------------------------------------- --------- 
 
¶2. (U) The Guangdong provincial government recently announced a 
?Double Transfer? policy backed with a budget of nearly 50 billion 
RMB (7.3 billion USD).  According to press reports, this strategy 
will seek to move labor-intensive industries to less-developed areas 
at the periphery of the province.  At the same time, training will 
be provided to unskilled workers, enabling them to work for the 
high-tech companies the government seeks to attract to the PRD in 
place of departing factories. 
 
¶3. (SBU) Although the strategy, as reported in the local press, said 
nothing about relocating migrant workers outside the province, our 
contacts have told us that this is a major goal of the government. 
Peter Pak-yan Leung, the Director of Hong Kong's Economic and Trade 
Office (HK ETO) in Guangdong, told us that new promotion criteria 
for public officials promulgated by Beijing represent a shift from 
?quantity to quality.?  These criteria, he said, stress per capita 
economic statistics, as opposed to the aggregate figures, and also 
emphasize social infrastructure.  Leung told us that the provincial 
government has determined that success under the new promotion 
criteria will rely on its ability to reduce the denominator of the 
per capita statistics by decreasing the number of migrant workers in 
the province.  Leung commented that the government is also concerned 
about the potential cost of developing social infrastructure for 
tens of millions of migrant workers. 
 
¶4. (SBU) Dr. Zhang Jie, the Dean of the Economics School at Jinan 
University, told us recently that the Guangdong government has 
determined that the millions of uneducated migrant laborers 
currently working in Guangdong factories will have difficulty taking 
part in the high-tech service industry the government is trying to 
establish in the PRD.  He echoed HK ETO's Leung, saying that the 
government's concern about per capita GDP growth is leading it to 
push many of these migrant workers back to their home provinces. 
Zhang suggested that this may be a controversial policy, arguing 
that it was not fair to the millions of migrant workers who helped 
transform the PRD into an engine of economic growth.  According to 
an article in the Southern Metropolis newspaper, the Dongguan 
municipal government recently scrapped a proposed policy to 
"transfer low-quality laborers" from the city after receiving 
negative feedback from the public. 
 
Opposition from Local Governments 
--------------------------------- 
 
¶5. (SBU) Zhang claims that many of the municipal governments in 
Guangdong oppose the Double Transfer policy.  He said that most 
local governments in the PRD were reluctant to push out 
labor-intensive factories, because they worry that the new high-tech 
companies promised by the provincial government won't actually 
materialize.  While Shenzhen and Guangzhou have had some success in 
attracting high-tech investment, other cities in the PRD have 
struggled.  Municipal governments are also concerned, Zhang said, 
about how to handle the many workers who would be laid-off by the 
departing factories.  His colleague, Li Guangming, added that he 
sees the Double Transfer policy as a tug-of-war between coastal 
 
GUANGZHOU 00000406  002 OF 002 
 
 
cities in the PRD and less-developed ones in the interior of the 
province.  Li commented that municipal governments in the interior 
are hopeful that factories displaced from the PRD will resettle in 
their cities. 
 
Other Challenges 
---------------- 
 
¶6. (SBU) In addition to uncertain support from local governments, 
the Double Transfer policy faces a number of other challenges, 
including a deficit of necessary resources; central government 
policies that discourage such a transfer; and a lack of suitable 
destinations for the existing labor-intensive industry.  Jinan 
University's Zhang told us that it is difficult to shift from 
manufacturing to service industries because the required 
infrastructures are quite different.  Dr. Lu Jun, the Chair of Sun 
Yatsen University's Department of Finance, said in a separate 
meeting that Guangdong lacks the talented workforce necessary to 
establish high-tech operations.  Lu commented that for this reason 
it is currently very difficult to attract foreign companies to bring 
their R&D operations to Guangdong.  Frank Newman, the Chairman and 
CEO of Shenzhen Development Bank, recently told the Consul General 
that his bank is having difficulty finding people with skills even 
in relatively basic areas, such as accounting; this leads to the 
intense "poaching" that goes on in banking sectors where good people 
are courted and wooed and won away with extra pay and extra 
benefits. 
 
¶7. (SBU) Another obstacle is the reluctance of factory owners to 
move away from the massive and efficient supply chains that have 
grown up around existing industries.  Although many manufacturing 
companies have been looking to relocate from the PRD in recent years 
due to the appreciating yuan and rising labor costs, highly 
developed supply chains, among other factors, continue to make the 
PRD very competitive as a manufacturing base.  Sun Yatsen 
University's Lu told us that he believes Vietnam is far too small to 
absorb a significant number of the PRD's factories, and he can't 
imagine that other countries, such as Bangladesh and India, would 
have sufficient infrastructure to merit relocation.  One footwear 
manufacturer told us that there currently is no better alternative 
to coastal China for shoe factories, due to established supply chain 
and transportation infrastructure.  (Comment: Rising energy prices 
will likely increase the advantage of a compact supply chain, 
enhancing the PRD's attractiveness as a manufacturing base for many 
industries.  End Comment.) 
 
¶8. (SBU) Certain central government policies also present 
challenges, perhaps inadvertent, to the vision of a high-tech PRD. 
According to HK ETO's Leung, the new labor law has made it far more 
costly for factories to shut down due to new requirements for 
severance pay.  This may slow the speed at which old industries 
depart, as owners seek to delay incurring prohibitive closing costs. 
 Jinan University's Zhang pointed out that national restrictions on 
foreign investment in service industries also present a serious 
obstacle to the Double Transfer strategy.  In addition, he commented 
that Party Secretary Wang's call for a Hong Kong/Macau/Guangdong 
Special Economic Cooperative Zone, which would create a larger, more 
integrated market that could encourage service industry investment 
in the PRD, has yet to win substantial support in the central 
government. 
 
Expected to be a Long Process 
----------------------------- 
 
¶9. (SBU) Many of our contacts emphasized that the envisioned 
transformation will not be easy.  HK ETO's Leung told us that he 
sees the shift as a long, drawn-out process.  Jinan University's 
Zhang pointed out that a similar industrial upgrading took other 
Asian tigers (Korea, Taiwan, Singapore, Hong Kong) 15-20 years. 
Zhang commented that Guangdong is likely to take even longer than 
this, since it has a much larger population and economic scale than 
the others. 
 
GOLDBERG