VZCZCXRO6081
RR RUEHCN RUEHVC
DE RUEHGH #0313/01 2210523
ZNR UUUUU ZZH
R 080523Z AUG 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7043
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHOO/CHINA POSTS COLLECTIVE
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7614

UNCLAS SECTION 01 OF 02 SHANGHAI 000313 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR OASIA/INA/CUSHMAN AND WINSHIP 
DEPT FOR EAP/CM 
 
E.O. 12958: N/A 
TAGS: ECON PGOV ELAB ETRD KIPR ENRG CH
SUBJECT: ZHEJIANG'S YIWU: BEARING THE BRUNT OF GLOBAL ECONOMIC 
FORCES 
 
SHANGHAI 00000313  001.2 OF 002 
 
 
¶1.  (SBU) Summary.  Zhejiang's Yiwu is home to one of the 
largest wholesale markets in the world.  During a July 21 visit, 
the Consul General discussed the impact of global economic 
trends on Yiwu with Yiwu Party Secretary Wu Weirong and Mayor He 
Meihua.  In addition, the CG visited Huahong Home Decoration, a 
privately-owned Chinese company supplying picture frames and 
other decorations to the United States.  Huahong's CEO explained 
how inflation, burgeoning labor costs, high transportation 
costs, RMB appreciation, and the downturn in the U.S. economy 
are buffeting the company.  As a result, Huahong is taking 
dramatic measures to reduce its work force, hedge currency, and 
cut input costs.  Party Secretary Wu said Huahong's difficult 
circumstances are shared by many other small and medium 
enterprises in Yiwu and elsewhere in Zhejiang.  Yiwu will begin 
publishing an IPR white paper in April of 2009.  End Summary. 
 
Yiwu's Economy:  A Picture Worth A Thousand Words 
--------------------------------------------- ---- 
 
¶2.  (SBU) Huahong Home Decoration Company CEO Wang Aixiang 
painted a bleak picture of the home decoration export market. 
Huahong's biggest customers include American chains such as 
Michael's, Home Depot, and Target, and exports to the United 
States represent 70 percent of the firm's revenue.  As the U.S. 
economy soured, particularly the real estate market, sales for 
home furnishings have plummeted.  Huahong's sales have 
contracted by twenty percent over last year.  Wang also 
estimated that in the current climate, 30 percent of China's 
home decoration companies that rely on exports to the United 
States would go belly up.  He also predicted the downturn would 
last a minimum of two to three years. 
 
¶3.  (SBU) Wang lamented that high fuel prices, RMB appreciation, 
inflation, and increasing labor costs are all eating into 
Huahong's margins.  As the RMB appreciates, the company is 
increasingly feeling the pinch.  Its orders are largely 
denominated in dollars and U.S. buyers are unwilling to absorb 
the additional costs due to those several factors.  Although 
Huahong is using hedging instruments to soften the blow, the 
company has lost "big money" due to RMB appreciation.  In 
addition, basic expenses have grown over the past year by 16 
percent and credit is very "tight" and interest rates high. 
Huahong has raised its prices somewhat, but only by 5 percent. 
Huahong sources much of its material locally, and many of the 
basic material costs are rising at a rapid clip.  Since the 
majority of Huahong's business is in the United States, 
exploding transportation costs have also undermined its 
business.  Wang noted that the average price of container 
shipments to the U.S. West Coast has jumped from USD 1,500 to 
USD 2,000 within the last year.  Huahong has also taken a series 
of measures to cut costs such as cutting out "middlemen" 
traders, laying off workers, and switching to lower cost 
materials.  For example, the company has switched from producing 
wooden frames to plastic frames made from recycled material. 
 
Labor Contract Law's Price Tag 
------------------------------ 
 
¶4.  (SBU) According to Wang, the Labor Contract Law that went 
into effect on January 1 of this year has increased the 
company's labor costs by 20 percent.  This increase in the cost 
of labor, along with the other economic factors, has forced the 
company to reshape the size of its workforce.  Huahong has cut a 
vice president and several mid-level managers as well as a large 
number of factory workers.  Before the rough times began, the 
company employed 2,000 full-time workers and had a network of 
over 20,000 temporary workers.  The company has now shrunk to 
1,600 full-time workers and rarely uses the temporary hires. 
The average wage of the full-time workers is roughly USD 300 per 
month and the company has scaled back benefits to the bare 
minimum. 
 
¶5.  (SBU) Wang suggested that workers are beginning to "rethink" 
the benefits of the new Labor Contract Law.  Before, they saw 
that foreigners have certain rights, and they "began to demand 
the same."  However, they did not realize that these increased 
demands might bring less employment opportunities as companies 
have had to scale back.  Previously, workers would "hop between 
jobs" without thinking twice.  Now companies are more reluctant 
to take on workers because of the law and current economic 
conditions, reducing the number of jobs available.  Wang said 
the government is also just beginning to wake up to the problem 
as more people are put out of work, adding the government needs 
to pay more attention to the problems of small and medium size 
businesses such as his.  However, he said Yiwu generally has a 
 
SHANGHAI 00000313  002.2 OF 002 
 
 
good business environment and the local government is generally 
"service oriented." 
 
Not the Only One with Economic Troubles 
--------------------------------------- 
 
¶6.  (SBU) In a separate meeting, Yiwu Party Secretary Wu Weirong 
emphasized that Huahong is not alone in its problems; many 
companies in the area are facing similar challenging 
circumstances.  Inflation, spiraling transportation prices, and 
the RMB appreciation are taking a toll on Yiwu's economy.  In a 
subsequent meeting, Mayor He added that Yiwu's economy was 
particularly vulnerable because 60 percent of the city's economy 
depended on trade.  Many businesses in the area are simply not 
able to cope with the rapid changes in the economy and are being 
forced into bankruptcy.  Wu acknowledged that unemployment is an 
increasing problem, but the government is seeking to solve the 
problem by finding other ways to develop the economy, 
particularly by stimulating domestic demand. 
 
¶7.  (SBU) When asked, Wu agreed that China's tightened visa 
issuance policy during the Olympics has had an effect on Yiwu's 
economy and wholesale markets.  However, he quickly added that 
the general economic downturn in the world economy was a much 
bigger factor.  (Comment:  A subsequent visit to Yiwu's normally 
bustling Commodity Wholesale Market revealed a dearth of buyers. 
 The shopkeepers all lamented the lack of foreign buyers for the 
past few months and attributed the problem to China's visa 
restrictions.)  Wu described a new effort the city is unfolding 
to attract more business to its wholesale market.  The wholesale 
market is now expanding from its traditional base of 
Chinese-made goods to products imported from around the world to 
be sold in the market.  The vision is to make the Yiwu Wholesale 
Commodities market a "market for the world."  The CG 
subsequently visited the newly built U.S. section of the market, 
which largely consists of U.S. wines. 
 
Yiwu Announces IPR White Paper 
------------------------------ 
 
¶8.  (SBU) Party Secretary Wu took the opportunity of the CG's 
visit to announce Yiwu would begin producing a yearly 
intellectual property rights (IPR) protection white paper.  He 
said that the idea came from the CG's suggestion during an 
earlier meeting, noting that the regular publication of a white 
paper would "allow foreigners to know what Yiwu is doing to 
protect IPR."  Yiwu will publish the first IPR white paper 
before April 2009.  Wu noted this decision also demonstrates 
that the Chinese Government takes IPR very seriously and is part 
of Zhejiang Province's plan to promote innovation through strong 
IPR protection.  This is "100 percent our own requirement" Wu 
noted, emphasizing that China's protection of IPR is in its own 
interest. (Note:  When the CG later mentioned the white paper in 
his meeting with the Mayor, Mayor He seemed unfamiliar with this 
plan.)  Mayor He emphasized that Yiwu is making a great effort 
to curb the counterfeit trade, noting the city has set up a 
special IPR tribunal which combines administrative, civil, and 
criminal cases.  While it was difficult to ensure Yiwu is 100 
percent compliant on IPR, it is making every possible effort, 
the Mayor asserted. 
 
An "Old Friend" of Yiwu 
----------------------- 
 
¶9.  (SBU) Party Secretary Wu also reviewed the close cooperation 
and exchanges between the Consulate and Yiwu over the past three 
years and welcomed further cooperation.  He noted that he met 
the CG eight times, and said there were many other opportunities 
for economic and cultural exchanges with the Consulate. 
 
Yiwu's Support for the Sichuan Earthquake Victims 
--------------------------------------------- ---- 
 
¶10.  (SBU) According to Wu, Yiwu has been active in giving 
support to the victims of the Sichuan earthquake.  The Yiwu 
Government gave official donations and 99 percent of individual 
party members made contributions.  Many cadres were also 
dispatched to assist in the quake-stricken area. 
JARRETT