VZCZCXRO9185
RR RUEHCN RUEHVC
DE RUEHGH #0320/01 2260514
ZNR UUUUU ZZH
R 130514Z AUG 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7052
INFO RUEHOO/CHINA POSTS COLLECTIVE
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7625

UNCLAS SECTION 01 OF 02 SHANGHAI 000320 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR OASIA/INA/CUSHMAN AND WINSHIP 
DEPT FOR EAP/CM 
 
E.O. 12958: N/A 
TAGS: ECON PGOV ELAB ETRD EINV ENRG CH
SUBJECT: ZHEJIANG LEADERS CONFIDENT IN TRADE TIES WITH UNITED STATES 
DESPITE CURRENT DIFFICULTIES 
 
REF: SHANGHAI 313 
 
SHANGHAI 00000320  001.2 OF 002 
 
 
(U) This cable is sensitive but unclassified and for official 
use only.  Not for distribution outside of USG channels or via 
the internet. 
 
Summary 
------- 
 
¶1. (SBU) Zhejiang Province enjoys a good relationship with the 
United States built on a foundation of strong trade ties, 
provincial and local officials told the Consul General on his 
farewell trip to Hangzhou, Zhejiang's provincial capital on 
August 6-7.  Zhejiang officials remain concerned that the 
slowing economy in the United States, as well as other factors, 
including RMB appreciation and rising labor costs, is adversely 
affecting the province's exports, but they hope the challenging 
economic landscape will provide needed impetus to reform the 
structure of the province's economy towards more 
energy-efficient production.  Zhejiang companies also are 
looking outwards to invest globally and within China to offset 
slowing exports.  End Summary. 
 
Zhejiang's Good Relations with the United States 
--------------------------------------------- --- 
 
¶2. (SBU) Zhejiang Provincial Party Secretary Zhao Hongzhu told 
departing Consul General and Poloff on August 6 that Zhejiang 
has a strong relationship with the United States, as evidenced 
by his many meetings with Ambassador Randt and the Consul 
General since Zhao assumed office in March 2007.  Business and 
cultural exchanges with the United States are growing and Party 
Secretary Zhao said he hopes to visit the United States in the 
next year.  Zhejiang's relations with the United States remain 
primarily trade-related.  U.S.-Zhejiang trade exceeded USD 28 
billion in 2007, and the Party Secretary said total trade is on 
pace to exceed last year's total, having reached USD 14.7 
billion through the first half of 2008.  During a separate 
meeting August 7, Hangzhou Mayor Cai Qi conveyed similar 
sentiments.  In fact, Cai had just returned from a visit to San 
Francisco and Boston the night before. 
 
Impact of the U.S. Economic Slowdown on Zhejiang 
--------------------------------------------- --- 
 
¶3. (SBU) With a heavy reliance on exports, Zhejiang definitely 
is adversely affected by the economic slowdown in the United 
States, officials said.  Party Secretary Zhao said trade with 
the United States will continue to increase but he expects the 
rate of increase to be slower in the future.  Not surprisingly, 
low-end processing industries that are geared towards exports 
have been hit hardest by the U.S. economic situation, officials 
said.  Zhao stated that the slowing U.S. economy, higher global 
energy prices, RMB appreciation, and the new Labor Contract Law 
all are factors in Zhejiang's own economic difficulties.  During 
an August 7 visit to the Wanxiang Group, China's largest auto 
parts supplier, Chairman Lu Guanqiu agreed that there are a 
number of factors contributing to slower growth, and companies 
will need to stay ahead of the curve by cutting costs.  (Note: 
Businessmen in Zhejiang's Yiwu shared similar concerns with the 
Consul General during his recent visit there (see reftel).  End 
Note.) 
 
Zhejiang's Focus on Economic Restructuring 
------------------------------------------ 
 
¶4. (SBU) Our contacts uniformly told the Consul General, 
however, that Zhejiang's current economic difficulties provide 
the impetus for economic restructuring towards production that 
is less energy-intensive and more hi-tech.  Mayor Cai, for 
example, said Hangzhou wants to transform Hangzhou's economy 
from processing industries to hi-tech, outsourcing, financial 
services, and tourism.  Cai said he was favorably impressed by 
Silicon Valley during his visit to the United States.  Silicon 
Valley, Cai said, takes advantage of bright, young minds, 
bringing investors together with a top university (Stanford) to 
build innovative new companies.  In addition to developing new 
hi-tech companies, Hangzhou is building a new convention center 
in the hopes of attracting more tourists, Cai said. 
 
¶5. (SBU) Party Secretary Zhao added that the province will move 
away from processing industries, such as textiles, in an effort 
to develop in a more environmentally friendly way as per the 
Central Government's mandate.  Zhejiang's private sector also is 
likely to move away from highly labor-intensive industries as 
 
SHANGHAI 00000320  002.2 OF 002 
 
 
labor costs rise.  Wanxiang's Lu said his company is encouraging 
more mechanization in the face of rising labor costs, which have 
increased 20 percent in the past two years. 
 
Outward Investment 
------------------ 
 
¶6. (SBU) To offset losses on the export front, Zhejiang 
companies increasingly are looking outside the province for 
investment opportunities, officials said.  Party Secretary Zhao 
stated that Zhejiang companies are investing both globally and 
in other parts of China.  Geely, the Zhejiang-based auto 
manufacturer, for example, has factories in Mexico, Thailand, 
Russia, and Vietnam, he said.  Zhejiang companies also are 
investing in Central China, as those textile mills and other 
processing industries that close in Zhejiang may relocate to 
Jiangxi Province or Hubei Province. 
 
Investment Disputes 
------------------- 
 
¶7. (SBU) During the meeting with Mayor Cai, the Consul General 
raised a dispute involving Ewing Management Group, a U.S. 
company.  The Mayor was not familiar with the problem but asked 
staff from the foreign trade commission to look into the 
situation.  During the dinner with Party Secretary Zhao, the CG 
asked about the impact of the Wahaha-Danon dispute on 
perceptions of Zhejiang's investment climate.  Zhao said the 
provincial government has spent considerable time trying to 
mediate the dispute.  He did not believe the altercation would 
hurt Zhejiang's image.  At this stage, the main outstanding 
issue is agreeing on a price for ending the partnership. 
 
Olympics 
-------- 
 
¶8. (SBU) Party Secretary Zhao said he is looking forward to the 
Olympics, and the Chinese Government is encouraged by President 
Bush's visit to Beijing to watch the Games.  Zhejiang Province 
has 26 athletes on the Chinese Olympic team with a chance for 
possibly five gold medals, Zhao said.  (Note:  Zhao attended the 
Olympic Opening Ceremony in Beijing on August 8.  End Note.) 
 
Ambassador John Leighton Stuart 
------------------------------- 
 
¶9. (SBU) The Director General of Zhejiang's Provincial Foreign 
Affairs Office confirmed that he is familiar with plans to 
return Ambassador John Leighton Stuart's ashes to Hangzhou in 
November.  The Provincial Government is supportive of the event 
and does not foresee any problems, he said.  (Note:  Stuart was 
born in Hangzhou in 1876 and later was U.S. Ambassador to China 
from 1946 to 1949, departing China just weeks before Mao Zedong 
proclaimed the founding of the People's Republic of China.  End 
Note.) 
JARRETT