VZCZCXRO1407
RR RUEHCN RUEHGH RUEHVC
DE RUEHBJ #4114/01 3080907
ZNY CCCCC ZZH
R 030907Z NOV 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 0711
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHUL/AMEMBASSY SEOUL 0987

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 004114 
 
SIPDIS 
 
E.O. 12958: DECL: 11/03/2028 
TAGS: PREL PGOV ECON EFIN ETRD CH
SUBJECT: CHINA: ECONOMIC TRENDS IN COASTAL CITY OF QINGDAO 
 
Classified By: Econ Minister Counselor Robert Luke.  Reasons 1.4 (b) an 
d (d). 
 
 ¶1. (C) SUMMARY:  Rising labor costs and declining exports 
are forcing companies to re-examine their business strategies 
in the coastal city of Qingdao, according to local government 
officials, scholars and a South Korean diplomat who met with 
EmbOffs during their October 22-24 visit to the city. 
Smaller South Korean companies have been particularly hard 
hit by the global economic downturn, appreciation of the 
Chinese Renminbi (RMB) and changes in government regulations. 
 Despite hosting the 2008 Olympics sailing competitions, the 
Olympics brought Qingdao little economic benefit, and the 
global financial crisis feeds the city,s economic worries. 
END SUMMARY. 
 
¶2. (C) EmbOffs visited Qingdao as part of the Embassy,s 
Virtual Presence Post (VPP) Program.  EmbOffs met Bureau of 
Foreign Trade and Economic Cooperation Vice Director-General 
Chunyu Xinli, Qingdao Association of Enterprises with Foreign 
Investment Executive Vice Chairman Wang Dongkai, Republic of 
Korea (ROK) Consulate Economic Affairs Director Kang 
Hyung-shik and Qingdao University Department of International 
Trade Professor Zhang Xibao. 
 
Large ROK Presence in Qingdao 
----------------------------- 
¶3. (C) As the largest city in Shandong Province and one of 
China,s most important port cities, Qingdao has witnessed 
rapid export-oriented economic growth in the last five years. 
 South Korea is the largest foreign investor in Qingdao, 
followed by Hong Kong, Japan and the United States. Just a 
one-hour flight from Seoul, Qingdao has a significant Korean 
presence.  ROK Consulate Economic Affairs Director Kang 
reported that more than 200,000 South Koreans live in 
Shandong Province and roughly half of them are in Qingdao. 
Of the nearly 10,000 Korean companies in Shandong Province, 
approximately 60 percent are based in Qingdao. 
 
Economic Downturn, RMB Appreciation and Regulations 
--------------------------------------------- ------ 
¶4. (C) Since 2007 declining overseas demand and rising labor 
costs have cut into export companies, profits and forced 
several small South Korean companies to leave Qingdao for 
Vietnam and other countries.  ROK Consulate Economic Affairs 
Director  Kang said there are three main causes for the 
"disappearance" of some South Korean businesses  in Qingdao. 
First, the recent downturn in the global economy has hurt 
export demand. "Economic problems in the United States 
greatly reduced demand," Kang said.  Qingdao University,s 
Zhang Xibao said labor-intensive industries such as textiles 
have been particularly hard hit.  According to Zhang, 
short-term GDP growth prospects for the city are "gloomy" as 
the global financial crisis will further affect demand for 
Qingdao exports. 
 
¶5. (C) A second reason that some companies have left Qingdao 
is RMB appreciation over the past year.  Kang noted that 
businesses often ship goods to the United States only to 
receive payment months later when the dollar value has 
declined. RMB appreciation has had a "major affect" on many 
of the manufacturing companies with already thin profit 
margins.  Several U.S. manufacturing companies in Qingdao, 
including Emerson Motor Technologies, said RMB appreciation 
is the biggest concern for their operations. 
 
¶6. (C) Kang said changes in Chinese government regulations 
have also forced some South Korean companies out of business. 
 For example, the new labor law requires companies to provide 
employees with costly benefits such as health care, and 
environmental regulations require expensive equipment or 
sanitation improvements.  Kang said smaller companies have 
been targeted for labor law violations by local government 
officials who previously ignored the violations but are now 
under pressure to tighten enforcement. 
 
¶7. (C) Qingdao Association of Enterprises with Foreign 
Investment Executive Vice Chairman Wang Dongkai confirmed 
that changes in labor regulations have affected smaller 
Korean businesses.  While the new Labor Contract Law has not 
significantly hurt U.S. firms in Qingdao, some smaller South 
Korean firms have been affected because they typically do not 
adhere to the same labor standards followed by U.S. firms, 
Wang said.  For some small and medium-sized processing, 
manufacturing and trade companies with already razor-thin 
profit margins, the additional costs of doing business were 
just too great.  Complex exit procedures and simple 
bankruptcy have led some business owners to abandon 
investments and return to South Korea, often times leaving 
behind large debts and unpaid salaries. 
 
Most Companies Remain but Must Re-examine Strategies 
 
BEIJING 00004114  002 OF 002 
 
 
--------------------------------------------- ---------- 
¶8. (C) Despite the difficulties faced by some companies, Kang 
said that overall ROK investment in Shandong is still 
increasing by nearly 10 percent per year.  New investors are 
especially interested in logistics, shipping and tourism 
rather than low-scale processing and manufacturing. Kang 
reported that most Korean companies remain in Qingdao, 
although declining exports and increased costs have forced 
many companies to re-examine their strategies.  The largest 
companies, such as Samsung and LG, generally export half of 
their production and sell the other half domestically. 
However, China,s rising standard of living and RMB 
appreciation have led these companies to focus more on 
China,s domestic market. 
 
¶9. (C) Executive Vice Chairman Wang also emphasized that most 
of the companies that departed were smaller Korean 
manufacturing companies involved in the textile, toy and 
garment industry.  He said that despite the recent departure 
of smaller Korean businesses, over 8,000 Korean enterprises 
are registered in Qingdao with more than 4,000 actively 
conducting business.  He emphasized that Qingdao continues to 
enjoy significant foreign direct investment from Korea and 
that there are 10 direct flights per week between Qingdao and 
South Korea, including flights to and from Seoul, Pusan and 
Taegu. 
 
Tightening Taxes on Foreign Firms 
---------------------------------- 
¶10. (C) Several U.S. company representatives reported that 
the Qingdao City government is more strictly enforcing 
taxation laws including property, sales and corporate taxes. 
One U.S. business contact noted that Qingdao City is trying 
to collect more taxes from foreign firms, particularly 
property taxes on industrial property.  Qingdao University,s 
Zhang confirmed that Qingdao City is reducing preferential 
corporate tax treatment for foreign firms.  He noted that the 
new Corporate Tax Law aims to unify corporate taxes for 
foreign and domestic firms to 25 percent rather than allowing 
foreign firms to enjoy preferential tax treatment at 15 
percent.  Several U.S. firms, however, stated that such 
regulations would predominantly affect new market entrants, 
while established businesses will continue to enjoy 
preferential tax treatment for the time being. 
 
Olympics Bring Little Economic Benefit 
-------------------------------------- 
¶11. (C) As host of the 2008 Olympics sailing competitions, 
Qingdao invested USD 11.8 billion over the last five years to 
improve infrastructure and build an impressive sailing center 
but experienced little economic benefit from the Olympics, 
according to Bureau of Foreign Trade and Economic Cooperation 
Vice Director-General Chunyu Xinli.  Chunyu expressed 
disappointment with the relatively small number of tourists 
who came to Qingdao for the Olympics sailing competitions, 
citing security concerns and tightening of visa requirements 
as reasons for the low turn-out. 
PICCUTA