VZCZCXRO7202
RR RUEHCN RUEHGH
DE RUEHGH #0490/01 3150915
ZNR UUUUU ZZH
R 100915Z NOV 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7311
INFO RUEHHK/AMCONSUL HONG KONG 1680
RUEHCN/AMCONSUL CHENGDU 1520
RUEHSH/AMCONSUL SHENYANG 1512
RUEHGP/AMEMBASSY SINGAPORE 0181
RHEHAAA/NSC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7910
RUEHBJ/AMEMBASSY BEIJING 2260
RUEHGZ/AMCONSUL GUANGZHOU 1491
RUEHIN/AIT TAIPEI 1313

UNCLAS SECTION 01 OF 03 SHANGHAI 000490 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
TREASURY FOR AMBASSADOR HOLMER, WRIGHT AND TSMITH; 
TREASURY FOR OASIA/INA - DOHNER, HAARSAGER/WINSHIP; 
TREASURY FOR CUSHMAN 
TREAUSRY FOR IMFP SOBEL. MOGHTADER 
NSC FOR WILDER AND LOI 
STATE PASS CEA FOR BLOCK 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
 
E.O. 12958: N/A 
TAGS: CH ECON EFIN KIPR
SUBJECT: JIANGSU ECONOMY SLOWING IN FACE OF GLOBAL CRISIS 
 
¶1.  (SBU) Summary:  Government officials and researchers in East 
China's Jiangsu Province are increasingly concerned about the 
adverse impact of the global economic slowdown on the province, 
particularly its large export sector.  Achieving more robust 
domestic consumption to offset the decline in external demand, 
however, will take time because of long standing structural 
weaknesses which promote high savings.  Although government 
officials are generally confident Jiangsu will weather the 
current economic storm, researchers at the provincial academy of 
social sciences highlighted what they believe are exploitative 
elements of the U.S.- China economic relationship.  End summary. 
 
Jiangsu Government: Econ Restructuring Will Take Time 
--------------------------------------------- -------- 
 
¶2.  (SBU) Jiangsu exporters, particularly textile manufacturers, 
have suffered from the slowing global economy, according to 
Provincial Government Deputy Secretary General Wang Quan. 
Meeting November 5 with the Treasury Department's Special Envoy 
for the U.S.-China Strategic Economic Dialogue (SED) Alan 
Holmer, Wang indicated the provincial government would take 
measures to assist ailing small and medium enterprises. 
Although Wang stressed that the provincial government supports 
the Central Government's policy of encouraging firms to target 
China's domestic market, as it is unrealistic to expect or even 
desirable for the previous high growth in exports to continue, 
he observed that promoting robust domestic consumption would 
take time.  He agreed that supporting exporters in response to a 
cyclical downturn can be at odds with China's medium-term goal 
to rebalance growth, but stressed the importance that 
rebalancing occur at a politically acceptable pace. 
 
¶3.  (SBU) Deputy Director of the Jiangsu Foreign Trade and 
Economic Cooperation Department Zhao Jin noted foreign-invested 
firms generate 76% of Jiangsu's exports and, as a result, face a 
major challenge in reorienting their production away from the 
international marketplace and toward domestic consumers.  When 
asked whether the Jiangsu authorities are conditioning 
assistance to exporters on operational restructuring, Wang cited 
efforts to improve product quality and efficiency, including 
through purchases of more advanced foreign equipment but did not 
elaborate on how these steps would strengthen the domestic 
orientation of the companies receiving assistance. 
 
¶4.  (SBU) Despite the recent turmoil, the United States has been 
China's reference point for modernization of its financial 
system, Wang stressed.  Because China's capital account remains 
largely closed, Chinese firms still have relatively little 
experience with modern finance.  Wang hoped U.S. financial firms 
would establish branches in Jiangsu in the future and that 
Jiangsu financial firms might eventually establish U.S. 
operations.  In reviewing the lessons of the U.S. financial 
crisis with the Treasury delegation, Wang believed China would 
soon be taking steps such as creating deposit insurance to set 
an explicit limit to the government's guarantee of China's 
banks.  China is also reviewing the efficacy of its fragmented 
financial regulatory system. 
 
IPR Protection Important for Province 
--------------------------------------------- -- 
 
¶5.  (SBU) On the question of intellectual property rights (IPR) 
protection, Wang stressed violations of IPR are a problem for 
large Chinese firms looking to establish brands as well as for 
foreign firms.  China's lack of internationally recognized 
brands has kept the value-added of Chinese produced goods low in 
comparison to their foreign competitors.  Wang said Jiangsu has 
implemented a "famous brand strategy" to address this, which 
includes strengthened IPR protection.  Foreign Trade and 
Economic Cooperation Department Deputy Director Zhao added 
Jiangsu has three IPR complaint centers established by the 
Ministry of Commerce and a special court to litigate IPR-related 
suits.  Jiangsu's efforts to build its service industries, 
notably the outsourcing of software development, demanded the 
 
SHANGHAI 00000490  002 OF 003 
 
 
province take measures to improve IPR protection, he stressed. 
 
Real Estate Concerns 
--------------------------------------------- -- 
 
¶6.  (SBU) Wang expressed concern over real estate prices in 
Jiangsu.  Although housing sales were still rising, the rate of 
increase had slowed considerably and the potential exists for a 
substantial fall in real estate prices.  Prices, however, have 
remained stable so far as most buyers have been purchasing homes 
for their own use and not for speculation.  Tax revenue growth 
has also slowed, signaling a slowdown overall in provincial 
economic growth.  Provincial Financial Department Director Pan 
Yonghe indicated, despite the declining economic indicators, 
that because the banking system still remained highly liquid and 
China's fiscal position is strong, the government has the means 
to support the economy. 
 
Jiangsu Researchers Skeptical of USG, Corporate Motives In Econ 
Downturn 
--------------------------------------------- -- 
 
¶7.  (SBU) Jiangsu is likely facing two to three years of "strong 
economic challenges" as a result of the current global economic 
downturn, researchers from the Jiangsu Academy of Social 
Sciences (JASS) told Ambassador Holmer November 6.  Currently, 
the value of Jiangsu's exports has surpassed the value of its 
GDP, said one researcher, making the province vulnerable to the 
slowdown in export growth that is already forcing substantial 
numbers of the province's small and medium-size exporters out of 
business.  This in turn will affect China's national economy, 
since Jiangsu accounts for 11 percent of China's GDP. 
 
¶8.  (SBU) The scholars are not optimistic that Jiangsu will be 
able to quickly transform its economic structure to better 
offset these challenges.  First, reorienting the Jiangsu economy 
to higher value added output is difficult because the Jiangsu 
labor force has a low educational level that cannot be changed 
in the short term.  Second, Jiangsu officials have fewer options 
for funding technological transformation because the Central 
Government leaves the province only 48 percent of the revenues 
it collects.  Third, new labor protections means workers cannot 
be simply laid off without social security payments.  Fourth, a 
large component of the Central Government's stimulus program 
(RMB 2-4 trillion) is targeted at new railroad construction. 
This is investment, and will not directly stimulate the 
consumption needed for more balanced economic growth. 
 
¶9.  (SBU) Note:  The JASS scholars said that their institute has 
unique access to the Jiangsu Communist Party Secretary and 
Governor because JASS holds biannual conferences in which their 
research is presented directly to those and other top provincial 
officials.  End note. 
 
¶10.  (SBU) One scholar questioned why Microsoft was turning the 
computer screens of suspected pirated Windows XP users black and 
postulated a ploy by Microsoft to push consumers to use its 
Vista operating system.  (Note:  According to Yahoo! Tech, 
Microsoft in late October began using information from its 
online software updating process to detect suspected pirated 
operating system copies and turn the PC desktop screens black 
every 60 minutes.  End note.) 
 
¶11.  (SBU) One researcher observed many ordinary Chinese, in 
fact, feel U.S. pressure on China is unfair because they believe 
China suffers from its trade with the United States.  Chinese 
workers manufacture products for export to the United States 
that are better than those sold in China's domestic market.  The 
factories that produce these goods, however, pollute China's 
environment and are heavy energy users.  Then, the local 
currency value of foreign exchange earnings from the export 
sales are whittled down by appreciation of the Chinese currency. 
 A third scholar cited a popular expression, "When the U.S. 
economy gets a cold, the global economy has to take the 
 
SHANGHAI 00000490  003 OF 003 
 
 
medicine."  In the view of another researcher, the housing price 
bubble created by the U.S. financial system, the hollowing out 
of U.S. manufacturing despite its technological edge, and 
Americans' excessive debt-fueled consumption underlies the 
present turmoil.  The strong complementarity of the U.S. and 
Chinese economies, however, though a source of trade friction, 
also means the countries must work together. 
 
¶12. (U) Beijing Financial Attache David Loevinger has cleared on 
this cable. 
SCHUCHAT