VZCZCXRO0177
RR RUEHCN RUEHGH
DE RUEHGH #0518/01 3311151
ZNR UUUUU ZZH
R 261151Z NOV 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7376
INFO RUCPDOC/USDOC WASHINGTON DC 0022
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASH DC
RUEHBJ/AMEMBASSY BEIJING 2310
RUEHSH/AMCONSUL SHENYANG 1555
RUEHCN/AMCONSUL CHENGDU 1563
RUEHGZ/AMCONSUL GUANGZHOU 0022
RUEHHK/AMCONSUL HONG KONG 1726
RUEHIN/AIT TAIPEI 1356
RUEHGP/AMEMBASSY SINGAPORE 0188
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7978

UNCLAS SECTION 01 OF 03 SHANGHAI 000518 
 
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: ECON EFIN ELAB PGOV SOCI CH
SUBJECT: (SBU) ZHEJIANG SEEKING TO RESTRUCTURE AS ECONOMIC GROWTH 
DOWNTURNS 
 
¶1.  (SBU) Summary.  Zhejiang Province is not likely to suffer a 
long-term economic downturn as a result of the global financial 
crisis, agree several Consulate contacts, but Zhejiang officials 
are seeking to use the current challenges to encourage firms to 
gradually restructure away from export dependence.  Our 
interlocutors pointed to two causes of the economic 
deceleration:  tight monetary policies and a slowdown in export 
growth as demand overseas fades.  The worst conditions are 
likely to hit between the end of the year and June 2009, the 
interlocutors generally agreed.  Businesses are asking workers 
to take salary freezes and cuts, and when faced with no choice 
are temporarily suspending production and sending workers home. 
End summary. 
 
============================ 
Zhejiang Hoping Economic Crunch Will Pass . . . 
============================ 
 
¶2.  (SBU) A conviction that business conditions in Zhejiang 
Province will turn around by the middle of 2009 is driving 
economic decisionmaking in the province, we find, based on 
interviews with a variety of officials, scholars, and business 
leaders during November 19-20.  Pan Guangen, director of the 
banking affairs department of the Zhejiang Provincial Government 
Financial Affairs Office, reflected a sentiment repeated at 
almost all meetings that the fourth quarter of this year through 
the first half of next year would be the hardest period.  Most 
interlocutors also connected the eventual turnaround with the 
impact of the Central Government's putative RMB4 trillion 
economic stimulus program. 
 
¶3.  (SBU) Our interlocutors point to two factors in the economic 
downturn:  1) The government's crackdown on credit in the first 
half of 2007.  Zhejiang Financial Affairs Office's Pan frankly 
criticized the People's Bank of China (PBOC) for maintaining a 
tight monetary policy for too long.  Now "the plane has landed, 
and can't take off again," said Pan; banks are afraid to lend to 
small and medium-size enterprises (SMEs), and several large 
enterprises have been hit with liquidity problems.  Zhou Dewen, 
President of the Wenzhou SME Development and Promotion 
Association, also said that the government's macroeconomic 
controls were responsible for the deceleration in Wenzhou's 
economic growth in the first half.  2) The global financial 
crisis, and the accompanying downturn in import demand by 
China's trade partners.  PBOC Hangzhou Subbranch President Zhou 
Yeliang said that "there has been a large impact from the 
financial crisis on Zhejiang, especially in light of the 
province's export dependence."  Wenzhou SME Association's Zhou 
said that, following June, there has been a direct impact from 
the global crisis on exports. 
 
¶4.  (SBU) Several of our interlocutors expressed confidence that 
Zhejiang's SME exporters could quickly refocus on the domestic 
market.  Zhejiang's companies are more nimble than Guangdong's, 
said Gao Jianming, vice president of the Zhejiang Provincial SME 
Bureau, because they are predominantly Chinese owned, while many 
of Guangdong's are joint ventures dependent on the foreign 
partner for marketing and distribution.  PBOC's Zhou said that 
Zhejiang's manufacturers focus on everyday use products, which 
have great growth potential among domestic consumers.  In 
addition, private enterprises dominate in Zhejiang, said PBOC's 
Zhou, making them more competitive under tough market conditions. 
 
============================ 
. . . While Indicators Show Difficulties Mounting 
============================ 
 
¶5.  (SBU) Most interlocutors agreed that export orders were 
plummeting, a fact that is not yet reflected in official 
statistics.  Zhejiang Financial Affairs Office's Pan made one of 
 
SHANGHAI 00000518  002 OF 003 
 
 
the most extreme estimates we heard, saying that export orders 
in the province have fallen by 40% without specifying the time 
period.  Zhejiang Provincial SME Bureau's Gao said that total 
orders were down 4.9% at this October's Yiwu trade fair of 
export-oriented consumer goods.  Christmas goods orders have 
been especially impacted, said Jin Chuanshi, Executive Dean of 
the Zhejiang University's College of Economics. 
 
¶6.  (SBU) ) Shaoxing City was identified by several of our 
contacts as the epicenter of the impact of the global trade 
slowdown in Zhejiang.  Shaoxing is heavily dependent on textile 
and apparel exports, said Wenzhou SME Association's Zhou, and 
also has a higher concentration of foreign-invested firms. When 
asked where exports have been hit the hardest, Zhejiang 
Provincial SME Bureau's Gao immediately suggested Shaoxing as an 
example. 
 
¶7.  (SBU) PBOC's Zhou said that Zhejiang's GDP growth in the 
first nine months was 10.6%, down 4.1 percentage points from the 
same period last year.  Investment growth during the period was 
around 20%, 4.5 percentage points lower than the previous year, 
although this number should be further deflated for raw 
materials cost increases.  Export growth was 24.3%, off 4.9 
percentage points.  Industrial profits growth was down 8.4 
percentage points.  Government revenue growth was greater than 
20%.  Zhejiang University's Shi estimated that 10% of the 
province's enterprises have gone out of business.  Among hardest 
hit in Zhejiang have been auto parts manufacturers and ship 
builders, due to downturn in demand during the crisis, said 
PBOC's Zhou. 
 
============================ 
Businesses Responding by Cutting Production and Staff 
============================ 
 
¶8.  (SBU) Most Zhejiang businesses have responded first by 
asking for wage freezes or cuts and then by temporarily closing 
down production and sending workers home, agreed our 
interlocutors.  Zhejiang SME Bureau's Gao said that SME 
employers were asking workers to accept lower salaries.  Wenzhou 
SME Association's Zhou and Wang Yibin, Assistant to the 
President of the Wenzhou Management Science Academy, said that 
it was not uncommon for businesses to make under-the-table deals 
with workers to get around the higher compensation requirements 
imposed by the new Labor Contract Law.  Wang further emphasized 
that migrant workers from other provinces did not want employers 
to comply with the law, since under it workers and employers 
paid into the local retirement system but these accounts are not 
portable back to the home province. 
 
¶9.  (SBU) Zhejiang SME Bureau's Gao said that most enterprises 
want to continue operations, but at a reduced scale.  Workers 
are being sent home on vacation, with some even being told to 
stay home until the end of the 2009 Lunar New Year holidays, 
which  will last from late January to early February.  This 
would minimize the impact of the economic growth slowdown on 
social stability, he offered.  Besides, for farmers from 
Zhejiang it would not be such a bad deal, since they could go 
back to their villages and draw stipends of RMB20 a day, Gao 
said. 
 
============================ 
Zhejiang's Exporters Losing Confidence in Overseas Markets 
============================ 
 
¶10.  (SBU)  U.S. and other overseas importers are no longer to 
be trusted, agreed Wenzhou SME Association's Zhou and Wenzhou 
Management Science Academy's Wang.  Zhou said that orders for 
Wenzhou's major exports such as lighters and eyeglasses are down 
30%.  In addition, 8%-10% of orders are being cancelled before 
 
SHANGHAI 00000518  003 OF 003 
 
 
delivery, and it is becoming increasingly more common for 
exporters not to be paid for goods.  "It used to be that you 
could trust the importers," said Zhou;  now, some exporters even 
refuse to take letters of credit for orders, for fear that the 
transaction will be caught up in a bank failure. 
 
¶11.  (SBU)  Zhejiang SME Bureau's Gao said that, according to 
his contacts among SME managers, U.S. consumers are no longer 
spending as freely -- "they are learning how to cut costs, just 
like Chinese consumers," he joked.  As an example, he said that 
one local SME retailed its costume jewelry in the United States 
through its own outlet.  Where once 75% of customers would make 
purchases in the range of $100-$200 per visit, now only 25% of 
customers made purchases, which average $50 per visit.  Gao said 
that he had heard U.S. consumers no longer purchase new 
draperies when moving homes, but instead take their old ones 
with them. 
 
============================ 
Comment 
============================ 
 
¶12.  (SBU) Our Zhejiang interlocutors were unanimous in assuming 
that the worst of the economic growth slowdown would pass in the 
coming seven to eight months, and appeared not to have 
considered the risk that export growth could continue to slide 
in the second half of next year.  In addition, our contacts were 
convinced that China's domestic market would continue its strong 
growth, especially with a boost from the Central Government's 
high-profile economic stimulus program; none suggested that the 
additional governmental outlays under the stimulus might be much 
less than advertised.   Zhejiang Provincial SME Bureau's Gao 
also cited government subsidies -- including subsidies for banks 
providing funds to SMEs and tax breaks for struggling firms -- 
as mitigating factors and indicated further government supports 
could be forthcoming. 
CAMP