VZCZCXYZ0000
RR RUEHWEB

DE RUEHGZ #0715/01 3440904
ZNR UUUUU ZZH
R 090904Z DEC 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 0055
INFO RUEHGZ/CHINA POSTS COLLECTIVE 0019
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC 0016
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0012
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEAIIA/CIA WASHDC 0019
RUEKJCS/DIA WASHDC 0019

UNCLAS GUANGZHOU 000715 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
STATE PASS USTR CHINA OFFICE 
 
E.O. 12958: N/A 
TAGS: ELAB EFIN ECON ETRD EIND PGOV CH
SUBJECT: Dire Predictions in Dongguan -- Hong Kong Investors Predict 
More Closures to Come 
 
REF: A) GUANGZHOU 696, B) GUANGZHOU 692, C) GUANGZHOU 685, D) 
GUANGZHOU 668 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly.  Not for release outside U.S. government channels.  Not 
for internet publication. 
 
¶1. (SBU) Hong Kong investors in the Pearl River Delta (PRD) are 
sounding the alarm, eager to attract attention to the growing 
economic impact of the global financial crisis on labor-intensive 
export manufacturers that have been a driving force in the region's 
economy.   Leaders of an industrial association dominated by Hong 
Kong investors in Dongguan estimated that nearly 10 percent of 
foreign-invested firms there had already ceased operations this year 
and the percentage could rise to 20 by the Lunar New Year holiday. 
Migrant workers are leaving in large numbers, possibly unaware of 
the magnitude of the economic difficulties facing the PRD. Financing 
remains a key challenge for domestic- and foreign-invested companies 
as sources of credit have dried up and suppliers demand cash on 
delivery.  But government officials at all levels have taken steps 
to show that they are responsive to the concerns of foreign-invested 
enterprises.  (Septel will report on conversations with government 
officials in Dongguan who paint a more optimistic picture of the 
situation but also acknowledge the challenges ahead.)  End summary 
 
Ten Percent of FIEs Closed, Twenty by Lunar New Year 
--------------------------------------------- ------- 
 
¶2. (SBU) Nearly 10 percent of Dongguan's approximately 15,000 
foreign-invested enterprises (FIEs) have shut their doors in 2008 
and that percentage will likely double by the end of Chinese New 
Year in February 2009, according to the Eddie Leung, chair of the 
Dongguan City Association of Enterprises with Foreign Investment. 
Vice Chair King Wong, who runs a costume jewelry manufacturer, 
pointed out in the same meeting with econoffs that many of the 
factories that have stayed open have cut their capacity by as much 
as 30 percent, reducing shifts or laying off workers. 
 
¶3. (SBU) Leung, who owns a watch manufacturer, acknowledged that the 
association's estimates are rough but challenged recent statements 
by provincial and local Dongguan officials that indicated only 794 
FIEs had closed in Dongguan with another 300 newly registered.  He 
argued that many closed firms would not appear in the government's 
statistics, which only count firms that have gone through the formal 
process of deregistering.  The association executives claimed that 
many companies had already declared long Lunar New Year vacations or 
initiated other temporary work stoppages to avoid paying severance. 
In addition, many that shut their doors permanently don't bother 
with deregistration, which adds costs and can take months, according 
to the executives. 
 
¶4. (SBU) A survey of the association's members paints a similarly 
negative picture.  Leung said that members had reported in the 
October poll that orders for the fourth quarter had already dropped 
by 15-20 percent and were projected to drop 30-40 percent in 2009. 
Operation costs had increased 30-40 percent and profits had dropped 
20-25 percent, according to the poll. 
 
¶5. (SBU) Peter Leung, chief representative of the Hong Kong 
government in Guangzhou went further, estimating that closures of 
Hong Kong-invested enterprises may have already exceeded 30 percent. 
 When asked for his "doomsday scenario," he said the eventual number 
could go as high as 50 percent by the time the Lunar New Year 
holiday concludes in early February.  He predicted that the true 
impact on the Pearl River Delta economy would spread well beyond 
FIEs, asserting that each Hong Kong-invested factory supports three 
to five suppliers.  As factories scale back operations or close, 
suppliers will also be squeezed, with few options but to shed 
workers and possibly close as well. 
 
Migrant Workers - Just an Extended Holiday? 
------------------------------------------- 
 
¶6. (SBU) The Dongguan FIE executives speculated that 400,000 to 
700,000 migrant workers had already been let go from the city's 
factories with more to come as the late-January holiday approaches. 
They based their estimate on informal discussions with local police 
stations and labor bureau offices in the sprawling manufacturing 
town.  Executives said migrant workers had turned in temporary 
residence permits and claimed social security benefits at local 
government offices at a pace unseen in previous memory, noting that 
train stations have also been full.  In a separate estimate, Peter 
 
Leung, the Hong Kong government representative, said Dongguan pork 
consumption had declined by 20 percent in recent months, from 10,000 
head per day to 8,000, further evidence that migrant workers are 
leaving Dongguan to return to their homes. 
 
¶7. (SBU) The investor association executives believe that workers do 
not fully realize the magnitude of the downturn.  They have been 
told to expect a longer holiday, as much as six weeks instead of the 
normal two, but employers and government have refrained from sharing 
too much information about weak orders and credit problems. 
Instead, some employers are offering skilled employees special 
amended contracts, which include a small monthly retainer and a few 
months leave until March or April 2009.  The executives commented 
that both sides see advantages in this approach but cautioned that 
it is predicated on an early recovery of overseas orders, which 
might not materialize that soon. 
 
Credit is Key, But Scarce 
------------------------- 
 
¶8. (SBU) Funding current operations continues to be the greatest 
threat to firms' survival, according to the executives.  SMEs 
continue to have difficulty getting most forms of credit, despite 
efforts by national and local leaders to stimulate bank lending to 
such companies.  In addition, because some factory closures have 
left supplier unpaid, many firms now insist that buyers purchase 
insurance or pay for materials on delivery rather than billing 
manufacturers on 30- or 60-day cycles as before.  At the same time, 
manufacturers are increasingly complaining about their overseas 
buyers canceling or delaying orders and payments for finished goods. 
 The executives warned that if credit conditions do not improve 
soon, firms that might otherwise have survived the downturn might 
also fail. 
 
Is Shifting to Domestic Demand a Solution? 
------------------------------------------ 
 
¶9. (SBU) Investment association executives said local governments 
are working to help firms shift output to the domestic Chinese 
market in order to maintain growth during the downturn.  In 
Dongguan, the local government is waiving and subsidizing 
registration fees that export makers must pay to begin producing 
goods for domestic consumers.  However, the Dongguan Taiwan 
Businessman's Association recently pointed out the challenges of 
this approach (ref D).  Many FIEs are contract manufacturers 
supplying international brand name firms.  Their international 
customers may not be happy with the decision to compete in the 
Chinese market and could drop them as suppliers.  In addition, many 
export manufacturers lack strong distribution channels in China. 
 
Attention from the Highest Levels 
--------------------------------- 
 
¶10. (SBU) Government officials at all levels appear eager to show 
concern for the challenges facing factories in the PRD.  Four 
Standing Committee members of China's Politburo, including Premier 
Wen Jiabao and Vice President Xi Jinping, have visited Guangdong in 
the last month to see economic conditions first hand.  The 
investment association executives said that the organization had 
been actively lobbying the central, provincial and local government 
to implement favorable regulations on VAT rebate rates and guarantee 
deposits.  Eddie Leung, the association chair, commented that 
Beijing had enacted some of their requests.  Dongguan officials have 
been particularly responsive to the association's concerns.  Leung 
noted that Dongguan had reduced land use and other administrative 
fees and had begun allowing firms to deduct research and development 
costs for their corporate income taxes.  The FIE association 
executives also met with Hong Kong Chief Executive Donald Tsang on 
November 12 to discuss the challenges they face.  They said Tsang 
had agreed to communicate their concerns to Beijing. 
 
GOLDBERG