VZCZCXYZ0003
RR RUEHWEB

DE RUEHGZ #0719/01 3460857
ZNR UUUUU ZZH
R 110857Z DEC 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 0059
INFO RUEHGZ/CHINA POSTS COLLECTIVE 0021
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0014
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC 0018
RUEAIIA/CIA WASHDC 0021
RUEKJCS/DIA WASHDC 0021

UNCLAS GUANGZHOU 000719 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/TC, EAP/CM 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV ELAB TW CH
SUBJECT: Dongguan Officials Express Optimism But Acknowledge 
Economic Challenges 
 
REF: A) Guangzhou 618, B) Guangzhou 692, C) Guangzhou 696, D) 
Guangzhou 715 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly. Not for release outside U.S. government channels. Not 
for internet publication. 
 
¶1. (SBU) Summary: Government officials in Dongguan, a major 
manufacturing center in the heart of the Pearl River Delta between 
Guangzhou and Shenzhen, are doing their best to put a positive spin 
on the city's economic prospects.  They express hope that Dongguan's 
growth in 2009 will be comparable to 2008 levels -- running at 15.1 
percent in the first ten months -- and challenged the notion that 
factories in the city are closing down in larger numbers than in 
previous years.  Nevertheless, they acknowledged the effects of the 
global financial storm that's hitting this export-reliant region 
earlier and harder than most other parts of China, saying that 
Dongguan has never before faced such a severe situation.   They 
described various steps the city is taking in coordination with 
central and provincial officials to shore up the economy.  The 
officials also indicated that Dongguan is encouraging 
labor-intensive export processing firms to stay in the area and 
upgrade rather than move to more remote areas of the province as 
envisioned in Guangdong Party Secretary's "double-transfer" policy. 
 The tone of the officials differs significantly from that of 
investors in the city (ref D), but it's clear they agree on one key 
issue: Dongguan is facing tough times ahead.  End summary. 
 
¶2.  (SBU) Comment: Some media reports and Consulate contacts have 
suggested that there is a significant difference of opinion between 
Guangdong Party Secretary Wang Yang, who has spearheaded the "double 
transfer" campaign, and central government senior leadership, 
particularly Premier Wen Jiabao, on what steps if any the government 
should take to aid failing SMEs in the Pearl River Delta.  Wang Yang 
has been quoted calling the closed firms "backward productive 
forces" and said it was good that they were closing.  Central 
government officials appear more concerned about the threat to 
social stability these closures and subsequent unemployment could 
represent.  Wang Yang may face resistance from above and below with 
municipalities like Dongguan eager to keep firms that might 
otherwise be targeted for relocation.  This internal debate will 
likely continue with significant impact on Guangdong's economic 
policies as well as Wang Yang's political future.  End comment. 
 
Hoping for Stable Growth Levels 
------------------------------- 
 
¶3. (SBU) Despite media reports of widespread factory closures, 
migrant workers returning home in large numbers and enterprise 
concerns about falling orders (confirmed by the December 10 
announcement that China's export declined in November by 2.2 percent 
nationally), Dongguan Development and Reform Council (DRC) Deputy 
Director Wang Zhaohong told us that growth in the city has remained 
stable and showed good momentum.  He believes that Dongguan could 
see growth next year at about the same level as this year.  In the 
first ten months, Dongguan's economy grew at 15.1 percent, 2.4 
percentage points lower than last year's but still higher than the 
projected 14 percent, according to Wang.  He cited other positive 
data, including 21.5 percent growth in the city's retail sales, 
export growth of 14.3 percent and growth in utilized FDI of 16.7 
percent.  Dongguan Bureau of Foreign Trade and Economic Cooperation 
(BOFTEC) Deputy Director Fang Jianbo offered some of the same 
statistics in presenting a similar case for why Dongguan's prospects 
didn't look too bad. 
 
¶4. (SBU) DRC's Wang also argued that the number of factories that 
have shut down in Dongguan was about the same as in previous years. 
He pointed out that the number of foreign-invested enterprises 
(FIEs) in Dongguan was stable at about 15,000.  According to 
government statistics more companies have opened in Dongguan this 
year than closed, he said.  (Note: Per ref D, other contacts have 
criticized government data on factory closures, arguing that they 
only count companies that have completed the necessary paperwork to 
formally de-register.  End note.)  BOFTEC's Fang asserted that even 
though more than 600 FIEs shut down during the first ten months, 
this was not unusual and the annual average was 744 closures.  He 
noted that of the 37,000 FIEs that have been established in Dongguan 
since 1978, 21,000 have eventually closed. 
 
Unable to Ignore Difficulties and Hard Times Ahead 
--------------------------------------------- ----- 
 
¶5. (SBU) However, Wang acknowledged that Dongguan had never before 
faced such severe challenges.  He noted that the difficulties had 
preceded the global financial crisis as central government policies 
E 
 
that removed benefits for export processing industries further 
exacerbated rising wages and increases in other input costs.  Wang 
believes that Dongguan is being hit harder than any other part of 
Guangdong Province because of the high concentration of 
labor-intensive export manufacturers. 
 
¶6. (SBU) Wang predicted industrial output would fall in the coming 
months as many factories downsize, restructure and search for new 
business models.  BOFTEC's Fang said that the number of FIEs might 
fall by 100 in December and again as many in January.  Even as he 
speculated that more small and medium-sized enterprises (SMEs) would 
likely close in early to mid-2009 if orders don't start to rise and 
costs continue to grow, Fang pointed out that previously closed FIEs 
had recently reopened in three different Dongguan townships. 
 
Ready to Help 
------------- 
 
¶7. (SBU) China's government is taking steps at various levels to 
help SMEs survive the crisis, according to DRC's Wang.  Dongguan is 
following the lead of the central and provincial governments by 
implementing a stimulus package of its own worth RMB 140 billion 
(about USD 20 billion).  Wang told us that the municipal government 
had sufficient funds available for the package.  He also described 
the city's "six one-billion" campaign to allocate up to RMB 1 
billion to provide support to SMEs in six target areas -- research 
and development, start-ups, industrial upgrading, interest payments, 
waivers of administrative fees, and tariff guarantee deposits.  In 
addition, Fang pointed out that the city was setting up an early 
warning system to warn of potential factory closures and was 
considering a new unemployment insurance scheme.  He said that the 
city government's efforts had contributed to Beijing's decision to 
restore VAT rebates for exports and other policies beneficial to 
SMEs in Donnguan. 
 
"Double Transfer" Going Nowhere 
------------------------------- 
 
¶8. (SBU) Contrary to the Guangdong provincial government's strategy 
of moving labor-intensive manufacturing away from the Pearl River 
Delta area to less developed parts of the province, both the DRC and 
BOFTEC officials said Dongguan plans to encourage these firms to 
upgrade their manufacturing technology and products but not to 
relocate.  Wang said that a few companies had moved to more remote 
areas recently but called the number insignificant.  He and Fang 
each highlighted elements of the "six one-billion" plan as part of 
the city's effort to encourage firms to upgrade.  Fang told us that 
BOFTEC also facilitates registration as wholly-owned foreign 
enterprises (WOFEs) without administrative fees to better allow 
local FIEs to access the domestic market. 
 
Making Sense of the View from Dongguan 
-------------------------------------- 
 
¶9. (SBU) Comment: Investors and officials in Dongguan each present 
substantially different views of the economic situation facing this 
important manufacturing center (ref D).  The numbers and the tone 
differ, but it's clear that both sides are deeply concerned about 
what might be around the corner.  Projections of growth and positive 
numbers aside, the government officials acknowledge that these are 
very challenging times and are quick to describe the steps they're 
taking to aid firms.  The Dongguan investors have praised the 
responsiveness of the local government to their concerns.  None of 
the parties involved have a clear picture of what lies ahead.  Even 
if perfect statistics were available, the level of uncertainty about 
the future would remain high.  Businesses are largely focused on 
getting the help they need that will carry them through the Lunar 
New Year holiday in late January 2009.  Officials have based their 
positive scenarios on export orders starting to recover in the 
spring.  How deep and how long will the economic downturn be in 
China's export markets are key questions that cloud Dongguan's 
economic future. 
 
GOLDBERG