VZCZCXYZ0000
RR RUEHWEB

DE RUEHGZ #0732/01 3570918
ZNR UUUUU ZZH
R 220918Z DEC 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 0077
INFO RUEHGZ/CHINA POSTS COLLECTIVE 0033
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC 0026
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0022
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEAIIA/CIA WASHDC 0033
RUEKJCS/DIA WASHDC 0033

UNCLAS GUANGZHOU 000732 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, S/P, INR/EAP 
STATE PASS USTR CHINA OFFICE 
 
 
E.O. 12958: N/A 
TAGS: ECON PGOV ELAB ETRD EINV EIND CH
SUBJECT: 30 Years of Reform and Opening in Guangdong - Retreat to 
Economic Statism? 
 
REF: A) GUANGZHOU 600, B) GUANGZHOU 618, C) GUANGHZOU 685, D) 
GUANGZHOU 715, E) GUANGZHOU 723, F) BEIJING 4574 
 
(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 and comment: Guangdong Province, where China's 
economic transformation began, is in a celebratory mood publicly, 
but behind the scenes, everyone - from top government and business 
leaders to think tankers whose job it is to peer into the future - 
is fretting over the meaning of 30 years of Reform and Opening and 
an uncertain economic future.  The overriding theme in south China 
(for now) is the triumph of private entrepreneurship over 
state-ownership and the dramatic increase in living standards for 
the people of the province.  But the global economic downturn has 
exacerbated trends that were already under way (especially the 
closing of many SMEs and a decline in job opportunities); there also 
appear to be significant disagreements among leaders within the 
province and between some provincial and national leaders, if 
reports are true of Premier Wen Jiabao's unhappiness with Party 
Secretary Wang Yang's desire to proceed with his "double transfer" 
policy.  All of which makes for a very interesting upcoming year, 
with high stakes politically for those involved: playing for time by 
retrenching vs. playing for the future through innovative practices. 
 
 
¶2. (SBU) Comment: Fear of unemployment and possible social unrest 
has led some academics and other observers to predict that there 
could be a resurgence in the role of state-owned enterprises (SOEs) 
in the future, largely for social stability reasons, but also 
because state credit institutions will be most comfortable with the 
limited risk of loaning to SOEs.  How likely that might be is 
unclear, given how far south China has come in shaking off 
state-owned, but not necessarily state-supported, industry.  We 
think that the next stage of development in the area is more likely 
to be based on technology and financial services, with the accent on 
high-value-added products and innovation.   Still, Guangdong may be 
at a turning point; we only wish our crystal ball would give us some 
guidance on whether the Pearl River Delta (PRD) will more closely 
approximate the commercial strategies of the Yangzi River Delta, 
with a globally connected community, or be the answer to a trivia 
question about which once vibrant area used to be the locus of 
economic development in China.  End summary and comment. 
 
(U) This is part a two cable report.  A companion cable (septel) 
examines the political meaning of Guangdong's celebration of the 
30-year anniversary of Reform and Opening. 
 
Guangdong Celebrates 
-------------------- 
 
¶3. (SBU) Guangdong is putting its best foot forward as it celebrates 
the 30 years of reform and opening.  Every major Guangdong media 
outlet, from TV networks to Internet media and newspapers, has 
joined the propaganda push to remind people of how well they have 
fared under the far-sighted stewardship of the Communist Party.  The 
government and academic institutions have also sponsored forums to 
mull over the meaning of the anniversary.  The message is 
congratulatory - Reform and Opening has been an unparalleled success 
in improving the lives of the people of Guangdong.  However, at a 
time of growing economic difficulty, further liberalization and the 
future structure of Guangdong's economy are less clear. 
 
Better Lives for All Citizens 
----------------------------- 
 
¶4. (U) A Guangdong government vast exhibition commemorating the 
Reform and Opening achievements at the former site of the city's 
famous biannual Canton Trade Fair takes great pains to demonstrate 
the tangible economic benefits.  The 60,000 visitors who walk 
through the exhibit each weekend are treated to displays that show 
primitive farming conditions, "clunky" household appliances and meal 
vouchers from 1978-79.  But that's all past, as subsequent displays 
highlight the emergence of Guangdong's modern cities and advanced 
transportation links, widely available consumer appliances and 
electronics on a par with those sold in advanced western economies, 
and sporting and cultural achievements culminating with the 
province's Olympic medal winners.  There are also renditions of 
Guangzhou's plans for the Asian Games, which it will host in 2010. 
 
 
¶5. (U) The celebration of Reform and Opening focuses on the 
provincial leadership's "people first" policy (septel).  There have 
been major economic accomplishments to be sure, with growth in GDP 
and trade volume, but more importantly, the people have benefited. 
Guangdong life expectancy in the last 30 years increased from 71.2 
years in 1978 to 75.3 now, and infant mortality rates fell from 34.7 
deaths per thousand births to 6.25 today, or less than half the 
national average.  Per capita incomes for both farmers and urbanites 
have increased at a staggering rate, from RMB 193 in 1978 to RMB 
5,450 today, and from RMB 412 to RMB 17,699, respectively.  In 
addition, literacy rates have climbed from 75 percent to 96 percent, 
and the number of Guangdong's college graduates has surpassed 5 
million, unimaginable in the aftermath of the Cultural Revolution 
when the country's schools were closed and a generation of students 
was sent to the countryside as laborers.  Even those of our local 
contacts who are most critical about human and labor rights and who 
believe some of what has been accomplished could have been done 
differently, acknowledge that life is better and the move toward 
private enterprise and investment (with government support and 
incentives in many cases) has played an instrumental role. 
 
¶6. (U) Expansion of consumer choice is another major benefit that 
has been highlighted in the celebration.  Despite China's rash of 
product safety scandals for products ranging from pet food to toys 
and milk, improvements in the quality, selection and price of 
products and services are dramatically better than in 1978. 
Guangdong Province has emerged as both the richest and the second 
most populous province, with local residents purchasing and driving 
the most cars and using the most cell phones of any province in the 
country. 
 
"Capital of Reform and Opening" 
------------------------------- 
 
¶7. (SBU) Guangdong Province's leading role in 30 years of Reform and 
Opening was inevitable and will continue for the next 30 years, 
according to the narrative commonly repeated in the province's 
official circles.  Guangzhou Party School Vice Chairman Wang 
Yongping recently told econoffs that the city had always been a 
pioneer of reform and opening, not just in the past 30 years but for 
the previous two millennia.  He cited proximity to Hong Kong and 
Macau as well as travel along ancient sea trade routes; a culture 
open to trade and experimental government policies; and a long 
history of progressive economic exchange even when the country was 
"closed" to outside interactions as factors that meant Reform and 
Opening was unstoppable in Guangdong. 
 
Economic Downturn Opens Door to Naysayers 
----------------------------------------- 
 
¶8. (SBU) Nevertheless south China's economic future is today a hot 
subject for doubters, dissenters and detractors who are increasingly 
voicing concerns about the direction and policies of the past 30 
years, and more importantly, the way forward.  Peng Peng, a 
researcher at the Guangzhou Academy of Social Sciences, said the 
criticisms primarily focus on two areas.  First, many opponents 
claim that the policies have not only  failed to achieve the goal of 
common prosperity, but have in fact been instrumental in creating 
the huge wealth gap between the rich and poor.  Second, according to 
Peng, many dissenters view the environmental impact and excessive 
resource consumption as evidence that China's economic growth is 
unsustainable in its current form. 
 
¶9. (SBU) At the same time, a spate of foreign-invested factory 
closures has attracted widespread media attention throughout south 
China, starting in late summer and growing steadily through the fall 
(refs B and D).  Unemployment rates among factory workers and other 
labor groups rose faster than could have been foreseen six months 
ago, and fear of social unrest among the unemployed has gripped 
leaders at all levels.  Recent media reports have suggested that 
there is some level of disagreement between provincial and central 
leadership on how much support should be provided to the small- and 
medium-sized enterprises that have felt the brunt of the global 
economic downturn.  Guangdong Party Secretary reportedly wants to 
allow "backward productive forces" to die, consistent with his 
"double transfer" policy aimed at forcing labor-intensive industries 
out of the PRD.  Meanwhile, Premier Wen Jiabao has been portrayed in 
the reports as the champion the struggling SMEs. 
 
¶10. (SBU) Long-term solutions to these problems remain unclear, but 
 
many business and academic leaders in south China argue that without 
a reliable social safety net for China's population, domestic 
consumption will never increase to a level that can effectively 
rebalance the economy away from export-led growth.  Citizens 
currently have little incentive to increase consumption if their 
personal savings are the only viable substitute for a nonexistent 
social safety net.  This perception has been reinforced by some 
official media portrayals of western profligacy as the number one 
cause of the current economic downturn. 
 
Resurgence of State-Owned Enterprises? 
-------------------------------------- 
 
¶11. (SBU) It this set of circumstances that leads Sun Yat-sen 
University Economics Professor Lin Jiang to believe that the 
government's role in south China's economy will expand in order to 
ensure stable employment for millions of workers and keep students 
in school longer.  In a conversation with econoff, Lin predicted 
that despite the privatization and closure of thousands of 
state-owned enterprises (SOEs) in recent years, an opposite trend 
would emerge, with the government directing funds and projects to 
SOEs in large part to raise employment levels.  At the same time, 
Lin speculated that universities and graduate schools would also be 
expanded and students would be encouraged to continue attending 
school after completing their undergraduate programs as a way to 
temporarily stem the tide of unemployed college graduates. 
 
Capital Flooding into State-Owned Enterprises 
--------------------------------------------- 
 
¶12. (SBU) South China financiers also told us they have noticed a 
trend towards larger and stronger SOEs as China's fiscal stimulus 
package and more relaxed lending policies have funneled large 
amounts of capital to them.  One international banker told us that 
in the current economic environment, loans to SOEs are a better risk 
than lending to SMEs.  Another banker told us he believes that SOEs 
are receiving the most attractive terms on new financing, in part 
because state-owned bank employees might perceive a potential SOE 
default as less threatening than a private-enterprise default if 
risk management officers later ask why a particular loan was 
approved.  News reports indicate that state-owned banks like China 
Construction Bank have agreed to underwrite provincial and local 
government policy loans and stimulus efforts, further demonstrating 
the government's reliance on state firms to step in and help 
stabilize south China's economy before the downturn becomes more 
severe. 
 
Comment: Two Steps Back, Then Step Forward? 
------------------------------------------- 
 
¶13. (SBU) The real economic challenge facing China's leaders is how 
to continue economic liberalization at the same time as maintaining 
strong growth during the downturn.  As academics and policy makers 
grapple with this dilemma, it appears that local authorities have 
already begun grasping at the only tools they have available to spur 
growth - the remnants of the state-controlled economy. 
 
¶14. (SBU) One view is that heavy reliance on SOEs could be a 
short-term crutch until local and provincial governments feel more 
secure about their economic, and by extension, their political 
security.  As the recent economic volatility stabilizes, policies 
less reliant on state-owned economic entities could then be 
reintroduced.  On the other hand, with social harmony increasingly 
valued and leaders uncomfortable with free market forces, some may 
see the SOEs as more effective tools in addressing long-term 
problems such as unequal income distribution and the lack of a 
social safety net.  In addition, many policy makers and Party 
members may benefit from the retrenchment of SOEs.  The danger for 
private enterprise (mirrored perhaps by the opportunity for 
government managers) is that it may prove difficult to turn back 
toward the private sector when the current economic cycle returns to 
a positive direction. 
 
¶15. (SBU) As one international banker told us, an SOE's monopoly 
advantages can be leveraged to produce a "good enough" economic 
scorecard in the short term, but will never spur the improvements 
and innovations that will yield long-term economic growth.  In 
addition, the government has long called for expansion of the 
service sector, but the same banker contended that such a 
development would only be possible after greater deregulation, not 
more, an approach that would directly challenge the resurgence of 
 
SOE power and influence.  There is little argument here about 
short-term problems and the long-term direction China should be 
moving in, which is greater reliance on market signals, a larger 
domestic market for consumers and more policies that help those less 
fortunate through difficult economic times.  The problem is, as 
always, getting from the short term to the long term in a way that 
supports a leadership whose legitimacy resides in its ability to 
deliver the economic goods. 
 
GOLDBERG