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OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0151/01 0161145
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O 161145Z JAN 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1905
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INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 02 BEIJING 000151 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD AND KEMP 
 
E.O. 12958:  N/A 
TAGS: EIND EMIN ECON SENV CH
SUBJECT:  CHINA ANNOUNCES STEEL AND AUTO INDUSTRY SUPPORT PLANS 
 
¶1. (SBU) SUMMARY.  The State Council approved industrial support 
plans for the auto and steel sectors on January 14, the first two of 
ten industry focused plans to help those sectors hardest hit by the 
economic slowdown.  The measures will support domestic demand, 
protect employment and promote environmental protection in two of 
China's largest industries.  Auto and steel industry representatives 
welcomed the announcement, but analysts for both sectors expressed 
doubts about the success of accelerated consolidation without 
addressing more systemic problems.  A provision to stabilize China's 
international market share in steel will be watched closely by 
foreign producers wary of export promotion.  END SUMMARY. 
 
¶2. (SBU) At the January 14 State Council meeting, Premier Wen Jiabao 
approved industrial revitalization plans for the auto and steel 
sectors.  These plans are the second phase of the Government's 
comprehensive economic support plan, which include the already 
announced RMB 4 trillion stimulus and an expected technology 
investment plan.  The measures announced by the Ministry of Industry 
and Information Technology (MIIT) are intended to stimulate domestic 
demand and employment, but also contain provisions for environmental 
and technology improvements.  While the announcement outlines the 
type of actions which will be taken, specific details remain to be 
clarified.  Additional support plans are expected to cover ten key 
industries, including ship building, chemicals, textiles, machinery, 
and property. 
 
Auto Plan Aims to Spur Consumption, Innovation 
--------------------------------------------- - 
¶3. (SBU) The five-part auto industry support plan includes the 
following measures:  1) a reduction in the sales tax on vehicles 
with engines smaller than 1.6 liters from 10 percent to 5 percent 
and a 5 billion RMB subsidy to encourage farmers to upgrade their 
low-end vehicles, 2) support for industry consolidation, 3) a 10 
billion RMB special fund to promote technical innovation, 4) 
subsidies to encourage the development of environmentally-friendly 
cars, and 5) support for the development of proprietary brands and 
the building of auto and parts export bases.  According to Chinese 
Academy of Social Sciences (CASS) Institute of Industrial Economics 
Researcher Zhao Ying, the subsidies to the auto industry will be 
funded by both the central government and local governments. 
 
Focus on Stimulating Domestic Consumption 
----------------------------------------- 
¶4. (SBU) CASS's Zhao said the short-term goal of the auto industry 
support package is to respond to the current economic slowdown by 
increasing domestic consumption.  He said the poor performance of 
China's stock market in 2008 impacted car sales.  Many middle class 
families changed their consumption habits because of income effects, 
and the growth rate of car sales slowed to 7 percent in 2008 after 
years of more than 20 percent growth.  Nevertheless, he predicted 
that the recent slowdown in auto sales is temporary.   He said the 
huge domestic market will ensure that car sales will grow in the 
long term. 
 
Protecting Employment and Environment are Key Goals 
--------------------------------------------- ------ 
¶5. (SBU) Zhao said one of the primary goals of the auto support plan 
is to protect employment.  NDRC and China Auto Industry Yearbook 
reported in 2007 that auto and auto parts manufacturing and services 
provided roughly 30 million jobs in China.  Protecting these jobs is 
important for maintaining social stability, Zhao noted.  He said the 
Government is also aiming to protect the environment by reducing the 
sales tax on vehicles with smaller engines and encouraging the 
development of environmentally-friendly cars. 
 
Doubts about Auto Industry Consolidation 
---------------------------------------- 
¶6. (SBU) In spite of the Government's plan to promote industry 
consolidation, Embassy contacts expressed doubts.  CASS's Zhao said 
that he is "not optimistic" about the prospects of auto industry 
consolidation.  He said car factories, as a "backbone" of local 
economies and major contributor to employment and tax revenue, 
receive strong support from local governments.   Zhao predicted that 
local governments will be reluctant to support consolidation and 
that most car companies will survive the economic slowdown.  He also 
noted that the enormous Chinese market is conducive to many 
companies producing different vehicles for many different customer 
segments.  GM Asia Pacific Public Policy Director David Tulauskas 
said the Central Government hopes that the economic downturn will 
push the industry into greater consolidation through bankruptcy but 
acknowledged that local governments will continue to find ways to 
support their local auto producers. 
 
Industry Response: GM Welcomes Support Plan 
------------------------------------------- 
¶7. (SBU) Tulauskas told EconOff that GM's overall response to the 
industry support measures is positive.   He said that GM provided 
input directly to the NDRC and Ministry of Finance and through the 
China Association of Automobile Manufacturers.   The Central 
 
BEIJING 00000151  002 OF 002 
 
 
Government asked GM detailed questions about what other governments 
around the world were doing to support the auto industry.  Several 
of GM's recommendations were accepted by the Government, including 
the decisions to cut the sales tax by 50 percent on smaller vehicles 
and to set a clear end date for the tax incentive to create a sense 
of urgency.  GM believes this large tax incentive should be enough 
to effectively encourage more vehicle consumption. 
 
¶8. (SBU) Tulauskas said that the 10 billion RMB fund established to 
spur development of new energy efficient and environmentally 
friendly vehicles was also a "step in the right direction, and the 
United States should take it seriously."   He said that this large 
amount of money could put China well on the way to becoming a leader 
in green vehicles.   According to Tulauskas, MOFCOM assured GM that 
it would be able to apply for this funding on a footing equal with 
domestic companies.  However, he noted the need to get more details 
on how the fund will be managed before determining its value to GM. 
 
 
¶9. (SBU) Regarding the 5 billion RMB fiscal subsidy to help farmers 
scrap old "vehicles" and buy new vehicles with engines smaller than 
1.3 liters, Tulauskas said that GM would likely benefit "greatly" 
from this measure through its joint venture with Wuling Auto, which 
produces a range of minivans and small trucks.  However, he noted 
that the provision was not fully clear and would likely be left up 
to the local governments to determine eligibility for the subsidy. 
He also said that local governments have been instructed to relax 
requirements on licensing, particularly licensing fees, but noted 
that the effect of this measure will be a mixed bag as local 
governments will likely implement in a variety of ways. 
 
Government Plans to Control Steel Production 
-------------------------------------------- 
¶10. (SBU) The steel industry measures are intended to control 
production, close down out-dated facilities and further consolidate 
the industry structure.  They will include policies to promote 
mergers and acquisitions and a special infrastructure fund to 
stimulate technological investment.  In an attempt to address 
industry over-capacity, for the first time there will be a freeze on 
new production facilities and the government will work to stabilize 
Chinese steel makers' export market share by adjusting export taxes. 
 Additional measures will modify the iron ore import process, 
restructure the sales of steel products, and help to distribute 
industry risk. 
 
Measures Welcomed; But Consolidation Will Be Tough 
--------------------------------------------- ----- 
¶11. (SBU) China Iron and Steel Association (CISA) Deputy General 
Secretary Zhang Jingang welcomed the announcement, which he said 
reflected input from industry and which replaces a failed attempt to 
mop up excess supply through a Government stockpile.  But industry 
media report unnamed steel mill sources are underwhelmed and have 
expressed doubts about the Government's ability to speed up closures 
of outdated facilities.  Steel industry expert Professor Lu Tie of 
CASS Institute of Industrial Economics says the current low level of 
consolidation is consistent with an industry in the early phase of 
development.  He considers the Government's consolidation targets 
ambitious and believes progress will be hampered by China's fiscal 
and tax system. 
 
We've Heard this Consolidation Song Before... 
-------------------------------------------- 
¶12. (SBU) The Government has long supported steel industry 
consolidation.  Yet China's top 10 producers currently account for 
only 38 percent of total domestic production, versus 88 percent in 
the U.S.  The reality was that even favored, state-owned firms found 
it difficult to achieve the scale benefits of mergers as powerful 
municipal and provincial interests sought to protect their ownership 
rights, tax revenues and local employment base.  The 2005 
Anshan-Benxi merger, for example, was delayed several years due to 
Benxi City Government's feared loss of 70 percent of its tax 
revenue. 
 
¶13. (SBU) COMMENT.  U.S. auto makers with established production 
bases in China are likely to benefit from the auto industry 
measures.  But efforts to stabilize Chinese steel makers' export 
market share will be closely watched by U.S. and other foreign 
producers who will be wary of export promotion in the guise of a 
domestic support plan.  With the economic slowdown, the timing of 
accelerated consolidation in both steel and autos would at first 
glance appear opportune, but more fundamental policy and structural 
issues will continue to frustrate these efforts.  END COMMENT. 
 
RANDT