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RR RUEHCN RUEHVC
DE RUEHGH #0046/01 0230735
ZNR UUUUU ZZH
R 230735Z JAN 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7555
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8184

UNCLAS SECTION 01 OF 05 SHANGHAI 000046 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR OASIA/INA/HAARSAGER AND WINSHIP 
DEPT FOR EAP/CM, INR/B, EEP/TRA/AN 
USDOC PASS BUREAU OF ECONOMIC ANALYSIS 
USDOC FOR ITA DAS KASOFF, MELCHER, OCEA 
STATE PASS USTR FOR STRATFORD, WINTER, KATZ 
NSC FOR LOI, SHRIER 
USPTO FOR BOLAND, WU 
 
E.O. 12958: N/A 
TAGS: ECON PGOV EFIN ETRD ELAB PREL KIPR CH
SUBJECT: WENZHOU - A CANARY IN CHINA'S ECONOMIC MINESHAFT 
 
REF: 08 SHANGHAI 174 
 
SHANGHAI 00000046  001.2 OF 005 
 
 
(U) This cable is sensitive but unclassified and for official 
use only.  Not for distribution outside of USG channels or via 
the internet. 
 
¶1.  (SBU)  Summary:  During the Deputy Principal Officer's 
January 21-22 visit to Wenzhou, Zhejiang Province, local 
officials said Wenzhou was one of the first cities in China to 
feel the impact of the global slowdown because of its largely 
private sector economy and heavy reliance on exports.  The 
effect of the slowdown has been dramatic with 10 percent of 
local businesses going bankrupt.  However, the Government is 
taking active steps to prevent the collapse of big companies and 
ensure social stability.  Foreign Direct Investment (FDI), 
although somewhat scarce in Wenzhou, has remained stable 
throughout the economic downturn.  A local shoe manufacturer 
said the effect of the economic slowdown on his firm was 
negligible because it is more focused on China's internal 
market.  Wenzhou IP Complaint Center officials said the city has 
come a long way on protecting IP, especially on raising IP 
awareness.   During a visit to the Nanmen Catholic Church, 
Father Ma Xianshi said the greater metropolitan area with its 
120,000 believers is home to the greatest concentration of 
Catholics in Zhejiang Province.  All the Wenzhou interlocutors 
showed great interest in President Obama's inauguration, 
discussing in detail his inaugural address and the meaning of 
his election for China.  End summary. 
 
"Where There Are No Wenzhou People, the Market Doesn't Have a 
Chance" 
--------------------------------------------- ------------ 
 
¶2.  (SBU)  In a meeting with Wenzhou Bureau of Foreign Trade and 
Economic Cooperation (FTEC) officials, Deputy Director Liu Ting 
explained Wenzhou's diaspora that built a network of businesses 
around the globe and continues to fuel the city's economy as one 
of the few sources of FDI.  Wenzhou, hemmed in by water and 
mountains in the southern part of coastal Zhejiang Province, 
lacks sufficient space (only 10 percent of the land is usable) 
to grow and prosper, thus driving more that 600,000 people 
overseas since China's reform began.  Describing his fellow 
Wenzhou citizens, including those overseas and in other Chinese 
cities, as highly entrepreneurial, Liu said that "where there is 
economic opportunity, there are Wenzhou people."  Liu estimated 
that in the United States alone there are close to 100,000 
Wenzhounese.  As these people left, over 2 million migrant 
workers from other parts of China have flooded the city, raising 
the total population of the metropolitan area close to 7.9 
million. 
 
¶3.  (SBU) Liu added that Wenzhounese continue to hold up the 
entrepreneurial spirit with over 60,000 companies registered in 
the city, 98 percent of which are private enterprises.  There 
are also 170 Wenzhou chambers of commerce - many of which are in 
China, but some are as far away as South Africa.   Liu said that 
other cities in China pay a great deal of attention to these 
chambers and their annual joint meeting.  The first annual 
meeting was hosted by Guangzhou, and now many municipal 
governments want to host the event as a means to attract 
business and investment.  Liu attributed Wenzhou's 
entrepreneurship to its people's ability to "chi ku" or "eat 
bitterness" to keep businesses running.  Lack of Central 
Government investment in the Wenzhou area also forced 
self-reliance.  Since China embarked on reform and opening up 30 
years ago, total Central Government investment in the city 
amounts to a mere RMB 600 million (USD 88 million).  "People 
don't wait for or depend on the Government for a hand out" said 
Liu.  (Note:  After the KMT's departure to Taiwan in 1949, the 
Central Government assiduously avoided investing in the coastal 
area close to Taiwan, assuming it would be the most likely 
location of any landing by KMT military forces.)  The 
inhospitable business environment, which includes lack of 
resources, low foreign investment, scarce usable land, and few 
good transportation links, has also honed Wenzhou people's drive 
to succeed despite the odds. 
 
Trade Falling Off a Cliff 
------------------------- 
 
¶4.  (SBU)  Wenzhou FTC Chief of Foreign Trade Xia Linhong said 
Wenzhou was one of the first cities in China to experience a 
 
SHANGHAI 00000046  002.2 OF 005 
 
 
sharp reduction in trade as the global economy ebbed and believe 
it would be the first to see a pick-up when demand resumes.  He 
attributed this to the fact that close to 95 percent of the 
local economy is tied to trade, and there are virtually no 
state-owned enterprises to soften the blow.  In addition, only 5 
percent of Wenzhou's exports are the result of processed 
imported components.   He said as early as January 2008, 
Wenzhou's trade growth rate had already started to drop below 
that of other cities in the province.  The biggest impact on 
trade during the first half of 2008 stemmed from higher labor 
costs resulting from the Labor Contract Law and the appreciating 
RMB.  For the second half of 2008, Xia laid the blame squarely 
on fluctuating commodity prices and weakening external demand. 
He added Wenzhou was particularly susceptible to exchange rate 
shifts because of its specialization in cheap goods that have a 
small profit margin. 
 
¶5.  (SBU)  Although the E.U. is Wenzhou's largest trading 
partner, the United States is the largest single country with 
which Wenzhou trades.   In 2008, exports from Wenzhou to the 
United States totaled USD 1.15 billion.  Imports from the United 
States were roughly USD 350 million.  Xia noted orders from the 
United States began dropping sharply as early as September. 
Some U.S. importers, having already placed orders, demanded that 
the products not be shipped, which caused a sharp increase in 
factory inventories.   As more customers in the United States go 
bankrupt, trade financing is increasingly drying up, compounding 
the problem for Wenzhou exporters.  He also expected that export 
growth would continue to drop significantly through the first 
half of 2009. 
 
Government Taking Firm Measures to Guard Against Social 
Instability 
--------------------------------------------- ---------- 
 
¶6.  (SBU) Liu believed that "many" Wenzhou factories would close 
all or part of their capacity after the Lunar New Year. 
Approximately 10 percent of all Wenzhou factories had already 
shut down - but most of these were small and medium size 
enterprises.  Big companies are still operating, which meant 
there likely would not be problems of social unrest.  Liu said 
the Government is intent on maintaining stability.  If a large 
company goes bankrupt, the Government will step in to liquidate 
the company's assets to pay wages to employees.  The Government 
is also offering low interest loans to companies that are unable 
to pay wages.  He added that companies are still having trouble 
obtaining financing from banks despite Government efforts to 
encourage loans.  Regarding migrant workers, Liu said a portion 
will likely not return after the Lunar New Year.  Those that 
have sufficient funds to build a house in their home village may 
choose not to come back and face the prospect of not having a 
job. 
 
Not Much Effect on FDI Since Not Much to Begin With 
--------------------------------------------- ------ 
 
¶7.  (SBU) Liu said that despite trade problems, the economic 
crisis has had little impact on FDI since, in Wenzhou, there is 
little to begin with.  Most of the FDI that continues to flow 
into Wenzhou comes from the pockets of Wenzhou citizens abroad. 
He said this unabated flow of investment is probably because 
people do not see better alternatives elsewhere.  Furthermore, 
the vast majority of inbound investment does  not flow to 
businesses, but rather into Wenzhou real estate.  Liu was only 
aware of one U.S. investment in the city, which produces auto 
parts.  There is also little investment from Hong Kong and 
Taiwan since "there are many other cities in China with better 
infrastructure to attract their business."  However, there is a 
long history of trade with Taiwan since many Wenzhou residents 
have relatives on the island, it is close by and Wenzhou 
dialect, while distinct from, is closer to Minnanhua, the 
southern Min dialect also known as Taiwanese, than any other 
dialect. 
 
¶8.  (SBU) Wenzhou investors are increasingly looking to the 
United States to park their money, according to Liu.  He cited 
as an example General Protect, a Wenzhou company specializing in 
breakers and switch products, which has committed USD 236 
million to build an industrial park in Georgia.  With the 
appreciation of the RMB and decreasing price of assets, the 
United States has become a real bargain.  Wenzhou people are 
 
SHANGHAI 00000046  003.2 OF 005 
 
 
particularly looking to snap up real estate in the United 
States.  Wenzhou businesses are also actively investing in other 
places in China, Shanghai being one of the most favored 
destinations.  He noted that Juneyao Group, owner of China's 
largest private airline, is one such Wenzhou company that had 
moved its operations to Shanghai.  However, the Wenzhou 
Government is actively encouraging companies to, at a minimum, 
maintain their headquarters in the city although branches may be 
located elsewhere. 
 
Vice Mayor Addresses Social Stability and Economic Stimulus 
--------------------------------------------- ----------- 
 
¶9. (SBU) In a separate meeting, Wenzhou Vice Mayor Chen Hongfeng 
echoed the remarks of Liu and Xia about Wenzhou's 
entrepreneurial spirit and the city's current difficulties.  He 
emphasized Wenzhou plays a more important role in China than 
most other cities its size because of its trade and business 
links.  Other cities in China have also looked to Wenzhou as a 
successful model.  Wenzhou has particularly benefited from 
having an open, private sector based economy, and 80 percent of 
the city's tax revenue comes from the private sector.  Wenzhou 
residents are also among the wealthiest in China, with a per 
capita GDP of RMB 26,000 (USD 3,800).  The city also has trade 
relations with over 100 countries.   Regarding the economic 
crisis, Chen assured that there has been no social unrest from 
factory closures and the situation is stable.  The Wenzhou 
Government is also benefiting from the stimulus package through 
new projects as well as the speeding up of already planned 
projects.  He said, for example, the city is building a new 
runway at the airport and upgrading the facility to accommodate 
international flights.  Two new rail lines will also be put into 
operation in 2009 (one to Ningbo, the northern Zhejiang city 
that is China's fourth largest seaport, and the other to Fujian 
Province south of Zhejiang).  A deepwater port is also under 
construction and set to open by the end of 2009. 
 
¶10.  (SBU) A number of interlocutors emphasized that the key to 
Wenzhou's success was the private sector.  Government's key 
contribution, especially at higher levels, was simply to permit 
Wenzhou entrepreneurs to go about their business.  FAO Director 
Chen Aichen contrasted Wenzhou and its larger rival in Zhejiang, 
Ningpo, saying that "Ningpo has a rich government but poor 
citizens, while Wenzhou has a poor government and rich 
citizens."  (Comment: Nevertheless, Wenzhou boasts a new 
municipal plaza area with a massive government office building, 
museum, library and opera house, all recently constructed and on 
a scale that would not be out of place for a city three times 
its size.  End comment.)  The Deputy Secretary General of the 
Municipal Government, Chen Weimin, told us at dinner that he had 
read a quote from President Reagan's inaugural address that had 
much impressed him - "government is not the solution to our 
problems, government is the problem," which, he implied, was a 
sentiment with which many Wenzhouese would agree. 
 
Running Faster with Better Shoes 
-------------------------------- 
 
¶10.  (SBU) During a visit to one of China's largest shoe 
manufacturers, Kangnai Group Vice Executive General Manager Zhou 
Jinmiao briefly outlined the history of his private enterprise. 
He said the company was part of Wenzhou's tradition of making 
shoes, which the city has done since the Ming Dynasty.  Shoe 
making is also one of the city's few competitive advantages, on 
which it is so intent to capitalize that Wenzhou has established 
shoe and clothing design majors in each of its four institutions 
of higher education.  (Note:  The Vice Mayor claimed that 
Wenzhou is the largest shoe manufacturing location in the 
world.)  As for Kangnai, Zheng Xiukang built the company from 
humble beginnings in 1980 with a loan of RMB 500 from a 
neighbor.  The company is now a behemoth that sells over 9 
million pairs of shoes a year in China, North America, Europe, 
and other parts of the globe.  The company had to significantly 
change its strategy and boost quality through standardization in 
the 1990s as Chinese became more brand conscious and demanding 
of quality.  The company decided to focus primarily on producing 
shoes under its own trademark, which it registered in 1992, and 
now has outlet stores in places such as Manhattan and Paris. 
Zhou said the shoe market in China, which was an open field of 
opportunity as China's reform began, has now become a fiercely 
competitive arena since the entrance of multinationals, so much 
 
SHANGHAI 00000046  004.2 OF 005 
 
 
so that it has even been driven out of some of the high fashion 
malls in Beijing. 
 
Economic Downturn Not Taking the Bounce Out of These Shoes 
--------------------------------------------- ------------ 
 
¶11.  (SBU) According to Zhou, Kangnai has been relatively 
unscathed thus far by the global economic downturn, primarily 
because the company chose to focus primarily on domestic demand 
rather than exports.  Other Wenzhou shoe makers that produce 
primarily under other brand names for exports had not been so 
lucky.  Kangnai chose to focus on China's market because of the 
potential.  "Even the poorest farmer can now afford shoes," said 
Zhou, and there is a long way to go since the average consumer 
only buys 1.7 pairs of shoes a year, compared to the average 
American consumer who buys 7 pairs each year.  The only real 
effect is that Chinese are now shying away from high-end shoes 
as consumer confidence falls.  Cooperation with a Pittsburg 
company to open an outlet was also postponed because of the 
economic downturn.  Kangnai, as an unlisted company, relied 
heavily on bank loans, and despite Chinese banks' tightening of 
purse strings, was able to still secure loans because of its 
"good credit record."  According to Zhou, the appreciating RMB 
gave Kangnai a bit of a boost since the imported leather, and 
other material from around the world is all the more cheaper. 
 
¶12.  (SBU) Zhou expected that most of his 3,000 workers would 
return after the Lunar New Year holiday.  He noted that around 
half came from Zhejiang Province while the rest hailed from 
central and southwest China.  Zhou supported the Labor Contract 
Law, saying it was the "right thing" to protect workers, and 
each of Kangnai's employees has a contract.  He added that 
Kangnai is completely unionized. 
 
Wenzhou IPR Protection - in Nascent Stages 
------------------------------------------ 
 
¶13.  (SBU) In a meeting with Wenzhou Intellectual Property 
Rights (IPR) Complaint center officials, Director Dan Shicheng 
said Wenzhou has its own IP website, under the auspices of a 
Central Government website, for disseminating information about 
IP issues in Wenzhou.  In total Wenzhou posted 1,371 pieces of 
information on its website in 2008.  The Wenzhou IPR Complaint 
Center, one of four in Zhejiang Province, has a small staff of 
three people and has been in existence since August 2006. 
However, there is no information in English on the website, nor 
is there any written material in English or English speaking 
staff at the center.  Complaints are handled through the 
website, as well as over the phone and in person.  Dan 
emphasized that it is mandatory that each complainant "establish 
his or her identity and show proof of the infringement."  Most 
of the complaints are related to trademarks and trade secrets, 
and there have been no cases related to foreigners.  Dan also 
noted that cases can be transferred electronically between all 
complaint centers within China.   The center also provides 
IP-related training to government workers from other bureaus 
within the Wenzhou Government. 
 
¶14.  (SBU) Dan said that Wenzhou has an IP Coordinating Council 
under the auspices of the Wenzhou IP Administration, which 
actively coordinates activities between IP bureaus within 
Wenzhou as well as with IP agencies in other jurisdictions. 
Wenzhou IP authorities, including the Copyright Bureau, the 
Public Security Bureau (PSB), and the IP Administration and 
others have a monthly meeting to coordinate issues.  Wenzhou has 
no IP white paper, but it reports monthly to Hangzhou and 
provides input into the provincial white paper.  The city has an 
IP tribunal that was established in the 1980s that combines 
civil and criminal cases.  For special cases, the court allows 
open trials for the public to see.  There have been no alleged 
cases of Internet-related piracy, and there have been few cases 
related to patents and copyrights.  The PSB also has a special 
unit to deal with IP crimes.  (Comment:  U.S. companies have 
been less than impressed by Wenzhou IP protection.  Besides 
basic difficulties getting assistance from local IP authorities, 
U.S. companies have strongly criticized a September 2007 Wenzhou 
Intermediate Court ruling against Schneider Electric of France. 
The Wenzhou Intermediate Court ruled that Schneider infringed 
against a competing Chinese company to the tune of USD 50 
million and was fined an equivalent amount.   This is a 
tremendous sum, especially in comparison with fines imposed on 
 
SHANGHAI 00000046  005.2 OF 005 
 
 
Chinese companies for similar infringement.  In a separate 
Wenzhou court case, the American firm 3M also complained of 
local protectionism when the court ruled documents "invalid," 
and dismissed the case because the documents did not contain 
proper notary seals, even though the notary seals were from the 
Chinese Consulate in Chicago.  End Comment.) 
 
¶15.  (SBU) FTC Chief of Foreign Trade Xia stressed how far IPR 
protection has come in Wenzhou in recent years, especially IPR 
awareness among the general population.  The city ensures there 
is an IP Complaint booth at all trade fairs and the city is 
pushing for harsh penalties for IP infringement and mandatory 
confiscation for infringed goods.  Wenzhou also makes a special 
effort to ensure its "48 famous trademarks" are well protected 
throughout China.  He acknowledged, however, there is little 
cooperation with Customs and PSB on infringement cases. 
Kangnai's Zhou said that his company experienced a significant 
IP problem in 1994, when knock-offs began turning up in market. 
However, using "legal means" and obtaining good support from the 
Government, it put an end to the piracy and has not encountered 
IP problems since. 
 
The Parish That Tries to Make a Difference 
------------------------------------------ 
 
¶16.  (SBU) During a visit to the Wenzhou Nanmen Catholic Church, 
the affable Father Ma Xianshi explained how the church tries to 
make a difference in the daily lives of its 1,200 members 
through numerous activities and Bible study classes, especially 
for children and young people.  Around 500 people attend 
services on a regular basis.  Father Ma gave high marks to the 
local government for its support, particularly for providing the 
land on which the church was built.  The building was 
constructed with funds from local members.  He also said the 
area has the largest Catholic concentration in Zhejiang 
Province, with over 150 churches and 120,000 believers in the 
larger metropolitan Wenzhou area.  There are only 30 priests, an 
insufficient amount according to Father Ma, to serve the large 
number of believers.  There are also a few foreigners, mostly 
Africans, who regularly attended services.  Attendance 
temporarily had jumped after the May 2008 Sichuan quake as more 
people sought comfort from the church.  He said the biggest 
challenge is reaching an accommodation with "house churches," or 
adherents of the "underground Church," that is, those Catholics 
who only recognize Church leaders appointed by the Pope.  Ma 
estimated that there are about 50,000 such people in the Wenzhou 
area.  The church boasted a handsome, framed picture of Pope 
Benedict on the wall of one of the meeting rooms.   When asked 
about the picture, Father Ma quickly affirmed that the Catholics 
in China are not subordinate to Rome. 
 
Obama on Their Minds 
-------------------- 
 
¶17.  (SBU) Throughout the visit, Wenzhou interlocutors 
repeatedly raised President Obama's inauguration, discussing in 
detail his inaugural address and the meaning of his election for 
China.  FTEC Deputy Director Liu said his impression of Obama 
was that he was relatively more protectionist that John McCain 
and expressed concern about how potential U.S. protectionist 
policies could hurt China's exports.  Vice Mayor Chen said he 
had seen the inaugural address and was very impressed.  He also 
expressed his desire to see Obama would be able to solve the 
global economic crisis.  Wenzhou Foreign Affairs Office Director 
Chen Aizhen discussed the inaugural address in great detail, 
noting that there was little about foreign policy.  Even Father 
Ma commented on the inauguration, saying how he was impressed 
that the President had used a Bible during the swearing in 
ceremony. 
CAMP