VZCZCXRO6970
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0326/01 0410714
ZNR UUUUU ZZH
O 100714Z FEB 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2191
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 02 BEIJING 000326 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, READE, 
VENKATARAMAN, KEMP, MILLER, MALMROSE 
DOC FOR MELCHER, SAUNDERS; LORENTZEN AND SHOWERS (CABLE CODE 5130); 
HEIZNEN (CABLE CODE 6510) 
 
E.O. 12958:  N/A 
TAGS: ECON KTEX ETRD EIND CH
SUBJECT:  CHINA'S TEXTILE SUPPORT PLAN DISAPPOINTS 
 
REF: Beijing 151 
 
This cable is Sensitive But Unclassified (SBU) and for official use 
only.  Not for transmission outside USG channels. 
 
¶1. (SBU) SUMMARY.  On Feb. 4, the State Council's Standing Committee 
announced a support plan for the textile and garment industry, one 
of ten key industries to receive government support.  The measures 
included lofty goals to expand domestic consumption, encourage 
industry consolidation and promote regional diversification. 
Textile manufacturers were disappointed at the single 
percentage-point increase in the VAT rebate for exports to 15 
percent, seeing it as a symbolic rather than substantive move. 
Stock prices of major textile firms fell 3 to 5 percent on the 
Shanghai exchange the day after the announcement.  Plan objectives 
include moving up the value-added spectrum with China's own patented 
products -- something which would require tougher domestic 
intellectual property right (IPR) enforcement.  Details on a special 
fund to help "good firms" in financial difficulty remain to be 
clarified.  END SUMMARY 
 
¶2. (SBU) On Feb. 4, 2009, the State Council announced an industrial 
support plan for the textile and garment industry, one of ten key 
industries to receive such attention.  (See reftel on auto/steel 
plans, reporting to follow on plan for machinery industry; other 
plans yet to be announced.)  The textile plan sets very broad, and 
apparently long term goals to support both the domestic and export 
markets by growing domestic consumption, developing rural markets, 
promoting the application of textile products in industry, and 
diversifying export markets to stabilize international market 
shares. 
 
¶3. (SBU) Specific measures will include: (1) promoting technology 
upgrades and the development of patented products; (2) accelerating 
elimination of outdated production capacity that conflicts with 
China's "jieneng, jianpai" (low energy consumption, low pollution) 
development objectives; (3) encouraging industry consolidation 
through mergers and acquisitions; (4)promoting regional development 
by encouraging coastal provinces to focus on high-tech, high 
value-added product and transferring low-end production to central 
and western provinces; (5) developing a production base in Xinjiang 
for high quality raw cotton and cotton textile products; and (6) 
providing financial support to textile and garment manufacturers by 
raising the VAT rebate on exports of textiles and garments by one 
percentage-point to 15 percent, and creating a special fund to be 
allocated to "good" enterprises which have temporarily suffered 
financial difficulties. 
 
¶4. (SBU) Textiles and garments represent a key export sector and 
play a critical role in employing migrant labor, particularly in the 
Pearl River and Yangtze River delta regions around Guangzhou and 
Shanghai.  The China National Textile and Apparel Council estimates 
over 20 million workers are employed in the industry, 80 percent of 
which are migrant workers.  But China's textile and garment exports 
grew only 8.2 percent in 2008 -- 10.7 percentage points lower than 
in 2007.  China just welcomed the elimination of quotas to the U.S. 
with the expiration of the U.S.-China Memorandum of Understanding on 
Textile and Apparel Products on Dec. 31, 2008.   A similar agreement 
with the E.U. expired at the end of 2007.  This lifting of quotas 
combined with an appreciating Euro spurred exports to Europe in the 
first half of 2008.  Demand from other developed markets, however, 
began to decline early in 2008. 
 
¶5. (SBU) The 17 percent VAT rate on textiles was typically rebated 
when products were exported.  In 2007, however, it was lowered to 11 
percent to address concerns about growing trade friction.  As the 
sector began to suffer in 2008, industry lobbied for the government 
to raise the VAT rebate rate.  It was lifted to 13 percent on Aug. 
1, 2008, and then to 14 percent on Nov. 1, 2008.  The Feb. 4 support 
plan raises this by one additional percentage-point to 15 percent. 
Each time industry was disappointed that the increase was not 
larger.  Following the announcement of the support plan, major 
textile firms fell on the Shanghai index, with Mongolia Eerduosi 
Cashmere Product Ltd., Huafang Textile Co., and Shanghai Dragon Co. 
dropping from between 3 to 5 percent. 
 
¶6. (SBU) Many observers see the increase in the VAT rebate as a 
symbolic measure, since it is too small to impact producers.  A 
large Guangdong manufacturer quoted in the Chinese press 
acknowledges the measure does nothing to address the drop in 
external demand that led to current difficulties.  He fears that the 
tiny increase in VAT rebates will be eaten up by trading companies 
or foreign customers, who tend to have stronger bargaining power. 
 
¶7. (SBU) Sun Huaibin, Director of the China Textile Economics 
 
BEIJING 00000326  002 OF 002 
 
 
Research Center, says including textiles in the first four 
industries to received support demonstrates the government's strong 
concern for the sector.  "Textiles have been hurting for nearly a 
year.  Export demand from U.S. began dropping from early in 2008. 
The financial crisis in the U.S. last fall only accelerated the 
impact."  Mr. Sun admits that the immediate financial benefit to 
firms from the plan will be limited, since most measures are long 
term.  He believes his industry association will, however, play a 
role in helping develop criteria for determining which firms will 
receive financial support -- one of the least transparent provisions 
of the plan. 
 
¶8. (SBU) COMMENT:   The government's textile support plan measures 
do appear to be mostly symbolic, and offer minimal immediate relief. 
 They include long-established, lofty development goals of 
transitioning industry to China's heartland, and increasing China's 
added value, stimulating innovation, reducing energy consumption and 
pollution, and consolidating industrial structure.  But coastal 
provinces already losing jobs may not be so willing to see factories 
move, even those with low value add.  Innovation and patentable 
technologies are a worthy goal, but unlikely to be realized given 
the current industry investment on R&D and of limited value without 
better IPR enforcement.  Consolidation sounds nice, but the industry 
by nature is diversified and private firms play a large role -- it 
will not be as easy as in industries where state-owned firms 
dominate.  As has been typical of these announcements, the policy is 
vague on the nature and application of the special fund for 
suffering enterprises.  END COMMENT. 
 
 
PICCUTA