VZCZCXRO6250
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0425/01 0500527
ZNR UUUUU ZZH
O 190527Z FEB 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2393
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 02 BEIJING 000425 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, READE, VENKATARAMAN 
AND KEMP 
USDOC FOR NICOLE MELCHER, MARY SAUNDERS, RONALD LORENTZEN AND CAROLE 
SHOWERS 
 
E.O. 12958:  N/A 
TAGS: EIND EMIN ECON CH
 
SUBJECT:  CHINA ANNOUNCES MACHINERY INDUSTRY SUPPORT PLAN 
 
   REF: A. BEIJING 151 
        ¶B. BEIJING 326 
 
¶1. (SBU) SUMMARY.  China's State Council announced February 4 a plan 
to support China's machinery industry, part of the government's 
campaign to bolster the country's slowing economy.  The plan aims to 
support the domestic machinery industry and reduce reliance on 
imported parts without running awry of China's WTO commitments.  A 
government researcher downplayed concerns about protectionist 
measures, stressing that joint ventures and foreign-owned machinery 
enterprises in China would also benefit from the support measures. 
Industry sources welcomed the plan but expressed concerns about the 
stimulus package and industry support plans leading to duplication 
and overcapacity.  End Summary. 
 
¶2. (U) At a February 4 meeting of the State Council, Premier Wen 
Jiabao approved a plan to support China's machinery industry.  The 
machinery industry support plan is the fourth of ten plans to 
provide a boost to sectors hard-hit by the economic downturn (see 
Ref A-B for auto, steel and textile industry support plans). 
The plan includes the following measures:  1) promote 
domestically-produced machinery, particularly for "priority 
projects" in infrastructure construction of high-speed railway, 
subway, natural gas pipeline transportation, liquefied natural gas 
(LNG) storage and transportation, mining, clean and efficient power 
generation, and extra-high voltage (EHV) power transmission; 2) use 
key projects of large industries such as steel, autos and textiles 
to promote domestically-produced machinery; 3) encourage mergers and 
consolidation of pillar enterprises in the industry; 4) increase 
lending to encourage machinery exports and exempt tariffs and VAT on 
imports of raw materials and key machinery parts; and 5) establish a 
risk compensation mechanism for the first use of 
domestically-produced machinery.  After the plan was announced, 
there was a sharp rise in machinery stocks on the Shanghai and 
Shenzhen markets. 
 
"No Need to Worry about Protectionist Measures" 
--------------------------------------------- - 
¶3. (SBU) According to State Council Development Research Center 
Deputy Director General Shi Yao Dong, one of the plan's strong 
points is the government's encouragement of innovation and support 
for domestically-produced technology and products.  Shi said China's 
machinery industry is weak in the production of machinery parts and 
high-end technologies, resulting in a tendency to import many key 
parts and components.  Approximately 70 percent of important 
machinery parts in China are imported from overseas.  This problem 
is compounded by a lack of R&D investment and poor coordination 
between industries, industrial associations and research 
institutions.  Shi predicted that the support measures would help 
domestic producers by promoting innovation and improving 
coordination between industry and research institutions.  However, 
he stressed that all machinery enterprises in China, including joint 
ventures and foreign firms operating in China, can benefit from 
these measures.  He claimed the plan is consistent with China's WTO 
commitments, adding that "there is no need to worry about 
protectionist measures." 
 
Industry Welcomes the Plan, Eager for More Details 
--------------------------------------------- ----- 
¶4. (SBU) The machinery industry welcomes the support plan, said 
China Machinery Industry Federation Department of International 
Cooperation Director Yang Junmian, whose Federation includes more 
than 50 machinery industry associations and institutions.  She said 
the plan will provide a much-needed boost to machinery companies 
hard-hit by the global economic slowdown.  Measures to promote 
domestically-produced machinery, including the proposed risk 
compensation mechanism for trialing Chinese-made machinery, are 
particularly welcome by industry.  Yang said the risk compensation 
mechanism should help domestic producers, whose machinery is often 
passed over for large-scale projects in favor of high-quality 
imported machinery.  She speculated that funds for this mechanism 
would come from the central government, local governments and 
companies themselves.  Song Xiaogang, Deputy Secretary General of 
the Federation, said he has heard positive feedback from companies 
regarding the plan to set up a special fund to promote R&D of 
machinery parts.  He said the plan to promote domestically-produced 
industry was a sign that the government recognizes the industry's 
potential impact on the country's economic security.  However, both 
Song and Yang acknowledged that the plan is short on details and 
said companies are eagerly awaiting more details on the plan. 
 
Concerns about Duplication and Overcapacity 
------------------------------------------- 
¶5. (SBU) According to Yang, the plan complements the government's 
four trillion yuan (USD 585 billion) stimulus package, which will 
 
BEIJING 00000425  002 OF 002 
 
 
fund many large-scale infrastructure projects requiring machinery. 
However, Yang expressed concerns about the possibility of the 
government duplicating projects and generating overcapacity.  She 
noted that the NDRC, which faces the difficult task of coordinating 
much of the spending of the stimulus package and industry support 
plans, may find it hard to avoid funding some unnecessary projects 
or funding duplicative projects in different provinces.  Lu Tie, a 
Chinese Academy of Social Sciences (CASS) Institute of Industrial 
Economics Researcher, shared these concerns.  He said local 
government officials were seeking stimulus package funds to protect 
local jobs, funds which would inevitably be used to save some 
factories that should be eliminated. 
 
Industry Consolidation Likely to Benefit SOEs 
--------------------------------------------- 
¶6. (SBU) One goal of the plan is to promote industry consolidation. 
Most machinery companies are small or medium-sized, with some large 
machinery factories concentrated in China's north-east provinces, 
Sichuan Province and central China.  Yang said the government's plan 
to encourage consolidation would likely benefit large-scale 
"backbone enterprises," most of which are state-owned enterprises 
(SOEs) under the supervision of the State Council's State-Owned 
Assets Supervision and Administration Commission (SASAC).  She noted 
that SASAC would probably take the lead in promoting consolidation 
with the long-term goal of improving the competitiveness of SOEs. 
 
Comment 
------- 
¶7. (SBU) Despite our contacts' assurances that the plan does not 
have protectionist measures, the plan includes a number of measures 
that may be inconsistent with China's G-20 pledge.  The clear 
support for domestically-produced machinery is troubling as it 
appears to discriminate against imports.  The proposed risk 
compensation mechanism and R&D fund appears aimed at boosting the 
use of domestic machinery instead of imported products.   Although 
joint ventures and foreign firms operating in China could benefit 
from support measures, it is also possible that the government would 
give priority to China's large SOEs, particularly for large-scale 
infrastructure projects.  Unfortunately, the announced plan offers 
few details on how the government will actually implement the plan, 
including such measures as the risk compensation mechanism and R&D 
fund.  However the plan is implemented, it appears that the big 
winners will likely be China's large SOEs.  End Comment. 
 
PICCUTA