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ZNY CCCCC ZZH (CCY AD366237 MSI7986-695)
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FM AMCONSUL SHENYANG
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INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEAIIA/CIA WASHDC 0168
RHMFISS/COMUSKOREA J2 SEOUL KOR
RUEKJCS/DIA WASHDC 0124
RUEKJCS/SECDEF WASHDC 0139
RUEHMO/AMEMBASSY MOSCOW

C O N F I D E N T I A L SHENYANG 000031 
 
SENSITIVE 
SIPDIS 
 
C O R R E C T E D COPY ADDED ADDEE 
 
MOSCOW PASS VLADIVOSTOK 
E.O. 12958: DECL: 02/26/2019 
TAGS: EAGR ECON ENRG ETRD KN KS PREL RS SENV
SUBJECT: LIFE IN CHINA'S NORTH: SNAPSHOTS FROM HARBIN TO 
THE SOUTHEAST BORDER WITH RUSSIA 
 
REF: A. (A) 08 SHENYANG 7 
     ¶B. (B) 08 SHENYANG 76 
     ¶C. (C) 08 VLADIVOSTOK 38 
 
Classified By: Consul General Stephen B. Wickman.  Reasons 1.4 (b) and 
(d). 
 
¶1. (C) SUMMARY: Leaders in Heilongjiang Province displayed a 
well-informed interest and concern about the global economic 
slowdown while remaining upbeat on prospects for 
development, particularly in the transportation and 
environmental areas.  Sector-specific industries related to 
exports and Russian ruble-denominated trade are experiencing 
the most difficulty, commensurate with the province's 
isolated, undiversified, and underdeveloped status, but the 
full effects have yet to touch China's northernmost areas. 
Local leaders continue to think big, embarking on capital 
infrastructure projects and proposing yet another regional 
logistical link with the Russians and the Koreans.  As 
Mudanjiang Party Secretary (PS) XU Guangguo bluntly put it, 
"we are a backward and remote region to begin with" and 
then, quoting Deng Xiaoping roughly, "if the sky falls, then 
the tall people will be around to hold it up (while the 
short people survive)."  END SUMMARY. 
 
¶2. (SBU) Taking advantage of a chance to drop in on the U.S. 
skating teams and attend the opening of the 24th Winter 
Universiade in Harbin, the Consul General and congenoff 
explored Heilongjiang's southeastern quadrant, visiting 
Harbin February 16-19 and the border cities of Dongning, 
Suifenhe, and Mudanjiang February 19-22.  The themes were 
consistent throughout.  While the leadership was concerned 
about the economic slowdown, most of the difficulties were 
sector-specific. 
 
EVIDENCE OF THE ECONOMIC SLOWDOWN AND ENVIRONMENT 
--------------------------------------------- ---- 
¶3. (C) Heilongjiang PS JI Bingxuan dispensed with all small- 
talk and opened with a polished and well-rehearsed, half- 
hour diatribe that could have come straight from the Party 
School, chiefly regarding American complicity and 
foolishness in precipitating the economic slowdown (NOTE: 
Like most of the high-level leadership in Heilongjiang, PS 
Ji is not a native but from Henan.  He reportedly had been 
considered for the PS slot in Lhasa but settled for the 
irreverent northernmost province of China instead.)  PS Ji 
worried that the economic slowdown would have dire 
implications for inflation and global stability and he was 
most puzzled about the reasons behind the gyrating price for 
crude oil, which is produced in Heilongjiang at China's 
oldest field in Daqing (NOTE: PS Ji was a real departure 
from his predecessor, who had nervously clutched his notes 
during his 2007 meeting with the CG and reportedly did not 
like meeting with foreigners.) 
 
¶4. (C) PS Ji's initial exposition avoided a strict analysis 
of Heilongjiang's experience with the slowdown.  He 
subsequently admitted, however, that the most intractable 
problem facing the local economy was the effect of imports 
of American genetically modified (GMO) soybeans, which had 
more to do with China's WTO concessions.  The central 
government continues to buy soybeans at a higher price to 
support its local farmers, but Heilongjiang's soybeans are 
ultimately uncompetitive with American GMO soybeans.  PS Ji 
cited falling oil prices and reduced trade with Russia as 
equally troublesome, but returned repeatedly to the soybean 
issue, reiterating its paramount importance to the province. 
 
¶5. (C) PS Ji also commented on the need to protect the 
environment, pledging RMB 50 billion over 10 years to 
protect regional forests, grasslands, and rivers as part of 
the government's package to improve the productivity of 
existing farmland by upgrading infrastructure and equipment. 
Certain species of trees are specifically protected, such as 
Korean pine and larch.  PS Ji boldly stated that 
Heilongjiang would cultivate no new land, "cutting not a 
single tree nor a single blade of grass" and pledged not to 
construct any factories near the relatively clean Amur 
(Heilongjiang) and Ussuri Rivers along the Russian border. 
PS Ji proudly pointed to the clear ice blocks from the 
Songhua River used in the popular Harbin Ice and Snow 
Festival as evidence that the river had recovered from the 
disastrous 2005 benzene incident in upstream Jilin Province 
(NOTE: Benzene is, of course, colorless.) 
 
¶6. (C) Harbin PS DU Yuxin also showed keen interest and 
knowledge about the global slowdown and seemed confident 
that the United States would rise to the challenge.  He 
agreed with the CG on the importance of addressing climate- 
change issues and described his city's efforts to hit some 
low-hanging fruit: building sewerage treatment plants on the 
Songhua River and a municipal central heating system that 
eliminates the need for household coal- and wood-burning 
stoves.  PS Du also cited the cost of clean technology as 
prohibitively high and hoped that the Secretary and others 
in the USG would facilitate technology transfer to China. 
If so, China would not repeat the mistakes of the 
industrialized world and the "the rest of the world would 
not suffer as much" (NOTE: PS Du is an anomaly in this part 
of the country as he is one of the only Party leaders that 
calls Heilongjiang home.  He is an avid reader and does not 
shy away from scholarly topics; his latest book of choice 
was on American environmentalism.) 
 
LOCAL PERSPECTIVES ON THE ECONOMIC SLOWDOWN 
------------------------------------------- 
¶7. (SBU) Harbin's economy seems not to have been terribly 
affected by the economic slowdown, and in some cases there 
is room to grow.  The Harbin Power Equipment Group, for 
example, manufactures large machinery, such as turbines for 
hydroelectric plants, after receiving rough casts from 
Qiqihar and Sichuan.  During our drop by, managers noted a 
marked decrease in incidental demand from Southeast Asia but 
said most of their products are procured as part of long- 
term capital projects that are less vulnerable to market 
fluctuations than other, lighter industries.  Harbin's 
wholly U.S.-owned Pepsi-Cola bottling operation documented 
continuing strong growth, particularly outside of Harbin. 
Pepsi is even launching new products in the non-carbonated 
beverage sector in anticipation of increased demand. 
 
¶8. (SBU) Sawmills and other lumber industries along the PRC- 
Russia border tell a different, gloomier story though their 
representatives maintained an outwardly rosy outlook during 
out visits.  Dongning's Huayu Wood is owned by a Sino-Korean 
and is the largest industrial operation in Heilongjiang's 
southeastern corner, sandwiched between Russia and Jilin 
Province's Yanbian Autonomous Korean Prefecture.  All the 
wood is imported from Russia, as are the (now-laid-off) 
Sichuanese carvers brought in to produce ornate heirloom 
furniture sets for the domestic market.  Domestic and 
Japanese demand for flooring from a sister plant owned by 
Huayu was also down and the shop totally idle even one month 
after the spring festival break.  This factory no longer 
exports to the United States or Europe because, unlike in 
Japan, margins are thin and there is no premium for the 
unblemished hardwood produced by Huayu.  Suifenhe's brand 
new Daya Wood sawmill is one of the five largest in China 
and produced its first sheet of particleboard in December 
¶2008.  Plant management evinced no worries about the 
slowdown, but even in this start-up phase with German and 
Swedish engineers breaking in the equipment, operations were 
far from robust.  Suifenhe officials privately noted that 
much less wood comes in from Russia, the result of Russian 
authorities imposing higher tariffs and the lack of 
international demand. 
 
¶9. (SBU) Mudanjiang is home to a unique experiment, Celluon, 
a Chinese-Korean joint venture utilizing Silicon Valley 
technology to manufacture Bluetooth-capable, laser- 
propelled, projection keyboards for smart phones.  A U.S. 
company, Canesta, sold the key patents for this seven-year 
old technology, partly in return for a 6-percent share in 
the majority Chinese-owned parent.  Uniquely headquartered 
in Mudanjiang, the company is the brainchild of a Korean- 
American who used to work for Samsung and a well-connected 
native Mudanjiang Sino-Korean businessman, ostensibly to 
utilize low-cost (RMB 1,000-2,000 per month) Mudanjiang 
labor to assemble these sophisticated devices that are just 
hitting the markets.  Celluon hopes someday to design its 
"keyboard" into such products as Samsung's just-released 
projector smart phone, which uses any flat surface as a 
"monitor."  Although not 100-percent certain about the 
prospects for their technology - which aims to bridge the 
medium-term gap between current smart-phone demand and long- 
term solutions, such as voice-recognition software - company 
officials say the advantages of production in Mudanjiang 
made their operation worthwhile, even against the backdrop 
of the economic slowdown.  Celluon also has offices in 
Beijing and Seoul to carry out patent law, R&D, and 
marketing responsibilities. 
 
FORWARD LOOKING - CAPITAL PROJECTS AND THE GOLDEN CORRIDOR 
--------------------------------------------- ------------- 
¶10. (SBU) Heilongjiang will take advantage of the central 
government's stimulus package by throwing some quick money 
at easy-to-realize transportation projects.  PS Ji described 
an initiative to spend RMB 10 billion in three years on 
additional freeways.  RMB 3 billion will be spent to build 
six airports over the next three years, completing airports 
in Daqing, Yichun, and Jixi by the end of this year alone. 
Further north along the Amur River, airports at Fuyuan, 
Jiagedaqi, and Wudalianchi are expected to come online by 
¶2012.  Heilongjiang has also received approval from China 
Railways to spend another RMB 3 million on an electrified, 
interurban railway network spanning out from Harbin. 
 
¶11. (SBU) Mudanjiang has even grander plans that involve 
Russian and Korean regional transportation cooperation. 
Perhaps emboldened by long-running delays in the Tumen River 
Area Development Program (Ref A) or the more recent Tumen- 
Tumangang-Khasan accords (Ref B), PS Xu spoke 
enthusiastically about a "Golden Corridor" that bypasses 
decrepit North Korean railways and inadequate Russian port 
facilities further south by connecting Mudanjiang and the 
world-class deepwater port Nakhodka.  Mudanjiang's only 
current port, Dalian, is located over 1700 kilometers away, 
while a link through Suifenhe to Nakhodka is only 330 
kilometers away.  PS Xu said he had just met with officials 
from the Busan Port Authority (BPA) who plan to invest USD 
100 million to improve container-handling capabilities at 
Nakhodka; Mudanjiang need not contribute anything. 
 
¶12. (C) (NOTE: PS Xu spoke openly about the fact that the 
Russians would not accept a Chinese company to build the 
port and that a Korean cut-out was needed to accomplish this 
project.  He also spoke critically about the Chinese way of 
conducting business, tersely joking that the Chinese "do 
many things that we do not need to do.") 
 
¶13. (C) Things seem to be moving quickly on this project as 
representatives from BPA, Russian Railways, and the Russian 
Far Eastern Transportation Group met with the Mudanjiang 
leadership in November 2008 to discuss the construction of 
an inland container depot (ICD) at Suifenhe in support of 
the Golden Corridor.  They met again earlier this month to 
sign a deal that plans to break ground in May 2009.  With 
the Suifenhe ICD and improved facilities at Nakhodka, BPA 
expects to process an additional 600,000 TEUs (twenty-foot 
equivalent units) annually.  The only catch is whether the 
Russians will ultimately deliver sufficiently reasonable 
transportation tariffs that would justify the link. 
Mudanjiang and BPA have already agreed upon a cost structure 
for overland transport to Nakhodka and marine transport from 
Nakhodka to Busan, but the Russians have yet to come up with 
a concrete commitment.  PS Xu admits that Russian 
intransigence could eventually make the entire project 
unviable - similar to the fate of the languishing Suifenhe 
duty-free, cross-border trade zone (Ref C).  There, the 
Chinese side is complete but the Russians seem to have no 
desire to move forward. 
 
COMMENT 
------- 
¶14. (SBU) Despite protestations that the structure of the 
economy has largely insulated its people from the economic 
turbulence further south, there are some mixed signs. 
According to the ranking of all China's regions, as sampled 
by the State Statistical Bureau, during the first three 
quarters of 2008, Heilongjiang was next to last in terms of 
average wages and benefits paid to urban workers at state- 
owned enterprises and collectives (some USD 2800 and USD 
1600 per year, respectively.)  However, wages and benefits 
at private and foreign-invested enterprises (about USD 3200 
per year) were above the median for all regions, and real 
rates of growth were above the national average for all 
three categories.  Per capita cash income for farming 
households ranked seventh in the nation, just ahead of 
neighboring Jilin Province, but net of expenditures, the 
cash balances were negative for both provinces (some 6-7 
percent of income.)  Our interlocutors sighed, moreover, 
when they related that Heilongjiang overbuilt its power- 
generation needs by some 40 percent without any way to 
export this oversupply.  This statistic alone may keenly 
demonstrate how isolated Heilongjiang is from the rest of 
the country and how much scope there is for development. 
END COMMENT. 
 
WICKMAN