VZCZCXRO1748
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0585/01 0650922
ZNR UUUUU ZZH
P 060922Z MAR 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 2725
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RULSDMK/DEPT OF TRANSPORTATION WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 BEIJING 000585 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, READE, 
VENKATARAMAN, KEMP, MILLER, MALMROSE 
DOC FOR MELCHER, SAUNDERS; LORENTZEN AND SHOWERS (5130); HEIZNEN 
(6510) 
 
E.O. 12958:  N/A 
TAGS: EIND ECON EAIR ELTN EWWT CH
SUBJECT: INDUSTRY SUPPORT PLANS - CHINA ADDS LOGISTICS, DROPS REAL 
ESTATE 
 
REF: (A) Beijing 151; (B) Beijing 326; (C) Beijing 425; (D) Beijing 
443; (E) Beijing 515 
 
This cable is Sensitive but Unclassified (SBU) and for official use 
only.  Not for transmission outside USG channels.  Not for internet 
distribution. 
 
¶1. (SBU) SUMMARY.  China's State Council announced on February 25 
that the tenth and final industry support plan would focus on 
logistics, not real estate and construction.  This is the only plan 
targeting the service sector, and seeks to reform a severely 
fragmented and inefficient industry.  Observers note that economic 
planners may save real estate measures for later, should economic 
conditions worsen.  China also announced an ambitious USD 14.7 
billion innovation fund to span a range of industries, and promised 
greater transparency on stimulus spending and industry plans through 
the National Development and Reform Commission (NDRC).  END 
SUMMARY. 
 
STIMULATE CONSUMPTION, CREATE EMPLOYMENT 
---------------------------------------- 
 
¶2. (U) On February 25, the State Council approved the final industry 
support plans for logistics and non-ferrous metals.  The 
announcement confirmed a week of press speculation that logistics 
would replace real estate and construction as the final beneficiary 
of government support under the industry support program.  The State 
Council stated the choice of the logistics industry was based on its 
"significant impact on employment, promoting domestic production and 
stimulating consumption."  NOTE:  This the tenth of ten industrial 
support plans announced since January 14.  Post has reported on 
plans for steel, autos, textiles, machinery, shipbuilding and 
information technology (reftels).  Reporting is forthcoming on 
petro-chemicals, non-ferrous metals, and light industry. END NOTE. 
 
¶3. (U) According to the State Council announcement, the logistics 
industry support plan will seek to: 
(1) expand logistics market demand by linking it to the development 
of China's industrial and commercial sectors; 
(2) raise the industry's level of service quality; 
(3) accelerate industry consolidation; 
(4) promote logistics development in key industries, such as energy, 
minerals, and autos; and 
(5) strengthen core logistics infrastructure, including industry 
standardization and broader application of information technology. 
 
¶4. (SBU) The plan identified key areas for projects, including 
multimodal transport and transshipment facilities, logistics 
industrial parks, and emergency logistics.  However, no specific 
projects were named nor funding announced.  The announcement called 
on local and central government departments to strengthen 
cooperation, to improve laws and regulations and to invest in 
training programs which support the development of the industry. 
Compared to other announcements, the logistics plan had noticeably 
few concrete details. 
 
CHINA'S LOGISTICS STRATEGY 
-------------------------- 
 
¶5. (SBU) China's industrial support plans to date have focused on 
core manufacturing industries, many with internationally active 
firms, which have suffered from the fall in external demand 
(shipbuilding, steel, textiles, machinery, etc.).  These industries 
were engines of growth, growing faster than GDP.  Logistics is the 
only service industry to receive support, and is not an area where 
China has been particularly competitive.  There is no shortage of 
third-party logistics (3PL) providers -- over 18,000 by some counts 
-- but they tend to be locally focused and there are practically no 
nationwide networks.  Service quality is notoriously poor, and can 
cost two to three times as much as in the U.S.  Large Chinese 
companies must still operate their own logistics departments, and 
3PLs have captured only 20 percent of the domestic market. 
Logistics industry growth has plodded along at roughly the same pace 
as GDP.  Thus, the choice of the logistics industry does indeed 
appear to be a strategic one, aimed at building a stronger 
foundation for domestic rather than export-led growth and aimed at 
creating new employment opportunities. 
 
REAL ESTATE AND CONSTRUCTION NOT FORGOTTEN 
------------------------------------------ 
 
¶6. (SBU) There has been media speculation about why logistics 
replaced a real estate and construction in the support program. 
 
BEIJING 00000585  002 OF 002 
 
 
Both industries appear to support employment and domestic 
consumption, and given the backward state of China's logistics 
industry, a stimulus to the real estate sector would likely impact 
the real economy sooner.  In a March 3 Bloomberg interview 
Dragonomics Managing Director Arthur Kroeber suggested Chinese 
economic planners would likely continue to consider measures to 
stimulate the real estate sector, but wait to implement them if and 
when the economic crisis becomes be more protracted. 
 
NEW INNOVATION FUND TO SPAN INDUSTRIES 
-------------------------------------- 
 
¶7. (SBU) The same State Council meeting approved a RMB 100 billion 
(USD 14.7 billion) fund from central and local government budgets to 
promote indigenous innovation over the next two years.  Nearly all 
ten industrial support plans have included some effort to raise the 
level of industrial innovation, and help industries raise their 
technical competence.  U.S. business representatives in China have 
expressed concern that such funding could be used to mask government 
subsidies for research and development, but admitted it is still too 
early to tell.  (NOTE. On February 26 the South China Morning Post 
had incorrectly reported that this fund would be allocated directly 
to the logistics and non-ferrous metal industries. END NOTE.) 
 
GOVERNMENT PROMISES GREATER TRANSPARENCY 
---------------------------------------- 
 
¶8. (SBU) The National Reform and Development Commission (NDRC) 
responded to local calls for greater transparency of China's overall 
stimulus spending and the industry support plans.  On March 1, NDRC 
Vice-Minister Mu Hong announced that details will hereafter be 
posted to NDRC's website (www.ndrc.gov.cn).  NDRC has promised that 
specifics on the industry support plans will be posted in mid-March, 
toward the closing of the National People's Congress. 
 
¶9. (SBU) COMMENT.  With little content made public, the significance 
of the announcement is more in the choice of the logistics industry 
rather than the measures to support it.  Unlike manufacturing, 
however, simple technology investments will not be enough to raise 
quality in the service sector.  China's service industries are most 
competitive where there is active foreign participation, which tends 
to raise the bar for domestic competitors.  Per Arthur Kroeber's 
comment above, it is quite possible China's policy makers are 
keeping real estate and construction measures as 'the ace in their 
pocket' should the downturn get worse.  While we welcome the news of 
greater transparency, we are not holding our breath that the NDRC 
website will suddenly illuminate China's murky stimulus spending. 
END COMMENT. 
 
PICCUTA