VZCZCXRO9101
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0777/01 0840851
ZNR UUUUU ZZH
P 250851Z MAR 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 3061
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEHUL/AMEMBASSY SEOUL 1135

UNCLAS SECTION 01 OF 02 BEIJING 000777 
 
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: ECON EWWT EIND ETRD CH KS
 
SUBJECT:  Shandong's Economy Hit by Economic Slowdown but Still 
Plodding Along 
This cable is Sensitive But Unclassified (SBU) and for official use 
only.  Not for transmission outside USG channels. 
 
¶1. (SBU) Summary:  Shandong Province, China's second largest in 
terms of GDP and population, has witnessed a significant drop in 
trade and foreign investment during the first two months of 2009, 
according to contacts in Jinan and Qingdao who recently met with 
EconOff.  However, contacts asserted that the province has weathered 
the global economic slowdown better than China's other coastal 
provinces because Shandong is home to many favored state-owned 
firms.  Declining trade has slowed growth in cargo volume at the 
Qingdao port but has not forced lay-offs or affected expansion 
plans.   Many smaller Korean enterprises have been particularly hard 
hit and have left Shandong, although one contact downplayed the 
impact of their departure on the overall economy.  End Summary. 
 
¶2. (SBU) EconOff visited Shandong's provincial capital of Jinan and 
coastal city of Qingdao February 25-27 under the framework of the 
Embassy's Virtual Presence Post (VPP) program.  EconOff met with 
Director of the Chinese Academy of Social Sciences (CASS) Shandong 
Economic Research Institute Zhang Weiguo, Director of the America 
and Oceania Division of the Shandong Foreign Trade and Economic 
Cooperation Department Fang Xiaojie, Vice Director of the Qingdao 
Port General Office Han Baolin, and Republic of Korea (ROK) 
Consulate official Lee Xiangzhen. 
 
Sharp Decline in Trade and Investment 
------------------------------------- 
¶3. (SBU) Trade and investment in Shandong have both suffered from 
the global economic slowdown, according to Shandong Foreign Trade 
and Economic Cooperation Department Director Fang Xiaojie.  In 2008, 
Shandong's total trade increased 29 percent, with exports rising 23 
percent and imports increasing 37 percent.  Shandong's trade volume 
started to decrease in November and December, a trend that continued 
in January 2009, when exports fell 10.1 percent, imports decreased 
44.7 percent and total trade declined 25.3 percent.  February was 
another difficult month, with a 25.3 percent decline in exports, 
12.1 percent drop in imports and 19.8 percent decrease in total 
trade.  Fang predicted further drops in trade in the coming months. 
As for investment, FDI in Shandong in 2008 increased 10.2 percent 
y-o-y to reach USD8.2 billion, with 65.7 percent invested in 
industries, 29.7 percent in the service sector and 4.7 percent in 
agriculture.  In January 2009, FDI was down 21.4 percent y-o-y to 
USD438 million. 
 
Shandong's Elephant Economy Weathers the Storm 
--------------------------------------------- - 
¶4. (SBU) In spite of declining trade and investment, the impact of 
the global financial crisis on Shandong Province has been relatively 
limited, CASS's Zhang Weiguo told EconOff February 25.  He 
attributed Shandong's relatively strong position to several factors. 
 First, Shandong's economy is not as export-oriented as the Southern 
coastal provinces of Guangdong, Zhejiang and Jiangsu.  Second, 
Shandong is characterized as an "elephant" economy, with many large 
state-owned enterprises (SOEs) that enjoy strong government support 
and are in a better position to withstand the crisis than private 
firms.  Industry makes up 58 percent of Shandong's GDP, while the 
service sector accounts for 33 percent and agriculture less than 10 
percent. 
 
Government Response: Rebates, Investment, New Trade 
--------------------------------------------- ------ 
¶5. (SBU) Zhang claimed the Shandong provincial government's 1.6 
trillion yuan stimulus package is providing a boost to industries 
affected by the economic slowdown.  The stimulus funds are being 
used for large-scale infrastructure projects including railway, port 
and airport construction as well as projects that promote rural 
development, industry restructuring, energy saving, emission 
reductions and environment protection.  Before the central 
government announced its 4 trillion yuan stimulus package, Shandong 
Province already had plans to build a new port, four east-west 
railways and four north-south railways.  According to Zhang, some of 
these large infrastructure projects will receive stimulus package 
funds from the central government. 
 
¶6. (SBU) Fang Xiaojie said the provincial government has responded 
to declining trade and investment by adopting a number of measures 
that aim to increase liquidity, expand domestic demand and promote 
trade.  Shandong has encouraged investment in alternative energy 
sources such as wind power, promoted the export of agricultural 
products and increased export rebates on certain products.   Fang 
will lead a delegation of more than 30 Shandong agricultural 
 
BEIJING 00000777  002 OF 002 
 
 
companies to Texas and Ohio later this month to seek trade partners. 
 He also noted that Shandong was hoping to develop new markets in 
developing economies in Africa. 
 
Qingdao Port:  Slower Growth but Continued Expansion 
--------------------------------------------- ------- 
¶7. (SBU) The global financial crisis has slowed growth in Qingdao's 
port cargo volume but has not led to layoffs or affected expansion 
plans, Qingdao Port Vice Director Han Baolin told EconOff.  The 
Qingdao container wharf was opened in 2004 with a total investment 
of USD887 million from three shipping companies - Chinese-owned 
COSCO, Danish-owned Maersk and British-owned P&O.  Port volume has 
grown steadily since that time but only increased 12 percent in 
2008, considerably less than the originally projected 18-20 percent 
increase.  January 2009 saw a 5 percent y-o-y increase in port 
volume.  (Note: A 5 percent increase over the previous January 
probably translates into a real contraction over the previous month. 
 End note.)  Han claimed that none of the 22,000 port employees had 
been laid off but acknowledged that some port companies had reduced 
workers' hours or adopted flexible working hours.  He said the 
economic slowdown had not affected their expansion plans, noting the 
ongoing construction of a new wharf with 10 berths and plans to 
build a new port with capacity of 300 million tons in the next three 
to five years.  The new port will handle iron ore, crude oil and 
bulk shipments. 
 
Korean Firms Are Leaving 
------------------------ 
¶8. (SBU) Many South Korean firms have gone bankrupt and left 
Shandong Province in the last year, according to Lee Xiangzhen, an 
official at the Republic of Korea Consulate in Qingdao.  Lee 
estimated that approximately 15 percent of Qingdao's sizable Korean 
population has left the province since the beginning of 2008. 
(Note: The South Korean Chamber of Commerce estimates that as many 
as 30 percent of the 100,000 Koreans have left, but Lee expressed 
doubt about this figure.  An American businessman in Qingdao told 
EconOff that enrollment has dropped 14 percent at one of Qingdao's 
largest international schools, where 75 percent of the student body 
was Korean.)  Those paid in Korean currency have been particularly 
hard hit by the significant devaluation of the Korean Won.  Some 
firms have abruptly left Shandong without paying their workers' 
salaries, creating a "big headache" for the Korean Consulate, which 
has faced angry complaints from local authorities.  In some cases, 
the local government has provided compensation to the laid-off 
workers.  CASS's Zhang said that most of the South Korean firms that 
left the province were small family firms whose departure did not 
significantly impact Shandong's overall economy. 
 
Comment: An Elephant Wearing Rose-Colored Glasses? 
--------------------------------------------- ---- 
¶9. (SBU) Shandong boasts some of China's largest state-owned 
enterprises, including the mammoth white-goods producer Haier.  Many 
of these SOEs expect to benefit from the Chinese government plans to 
spur domestic demand and allow industrial consolidation.  However, 
Shandong also faces some serious problems.  While less dependent on 
exports than some of its neighbors, much of Shandong's wealth and 
development has come from processing trade centered on Japanese and 
Korean investors.  This sector of the export market has been 
particularly hard hit by the global economic downturn and is not 
expected to recover quickly.  Further, as a major agricultural and 
petroleum producer, the collapse of international commodity prices 
has hit Shandong hard.  The government response is important, and in 
the near-term government infrastructure investment should start to 
replace local private production.  In the medium- to long-term 
Shandong's SOEs will almost certainly benefit from a gradually 
increasing reliance on domestic demand to drive the Chinese economy. 
 But Shandong, like the rest of China's coastal provinces, still 
faces several months of economic pain. 
PICCUTA