VZCZCXRO8560
RR RUEHCN RUEHGH
DE RUEHGH #0119/01 0721011
ZNR UUUUU ZZH
R 131011Z MAR 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7724
INFO RUEHBJ/AMEMBASSY BEIJING 2598
RUEHCN/AMCONSUL CHENGDU 1818
RUEHGZ/AMCONSUL GUANGZHOU 0274
RUEHHK/AMCONSUL HONG KONG 1985
RUEHML/AMEMBASSY MANILA 0052
RUEHGH/AMCONSUL SHANGHAI 8359
RUEHSH/AMCONSUL SHENYANG 1809
RUEHGP/AMEMBASSY SINGAPORE 0233
RUEHIN/AIT TAIPEI 1606
RUEHKO/AMEMBASSY TOKYO 0579
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC 0242

UNCLAS SECTION 01 OF 05 SHANGHAI 000119 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, DAS DAVIES 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP 
TREASURY FOR IMFP -- SOBEL/CUSHMAN 
USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA 
NSC FOR LOI 
STATE PASS CEA FOR BLOCK 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
STATE PASS CFTC FOR OIA/GORLICK 
 
E.O. 12958: N/A 
TAGS: CH ECON EFIN PGOV PREL
SUBJECT: (SBU) SHANGHAI FINANCIAL SECTOR SEES CHINESE INVESTMENT AS 
KEY TO RECOVERY 
 
¶1.  (SBU) Summary.  China 's stimulus program emphasizes capital 
investment, particularly in railways, subways, roads, and 
airports, say a variety of Shanghai financial sector 
professionals.  Shanghai has been quick to seek support for 
previously rejected World Expo and other projects.  At the same 
time, our interlocutors suggested that some thought is being 
given to spreading investment to inland and rural China.  Bank 
lending will be key to the stimulus, suggested several bankers. 
However, the People's Bank of China (PBOC) is also concerned 
that excessive credit growth could lead to  inflation.  The 
United States was blamed for the financial crisis, and potential 
trade protectionism was cited as an aggravating factor.  U.S. 
banks may emerge from the crisis to find the China market less 
welcoming.  End summary. 
 
¶2.  (U) This is the first of two reports based on Beijing 
Finatt's February 19-20 meetings in Shanghai. This first report 
covers macroeconomic issues, and the second covers financial 
service sector trends. 
 
============================ 
Stimulus Package Focuses on Capital Investment 
============================ 
 
¶3.  (SBU) China 's stimulus program needs to emphasize 
investment, since only investment can make up for falling 
exports, Lian Ping, chief economist of Shanghai-based Bank of 
Communications, one of China's top five banks, told the Finatt 
delegation.  Of the "three horses" that power the Chinese 
economic "cart" (san1 ma2 che1), said Lian, exports are falling, 
consumption is maintaining its share, and therefore investment 
must make up the difference.  Lian explained that this is the 
same approach used with success during the Asian Financial 
Crisis.  Ding Guorong, chairman of Shenyin & Wanguo Securities, 
one of China's largest securities firms, said that in his 
optimistic scenario, the stimulus program will bolster the 
Chinese economy for 12 months, until exports rebound again in 
¶2010. 
 
¶4.  (SBU) Our interlocutors agreed that the stimulus targets 
railways, subways, roads, and airports--which they explained 
have the greatest potential for bolstering economic growth. 
Steve Lee, CEO of HSBC Jintrust Fund Management Co., said that 
medical infrastructure was also among the focal points of the 
stimulus plan.  As for particular sectors, Lian Ping and Ding 
Guorong specifically pointed to the Central Government's 10 
industry support plans as having an impact--Ding exclaimed that 
these plans had far exceeded the financial sector's 
expectations. 
 
¶5.  (SBU) Lian said that the RMB 4 trillion (approximately 
US$586 billion) stimulus is already having an impact.  Ding 
similarly predicted that China's market has reached bottom, and 
the economy will see quarter-on-quarter rises for the next three 
to four quarters.  At the same time, Lian said that the Central 
Government's contribution to the stimulus--RMB 1.18 trillion 
(approximately US$173 billion) over two years, or equivalent to 
only around 3 percent of GDP per year--does not surpass 
international norms; the full stimulus will be filled out by 
matching funding from local governments, local banks, and 
private investment.  Lian agreed that, contrary to the views of 
some government officials, China could easily allow budget 
deficits above 3 percent of GDP, and even as high as 5 percent 
without raising concerns about their sustainability or China's 
creditworthiness. 
 
============================ 
New Policies May Benefit Interior Cities 
============================ 
 
 ¶6.  (SBU) Some of the investment may be directed to central and 
 
SHANGHAI 00000119  002 OF 005 
 
 
western China through innovative policies, explained Shanghai 
Financial Services Office Director General Fang Xinghai.  For 
instance, Beijing is considering moving the headquarters of 
Chinese corporations to interior cities, since in theory these 
companies do not need to be based in the capital.  Sinopec, 
China's leading petrochemical firm, could be headquartered in 
the Anhui provincial capital, Hefei.  There are good prospects 
for domestic-led growth in Hefei, said Fang, with the urban area 
having doubled in recent years, but this was built on migrant 
worker remittances, which now may fall off. 
 
============================ 
Shanghai Quick To Seek Support for New Investment 
============================ 
 
¶7.  (SBU) Given the emphasis on investment in the stimulus 
program, the Shanghai Municipal Government has been delighted to 
find that many major projects put on hold by the Central 
Government in 2007 have now been approved, said John Tan, a 
Shanghai-based managing director of Standard Chartered Bank. 
For instance, Shanghai has received the go-ahead for several 
previously rejected World Expo projects, as well as the Disney 
theme park, said Tan.  In fact, Shanghai officials have called 
Standard Chartered to ask for project proposals, said Tan, and 
Fang Xinghai has asked Standard Chartered for a letter on viable 
projects that he can use in talks with Beijing 
 
============================ 
Boosting Consumption Will Take Longer 
============================ 
 
¶8.  (SBU) The contribution of domestic consumption to GDP is 
very hard to change, admitted BoCom's Lian.  The national plan 
to promote purchase of household electrical appliances in the 
countryside is one example of a program that could have an 
impact, said Lian.  Luo Yang, PBOC Shanghai Head Office 
International Department Director General, acknowledged U.S. 
concerns that China increase domestic demand, and said that 
"China understands this responsibility."  Wang Kaiguo, Chairman 
of Haitong Securities, also one of China's largest securities 
firms by several measures, offered a broad endorsement of the 
government doing more to help China's 800 million farmers who do 
not have enough medical care, roads, and other infrastructure. 
 
============================ 
Relying on Banks for Policy Support . . . 
============================ 
 
¶9.  (SBU) Several interlocutors emphasized that China's banks 
would support the government's economic turnaround policies, 
including BoCom's Lian and Raymond Yin, executive director of 
Beijing Gao Hua Securities Company, a joint venture with Goldman 
Sachs.  Lian said that banks are healthy, with high capital 
adequacy ratios and low non-performing loans (NPLs), and thus 
are able to support both fiscal and monetary policy easing. 
Compared with the time of the Asian Financial Crisis, said Lian, 
the banks are better prepared.  Yin commented that banks have an 
obligation to lend as a way of giving something back to society 
after years of high profits.  (Comment:  PBOC officials have 
expressed similar sentiments.  End comment.) 
 
¶10.  (SBU) As a result, said Gao Hua's Yin, banks will probably 
face higher levels of non-performing loans in the future--and 
regulators are prepared to accept this.  For instance, PBOC 
officials have told Yin that the China Bank Regulatory 
Commission is privately saying that it is acceptable to have a 
rising level of NPLs, as long as a bank's NPL ratio 
declines--this can be achieved simply by raising the overall 
level of lending.  If later a slack economy causes NPLs to 
spike, said Yin, the CBRC has promised not to blame the banks. 
 
 
SHANGHAI 00000119  003 OF 005 
 
 
¶11.  (SBU) Banks are also contributing to the macroeconomic 
stimulus by acquiescing to lower interest rate spreads, even 
though this also puts their bottom line at risk, said Gao Hua's 
Yin.  PBOC's Luo said that banks, despite excess liquidity, are 
still keeping the interest rate on deposits at the maximum 
ceiling allowed because they assume that customers will quickly 
switch banks if the interest rates are lowered.  Banks also want 
to keep their level of deposits steady to maintain market share 
in advance of the eventual economic recovery.  In addition, Luo 
explained, banks are helping keep the entire financial market 
stable by competing in terms of service quality, not through 
interest rates.  In the early 1990s, banks offered high deposit 
rates to compete for customers, and the result was large losses, 
said Luo. 
 
============================ 
. . . But Keeping Watch on Monetary Expansion 
============================ 
 
¶12.  (SBU) Bank lending appeared to be too high in January, said 
PBOC Shanghai Head Office Statistics and Research Department 
Deputy Director General Liu Mingzhi.  However, said Luo, the 
PBOC cannot issue orders to the banks to rein in lending, and 
instead has released some public notices indicating concern. 
Over the next two months or so, the PBOC will collect and 
analyze banking sector data, said Luo, and some new policies may 
result.  In particular, said Luo, the PBOC is tracking 
discounted bill lending--if this lending subsides, lending could 
go forward on a more stable basis.  (Comment:  The rise in 
discounted bill lending appears to be due to interest rate 
arbitrage.  Companies can borrow through discounted bills and 
earn a higher interest rate in corporate CDs.  Some corporate 
borrowers also appear to be using low interest rates on 
discounted bills to speculate in the stock market, accounting 
for its recent rise.  Due to the sharp fall in interbank rates 
and interest paid on excess reserve, discounted bills offer 
banks the highest return for parking funds short-term.  End 
comment.) 
 
¶13.  (SBU) Our interlocutors agreed that monetary authorities 
should remain vigilant to avoid an upsurge in inflation.  PBOC's 
Luo said this is a major future concern, but that inflation does 
not look very serious for now.  Nonetheless, the PBOC has 
carried out some open market operations in recent days to absorb 
liquidity.  This is a signal to the market that the PBOC does 
not want to see another credit fueled boom and bust cycle. 
BoCom's Lian Ping separately agreed, saying that the government 
for now is saying it wants to "stabilize" the monetary base, not 
"tighten" it.  Lian summarized a variety of factors that could 
eventually lead to inflation:  interest rates have dropped, 
required reserves have been lowered, PBOC bill issuance has been 
decreased, and the national credit quota has been eliminated. 
Lian commented that inflation has always resulted from 
overlending, especially in an environment of international 
inflation induced by substantial monetary easing. 
 
¶14.  (SBU) An additional concern brought by the monetary 
expansion is whether freed-up liquidity is flowing toward 
speculative investments, said BoCom's Lian.  There are some 
signs that the extra liquidity is funding the run up in values 
of stocks, postage stamps, and gold and silver coins.  Real 
estate has not been affected, said Lian, although real estate 
values are still rising to some extent.  Nonetheless, concluded 
Lian, most of the liquidity is going to three areas:  1) large 
government projects, 2) less cyclical businesses, and 3) 
short-term funding needs--the latter explaining the rise in 
discounted bill lending. 
 
¶15.  (SBU) Gao Hua's Yin provided an insight into a possible 
policymaker perspective on the flood of liquidity into the 
market.  He said that one of Gao Hua's advisers, Beijing 
 
SHANGHAI 00000119  004 OF 005 
 
 
University professor Song Guoqing, is highly optimistic that the 
surge in the monetary base could bring 9 percent growth by the 
end of 2009.  Yin said that Song's views may not be mainstream, 
but they represent the "pure monetary school" of economic 
policymaking. 
 
============================ 
Many Blame the United States for the Global Financial Crisis 
============================ 
 
¶16.  (SBU) Several interlocutors emphasized that the United 
States was the source of the current financial crisis.  Shenyin 
& Wanguo's Ding put it most starkly, calling it "the collapse of 
the U.S. 'fairy tale.'"  Shanghai financial official Fang said 
that the global financial crisis is a result of the "profligacy 
of U.S. consumers," which in turn has "destroyed confidence in 
the U.S. dollar."  Haitong's Wang said that he "used to think 
that the United States has the best technology and military, but 
not since the financial crisis started." 
 
¶17.  (SBU) But our interlocutors also held out hope that the 
resolution to the crisis would emanate from the United States. 
Fang speculated that the years ahead will be a difficult time 
for trade and investment, with "no anchor" for the global 
currency system; however, eventually the U.S. dollar will be 
reestabilished as the primary, but not sole, global currency. 
Other interlocutors offered more general comments, calling the 
recovery of the United States essential to world recovery 
(Haitong's Wang), and saying that what the United States does 
next in the crisis is very important, because the two sides have 
closer and closer ties (PBOC's Luo).  Several interlocutors 
noted concerns that the United States is entering into even 
greater financial turmoil from a consumer finance induced 
"second wave" of the crisis. (Comment:  Concern about the United 
States entering a "second wave" of the crisis has become 
increasingly prevalent in Chinese media.  End comment.) 
 
============================ 
Concerns Over Possible U.S. Protectionism 
============================ 
 
¶18.  (SBU) Several interlocutors raised concerns about the "Buy 
American" clauses in the U.S. economic stimulus program.  The 
PBOC's Luo said that the United States is right to want to avoid 
the mistakes of the 1930s--since the United States made that 
mistake then.  Protectionism could undermine future economic 
growth, said Shenyin & Wanguo's Ding, and " if there really are 
buy local provisions, this will be bad for China." 
 
¶19.  (SBU) At the same time, some interlocutors offered a more 
nuanced understanding of the political backdrop in the United 
States.  The PBOC's Luo said he noticed that Treasury Secretary 
Geithner was careful to qualify his statement concerning Chinese 
currency manipulation by saying he was quoting President Obama. 
Luo also said he understood that this statement was being made 
to Congress, implying that he knew it was said for political 
purposes.  Gao Hua's Yin said that there was shock when 
then-Treasury Secretary Paulson was reported as blaming China 
for the global financial crisis, but that this calmed down with 
Paulson's subsequent correction.  "We do understand American 
politics, that even Obama has to be a politician," said Yin. 
 
¶20.  (SBU) Haitong Chairman Wang admitted that he thinks of the 
United States as a good place to invest, especially now when 
valuations are so low.  However, his concern is whether or not 
Haitong could hold onto senior managers following an 
acquisition, given Chinese banks' lack of knowledge of U.S. 
culture and laws.  Shenyin & Wanguo Chairman Ding also affirmed 
that, even though Chinese securities markets are performing 
relatively well, his company is interested in greater 
cooperation with U.S. firms. 
 
SHANGHAI 00000119  005 OF 005 
 
 
 
============================ 
U.S. Banks May Find Doors Harder To Open 
============================ 
 
¶21.  (SBU) Citi China CEO Andrew Au noted that Citi is 
increasingly viewed as "part of the U.S. Government," which may 
make Chinese clients want to hold back on revealing information 
to Citi.  Au also said that "the gap is widening" in terms of 
branch approvals for Citi vs. HSBC and Standard Chartered: over 
the past four years, Citi has had three branch approvals, while 
the others have had ten each.  Citi's last branch approval was 
for Dalian, in December 2007; Citi's current Chongqing branch 
application and others are still under review by the PBOC.  In 
effect, said Au, where there used to be a 50/50 split in branch 
approvals for European and U.S. banks, there is now closer to a 
70/30 split in Europe's favor. 
 
¶22.  (SBU) Haitong's Wang offered a different comparison of U.S. 
and European banks.  Wang said Chinese banks have been generally 
unsuccessful in opening branches in the United States, despite 
more than ten years of trying, while China itself is open.  In 
addition, the first phrase U.S. securities firms use in 
negotiations with potential partners is "I'm going to eat you 
up," said Wang--the U.S. side demands a 49 percent share the 
first year, a 51 percent share the second, and 100 percent 
ownership the third.  Singaporean and European banks, on the 
other hand, are less aggressive, willing to hold minority 
shares, and seek to start small and grow. 
 
============================ 
Comment 
============================ 
 
¶23.  (SBU) Many of these February 19-20 Shanghai interlocutors 
reflected expectations that China's economic stimulus plan would 
be effective in reviving China's economy in advance of an 
anticipated 2010 rebound in global trade, but Gao Hua's Yin hit 
a more cautionary note.  There are signs that things are getting 
better in the first two weeks of January, said Yin, but that is 
primarily because of government-supplied liquidity, and final 
demand is not rising.  Some factories are back up and 
running--for instance, in steel there has been some 
restocking--but overall electricity demand has not rebounded. 
On the export side, said Yin, following the Lunar New Year 
multinationals have found no new orders.  For instance, CIMC, 
the world's largest container maker, has had no orders since 
November, said Yin.  Domestic Chinese demand appeared to have an 
uptick during Lunar New Year, but there was also heavy price 
discounting, said Yin; consumers are scaling back, taking a 
domestic trip rather than an international one. 
 
¶24. (SBU) The surge in bank lending appears to have taken 
monetary officials by surprise and raised concerns that this 
will generate another credit boom and bust.  As a result, it is 
likely that they will be more reluctant in the near term to ease 
monetary conditions further, despite the rise in deflation. 
 
¶25.  (U) Beijing Financial Attache David Loevinger has cleared 
on this cable. 
CAMP