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FM AMCONSUL SHANGHAI
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INFO RUEHBJ/AMEMBASSY BEIJING 2795
RUEHCN/AMCONSUL CHENGDU 1983
RUEHGZ/AMCONSUL GUANGZHOU 0440
RUEHSH/AMCONSUL SHENYANG 1974
RUEHHK/AMCONSUL HONG KONG 2152
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RUEHUL/AMEMBASSY SEOUL 0448
RUEHKO/AMEMBASSY TOKYO 0654
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RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8596

UNCLAS SECTION 01 OF 05 SHANGHAI 000228 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, DAS NORRIS 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP 
TREASURY FOR IMFP -- SOBEL/CUSHMAN 
USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA 
NSC FOR LOI, SHRIER 
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: PGOV ECON EFIN SOCI CH
SUBJECT: CONSUMPTION COUPONS IN HANGZHOU: BOOSTING CONSUMPTION, OR 
JUST BOOSTING LOCAL GOVERNMENT FISCAL WOES? 
 
¶1.  (SBU) Summary: One of few cities in China to issue its own 
consumption coupons, Hangzhou has taken the lead in local 
government efforts to boost consumption.  The Hangzhou 
Government issued the first tranche of consumption coupons in 
mid-January 2009, followed by a second tranche in March 2009. 
The second tranche includes coupons for the purchase of daily 
goods, electronics, and household appliances as well as coupons 
for tourism sites and educational/training programs.  The 
coupons also include an 18 percent subsidy for the purchase of 
select Hangzhou-made electronics and household appliances. 
Local government officials are mixed in their assessment of the 
program's impact on local consumption, though they hope the 
program can serve as a model for other cities in China.  Our 
academic interlocutors are skeptical of the program's long-term 
benefits.  Implementation appears to be inconsistent, as each 
store can choose which products to include in the program. 
Fraud does not appear to be a serious concern so far.  The 
Hangzhou Party Secretary has taken an active interest in the 
program, according to an academic and media reports.  End 
summary. 
 
Background: First Tranche 
-------------------------- 
¶2.  (U) In an effort to boost local consumption in Hangzhou 
(population 7.9 million; the capital of Zhejiang Province), the 
Hangzhou Finance Bureau issued its first tranche of consumption 
coupons in mid-January 2009.  The coupons were given to retired, 
disabled, and low income residents as well as students for the 
purchase of groceries, household goods, electronics, and 
household appliances in 535 designated stores throughout 
Hangzhou.  The coupons could also be used at designated tourist 
sites and entertainment venues, such as theaters, restaurants, 
and health clubs.  Each qualifying resident was issued 200 RMB 
(USD 29) worth of coupons, which could be used between January 
15 and April 30, 2009.  The coupons came in 20 RMB (USD 2.90) 
denominations, with each coupon having an actual value of 5 
percent above the face value for the purchase of goods.  In 
other words, each 20 RMB coupon could actually purchase 21 RMB 
worth of goods.  The 5 percent additional benefit was borne by 
the retailer while the face value of the coupon was financed by 
the local government.  For designated Hangzhou-made electronics 
and household appliances, such as televisions, refrigerators, 
washing machines, and mobile phones, the coupons had an 18 
percent additional benefit, meaning that each 20 RMB coupon 
could purchase 23.6 RMB worth of goods.  Of the 18 percent 
benefit, 5 percent was borne by retailers and 13 percent by the 
local government.  For tourist sites and entertainment venues, 
the coupons had a 20 percent additional benefit, meaning each 20 
RMB coupon was worth 24 RMB, with half of the additional benefit 
financed by the local government.  There was a total of 220 
million RMB (USD 32.11 million) worth of coupons issued in the 
first tranche, 120 million RMB (USD 17.5 million) of which was 
financed by the city-wide Hangzhou Finance Bureau, 40 million 
RMB (USD 5.84 million) by the Yuhang district government (within 
Hangzhou), and 60 million RMB (USD 8.76 million) by the Xiaoshan 
district government (within Hangzhou).  According to Wu Wenxing, 
Vice Director of the Hangzhou Finance Bureau, of the 120 million 
RMB (USD 17.5 million) in coupons issued by the Hangzhou Finance 
Bureau, 108 million RMB (USD 15.77 million) had been used by the 
time we met with Wu in Hangzhou on May 7. (Note: Our Hangzhou 
interlocutors were not sure how many of the coupons issued by 
Yuhang and Xiaoshan districts had been used, but said "most" of 
the coupons had probably been used.  End note.) 
 
Second Tranche of Coupons 
-------------------------- 
¶3.  (U) The Hangzhou Finance Bureau issued a second tranche of 
consumption coupons in March 2009.  The second tranche was 
expanded in both scope and scale, with five different categories 
differentiated by recipient and use, as explained to us by 
 
SHANGHAI 00000228  002 OF 005 
 
 
officials from the Hangzhou Finance Bureau on May 7: 
 
--Government Consumption Coupon: The Hangzhou Finance Bureau 
financed 20 million RMB (USD 2.92 million) in coupons issued to 
retired, disabled, and low income residents as well as students. 
 For the purchase of groceries, household goods, electronics, 
and household appliances in 2300 designated stores throughout 
Hangzhou between March 20, 2009 and June 30, 2009.  The coupons 
can also be used at designated tourist sites and entertainment 
venues, including theaters, restaurants, and health clubs. 
Additional 5 percent, 18 percent, and 20 percent benefits are 
the same as those for the first tranche of coupons. 
 
--Social Consumption Coupon: 100 million RMB (USD 14.60 million) 
in coupons for individual purchase by any Hangzhou resident at 
Hangzhou banks.  For the purchase of groceries, household goods, 
electronics, and household appliances in 2300 designated stores 
throughout Hangzhou between March 20, 2009 and June 30, 2009. 
The coupons can also be used at designated tourist sites and 
entertainment venues, including theaters, restaurants, and 
health clubs.  Additional 5 percent, 18 percent, and 20 percent 
benefits are the same as those for the first tranche of coupons. 
 
--Transferable Consumption Coupon: The Hangzhou Finance Bureau 
provided a total of 480 million RMB (USD 70.07 million) in 
subsidies to local companies.  The companies can use these funds 
to pay for their employees' social security or to invest in new 
technology to upgrade production.  The Hangzhou Finance Bureau, 
however, has been "encouraging" companies to convert most of 
these funds into consumption coupons to be handed out to 
employees, said Shou Xuejun, Department Head of the Hangzhou 
Finance Bureau.  The coupons can then be used for the purchase 
of groceries, household goods, electronics, and household 
appliances in 2300 designated stores throughout Hangzhou between 
March 20, 2009 and June 30, 2009.  The coupons can also be used 
at designated tourist sites and entertainment venues, including 
theaters, restaurants, and health clubs.  Additional 5 percent, 
18 percent, and 20 percent benefits are the same as those for 
the first tranche of coupons. 
 
--Educational Training Consumption Coupon: A total of 150 
million RMB (USD 21.90 million) in coupons financed by the 
Hangzhou Finance Bureau.  The coupons are issued to students 
from poor families, new high school graduates, and unemployed 
persons for vocational and technical training.  The coupons can 
be used between April 1, 2009 and June 30, 2010. 
 
--Tourism Consumption Coupon: A total of 250 million RMB (USD 
36.50 million) in coupons issued by the Hangzhou Finance Bureau. 
 These coupons can be used by anyone between March 1, 2009 and 
May 31, 2009 at 823 designated locations in Hangzhou, including 
tourist sites, restaurants and hotels.  Though they are 
primarily targeted at non-Hangzhou residents, Hangzhou residents 
can also use them, according to Wang Xinzhang, Deputy Director 
of the Hangzhou Tourism Commission.  Non-Hangzhou residents can 
obtain these coupons online or at Hangzhou banks and tourism 
agencies in other cities, including Shanghai, and there is no 
limit to the number of coupons per person.  Each coupon has a 
face value of 10 RMB (USD 1.45), and one coupon can be used for 
every 40 RMB (USD 5.84) of consumption (i.e., every 40 RMB of 
consumption has a 25 percent subsidy, so one would only pay 30 
RMB out of pocket for a purchase worth 40 RMB).  (Note: Econoff 
and LES used a 10 RMB coupon to purchase 50 RMB worth of lattes 
at a Starbucks in Hangzhou, paying only 40 RMB out of pocket.  A 
nearby Haagen-Dazs said it would also accept the tourism 
consumption coupons.  A local businesswoman commented that the 
tourism coupons are "very convenient" since she can use them at 
many local restaurants.  End note.)  Of the 10 RMB subsidy, 5 
RMB is financed by the Hangzhou Finance Bureau and the other 5 
RMB by the vendor. 
 
SHANGHAI 00000228  003 OF 005 
 
 
 
Criteria For Joining Program 
----------------------------- 
¶4.  (SBU) According to Shou Xuejun, the 2300 stores that accept 
the Government, Social, and Transferable coupons have to fulfill 
certain requirements to be included in the program, such as 
having no criminal record and signing an agreement to observe 
the rules of the program.  Although these stores have to 
subsidize 5 percent of purchases, they feel it is worth it since 
it may attract more customers.  Regarding the tourism coupons, 
Wang Xinzhang did not mention specific criteria but said that 
most economy class hotels in Hangzhou do not want to participate 
since the coupons would cut into their already low profit 
margins.  Other vendors also do not want to join, said Wang, 
because of the paperwork they would need to file to get 5 RMB of 
every 10 RMB coupon reimbursed from the government.  (Comment: 
Based on our discussions and general observations, Econoff did 
not detect any bias in the selection of stores for the program. 
It appears both Chinese and foreign-invested stores are eligible 
to participate.  End comment.) 
 
Favoring Hangzhou-Made Products 
--------------------------------- 
¶5.  (SBU) In terms of the products included in the program, Shou 
said there are generally no restrictions and that most, if not 
all, groceries, household goods, and appliances can be purchased 
using the coupons at designated stores.  Certain Hangzhou-made 
products, however, receive favorable treatment in that the local 
government provides a 13 percent additional subsidy for the 
purchase of these products (the coupons will be valued at 18 
percent above their face value, with the local government paying 
13 percent and the retailer 5 percent, as opposed to only the 5 
percent benefit provided by the retailer for other non Hangzhou- 
made products).  Products in this category include Huaru 
refrigerators, Goldfish washing machines, Motorola mobile 
phones, and Panasonic washing machines.  These are all Chinese 
or foreign-invested enterprises manufacturing in Hangzhou, and 
there are now 7 or 8 brands included in the program (up from 4 
in the first tranche), according to Shou.  (Note: See paragraph 
9 for more on implementation of the program.  End note.) 
 
Murky Results, Many Skeptics 
----------------------------- 
¶6.  (SBU) Shou Xuejun of the Hangzhou Finance Bureau said the 
goals of the program are to boost local consumption, strengthen 
consumer confidence, and show the public that the government is 
taking action to stimulate the local economy.  Although the 
Hangzhou Finance Bureau's documents indicate that local 
consumption grew by 11.10 percent year-on-year in Q1 2009, Shou 
downplayed this figure and acknowledged that it is not clear 
what concrete impact the consumption coupons have had on the 
local economy.  He said there is "no target figure," and that it 
is "difficult to measure the effects."  Shou reminded us that 
the total 1 billion RMB (USD 146 million) in consumption coupons 
issued under the program is only a "small part" of the 160 
billion RMB (USD 23.36 billion) in total annual consumption in 
Hangzhou.  The main goal for now is to boost consumer 
confidence, Shou reiterated. 
 
¶7.  (SBU) Wang Xinzhang of the Hangzhou Tourism Commission said 
the tourism coupon's goals are to improve Hangzhou's 
competitiveness as a tourism destination and, by bringing in 
more tourists, boost local consumption.  He was upbeat about the 
program's impact, citing a recent Ctrip (a popular Chinese 
travel website) survey ranking Hangzhou as the top city for 
tourism in China (Hangzhou was previously ranked 4 or 5).  Wang 
said 82 percent of tourists in Hangzhou who used the tourism 
coupons said they visited Hangzhou because they received the 
coupons.  Although Wang could not quantify the economic impact 
of the program, including if and by how much the number of 
 
SHANGHAI 00000228  004 OF 005 
 
 
tourists had increased, he said that (as of our discussion on 
May 7) 684,000 RMB (USD 99,854) worth of tourism coupons had 
been used.  This is a small number, admitted Wang, adding that 
coupons used during the holidays in early May (when many Chinese 
travel) had not been counted yet. 
 
¶8.  (SBU) Academic interlocutors were skeptical of the impact of 
the consumption coupons.  Ding Jianping, Professor and Director 
of the Research Center for Modern Finance at Shanghai University 
of Finance and Economics, believes that the coupons will only 
have a short-term impact and will not boost consumption in the 
long-run.  Fan Xiaoping, Professor and Director of the EMBA 
Program at Zhejiang University who has been quoted in local 
media on the subject, told Econoff during a separate discussion 
on May 7 that it will take at least one or two years to analyze 
the impact of the program.  He said that most of the Government, 
Social, and Transferable coupons are being used to purchase 
daily necessities that people would buy anyway, so the coupons 
will not necessarily boost new consumption.  Though the 
headlines tout this as a 1 billion RMB (USD 146 million) 
program, Fan argued that much of the money being poured into the 
program is actually not new.  The funding for the Education and 
Transferable coupons, he said, were already part of the original 
government budget.  The Hangzhou Government provides education 
allowances and company subsidies every year, and it just 
repackaged these funds under the coupon program, he said.  Fan's 
other concern is that by issuing coupons that can be used like 
cash, the Hangzhou Finance Bureau is becoming a de-facto bank 
issuing its own currency and creating market distortions. 
Nevertheless, the consumption coupons are a good start, said 
Fan, but in the long-run, the government has to think about how 
to change the people's mindset about consumption.  "Chinese 
people have a lot of money in banks," said Fan, but they do not 
know how to spend it (aside from daily necessities) nor do they 
want to spend it given the economic downturn. 
 
 
Complex Rules, Inconsistent Implementation 
-------------------------------------------- 
¶9.  (SBU) The program's complexity and implementation appear to 
be another problem.  Econoff visited several stores in Hangzhou 
that have been designated to accept the coupons.  At Trustmart, 
a foreign-invested megastore chain selling everything from food 
and clothes to electronic products, the cashiers told Econoff 
that they accept the Government, Social, and Transferable 
consumption coupons with the additional 5 percent benefit for 
all products in the store.  They, however, were not familiar 
with the 18 percent benefit for Hangzhou-made products and 
referred us to a store manager.  The store manager told Econoff 
that the store carries Hangzhou-made appliances, like Huaru and 
Goldfish, and that he is aware of the 18 percent rule.  However, 
he said the store would not provide more than the 5 percent 
additional benefit since it is too "troublesome" ("mafan") to 
file the paperwork to get reimbursed the other 13 percent from 
the government.  At a nearby Gome, a domestic electronics and 
household appliance chain, the manager said the store would 
accept the Government, Social, and Transferable coupons for only 
limited products and provide the 18 percent additional benefit 
for Hangzhou-made Panasonic washing machines (but not all 
Hangzhou-made products).  They, however, would not even provide 
the 5 percent additional benefit for certain brands and 
products, such as Sony, Philips, Haier televisions, all mobile 
phones (including Motorola), and all computers.  The manager 
explained that profit margins on these products were too low. 
At the entrance to the Gome store was a large poster, listing 
several dozen products that would not receive the 5 percent or 
18 percent benefit with the coupons. 
 
Fraud Not a Serious Problem 
--------------------------- 
 
SHANGHAI 00000228  005.2 OF 005 
 
 
¶10.  (SBU) Wu Wenxing and Shou Xuejun of the Hangzhou Finance 
Bureau said that fraud has not been a serious problem so far. 
Because of the short duration of the coupon program, 
counterfeiters have not had a strong incentive to produce fake 
coupons.  However, some stores that have not been designated to 
take part in the program have recently started accepting the 
coupons.  The owners of these stores accept the coupons at face 
value without providing the additional 5 percent or 18 percent 
benefit, and then use the coupons themselves in designated 
stores that provide the additional benefits, according to Shou. 
He added, however, that there have only been few cases of such 
abuse in the program. 
 
Hangzhou A Model for Others? 
----------------------------- 
¶11.  (SBU) Shou Xuejun said very few cities in China have 
implemented similar consumption coupon programs.  He noted that 
Chengdu (capital of Sichuan Province) had issued 30 million RMB 
(USD 4.38 million) in consumption coupons in December 2008, with 
each member of poor households receiving 100 RMB (USD 14.60) in 
coupons.  Wang Xinzhang mentioned that Nanjing (capital of 
Jiangsu Province) recently issued tourism coupons worth 20 
million RMB (USD 2.92 million), but that these coupons were 
given to only Nanjing residents for use in rural districts of 
Nanjing.  Shou said that officials from Qingdao (Shandong 
Province) and Shaoxing (Zhejiang Province) had recently visited 
Hangzhou to learn more about the city's consumption coupon 
program, but he was not sure whether these cities had 
implemented any program.  Shou and Wu Wenxing expressed their 
hope that Hangzhou's program would serve as a model for other 
consumption-boosting programs throughout China.  (Note: These 
discussions took place before the Chinese Central Government 
announced a plan on May 19 to provide 5 billion RMB (USD 730 
million) and 2 billion RMB (USD 292 million) in subsidies for 
the replacement of cars and home appliances respectively, 
starting in select cities and provinces.  End note.) 
 
Comment 
-------- 
¶12.  (SBU) The Government and Transferable consumption coupons 
will not be continued beyond the second tranche, according to Wu 
and Shou, due to budgetary constraints.  Hangzhou officials have 
yet to decide whether to continue issuing the other category 
coupons beyond the current tranche, though ones like the Social 
consumption coupons, whose costs are borne mainly by consumers 
themselves, have a chance of being continued.  The officials 
instead are taking a wait and see approach.  As noted by our 
interlocutors, it is difficult to gauge the success or failure 
of this program.  The program does not appear to be 
significantly boosting sales of Hangzhou-made products, at 
least, as the local government has so far only paid out 1.2 
million RMB (USD 175,000) for the 13 percent subsidy on these 
products.  Like the scholars, the Hangzhou Finance Bureau 
officials themselves do not sound optimistic that the program 
would significantly boost local consumption.  Rather, it appears 
they were placed under political pressure from Hangzhou's Party 
Secretary, who took a strong personal interest in this issue, 
according to Zhejiang University Professor Fan Xiaoping and 
local media reports.SCHUCHAT