VZCZCXRO9343
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #1602/01 1662322
ZNR UUUUU ZZH
P 152322Z JUN 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 4517
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 BEIJING 001602 
 
SIPDIS 
SENSITIVE 
 
TREASURY FOR OASIA/DOHNER 
USDOC FOR 4420, 5130 and 6510 
STATE PASS USTR FOR STRATFORD 
 
E.O. 12958:  N/A 
TAGS: ECON ETRD EINV EIND EFIN EAGR ENRG EDEV SENV CH
 
SUBJECT:  China/Economic Plans: Continued Reform Endorsed 
 
REF: A) Beijing 592, B) Beijing 1571, C) Beijing 1556, D) Beijing 
39, E) Beijing 665 and previous, F) Beijing 693, Beijing 829, Hong 
Kong 421 G) Beijing 422, Beijing 359 
 
This cable is Sensitive but Unclassified (SBU) and 
for official use only.  Not for transmission outside 
USG channels. 
 
¶1. (SBU) SUMMARY.  Beijing's 2009 economic planning document, in 
contrast to last year's version and some of the trends evident in 
China's recent economic support and stimulus plans, endorses 
liberalization and economic transformation.  Financial reform 
continues. China's largest state-owned enterprises (SOEs)--and in 
particular the giant services monopolies--are singled out for 
increased private investment and competition, while financial and 
logistical support is offered to smaller private companies.  The 
document calls for further progress in ending energy price 
manipulation that encourages energy inefficiency, as well as 
provision of social services and SOE profit-sharing to spur 
domestic consumption.  The plan shows little support for exports, 
although outward bound investment is encouraged.  The plan settles 
for merely re-stating past commitments on rural reform and 
backtracks slightly in the area of exchange rate flexibility; with 
millions of migrants returning home to their land and falling 
exports, there seems to be little appetite for major new steps in 
these areas.  China's current economic support policies certainly 
emphasize industrial and infrastructure investment and 
consolidation; the State Council, however, has indicated in this 
annual planning document that (at least in theory) China's future 
lies with increased marketization and liberalization.  END SUMMARY. 
 
 
¶2. (SBU) China has released its 2009 economic plan, the "Opinions 
Regarding the Work on Deepening Systemic Economic Reforms in 2009." 
 
The annual plan, issued by China's State Council and coordinated 
by the National Development and Reform Commission (NDRC), is 
designed to set the overall economic direction for the coming year. 
 
In all, it lays out more than seventy specific policy tasks, and 
for each one names the ministry (or ministries) responsible for 
implementation.  NDRC is tasked with providing overall interagency 
coordination and reporting to the State Council on progress. The 
full translated text of the document is posted on the Embassy 
Economic Section website at 
http://www.intelink.gov/communities/state/chi naecon/. 
 
Continuing Reform 
----------------- 
 
¶3. (SBU) The 2009 plan is a clear endorsement of continued 
economic liberalization and marketization.  In the first paragraph 
the plan asserts that, in spite of the economic down turn, China 
cannot diverge from continuing opening and reform.  Its stated 
goals are consistent with fundamental economic transformation, 
including increasing domestic demand and improving livelihoods. 
Although government regulation is welcomed, the endorsed mechanism 
is the market, which should be perfected as opposed to managed. 
 
Government as Regulator, Not Manipulator or Primary Investor 
------------------------------------ 
 
¶4. (SBU) Tracking with this endorsement of market primacy, the 
plan calls for further adjustment of the role of the government in 
the economy.  Specifically, it calls for the government to adopt a 
supervisory role.  Investments subject to government approval are 
to be reduced and approvals decentralized.  The plan has 
completely new language calling for caution in government-led 
investment, to ensure that it attracts, as opposed to crowds out, 
private investment.  Even government-led programs to foster 
indigenous innovation, a mainstay of many of China's recent 
industrial revitalization plans (REF E), must be "market oriented" 
with "enterprises at the core." 
 
Cracking Open the Monopolies, Transforming the Economy 
------------------------------------ 
 
¶5. (SBU) Continuing with the theme of valuing private investment, 
the plan opens the door to private investment in many of China's 
largest state-dominated services monopolies, specifically 
mentioning petroleum, railroads, electricity, telecom, and 
municipal services.  Private sector investment in services SOEs is 
welcomed, with promises to open the services sector to greater 
 
BEIJING 00001602  002 OF 003 
 
 
market access.  The long-awaited establishment of a security 
review mechanism for foreign mergers and acquisitions is to be 
speeded up (REF D for background of security review).  Services 
are also emphasized in the context of trade, with the plan calling 
for a new regulatory framework for trade in services and creation 
of an outsourcing industry. 
 
¶6. (SBU) The plan, as in previous years, calls for further reform 
of China's controlled pricing for grains and energy.  What is 
different this year is the reason stated: prices must be 
marketized and liberalized in order to transform China's economic 
growth model.  Singled out for particular focus are electricity 
and water prices that subsidize industrial users at the expense of 
services and retail consumers.   Similarly, the plan endorses the 
various healthcare, wage, unemployment insurance, housing, and 
pension reforms introduced in the past few months, but with the 
rationale that these reforms are important to spur consumption 
(REF F). 
 
Small (and Medium-sized) is Beautiful 
------------------------------------ 
 
¶7. (SBU) Despite government lending and stimulus projects that 
benefit China's largest enterprises and revitalization plans that 
aim at industry wide consolidation (REF E), the 2009 plan focuses 
on small and medium sized enterprises.  SOEs are mentioned as 
institutions in need of reform, while SMEs will receive credit 
guarantees and other new financing facilities.  Start-ups are 
welcomed as a means to increase employment opportunities, and 
small- and medium-sized financial enterprises will be promoted. 
 
¶8. (SBU) In the section on improving the people's livelihood, the 
plan calls for regulating SOE managers' salaries in order to keep 
income disparity within reasonable limits.  A somewhat cryptic 
clause in the section on taxes appears aimed at going after SOE 
excess profits and operating budgets, which have come under great 
criticism this year for taking money out of the pockets of 
consumers and using it for over-investment.  The section calls for 
returns to "state-owned capital" to go into a social security 
budget. 
 
Financial Reform Continues 
-------------------------- 
 
¶9. (SBU) Financial sector reform is extensively addressed in the 
plan; there is little evidence of back-tracking many observers 
speculated could result from the global financial crisis. 
Continued reform of banks, private asset management companies, 
rural credit, deposit insurance, interest rates, and equity and 
bond markets are all endorsed.  Pushing forward, the plan adds 
requirements for reform of the insurance industry and development 
of private equity funds. 
 
Exports not Emphasized, but Outward Investment Is 
------------------------------------ 
 
¶10. (SBU) Despite a serious downturn in China's exports, there is 
no evidence in the plan of an attempt to prop up exports.  A 
concern with potential trade protectionism is apparent in the 
endorsement of a "mechanism to deal with trade frictions" and 
calls to pursue Free Trade Agreements (FTAs).  Imports are dealt 
with only in the context of management of advanced technology and 
strategic inputs, although there is also mention of an "early 
warning system" to inform Beijing of surges in imports, exports, 
or investment in certain sectors.  Outbound investment gets a 
boost through regulatory liberalization and financial and 
logistical support for enterprises to "go-out" and use foreign 
earnings to invest overseas (REF A Chinalco cable). 
 
Rural and ForEx Reform Not/Not Evident 
------------------------------------ 
 
¶11. (SBU) The plan calls for rural reform and development, but the 
specific programs mentioned as well as the wording used is 
consistent with past years, indicating little appetite for 
breaking new ground (REF G). 
 
¶12. (SBU) While the plan, as in previous years, calls for an 
improved RMB exchange regime, it notably drops language in 
previous plans calling for increased foreign exchange flexibility. 
 
As Vice Premier Wang Qishan recently told Treasury Secretary 
Geithner (REF B), China intends to maintain a stable yuan exchange 
 
BEIJING 00001602  003 OF 003 
 
 
rate until the international economic situation stabilizes. 
 
Comment 
------- 
 
¶13. (SBU) Many of China's programs and policies over the last year 
have raised concerns that the government might be backtracking on 
opening and reform (REF C).  China's recent fiscal and monetary 
stimulus packages have funneled resources to and through China's 
state sector.  Further, the fruits of the stimulus' resources have 
accrued disproportionately to traditional large, industrial 
companies, most of which are SOEs.  The accompanying industry 
revitalization plans have almost without exception emphasized 
industry consolidation and government support over structural 
economic reform.  To be fair, these measures should be seen as 
rapid and decisive responses to the global financial crisis, but 
they reinforced other preferential policies aimed at strengthening 
central government-owned SOEs that pre-dated the outbreak of the 
crisis. 
 
¶14. (SBU) The themes echoing throughout the "Opinions Regarding 
the Work on Deepening Systemic Economic Reforms in 2009" stand in 
stark contrast to these statist trends.  The State Council, 
through this document, largely has endorsed a vision of a smaller, 
less controlling government.  China's leadership has apparently 
accepted the view of many Chinese economists that the state-owned 
monopolies, particularly the large service monopolies, are 
preventing fundamental structural reform.  Likewise, the plan 
addresses other standard liberal-economists' complains, such as 
the lack of a social safety net and inefficient financial markets 
leading to excess savings and poor allocation of capital, 
respectively. 
 
¶15. (SBU) China's current policies, aimed to support short-term 
economic growth and thus social stability, may in practical terms 
set back overall economic restructuring.  The State Council, 
however, has indicated in this annual planning document that the 
general trend should be towards increased marketization and 
liberalization. 
 
¶16. (SBU) We strongly recommend that USG agencies engaging with 
Chinese counterparts on any of the issues covered in the plan 
reference its relevant sections.  It is likely that U.S. arguments 
for further liberalization of the Chinese economy would be 
strengthened by citing, where appropriate, this State Council 
guidance. 
 
Piccuta