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RR RUEHCN RUEHGH
DE RUEHGH #0248/01 1550344
ZNR UUUUU ZZH
R 040344Z JUN 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8006
INFO RUEHBJ/AMEMBASSY BEIJING 2845
RUEHCN/AMCONSUL CHENGDU 2030
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0487
RUEHHK/AMCONSUL HONG KONG 2198
RUEHGH/AMCONSUL SHANGHAI 8653
RUEHSH/AMCONSUL SHENYANG 2021
RUEHIN/AIT TAIPEI 1817
RUEHKO/AMEMBASSY TOKYO 0669

UNCLAS SECTION 01 OF 04 SHANGHAI 000248 
 
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, 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: CH ECON EFIN KIPR PGOV PREL SENV
SUBJECT: (SBU) SHANGHAI EMPHASIZES ECONOMIC GROWTH TO KIRK, LARSEN 
 
REF: SHANGHAI 191 
 
¶1.  (SBU) Summary.  During a May 27-28 visit by U.S. 
Representatives Larsen and Kirk, a variety of interlocutors 
painted a picture of Shanghai responding to a sharp downturn  in 
the local economy, but optimistic that the elements of 
longer-term growth are in place.  AmCham Shanghai noted that 
multinationals now have to bring their "A team" to China in 
order to profit, and that the previous model of using China 
merely for low-cost labor assembly has become outdated. 
Shanghai is hungry for new technology, and in some cases is 
using regulatory measures to force technology transfer or to 
protect local industries in the process, said the AmCham 
Shanghai interlocutors.  Shanghai officials met by the 
delegation said that Shanghai was seeking to lend a short-term 
stimulus to the economy, while simultaneously moving gradually 
towards a more sustainable, domestic consumption-led growth 
model.  A senior Shanghai legislator outlined examples of the 
legislature impacting local policies.  As for China's 
international economic policy, interlocutors said that China 
would place greater attention on the U.S. making "responsible" 
economic choices, and China will seek a greater voice in 
international financial institutions.  End summary. 
 
¶2.  (U) U.S. Representative Rick Larsen (D-Washington) and U.S. 
Representative Mark Kirk (R-Illinois), Co-Chairs of the 
U.S.-China Working Group in the House of Representatives, led a 
delegation sponsored by the National Committee on United 
States-China Relations (NCUSCR) and the National People's 
Congress of the People's Republic of China on a May 27-28 visit 
to Shanghai to look at local trends in advanced manufacturing. 
The delegation included Steve Orlins, NCUSCR President.  On May 
28, the delegation held a roundtable of local businesses 
arranged by the U.S.-China Business Council and the American 
Chamber of Commerce, Shanghai; met with local business 
representative offices of their home constituencies; had lunch 
with Shanghai Municipal People's Congress (SMPC) Vice Chair 
Madame Yang Dinghua; met with Fang Xinghai, Director-General of 
the Shanghai Financial Services Office (SFSO); and held a 
roundtable with local academics on the topic "2011: What Will 
China's International Financial Role be Post-Crisis?" 
 
========================== 
Shanghai Manufacturing Moving Up the Value-Added Chain 
============================ 
 
¶3.  (SBU) Ted Hornbein, Managing Director for Asia, Richco 
International Trading, and a member of the AmCham Shanghai 
committee studying trends in the local manufacturing sector, set 
the tone for the delegation's first meeting, saying that 
multinationals now have to bring their "A team" to China in 
order to profit.  He said that the previous model of using China 
merely for low-cost labor assembly has been outdated by the 
combined pressures of the Labor Contract Law, exchange rate 
appreciation, and environmental restrictions, among other 
factors.  In addition, the committee's study also identified 
companies manufacturing "in China, for China" as more 
successful.  (Note:  The China Manufacturing Competitiveness 
Study 2008-2009 is available on the AmCham Shanghai website. 
End note.)  Jeff Song, President China, Ingersoll Rand, a 
manufacturer of industrial air chillers and other products, 
confirmed these trends, saying that his company starts out with 
only 20 percent local content, but eventually sources 70 percent 
locally.  However, he added that fears of intellectual property 
theft and other factors contributed to the company always 
retaining some imports. 
 
¶4.  (SBU) Several representatives noted concerns about forced 
technology transfer or local protectionism.  For instance, 
Charles McElwee, a lawyer with Squire, Sanders, and Dempsey's 
Shanghai office, said that local governments are requiring 70 
percent local content for companies bidding for windpower 
projects.  In addition, he said, there is an expectation among 
Chinese officials that advanced windpower technology will be 
 
SHANGHAI 00000248  002 OF 004 
 
 
compulsorily licensed at low profit margins to Chinese firms, 
and that this is one of the three central elements of Beijing's 
negotiating position heading into the upcoming Copenhagen talks 
on climate change.  James McGill, President Asia Pacific, Eaton 
Corporation, a maker of hybrid engines for buses and other 
equipment, said that his company is close to closing a deal to 
provide dozens of green-technology buses for the 2010 Shanghai 
Expo, but that because Eaton uses Cummins engines built in Wuhan 
rather than SAIC engines built in Shanghai, some problems 
remain.  (Note:  McGill separately indicated to ConGenOffs that 
the decision not to move forward on the purchase had apparently 
risen to the level of Shanghai Executive Vice Mayor Yang Xiong. 
End note.)  Mitch Barns, President for Nielson Greater China, 
said that the company a few weeks ago dropped its television 
ratings business in China because regulators had made it clear 
that CCTV's own ratings service was preferred, even though 
advertisers complain that programs are able to purchase higher 
ratings from CCTV. 
 
============================ 
Shanghai Slowly Adapting to Global Financial Crisis 
============================ 
 
¶5.  (SBU) SMPC Vice Chairwoman Yang Dinghua at a reception and 
lunch for the delegation said that despite the difficult 
circumstances Shanghai faces as a result of the global financial 
crisis, the short-term stimulus measures introduced by the 
Central Government are having a positive impact, and, longer 
term, the city's economy is being gradually restructured.  Yang 
noted that Shanghai is shifting away from manufacturing and 
towards services; in fact, services now accounts for 52 percent 
of the city's GDP, and this is expected to grow further this 
year.  Industrial restructuring is one of Shanghai's major tasks 
this year, as is maintaining unemployment at a stable level 
below 4.5 percent.  (Note:  Yang was most likely referring to 
the official unemployment number, which does not count migrant 
workers and probably undercounts layoffs in the private sector. 
End note.) 
 
 
¶6.  (SBU) Yang said that, while Shanghai received little in 
direct stimulus funding, the Central Government had recently 
approved two related measures that would help support Shanghai's 
growth: naming Shanghai as China's international financial 
center and international shipping center (see reftel) and 
arranging for Pudong District to absorb the neighboring Nanhui 
District.  Yang explained the possible synergies opened up by 
these policies, including tapping Pudong's financial industry to 
develop the shipping industry and its associated financial 
service needs--including insurance and trade finance--while 
drawing on the undeveloped land in Nanhui to give Pudong growing 
room. 
 
¶7.  (SBU) SFSO's Fang Xinghai later emphasized a similar theme, 
that changes to China's financial structure would take time. 
Consumption is hard to increase in the short term, said Fang: 
 
- the Chinese people are poor, and have an inadequate social 
safety net, so it is appropriate for them to save for 
necessities; 
 
- for this same reason, further appreciation of the renminbi 
will not stimulate domestic consumption, because this will not 
put more money in poor people's pockets; 
 
- in a similar way, lowering the savings rate also will not 
stimulate domestic consumption, as savings have come from the 
corporate sector, including exporters; 
 
- even for people that do have money, there is a dearth of 
consumption goods in China, as with rich Shanghai people who 
tell Fang that there is not enough high-quality private 
education in the city. 
 
SHANGHAI 00000248  003 OF 004 
 
 
 
¶8.  (SBU) Fang added his impression that Chinese economic 
decision makers would switch tracks from using banks to finance 
the bulk of China's stimulus, as currently is the case.  First, 
banks are still at around a .75 : 1.00 loan-to-deposit ratio, 
but they are beginning to tell that government that they are 
unable to continue at the current lending growth rate.  In 
addition, Chairman Liu Mingkang of the China Banking Regulatory 
Commission (CBRC) has been warning that the banks are taking on 
undue risk.  For instance, said Fang, CBRC has recently 
reaffirmed the rule that people contribute a 40 percent down 
payment when taking out a second mortgage, a rule that was not 
being observed. 
 
============================ 
Shanghai Legislature Exercising Its Oversight Powers 
============================ 
 
¶9.  (SBU) SMPC Vice Chairwoman Yang and Yuan Yining, who serves 
on the SMPC budget committee, offered the delegation some 
examples of oversight functions of the legislature.  Yang noted 
that "the government needs to report" to the SMPC regarding 
"issues that are on the agenda of the SMPC."  Yang and Yuan 
cited two cases where legislative oversight had resulted in 
policy changes.  In one case, the government had allocated RMB1 
billion (Note: Approximately US$150 million.  End note.) for 
energy savings and pollution reduction, but the funds had not 
been spent because there were no implementing regulations. 
There were "beautiful plans," said Yang, but no concrete 
procedures for carrying them out.  The legislature asked the 
government to issue implementing regulations so that businesses 
could use the allotted funds.  In a second case, said Yang, the 
government was offering a 150 percent tax rebate on businesses 
involved in creating products based on indigenous Chinese 
innovation.  Again, the implementing policies were unclear so 
the rebates were going unclaimed, and the SMPC stepped in to ask 
for changes. 
 
============================ 
China Developing Its Foreign Economic Policy 
============================ 
 
¶10. (SBU) Fang said that People's Bank of China Chairman Zhou 
Xiaochuan issued his pre-G-20 paper calling for a dollar 
substitute in international trade to call attention to China's 
concern over the "irresponsible" way that the United States was 
handling its financial affairs.  China realizes that it would be 
impossible to create a dollar substitute without the consent of 
the United States, and also that the United States would not 
agree to this change.  At the same time, Fang agreed that China 
was working to reduce the average maturity of its official U.S. 
debt instruments.  Beijing's promotion of the use of the 
renminbi in international trade is in part a reaction to the 
drying up of trade finance in the wake of the global financial 
crisis, said Fang.  China should "aggressively push" for greater 
south-south trade denominated in renminbi, said Fang, including 
in countries such as Indonesia. 
 
¶11.  (SBU) At a subsequent academic roundtable, Professor Pan 
Rui of the Center for American Studies at Fudan University 
continued this theme, noting that more lesser developed 
countries are trying to learn from the "Beijing 
Consensus"--which Pan said entailed economic growth without 
Western-style democracy--in the wake of the global financial 
crisis, turning to China as their exemplar rather than the 
United States.  China is set to gain political clout by 
maintaining its growth rate during the crisis, said Pan.  With 
respect to what China expects from the United States, Pan 
invoked a phrase first used during the Bush Administration, that 
China be a responsible stakeholder in the international system. 
Now China wants to raise this same question with the United 
States, said Pan.  If China is to continue to purchase large 
amounts of U.S. debt, China hopes that the United States will 
 
SHANGHAI 00000248  004 OF 004 
 
 
act in a "responsible" manner, which includes not weakening the 
U.S. dollar. 
 
============================ 
China Seeking a Greater Role in IFIs 
============================ 
 
¶12.  (SBU) Pan also noted that China would gradually seek a 
greater voice in the international financial institutions, 
although it would probably seek to maintain its developing 
country status.  One way to achieve both simultaneously, said 
Pan, was to work together with the BRIC countries (Note: 
Brazil, Russia, India, and China.  End note.).  Professor Frank 
Peng of Tongji University's World Bank Studies Center said that 
even if the large developing countries were to act more in 
concert, this would probably not lead to an end of the guiding 
influence of the developed countries, since at the World Bank, 
major rules changes require a 60 percent vote, and developed 
countries hold over 40 percent of the vote currently. 
 
¶13.  (U) The delegation did not have an opportunity to clear on 
this cable. 
SCHUCHAT