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RR RUEHCN RUEHGH
DE RUEHGH #0251/01 1590651
ZNR UUUUU ZZH
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FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8015
INFO RUEHBJ/AMEMBASSY BEIJING 2854
RUEHHK/AMCONSUL HONG KONG 2207
RUEHIN/AIT TAIPEI 1826
RUEHGZ/AMCONSUL GUANGZHOU 0496
RUEHCN/AMCONSUL CHENGDU 2039
RUEHSH/AMCONSUL SHENYANG 2030
RUEHKO/AMEMBASSY TOKYO 0676
RUEHUL/AMEMBASSY SEOUL 0468
RUEHGP/AMEMBASSY SINGAPORE 0268
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8662

UNCLAS SECTION 01 OF 05 SHANGHAI 000251 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
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 ETRD KIPR CH
SUBJECT: EAST CHINA COMMODITY EXPORTS HEADING FOR RECOVERY? YIWU 
ENTREPRENEURS, OFFICIALS SEE LIGHT AT END OF TUNNEL 
 
REF: A) 08 SHANGHAI 467; B) SHANGHAI 21; C) 08 SHANGHAI 476 
 
(U) Sensitive but unclassified.  Not for dissemination outside 
USG channels or posting on the internet.  Please protect 
accordingly. 
 
¶1.  (SBU) Summary: One of the largest manufacturing and trading 
centers in East China, the city of Yiwu in Zhejiang Province 
suffered in late 2008 from the global financial crisis but is 
seeing signs of recovery.  The economic downturn has impacted 
different industries to varying degrees, with manufacturers of 
daily necessities and seasonal products, like Christmas 
decorations, faring better than manufacturers of interior 
decorations, arts and crafts, and electronic appliances.  Firms 
are also adjusting their lines of products and markets, with 
many focusing more on the Chinese domestic market and developing 
regions of Latin America and the Middle East to compensate for 
declining exports to the United States and Europe, though our 
interlocutors are also starting to see a gradual recovery in 
orders from developed markets.  The H1N1 flu outbreak, which has 
discouraged some overseas customers from visiting China, has had 
a big impact on some Yiwu companies.  The Yiwu local government 
is hoping to receive fiscal stimulus funds from the Central 
Government for local infrastructure projects.  An IPR service 
center in the Yiwu commodities trading market handles 3-5 
complaints a day, mostly from domestic companies, and 
coordinates investigations of IPR infringement with relevant 
local government agencies.  End summary. 
 
¶2.  (U) During a trip to Yiwu (Zhejiang Province) June 4-5, 
Congenoff spoke with local government officials, managers of 
trading companies, and executives of several local manufacturing 
firms about the impact of the global economic crisis and China's 
domestic economic downturn on Yiwu's manufacturers and exports. 
(Note: For more on Yiwu, see Reftels.  End note.) 
 
All Impacted, But Not Equally 
----------------------------- 
¶3.  (SBU) Li Zhiqiang, Vice Director of the Yiwu Foreign Affairs 
Office (FAO), told Congenoff on June 5 that the global financial 
crisis caused a general downturn in Yiwu's economy, particularly 
in the latter half of 2008.  GDP growth was 12 percent in 2008 
compared with 15.7 percent in 2007, largely due to a sharp 
decline in exports from October to December 2008.  Weng 
Jianping, Vice Director General of the Yiwu Foreign Trade and 
Economic Cooperation Bureau, said during a separate meeting on 
June 4 that all industries in Yiwu were impacted by the global 
crisis, but some more than others.  Manufacturers of socks, 
clothing, and other "daily necessities" have done relatively 
well, while makers of electronic appliances and arts and crafts 
have suffered, according to Weng. 
 
¶4.  (SBU) Sun Yongquan, General Manager of The China Small 
Commodities City Group Foreign Trade Co, Yiwu's largest foreign 
trading company, told Congenoff on June 5 that he has actually 
seen a rise in exports of some "daily necessities," such as 
clothes and toothbrushes, while exports of home decorations, 
arts and crafts, and entertainment products have declined 
significantly.  Sun's company, which "exports all products to 
most countries of the world," had experienced 15-20 percent 
annual growth the past few years until orders plummeted in late 
October 2008, said Sun.  Some overseas markets were hit harder 
than others.  Orders from the United States, Europe, South 
Korea, Russia, and Ukraine were down "a lot" in late 2008, while 
orders from Africa and the Middle East actually increased 
slightly in the same period, according to Sun. 
 
Domestic Market Compensating for Slowing Exports 
--------------------------------------------- ---- 
¶5.  (SBU) Our interlocutors explained various ways in which they 
are adapting to the economic downturn.  Lou Zhongping, President 
 
SHANGHAI 00000251  002 OF 005 
 
 
of Shuangtong Daily Necessities Co, the world's largest 
manufacturer of drinking straws, spoke of his company's 
increasing focus on the Chinese domestic market during a meeting 
on June 4.  The global economic downturn has had minimal impact 
on his company, he said, as sales grew 13 percent year-on-year 
in 2008 and 19 percent in January-May 2009, and his factory of 
500 workers continues to operate 24 hours a day.  Most of this 
growth, however, has come from the domestic market, compensating 
for slowing growth overseas, said Lou.  Exports accounted for 80 
percent of total sales in 2002 but now account for only 40 
percent, with the United States (Walmart, Target, Dollar Tree) 
and Europe the primary overseas markets.  While the company 
shifts its focus increasingly to the domestic market, it is also 
developing higher-end products, such as environmentally-friendly 
biodegradable drinking straws made from corn, which are roughly 
twice as expensive as regular straws but have been well received 
in Europe and Japan.  Lou also noted that his company imports 70 
percent of the raw material (polypropylene) used to make straws 
because it is cheaper when imported in bulk, and for the last 
two years the Chinese Government has been encouraging firms to 
import raw materials to help balance China's trade surplus. 
(Note: Congenoff observed piles of bags marked as polypropylene 
from Colombia, South America in the factory warehouse.  End 
note.)  Lou attributed his company's continued growth to his 
belief that consumers will not cut back on the use of straws. 
"People will continue to drink Coke" even amid economic 
downturns, Lou said, and "most people prefer to drink Coke using 
straws." 
 
Diversifying Products: Christmas Still Coming to Yiwu 
--------------------------------------------- -------- 
¶6.  (SBU) Some of our interlocutors explained how they are 
diversifying their product line and export markets to cope with 
the downturn.  Huang Yiming, President of Yiwu Hangtian Arts & 
Crafts Co, one of Yiwu's largest manufacturers of Christmas 
decorations, told Congenoff on June 4 that the global financial 
crisis has had some impact on his business, but not as much as 
anticipated.  Exports account for 60 percent of Hangtian's 
sales.  Most orders in 2008 were placed before the financial 
crisis, alleviating some of the effects of the economic downturn 
in late 2008, but orders in early 2009 were down 20 percent from 
the same period in 2008 as customers have focused on reducing 
inventory, said Huang.  However, exports to Brazil, Mexico, 
Malaysia, Singapore, and the Philippines have been "good" so far 
this year and have blunted the impact of declining orders from 
the United States and Western Europe.  Increasing domestic sales 
through large retailers such as Carrefour and Metro hypermarts 
in China have also helped offset some of the decline in 
developed markets.  The company is diversifying its product 
line, developing products for Valentine's Day and decorations 
for customers in the Middle East.  Huang is also fairly 
optimistic about his company's main product line, Christmas 
decorations, since he believes people worldwide will continue to 
celebrate Christmas regardless of the economic situation. 
However, his company is now focusing more on basic low-end 
Christmas decorations, which are still selling well, since sales 
of fancy electronic Christmas decorations have declined, 
according to Huang. 
 
¶7.  (SBU) Shi Jianjun, General Manager of Topsees Co, a trading 
company and manufacturer of household decorations such as 
picture frames and wall decorations, told Congenoff on June 5 
that all of his company's products are exported, mostly to the 
United States (50-60 percent of total exports) as well as to the 
EU, Middle East, Japan, and India.  Revenue at Topsees has grown 
30-40 percent annually over the past few years but slowed 
considerably in late 2008, with exports to the United States and 
EU growing only 10 percent in Q1 2009 compared with Q1 2008. 
Although growth has slowed, Shi said, his company's sales are 
still relatively stable, especially when compared with some of 
 
SHANGHAI 00000251  003 OF 005 
 
 
his competitors making household decorations.  Topsees has fared 
better than others because it began diversifying its products 
and export markets in late 2007, shifting a significant portion 
of its product line to more high quality, high-end home 
decorations and also designing products specifically for 
customers in the Middle East.  The company's bottom line is also 
helped by the fact that it has an in-house design unit that can 
produce custom-made products, unlike other companies that solely 
rely on mass produced low-end decorations.  One of Topsees' 
biggest competitors, Huahong, has suffered through the economic 
downturn because of its high personnel costs and focus on mass 
production of generic products, said Shi.  (Note: See Refs a and 
b for more on Huahong.  End note.)  Topsees does not plan to 
expand into the domestic market, as its products are designed 
for "foreign tastes" and are not suitable for typical Chinese 
homes, said Shi. 
 
Fake Flowers Shriveling Under Economic Pressure 
--------------------------------------------- --- 
¶8.  (SBU) Some Yiwu industries have suffered more than others, 
as explained to Congenoff during a meeting on June 4 by Gong 
Hangbin, President of Yiwu Hangbin Imitation Plants Production 
Co, the largest among "several thousand" artificial flower 
companies in Yiwu.  Gong lamented that his company has been hard 
hit by the global economic downturn, as exports account for 90 
percent of his company's sales.  Revenue has declined 30 percent 
in Q1 2009 compared with the same period in 2008, said Gong. 
Prior to this year, the company had enjoyed 20 percent annual 
growth.  The number of company employees has also declined to 
300 from its peak of 700-800 in 2004.  Gong said that, despite 
the downturn, his company will continue to focus on exports 
rather than the domestic market, as China does not have a large 
demand for artificial plants and flowers.  Gong also explained 
that his company is still better off than many of his 
competitors in Yiwu because, as the largest manufacturer of 
these products, his company has a stable line of larger 
customers who place orders in bulk. 
 
H1N1 Hurting Business in Short Term 
------------------------------------ 
¶9.  (SBU) Several of our interlocutors said that the H1N1 flu 
outbreak has had a bigger impact on their businesses in the 
short term than the global financial crisis.  Huang Yiming of 
Yiwu Hangtian Arts & Crafts Co said that Mexico is one of his 
company's largest export markets, and many of his Mexican 
customers have postponed their travel to China in recent months 
due to H1N1.  Wang Xia, Sales Manager of Topsees Co, also said 
several large customers from Mexico canceled their trips to 
China in May, and the company forecasts June to be a slow month 
due to continued concerns over H1N1.  (Note: Chinese health 
authorities have reported fewer than 100 confirmed cases of H1N1 
within China as of the time of this early June visit to Yiwu. 
China's strict inspection of airline passengers and quarantining 
even of passengers seated near suspected cases on inbound 
flights may be an important factor in deterring some foreign 
customers' travel to China.  End note.) 
 
Signs of Recovery 
------------------ 
¶10.  (SBU) Most of our interlocutors painted a cautiously 
optimistic picture for 2009.  Li Zhiqiang of the Yiwu FAO said 
Yiwu's GDP grew by 6 percent in Q1 2009 on an annualized basis, 
and he expects 8-9 percent GDP growth for all of 2009.  While 
lower than the 12 percent growth of 2008, Li sees the glass half 
full, saying that Yiwu has done better than other 
export-oriented cities like Dongguan (in Guangdong Province) 
because Yiwu has a more diverse array of industries, many of 
which produce "daily necessities" that can withstand sharp 
economic downturns.  Sun Yongquan of the trading company said 
his company's sales were up 3.8 percent in Q1 2009, and he sees 
 
SHANGHAI 00000251  004 OF 005 
 
 
signs of recovery even in developed countries.  Sales to the 
United States started to pick up again after January 2009, said 
Sun, as customers have reduced inventories and have started 
placing orders again.  He thinks the US and EU economies have 
started to stabilize, leading to stabilization in other regions 
as well.  Sun Yongquan and Shi Jianjun of Topsees expect their 
businesses to pick up in August or September 2009, with Shi 
forecasting 20 percent sales growth for 2009.  Shi noted that 
customer traffic at the biannual Canton Fair in October 2008 was 
"not good," but customer orders at the April 2009 Canton Fair 
were actually higher than in April 2008. 
 
Yiwu: Still Growing, Waiting for Fiscal Stimulus Money 
--------------------------------------------- --------- 
¶11.  (SBU) Our interlocutors said the Yiwu local government has 
been very supportive of local businesses, providing tax 
incentives and facilitating loans to small and medium-sized 
enterprises.  The local government has also gone to great 
lengths to transform Yiwu, once a backwater agricultural city, 
into a cosmopolitan center of trade with a large population of 
foreign residents.  (Note: For more on Yiwu's foreign resident 
population, see Refs b and c.  End note.)  The city is still 
growing, and Congenoff observed construction of new buildings 
throughout the city, including a new technical training college 
and a new stadium-sized trading center.  Feng Meilan, Director 
of the Yiwu FAO, told Congenoff during a June 4 dinner that Yiwu 
expects to eventually receive some fiscal stimulus funds from 
the Central Government.  The funds will be used primarily to 
build new roads and schools, particularly for children of Yiwu's 
migrant workers.  (Note: There are more than 1 million migrant 
workers, compared with 700,000 native residents, in Yiwu.  End 
note.)  When asked if these projects would favor local 
construction firms, Feng replied that all projects would be 
subject to an open bidding process, and that most construction 
firms currently operating in Yiwu are Shanghai-based firms. 
Feng added that she does not know when the city would receive 
stimulus funds from the Central Government. 
 
IPR Service Center 
------------------ 
¶12.  (SBU) Chen Xinhua, Director of the Yiwu Service Center for 
Intellectual Property Protection, told Congenoff on June 5 that 
the IPR Center was established in August 2006 and currently has 
9 full-time staff.  (Note: Congenoff observed 7 staff in the 
Center's offices during the visit.  End note.)  Located in one 
of Yiwu's large commodities trading markets, the Center is 
responsible for receiving all complaints of IPR-infringement 
involving products sold in the Yiwu commodities markets. 
According to Chen, the Center operates 24 hours a day and serves 
as the initial point of contact for all IPR-related complaints. 
People with complaints usually call 110 (the police hotline) 
first and get their calls transferred to the Center since "most 
people do not know the Center's direct phone number," said Chen. 
 The Center handles 3-5 calls a day, mostly from domestic 
Chinese companies involving accusations of trademark 
infringement, commercial espionage, and illegal reproduction of 
company publications, said Chen.  There have been very few 
complaints from US companies, according to Chen, though he 
recalled a case involving Johnson & Johnson a few years ago. 
Few calls have come from EU and Japanese companies.  Although 
none of the staff in the Center speak foreign languages, most 
callers can speak Chinese.  If the caller is a foreigner who 
does not speak Chinese, the Center engages in a three-way call 
with the foreigner and the Yiwu Public Security Bureau, which 
has staff with foreign language capability, explained Chen.  The 
Center does not conduct any investigations itself.  Instead, it 
coordinates investigations with relevant local government 
agencies, such as the Bureau of Industry and Commerce.  Many of 
the products suspected of IPR infringement are not made in Yiwu, 
but only sold in the Yiwu markets, he said.  Chen further 
 
SHANGHAI 00000251  005 OF 005 
 
 
explained that the Center hosts a monthly meeting with 
representatives from 19 local government agencies to discuss 
individual cases, and that the Yiwu Vice Mayor sometimes attends 
these meetings. 
 
Comment 
------------- 
¶13.  (SBU) Yiwu was impacted by the global financial crisis like 
all export-oriented cities in China, but has fared better than 
others because of the diversity of its industries and products, 
said most of our interlocutors.  Our interlocutors also said the 
economic downturn in Yiwu was relatively short-lived, as they 
already see signs of gradual recovery.  Anecdotal evidence, 
however, suggests a more nuanced reality, with many enterprises 
still facing dire prospects for the foreseeable future.  A Saudi 
Arabian entrepreneur who travels to Yiwu 3-4 times a year to 
oversee his local factory, for example, said his exports of 
clothes and fashion accessories to Saudi Arabia have declined 50 
percent in 2009.  This same individual also noted that "Yiwu was 
doing better than Guangzhou," where he also has business, since 
Yiwu's products were lower cost than those available in the 
Pearl River Delta.  There remains much uncertainty amid the 
cautious optimism of many of our interlocutors, as their 
expectations for recovery in 2009 largely hinges on their hope 
that the US economy, still the largest export destination for 
many of these firms, has bottomed out. 
SCHUCHAT