VZCZCXRO3114
RR RUEHCN RUEHGH
DE RUEHGZ #0397/01 1820731
ZNR UUUUU ZZH
R 010731Z JUL 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 0734
INFO RUEHBJ/AMEMBASSY BEIJING 0563
RUEHGH/AMCONSUL SHANGHAI 0128
RUEHSH/AMCONSUL SHENYANG 0138
RUEHCN/AMCONSUL CHENGDU 0126
RUEHHK/AMCONSUL HONG KONG 0180
RUEHGZ/CHINA POSTS COLLECTIVE 0196
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0109
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC 0183
RUEKJCS/DIA WASHDC 0179

UNCLAS SECTION 01 OF 03 GUANGZHOU 000397 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/LEE 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER 
STATE PASS SAN FRANCISCO FRB FOR CURRAN 
TREASURY FOR MOGHTADER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD HK CH
SUBJECT: South China Bankers See Signs of Economic Improvement, 
Skeptical on RMB Internationalization 
 
Ref: 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly.  Not for release outside U.S. government channels.  Not 
for internet publication. 
 
¶1. (SBU) Summary: Guangzhou bankers differ over whether South 
China's economy is as bad off as some media reports would have us 
believe.  They agreed, however, that Beijing is increasing the 
pressure to expand lending to small and medium enterprises.  They 
expressed interest in the Chinese government's new renminbi (RMB) 
settlement proposal, but identified obstacles that continue to 
impede the use of the RMB as an international currency.  One noted 
advantages that Hong Kong banks will enjoy with the next round of 
opening under the Closer Economic Partnership Arrangements (CEPA). 
A business leader from the Hong Kong Chamber of Commerce 
China-Guangdong (HKCCC) told of strong support for Hong 
Kong-Guangdong economic integration on both sides of the border. 
End summary. 
 
Positive Economic Signs in Guangdong 
------------------------------------ 
 
¶2. (SBU) The economic situation in Guangdong isn't nearly as dire as 
reports in the South China Morning Post would have you believe, 
according to a senior executive at Guangdong Development Bank (GDB). 
 In a meeting with ConGen Hong Kong and ConGen Guangzhou econoffs 
participating in a joint reporting effort to look at southern China 
financial issues, the GDB executive explained that his bank had more 
problems with non-performing loans (NPLs) at its Hangzhou branch in 
Zhejiang than in its Guangdong branches.  The executive argued that 
enterprises in Guangdong had learned valuable lessons from the Asian 
financial crisis in the late 1990s.  Many businesses in the Yangzi 
River Delta (YRD), on the other hand, had only known success and 
were unprepared for the economic downturn, according to the banker. 
 
 
¶3. (SBU) However, he also noted differences in the banks loan 
portfolios in the two locations that helped explained the variation 
in performance.  GDB has relatively few clients in those industries 
hardest hit by the downturn, including export manufacturers.  In 
addition, the Guangdong provincial government purchased many of the 
bank's NPLs before Citibank bought its stake in GDB. 
 
¶4. (SBU) An executive from the Bank of East Asia's Guangzhou branch 
was also fairly optimistic on the PRD's economic prospects.  He said 
that although many Hong Kong-owned enterprises in the PRD had closed 
last year, the wave of closures was mostly finished; those that 
needed to close had already shut down.  Those left will survive the 
downturn, he said, and gain market share at the expense of firms 
that have already been eliminated. 
 
¶5. (SBU) A senior executive from Standard Chartered Bank had a less 
positive outlook.  He said the impact of the economic slowdown had 
been more severe in southern China due to the high concentration of 
small and medium enterprises (SMEs) here.  The executive predicted 
exporters in the PRD would find it difficult to shift their focus to 
the domestic Chinese market or to emerging overseas markets.  He 
cited the example of a logistics company in Shenzhen that provided 
services for exporters to Africa and the Middle East; the firm 
recently closed because it couldn't find enough business.  The 
banker predicted that by the time the economic downturn has run its 
course about 30 percent of businesses in Guangdong will have 
failed. 
 
Beijing Pushing SME Credit 
-------------------------- 
 
¶6. (SBU) The BEA and Standard Chartered bankers both commented that 
Beijing was strongly encouraging banks to lend to SMEs.  The 
Standard Chartered executive said that domestic banks had previously 
dealt mostly with state-owned enterprises (SOEs) but are now being 
forced to extend loans to SMEs.  Banking regulators have even 
required local banks to set up internal sections specifically 
devoted to SME business.  Standard Chartered has been providing 
services to SMEs in Guangdong since 2003 and has a staff of 20 
 
GUANGZHOU 00000397  002 OF 003 
 
 
dedicated to SME clients, but it is still not a large part of their 
business.  The BEA banker said that his firm serves SME clients 
because it has an open door policy that doesn't permit turning 
qualified clients away.  However, SME clients are cost intensive. 
The loan amounts are small and supervision is more intensive than 
for larger firms.  The bank always asks SME loan applicants for 
collateral and SME clients only comprise about 10 percent of BEA 
customers in Guangdong. 
 
RMB Internationalization - Obstacles Remain 
------------------------------------------- 
 
¶7. (SBU) Banking customers are interested in the option of RMB trade 
settlement under the Chinese government's new proposal, but 
expectations are low, according to the BEA executive.  Noting that 
the regulations for the settlement plan had not yet been released, 
he said his bank was waiting and watching closely, but progress had 
been slow.  A business leader from the HKCCC agreed that 
expectations were low, saying that Hong Kong-based companies still 
prefer settlement in Hong Kong or U.S. dollars even though some 
Guangdong manufacturers would rather settle in RMB. 
 
¶8. (SBU) Commenting on BEA's RMB bond sale in Hong Kong, the BEA 
executive denied reports that receipts from the sale would be used 
to set-up a new sub-branch in Guangdong.  Instead the bond receipts 
will be used to finance RMB lending in China, he said.  The bank is 
not able to transfer RMB deposits from Hong Kong directly to its 
Guangdong branches, but is permitted by Chinese currency exchange 
regulators to transfer the bond receipts. 
 
¶9. (SBU) The bankers pointed out that lack of convertibility and 
other regulatory obstacles to currency exchange continue to hamper 
business transactions between the mainland and other jurisdictions, 
including Hong Kong and Macau.  The Standard Chartered banker said 
large amounts of cash continue to be smuggled across the Hong 
Kong-Shenzhen border, noting that 90 percent of China's cash 
settlements take place in Shenzhen.  The GDB executive explained 
that his bank had encountered difficulty getting State 
Administration of Foreign Exchanges (SAFE) approval for an inbound 
transfer after a foreign buyer bought a non-performing loan 
associated with a commercial building project in the Shanghai area. 
In addition, the bank was unable to get SAFE approval to allow a 
client with savings in GDB's Beijing branch to use the money to 
secure a loan from the bank's Macau branch.  Standard Chartered 
execs agreed that SAFE's sluggishness in approving foreign currency 
transactions is a significant problem. 
 
Challenges for Foreign Banks 
---------------------------- 
 
¶10. (SBU) Foreign banks in China still face unique challenges, 
according to the Standard Chartered executive.  Chinese banks strong 
network of local connections and vast scale give them a major 
advantage.  In addition, the Chinese banks, under pressure to expand 
liquidity, are now offering lending rates that are half of what 
Standard Chartered is able to offer, he said.  The Chinese banks 
have also learned a lot from foreign banks that have invested in 
China, especially in the area of risk assessment.  However, the 
banker said that foreign banks continue to have an advantage in 
their international service networks and their ability to offer 
sophisticated supply chain financing.  Standard Chartered has been 
able to leverage these advantages particularly well with a growing 
number of clients looking to expand in Africa where the bank has 
been operating for more than a century. 
 
¶11. (SBU) Both the Standard Chartered and BEA bankers believe the 
sixth round of CEPA will provide real benefits for Hong Kong banks 
in the mainland.  The new measures will allow Hong Kong banks to 
open sub-branches in Guangdong Province much more easily.  Capital 
requirements for each individual sub-branch are far lower than those 
required for branches. 
 
Hong Kong-Guangdong Integration 
------------------------------- 
 
¶12. (SBU) There is a high level of interest in both Guangdong and 
 
GUANGZHOU 00000397  003 OF 003 
 
 
Hong Kong in pursuing further integration of the two economies, 
according to the HKCCC business leader.  He told us that each side's 
appetite for integration has varied as their financial circumstances 
have waxed and waned.    Hong Kong and Guangdong now see the YRD as 
a major competitor, boosting the appeal of integration to both 
sides.  The HKCCC executive claimed that Guangdong Party Secretary 
Wang Yang was pushing integration and the political leadership in 
Beijing was supportive too.  He said that Hong Kong and Guangdong 
were both preparing individual proposals for enhancing integration 
that needed to be submitted to Beijing in September, noting that he 
had been asked to provide input on each side's proposals. 
 
¶13. (SBU) The HKCCC executive highlighted the service sector as one 
area with high potential for further cross-border integration.  He 
pointed out that service sector companies now made up more than 50 
percent of HKCCC's Guangdong membership, which had formerly 
consisted primarily of export manufacturers based in Dongguan. 
Explaining that Guangdong enterprises are heavily concentrated in 
manufacturing with little interest in expanding production to Hong 
Kong's high-wage labor market, he suggested that the two governments 
need to do more to encourage Hong Kong service providers to expand 
to Guangdong.  Tax incentives aren't enough, he said.  Local 
governments in Guangdong should provide business matching services 
to help Hong Kong firms identify clients.  The Hong Kong service 
companies will be unwilling to set up an office in Guangdong until 
they have already established a client base, according to the 
executive. 
 
¶14. (SBU) This cable was a joint reporting effort by ConGen 
Guangzhou and ConGen Hong Kong. 
 
JACOBSEN