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ZNR UUUUU ZZH
R 041116Z SEP 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8254
INFO RUEHBK/AMEMBASSY BANGKOK 0224
RUEHBJ/AMEMBASSY BEIJING 3050
RUEHRL/AMEMBASSY BERLIN 0013
RUEHBS/USEU BRUSSELS 0021
RUEHBY/AMEMBASSY CANBERRA 0051
RUEHCN/AMCONSUL CHENGDU 2188
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0646
RUEHHI/AMEMBASSY HANOI 0038
RUEHHK/AMCONSUL HONG KONG 2353
RUEHJA/AMEMBASSY JAKARTA 0032
RUEHLO/AMEMBASSY LONDON 0031
RUEHML/AMEMBASSY MANILA 0101
RUEHMO/AMEMBASSY MOSCOW 0071
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHNE/AMEMBASSY NEW DELHI 0061
RUEHOT/AMEMBASSY OTTAWA 0039
RUEHFR/AMEMBASSY PARIS 0010
RUEHRO/AMEMBASSY ROME 0014
RUEHUL/AMEMBASSY SEOUL 0546
RUEHGH/AMCONSUL SHANGHAI 8905
RUEHSH/AMCONSUL SHENYANG 2179
RUEHIN/AIT TAIPEI 1982
RUEHKO/AMEMBASSY TOKYO 0757

UNCLAS SECTION 01 OF 04 SHANGHAI 000380 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/CM 
NSC FOR LOI, SHRIER 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP 
TREASURY FOR IMFP -- SOBEL/CUSHMAN 
STATE PASS CEA FOR BLOCK 
STATE PASS CFTC FOR OIA/GORLICK 
MANILA FOR ADB USED 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV PREL CH
SUBJECT: BOOSTING CHINESE DOMESTIC CONSUMPTION PROBLEMATIC, SAY EAST 
CHINA FINANCIAL CONTACTS 
 
¶1.  (SBU) Summary:  China's decentralized investment approval 
process aids the entry of foreign businesses into the China 
market, in the view of ConGen contacts in Shanghai's financial 
sector.  However, problems with official approval of investment 
projects and the varying quality of government cadres impede the 
process.  In the longer term, China's plans to develop the 
service sector and advance domestic consumption will be hindered 
by the government's unwillingness to embrace political opening 
and rural land reforms.  The contacts also commented on recent 
corruption cases and the Rio Tinto case, using the latter as an 
example of what can happen when a foreign company publicly 
embarrasses the Chinese leadership.  End Summary. 
 
¶2.  (SBU) ConGenOffs met with four financial sector contacts on 
August 27.  Two of the contacts are investment advisors, one 
focused on the securities markets and the other facilitating 
Sino-foreign mergers and acquisitions.  Another is the chief 
economist of a foreign financial firm.  The fourth heads a 
joint-venture securities firm. 
 
============================ 
Local Governments Make Deals 
============================ 
 
¶3.  (SBU) While China presents the image of a unified foreign 
investment approval system, the reality is that local 
governments in East China have great leeway to approve projects, 
according to these financial professionals.  Local authorities 
have many reasons to say yes to investments, but central-level 
officials have many more reasons to say no.  Some central-level 
officials openly admit that their hands are tied, one said, and 
privately advise him to reconfigure deals so that they can be 
approved by local authorities without review from the center. 
 
============================================= =========== 
Government Officials Not Cut From the Same Cloth Anymore 
============================================= =========== 
 
¶4.  (SBU) Government officials vary widely in capacity and 
predisposition.  One contact said that, in the Central 
Government, there was a higher quality in the "C's," referring 
to the relatively new commissions such as the China Banking 
Regulatory Commission, than in the "M's," the ministries.  He 
was impressed with the quality of government officials with whom 
he had recently served for several months on a Central 
Government-sponsored legal reform advisory committee.  These 
present and former officials were willing to debate the issues 
at length, maintaining articulate and informed positions.  He 
said government officials come in all stripes these days, from 
market-oriented to protectionist and nationalistic. 
 
========================================== 
Corruption Crackdown Politically Motivated 
========================================== 
 
¶5.  (SBU) The financial professionals viewed recent 
 
SHANGHAI 00000380  002 OF 004 
 
 
anti-corruption cases in the Chinese media as posturing by the 
Communist Party ahead of the 60th anniversary of the founding of 
the People's Republic of China on October 1.  (Note: The 
contacts were referring to the case of Huang Guangyu, the 
founder of the Gome electronics chain, who was detained in 
November 2008, and to the August 2009 news that several 
high-ranking officials had been detained in an investigation 
into criminal gangs in Chongqing, among others.  End note.)  One 
suggested that the authorities needed to launch periodic 
crackdowns on corruption to sate the anger of the masses over 
official misdeeds.  He did not see major corruption cases 
breaking in Shanghai, since Party Secretary Yu Zhengsheng has 
been very good at keeping in Beijing's good graces, and would 
not cross Hu Jintao like former Shanghai Party Secretary Chen 
Liangyu did before his downfall in 2006. 
 
============================================= ========= 
China Slowly Moving Towards Domestic Consumption . . . 
============================================= ========= 
 
¶6.  (SBU) There was some debate over whether China is moving 
towards an economy driven by domestic consumption.  Those who 
agreed pointed to the vast changes over the past ten years in 
the landscape for Chinese retail consumers.  In the 1990s, for 
example, the securities market advisor said, foreign retailer 
Carrefour was "a freak show" for most Chinese, but now business 
is booming at Carrefour hypermarkets in Shanghai, with Chinese 
buying mainly locally produced products.  The investment advisor 
said second- and third-tier cities are bursting with consumption 
activity.  And the securities firm executive said his company is 
recommending to clients to buy into consumption-related stocks, 
including automobiles and white goods, because of the 
potentially strong medium-term growth.  The macroeconomist, 
however, offered a contrarian analysis, saying that most of the 
government-led economic stimulus measures announced in late 2008 
had been misguided, flowing into unneeded infrastructure rather 
than helping push domestic consumption. 
 
============================================= 
. . . But Services Sector Growth Stymied . . . 
============================================= 
 
¶7.  (SBU) Nonetheless, China faces some hurdles regarding 
domestic consumption growth.  One contact said, ultimately, 
service sector growth is restricted by lack of political reform. 
 The Central Government understands it would need to permit 
enhanced political freedom and a loosening of control over 
political debate before the service sector can take off. 
However, the leadership is unwilling to take these steps, even 
though it means sacrificing the development of China's service 
sector.  (Note:  This connection has been made by other analysts 
in light of the recent Green Dam incident, in which the Ministry 
of Industry and Information Technology attempted to place 
controls on domestic computer access to the internet.  End 
note.) 
 
 
SHANGHAI 00000380  003 OF 004 
 
 
============================================= ====== 
. . . And Rural Incomes Restricted by Land Policies 
============================================= ====== 
 
¶8.  (SBU) Rural land reform is needed to stimulate greater 
domestic consumption and growth, according to the securities 
firm executive and the investment advisor.  However, many 
officials fear that providing peasants with the right to sell 
land use rights would go badly, with discontented and eventually 
landless peasants ripe for social unrest.  The government 
assumes that the peasants would sell away their land use rights 
for too little compensation, said the securities firm executive, 
but he thought that peasants are smarter than that.  Chinese 
officials draw an analogy with the social unrest involving 
state-owned enterprise employees in the late 1990s, who were 
paid for early retirement, but began protesting a few years 
later to get another payout.  There was general agreement that 
the internal jockeying prior to the 18th Party Congress in 2012 
would make all players very conservative on this front. 
 
================== 
The Rio Tinto Case 
================== 
 
¶9.  (SBU) The Rio Tinto case was raised as an example of the 
dangers a foreign firm faces if it crosses the Communist Party. 
Rio Tinto's real problem had been to humiliate publicly the 
Chinese leadership, the macroeconomist said.  Beginning in early 
2009, he explained, the Chinese side attempted to take the lead 
in negotiations over international iron ore prices, claiming 
this right as the single biggest purchaser of iron ore 
worldwide.  However, commodity prices began to rise again, and 
one by one importers in other Asian countries agreed to pay 
higher prices.  At this point, rather than giving the Chinese a 
face-saving way out, Rio "twisted the knife" by demanding China 
agree to a higher price, and "made the Chinese leaders look 
stupid in public."  The arrests and charges of stealing state 
secrets, in this context, are the Chinese side's "negotiating 
tactics." 
 
¶10.  (SBU) In actuality, said the macroeconomist, what Rio did 
is common practice in the industry.  Other companies take the 
same Chinese officials out to the same restaurants; by the Rio 
standard they could also be prosecuted.  (Note:  According to 
Western media, Chinese officials raided Rio Tinto's Shanghai 
offices on July 5 and detained four employees, who are being 
investigated for bribing Chinese steel industry officials during 
iron ore price negotiations.  On August 11, Chinese prosecutors 
formally charged the Rio Tinto employees with infringing trade 
secrets and bribery, without raising the more serious charges 
involving state secrets.  End note.) 
 
======= 
Comment 
======= 
 
 
SHANGHAI 00000380  004 OF 004 
 
 
¶11.  (SBU) These contacts see clearly the linkage between 
political and economic reform, and the unfortunate likelihood 
China's leaders will back away from any initiative in this 
regard until after the 18th Party Congress in 2012.  This could 
begin to have a tangible impact on East China's economic growth, 
especially given the Shanghai government's goal to develop its 
service sector to counteract the export downturn and, by 2020, 
to turn the municipality into an international financial center. 
CAMP