VZCZCXRO5403
RR RUEHCN RUEHGH
DE RUEHGZ #0598/01 2940608
ZNR UUUUU ZZH
R 210608Z OCT 09
FM AMCONSUL GUANGZHOU
TO RUEHBJ/AMEMBASSY BEIJING 0784
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/SECSTATE WASHDC 1000
INFO RUEHGH/AMCONSUL SHANGHAI 0229
RUEHSH/AMCONSUL SHENYANG 0239
RUEHCN/AMCONSUL CHENGDU 0230
RUEHHK/AMCONSUL HONG KONG 0300
RUEHGZ/CHINA POSTS COLLECTIVE 0295
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0158
RUEAIIA/CIA WASHDC 0278
RUEKJCS/DIA WASHDC 0274

UNCLAS SECTION 01 OF 03 GUANGZHOU 000598 
 
SENSITIVE 
SIPDIS 
 
FROM CONSUL GENERAL GOLDBECK TO AMBASSADOR HUNTSMAN AND SECRETARY 
LOCKE 
 
STATE FOR EAP/CM, EAP/EP, EEB/TPP, EEB/IFD 
STATE FOR INR/EAP, S/P 
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 LOEVINGER/MOGHTADER 
COMMERCE FOR SZYMANSKI/MCQUEEN 
 
E.O. 12958: N/A 
TAGS: ECON ETRD PGOV ELAB EINV CH
SUBJECT: Visits of Secretary Locke and Ambassador Huntsman: South 
China Snapshot 
 
(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: During your visit to Guangzhou in China's 
economically vibrant Pearl River Delta (PRD), you will see that the 
region was hit hard by the fall in exports that followed the global 
financial crisis, but is starting to show signs of recovery, 
including a tighter labor market.  The continuing expansion of 
China's domestic economy has helped some firms in the region prosper 
in the face of the downturn.  Increasingly firms are turning to the 
domestic market, but export manufacturing will remain a critical 
engine of the PRD's economy.  Guangdong's "double transfer" policy 
to upgrade the economy remains a centerpiece of the province's 
development strategy despite continuing competitiveness of the PRD 
region as a location for labor-intensive manufacturing and 
challenges in attracting high-value-added industries.  Nevertheless, 
the policy has already been declared a success by China's state-run 
media, which bodes well for the political future of Party Secretary 
Wang Yang.  The other provinces of the consular district have 
pursued different development strategies with Fujian largely 
focusing on strengthening cross-Strait economic ties, Guangxi 
enhancing trade and investment with Southeast Asia and Hainan 
concentrating on tourism and environmentally sustainable 
development.  End summary. 
 
Signs of Recovery, Larger Crisis Averted 
---------------------------------------- 
 
¶2. (SBU) You are arriving at the "world's factory floor" just as 
optimism is returning to the region's critical export manufacturing 
sector.  The Pearl River Delta (PRD), especially the export 
processing center of Dongguan, was hit hard by the global economic 
downturn.  But in recent months economic data and commentary from 
our contacts in industry have indicated that the PRD is bouncing 
back well.  Guangdong's GDP growth rate in the first quarter of 2009 
was just 5.8%, well below the province's typical performance.  But 
for the entire first half of the year, growth was 7.1%.  The 
province's exports in the first quarter of 2009 were down 23.1% 
year-on-year, but for the month of September they were down just 
8.3% from a year ago.  Early reports from the Canton Fair, China's 
largest export fair, are also good.  The first of three phases, 
which closed in Guangzhou on October 19 indicate that the value of 
contracts signed rose 26.3% compared with the last session in the 
spring. 
 
¶3. (SBU) The outlook of our contacts is also much improved.  Less 
than a year ago, factory owners and industry association leaders 
were sounding alarm bells warning of wide-scale factory closures and 
massive layoffs.  In the fall of 2008, the leadership of the 
Dongguan Association of Enterprises with Foreign Investors, which 
mainly represents Hong Kong investors, told us that 10% of foreign 
invested enterprises in Dongguan had shut down and expected the 
ratio to reach as high as 20% by the Lunar New Year holiday.  On my 
mid-October trip to Dongguan, these same business leaders told us 
that the situation had stabilized.  They said orders were now 
picking up and they expect Dongguan's exports for all of 2009 to be 
down just 16-17% from 2008.  One executive pointed out that 2008 was 
actually a particularly good year for exports and speculated that 
2009's performance would be down only about 7% from 2007, which he 
said was a more appropriate comparator. 
 
Tighter Labor Market 
-------------------- 
 
¶4. (SBU) The signs of economic recovery also extend to south China's 
labor market.  Predictions of large numbers of migrant workers 
failing to find work in the PRD and becoming a potential source of 
social unrest have not materialized.  In our most recent 
conversations with business leaders and labor NGO leaders, they 
 
GUANGZHOU 00000598  002 OF 003 
 
 
report a tighter labor market.  Some major multinationals said their 
factories and suppliers have recently increased hiring in the PRD 
and are having trouble finding all the workers they need. 
 
Domestic Sales Growing, but Export Orientation Remains 
----------------------- ------------------------------ 
 
¶5. (SBU) The continuing expansion of China's domestic economy has 
also benefitted the PRD and increased its orientation toward the 
domestic market.  The CEO of Nine Dragons, Asia's largest paper 
manufacturer based in Dongguan, recently told us that exports 
previously accounted for 44% of the firm's sales, but today that 
ratio had fallen to about 10%.  Other major Chinese manufacturers in 
the PRD like appliance makers Gree, Galanz and Midea told us earlier 
this year that domestic sales had continued to show healthy growth 
even as their exports had stalled or declined.   Even companies that 
continue to focus on exports have praised government efforts to help 
them develop marketing channels in the domestic market. 
 
¶6. (SBU) Nevertheless, officials and academics as well as factory 
owners in the region point out that exports will continue to be a 
critical economic engine for the PRD.  They point out that south 
China is still one of the world's most competitive manufacturing 
bases.  It has well-developed supply chains, infrastructure and 
marketing channels to overseas buyers that will preserve its export 
orientation for years to come. 
 
Reform Laboratory 
----------------- 
 
¶7. (SBU) Guangdong has been an important testing ground for China's 
reform policies since "reform and opening" began 30 years ago.  The 
global economic downturn has had an impact on the latest development 
strategies being tested in south China.  Guangdong Party Secretary 
Wang Yang has championed the "double-transfer" policy, which aims to 
move both labor-intensive, low-tech, and often polluting 
manufacturing industries and the large migrant labor workforce out 
of the PRD to less-developed parts of Guangdong and elsewhere in 
China.  In its place, Guangdong hopes to attract high-technology 
manufacturing, services and other high-value-added industries to the 
PRD.  The government has been able to create enough incentives to 
convince some factories to move out of the PRD, but most factory 
owners we've spoken to have said they want to maintain operations in 
the PRD because of the advantages it continues to offer.  The 
economic downturn drove some of the least competitive manufacturers 
out of business, but the crisis has also created challenges for 
local governments working to attract investment in high-value-added 
industries.  Even as some high-tech firms like telecommunications 
equipment manufacturers Huawei and ZTE have flourished, lack of 
highly skilled workers is one of the obstacles that will continue to 
impede the PRD's efforts to move up the value chain. 
 
¶8. (SBU) Other major reform efforts include the Pearl River Delta 
Reform and Development Plan, which was released in December 2008. 
One of the plan's major goals is to enhance integration of the PRD, 
both among the municipalities of the PRD area of Guangdong Province, 
as well as between Guangdong, Hong Kong and Macau.  The plan also 
includes measures supporting the "double-transfer" policy.  In 
addition, Shenzhen is the site of recent political reform programs. 
However, these measures have amounted to little more than 
administrative changes largely aimed at enhancing the accountability 
of officials rather than genuine democratic reform, so their utility 
and transferability elsewhere remains to be seen. 
 
Wang Yang's Star Rising 
----------------------- 
 
¶9. (SBU) While in Guangzhou, you will have an opportunity to meet 
Guangdong's senior leader, Party Secretary Wang Yang.  As a member 
of the Politburo, Wang is also a key national political figure with 
 
GUANGZHOU 00000598  003 OF 003 
 
 
an important future.  The prospects of his signature economic 
policy, the "double transfer" policy, have serious implications for 
his future career.  Although the policy, by any objective measure, 
remains a work in progress at best, the People's Daily declared in a 
front page article in late July that it was a success.  This 
portends well for Wang's chances of moving into a senior leadership 
position in Beijing after his term in Guangdong ends in 2012.  Prior 
to coming to Guangdong, Wang was a CPC leader in Chongqing; to date 
he has not been implicated in emerging triad corruption trials 
there. 
 
Strategies of Other Provinces 
----------------------------- 
 
¶10. (SBU) The other three provinces in Guangzhou's consular district 
have different priorities and have pursued economic strategies 
different from Guangdong's.  Fujian is the second most economically 
developed province in the district and a major source of immigration 
to the United States.  It has been the main focus of our 
transformational diplomacy efforts with an officer dedicated 
full-time to expanding our outreach there, especially in Xiamen, 
where we hope eventually to open a consulate.  The province has 
focused much of its economic development planning on expanded 
economic ties with Taiwan, which lies directly across the Taiwan 
Strait.  Fujian aims to develop the West Taiwan Strait Economic Zone 
with infrastructure and incentives to attract Taiwan and other 
investment. 
 
¶11. (SBU) Guangxi Zhuang Autonomous Region is the consular 
district's poorest province.  Because of its common border with 
Vietnam and proximity to the rest of Southeast Asia, Guangxi has 
made enhancing trade and investment relations with ASEAN a key 
component in its development strategy.  It seeks to improve 
transportation links to Southeast Asia in its Beibu Gulf Economic 
Zone to attract investment.  The island province of Hainan, 
sometimes called the Hawaii of China, is the smallest in Guangzhou's 
consular district.  It has made tourism and sustainable development 
priorities in its economic planning. 
 
GOLDBECK