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RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC 0009
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0175
RUEHRC/USDA FAS WASHDC 0007

UNCLAS SECTION 01 OF 03 GUANGZHOU 000613 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EIND PGOV CH
SUBJECT: Exports to Remain Pillar of Guangdong's Economy 
 
Ref A) Guangzhou 528, B) Guangzhou 237, C) Guangzhou 218, D) 08 
Guangzhou 406 
 
¶1. (SBU) SUMMARY: With the global economy showing signs of recovery, 
Guangdong province is reassessing its export market orientation and 
attempting to make structural adjustments to expand its domestic 
market in light of the global economic downturn, according to 
Guangdong contacts who met with representatives from the Department 
of Treasury's Strategic and Economic Dialogue (S&ED) Office and 
ConGenoff in late September.  However, Guangdong government 
officials stressed that exports will continue to be an important 
part of the province's economic development.  Several contacts 
pointed out numerous challenges that lie in the way of repositioning 
industries in China to serve the domestic market.  END SUMMARY. 
 
Exports Will Continue to Be a Key Economic Engine 
--------------------------------------------- ---- 
 
¶2. (SBU) Although Guangdong must not be too reliant on the export 
market in light of the economic downturn, the province will continue 
to maintain its export orientation, according to Deputy Secretary 
General Xie Pengfei of the Guangdong Center for Development Research 
(CDR).  Xie told U.S. Treasury representatives and ConGenoff that if 
Guangdong has the ability to take a share of the global export 
market, it should certainly do so.  Xie also said exports will 
continue to be important to Guangdong because economic globalization 
is here to stay.  After the full benefits of China's economic 
stimulus plan have been felt, Xie believes China's economic growth 
will continue in the export sector, even as it turns more attention 
to expanding domestic demand.  In sum, Xie said that China will not 
give up exports. 
 
Eggs Not In One Basket 
---------------------- 
 
¶3. (SBU) Deputy Secretary General Xie said that his province sees 
the global economic downturn as a result of over expenditure by 
developed economies that will force economic models to change in 
both developed and developing economies.  The contraction of foreign 
demand will cause China's export-oriented posture to change, he 
said.  Guangdong's economy will undergo structural changes to 
diversify its portfolio with the goal of increasing domestic demand 
and warding off any negative impact from future global economic 
slumps.  Likewise, executives from Lung Cheong International 
Holdings Ltd., a Hong Kong toy manufacturer operating in Dongguan, 
said in a separate meeting that the industry cannot depend solely on 
exports, believing that China's domestic market has great potential. 
 C.M. Leung, managing director of Lung Cheong, is pleased to see 
that the local and provincial governments are taking steps to expand 
the domestic market. 
 
Government Lending a Hand to Expand Local Demand 
--------------------------------------------- --- 
 
¶4. (SBU) Deputy Secretary General Xie shared some of Guangdong's 
plans for new policies to increase domestic demand.  Their approach 
is to analyze the different components of "demand" as it relates to 
Guangdong, such as technical infrastructure investment, social 
safety net, education, urbanization, and consumer demand.  A full 
report will be released by the end of October, and a meeting will 
convene at the end of the year to announce the implementation of a 
strategy to expand Guangdong's domestic demand.  Xie expects that 
Guangdong, with full support from the central government, will 
implement such a strategy prior to other provinces.  He also 
anticipates that the central government will push forward a similar 
policy at the national level after Guangdong executes its strategic 
plan. 
 
¶5. (SBU) In addition, Guangdong is also taking steps to help local 
businesses tap the domestic market.  The province held its first 
Foreign Invested Enterprises Commodities Fair in June 2009 in 
Dongguan.  The fair aimed to help foreign-invested companies in 
Dongguan develop marketing channels with major distributors and 
retailers in China like Wal-Mart and Alibaba.  According to Dongguan 
Today, a local news website, the amount of purchases resulting from 
the event reached RMB 31.6 billion (US$ 4.6 billion), including 
sales in home appliances, consumer electronics, clothing and 
accessories, toys and gifts, home accessories, and chemical 
products.  Mr. Leung of Lung Cheong felt that the fair enhanced 
 
GUANGZHOU 00000613  002 OF 003 
 
 
business relationships between manufacturers, distributors, and 
retailers, but he did not provide any tangible examples of sales 
that resulted from the fair.  However, he commented that the toy 
industry had sent a letter to Guangdong Party Secretary Wang Yang 
asking that the fair be made an annual event. 
 
Structural Adjustments, Easier Said Than Done 
--------------------------------------------- 
 
¶6. (SBU) Mr. Leung raised two issues that hindered companies like 
his from selling domestically.  First, the distribution system for 
goods is complex and not particularly well-formed, making it 
difficult for companies to establish strong sales and logistics 
networks.  Second, large Chinese department stores often have 
stringent product requirements, while smaller retailers are lax on 
quality and protection of intellectual property, allowing for poor 
products and knock-offs to enter the market.  These conditions 
inevitably create disincentives for established manufacturers to 
sell domestically, said Leung. 
 
Signs of Export Recovery 
------------------------ 
 
¶7. (SBU) Businesses in Guangdong expressed cautious optimism when 
asked about the outlook for export recovery, which could diminish 
the emphasis placed on efforts to redirect the economy toward 
domestic demand.  Mr. Leung said that the export-oriented toy 
industry has slowly stabilized and firms saw some orders return for 
the 2009 Christmas season.  One of the largest foreign-invested 
shipping companies in the region estimated 2% growth for 2010 after 
seeing a loss of US$500 million so far in 2009, according to a 
senior executive.  The company has observed some increase in volume 
in the third quarter, but warned that seasonality should not be 
mistaken for growth.  Though the company does not expect to bounce 
back in 2010, it does hope to come close to breaking even. 
 
¶8. (SBU) The general manager of a large container terminal operating 
in Dongguan echoed similar views, noting that his company 
experienced some volume pick-up in late summer of 2009, but has not 
yet returned to a growth track.  However, he said that the shipping 
industry has already seen the "trough" of the economic slump, but 
only time will tell how long the recovery will take.  Professor Feng 
Subao, deputy research director at the China Development Institute 
(CDI) in Shenzhen, also cited indicators of economic upturn, 
pointing to electronics manufacturer Foxconn's return to full-scale 
operations and the recovery of the mobile phone market.  Feng 
explained that Shenzhen's economic cycle is 3-6 months ahead of the 
nation and 1-2 months ahead of the rest of the Pearl River Delta 
(PRD), so he sees Shenzhen's recovery as a sign of greater 
recovery. 
 
Guangdong's Double-Transfer Policy Also Faces Obstacles 
--------------------------------------------- - 
 
¶9. (SBU) Although CDR's Xie highlighted the success of Guangdong's 
double-transfer policy, which moves labor-intensive industries out 
of the PRD to less developed areas while encouraging investment in 
services and advanced manufacturing industries in their place (ref 
D), academics at CDI noted the challenges the policy has faced.  Xie 
claimed that the effectiveness of the policy is already obvious, 
manifested in the quickened pace of industrial development in 
regions such as northern and eastern Guangdong.  Such transfers, he 
explained, have opened up space in the PRD to develop high-skilled 
and high-tech industries.  However, Xie added that most of the 
transferred companies are export firms, while the proportion of 
domestic-oriented companies is low. 
 
¶10. (SBU) However, Professor Feng of CDI explained that despite the 
intentions of the double-transfer policy, many companies in reality 
had not moved to areas designated by the government.  Due to the 
lack of infrastructure and conveniences in the designated rural 
areas, companies often prefer cities outside Guangdong, like those 
in Hunan (Changsha), Hubei (Wuhan), Guangxi, and Northeast China. 
Also, actual transfers have been few because many businesses either 
stopped operations or went bankrupt during this latest economic 
slowdown.  Dr. Hu Zhenyu, also of CDI, identified other challenges 
including the lack of skilled labor in designated areas or the 
unwillingness of skilled labor to move with factories and the lack 
of local government experience to assist new industries in their 
 
GUANGZHOU 00000613  003 OF 003 
 
 
regions.  Hu believes that adjustments in industrial structure will 
ultimately be driven by the market and will take 20 years or more, 
comparing the transition to China's last 30 years of economic 
reform. 
 
GOLDBECK