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R 161012Z NOV 09
FM AMEMBASSY BEIJING
TO SECSTATE WASHDC 6853
INFO DEPT OF TREASURY WASHDC
USDA FAS WASHDC
DEPT OF COMMERCE WASHDC
DHS WASHDC
AMCONSUL GUANGZHOU 
AMCONSUL CHENGDU 
AMCONSUL SHANGHAI 
AMCONSUL SHENYANG 
AMCONSUL HONG KONG 
AIT TAIPEI 7409
ASIAN PACIFIC ECONOMIC COOPERATION
AMEMBASSY MOSCOW 
AMCONSUL VLADIVOSTOK

UNCLAS BEIJING 003123 
 
 
STATE PASS USTR FOR R. SMITH 
 
E.O. 12958: N/A 
TAGS: SENV ETRD KSCA CH
SUBJECT: MIXED IMPACT AND INDUSTRY SKEPTICS FOR CHINA'S FOREST 
INDUSTRY STIMULUS PLAN 
 
REF:  BEIJING 3052 
 
 
SUMMARY 
------- 
 
¶1. (U)  On October 29, five Chinese central government agencies 
(State Forestry Administration (SFA), National Development and 
Reform Commission (NDRC), Ministry of Commerce (MOFCOM), Ministry of 
Finance (MOF), and the State Administration of Taxation (SAT)jointly 
issued a "Forestry Industry Development Plan (2010-2012), designed 
to bolster China's timber processing and forest products industry 
during the current worldwide economic downturn, a downturn, which 
according to the Plan, has resulted in over 3 million job losses 
within the sector in major timber processing areas.  Because 
increasing numbers of migrant workers previously-employed in the 
sector are now returning to more rural areas, major components of 
the Plan are targeted toward rural development.  The Plan's primary 
goals are to "maintain growth (12% annual target growth rate for 
sector; overall output increased from USD 210 billion in 2008 to USD 
330 billion by 2012), protect livelihoods (employing 57 million 
people by 2012, up from 45 million in 2008), and maintain stability" 
through a variety of policy measures, the combined economic impact 
of which is likely to be mixed.   Chinese timber industry contacts 
remain skeptical that the Plan will be implemented in any meaningful 
way without a lasting revision in the current value-added tax (VAT) 
rebate rate on exports of timber products.  END SUMMARY. 
 
ECONOMIC STIMULUS--ENVIRONMENTAL IMPACT UNCERTAIN 
--------------------------------------------- --- 
 
¶1. (SBU) The Forestry Industry Stimulus Plan released on October 29 
has the potential to be far-reaching, with links to trade, 
employment, R&D support, industry restructuring, new financing 
mechanisms, forest tenure reform, climate change accounting, and 
quite significantly, the utilization of forest resources in other 
countries on which China's timber processors rely for sourcing raw 
timber. (NOTE: The "forest industry" in this context encompasses not 
only traditional products like timber, bamboo, wood panels, and wood 
pulp, but also other products like woody grains and oils, edible 
fungi, flowers, silkworms, medicinal herbs, and forest-based 
eco-tourism.  END NOTE) Key components of the plan are detailed 
below. 
 
¶2. (U) INCREASING DEMAND:  The Plan seeks to expand market demand by 
increasing domestic consumption of forest products, stabilizing 
"traditional" export markets (U.S., EU, Japan), and opening new 
international markets (Middle East, Russia, Africa, Central Asia, 
South America, and other emerging markets).  Domestically, demand 
would be driven by new construction in rural areas, post-disaster 
reconstruction, and conversion of squatter settlements.  By 2012, 
targeted overall trade volume in forest products will be USD 90 
billion, with exports making up at least USD 50 billion of that 
trade volume. 
 
¶3. (U) The Plan calls for promoting growth in international end 
markets for Chinese-processed timber products "in line with WTO 
rules," including adjustment of tariffs on (imported) forest 
products and favorable tax incentives for export-oriented timber 
processing firms that create jobs.  The government also plans to 
fund a loan program with discounted interest rates for which 
companies engaged in animal husbandry, timber processing, plantation 
forests, biofuels, nurseries, nature reserves, and eco-tourism would 
be eligible to apply.  (NOTE:  A similar expansion in government 
support mechanisms within the agricultural sector, targeted toward 
specific sub-industries and linked to rural development, was 
announced in early 2009 (REFTEL). END NOTE) 
 
¶4. (U) INNOVATION AND R&D: The Plan encourages innovation and the 
use of advanced technologies to make Chinese timber processing more 
efficient.  This includes support for additional R&D domestically, 
and also to "introduce, digest, and absorb" foreign advanced 
technology and equipment for use by processing plants in reducing 
energy use and minimizing pollution.  Domestic R&D would focus on 
enhanced timber processing equipment, reforestation, pest control, 
and reducing threats from forest fires.  To offset potential 
investment risk, tax incentives and government funding would support 
these efforts. 
 
¶5. (U) MODERNIZED PROCESSES: The Plan encourages processors to 
"capitalize on current weak demand and lower prices" to procure 
advanced processing equipment imported from abroad, instituting 
possibly "relaxed trade barriers" and tax incentives for operations 
that upgrade technology used.  Specific technologies encouraged 
include thermal center heating, sewage treatment, low-formaldehyde 
adhesives, continuous press wood-panel production technologies, and 
energy saving/pollution control equipment.  The Plan also seeks to 
promote sustainable forestry and chain of custody certification 
processes, to "strengthen the commercial environment," and to 
"improve product quality." 
 
¶6. (U) CONSUMER CONFIDENCE AND BRAND RECOGNITION: The Plan calls for 
"enhancing" the competitiveness of Chinese processors by increasing 
the quality of Chinese timber products and strengthening brand 
recognition in both domestic and international markets.  At the same 
time, the Plan recognizes the need to improve mechanisms for 
granting business permits, safety supervision, and testing to ensure 
product quality and safety, i.e., use of anti-corrosion and/or 
flame-retardant materials.  Low efficiency, highly-polluting 
operations will be discouraged, including quantities of formaldehyde 
used in production processes. 
 
¶7. (U) INDUSTRY CONSOLIDATION AND RISK MANAGEMENT: The Plan also 
provides incentives for the industry to restructure and realign 
itself, with the most competitive companies becoming stronger, while 
creating a secondary market for small and medium-sized enterprises 
(SMEs), which would distribute the risk within the industry.  Policy 
tools employed would include allowing for forest products companies 
to raise capital through newly-created investment funds, and to 
establish an insurance system to insulate companies further from 
risk. 
 
¶8. (U) ELEVATE DOMESTIC OUTPUT CAPACITY: The stimulus plan seeks to 
increase the capacity of plantation forests, the development of 
biomass energy, production of woody oils, and the establishment of 
more eco-tourism opportunities.  The Plan stipulates that this 
action would not only enhance China's energy and food security, but 
also increase opportunities for economic and rural development. 
Growth in production is to be led by wood panels, packaging, and 
other construction materials, but also includes tea-oil, olive, 
walnut, and other high-yielding oil-producing plantations, 
specifically in Hunan, Jiangxi, Sichuan, and Yunnan Provinces; 
plantations for use in biofuel production; cultivating rarer species 
like oak and mulberry; and continued development of "fast-growing" 
timber plantations.  On the eco-tourism side, the Plan stipulates 
increased investment in infrastructure development at 300 scenic 
spots, which would generate income and create jobs locally, 
ultimately creating a "brand" for Chinese eco-tourism. 
 
¶9.  (U) Linked to this push to increase domestic capacity, the Plan 
provides guidance for attracting additional foreign direct 
investment in developing or upgrading timber processing operations 
in line with the government's "Industrial Foreign Investment 
Catalogue."  The Plan also targets Central and Western regions, as 
well as Heilongjiang and Inner Mongolia, where proximity to the 
Russian border would provide continued easy access to timber, wood 
pulp, and paper. 
 
¶10. (U) INTEGRATE FOREST TENURE REFORM WITH STIMULUS: The Plan 
emphasizes the need to continue with China's ongoing collective 
forest tenure reform process.  This would include expanding the 
direct economic benefits to those living near forested areas and 
encouraging a shift from "traditional" to "modern" forestry.  For 
those qualified to purchase forest tenure rights, a mortgage loan 
program would be established to facilitate such purchases, and the 
government will create guaranteed micro-credit loans for individual 
foresters and small and medium enterprises.  (NOTE:  This ongoing 
reform effort of forestry rights only applies to economic activity 
associated with the trees; the land itself will still remain 
"collectively" owned.  END NOTE) 
 
¶11. (U) FOREIGN TIMBER RESOURCES: Ensure a "stable" supply of 
imported raw timber and paper products from foreign sources, 
maintaining the volume at or above 160 million cubic meters. 
Specific objectives include "accelerating" the development of 
Russia's forest resources, "properly handling the international 
problem of illegal logging."  The Plan also encourages the export of 
wood panel processing equipment to intended "new markets" (Africa, 
Southeast Asia, and Russia) to co-locate Chinese processing 
operations with the sources of raw timber.  At the same time, it 
would support "qualified" Chinese companies in efforts to establish 
overseas operations through cross-border mergers and acquisitions, 
but in accordance with the government-issued but voluntarily applied 
2007 "A Guide on Sustainable Overseas Silviculture by Chinese 
Enterprises." 
 
¶12. (U) IMPLEMENTING GUIDELINES:  As the State Forestry 
Administration and other government entities implement these 
policies, the Plan specifically calls for an "earnest strengthening 
of macro controls," to improve the management and 
institution-building of the forest industry.  The Plan also cautions 
that R&D investment should be carefully coordinated and advances 
properly safeguarded under binding contracts.  At the same time, 
further development in the forest industry should be carried out 
mindful of "local conditions," coordinated at all levels to avoid 
redundancy, and allocated based on greatest development needs as 
well as market principles.  Finally, the government pledges in the 
Plan to include domestic industry associations in most if not all 
aspects of this stimulus process, including "responding to industry 
concerns of anti-dumping, countervailing duties, and other 
international trade frictions in a timely manner." 
 
CHINESE INDUSTRY THINKS PLAN LACKS MEANINGFUL CHANGES 
--------------------------------------------- -------- 
 
¶13.  (U) Chinese industry contacts doubted the Plan will accomplish 
the GOC's expectation because there are no new "solid" support 
policy/measures.  Post contacted Mr. ZHU Guangqian, President of the 
China Timber Trade Distribution Association, Mr. WU Shengfu, 
Director of China Forestry Industry Association, and Mr. LI Wei, a 
large wood trader to ask their views.  They unanimously expressed 
skepticism that the plan would be implemented in a meaningful way. 
They noted that China's wood processing sectors are very 
market-oriented; about 90% of the wood processing factories are 
privately owned.  Thus, industry believes tax policies would be one 
of the few ways to influence directly China's wood processing 
sector.  The industry leaders noted that, while the Plan may impact 
production of wood products from domestic sources, the industry 
heavily relies on exports of finished products and imports of raw 
materials.  This trade is impacted by the Value Added Tax (VAT) 
rebate on exported timber products more than any other policy.  The 
government "means business" when the VAT rebate is changed. 
 
¶14.  (U) This current Plan was originally released in May 2009 and 
designed to urge financial institutions to provide support for 
forestry development.  However, mandatory contributions by large 
processors to a centralized "cultivation fund," managed by the 
timber associations to funnel to the State Forestry Administration, 
has been reduced to 10% of wood sales since July 2009, from 20%. 
Industry voiced the opinion that China's wood processing sector has 
passed the most difficult time and that both domestic and export 
markets are going up.  Representatives further noted that while an 
increase in mergers and acquisitions within the industry is one of 
the goals of the Plan, this has been accomplished by the bearish 
market in 2008 and 2009 rather than by government encouragement. 
Nonetheless, industry likes the fact that the Plan "encourages 
large-scale businesses, supporting mergers and acquisitions of 
leading companies."  Industry believes the Plan may be able to offer 
substantial financial incentives and policy support offered to 
increase M&A. 
 
COMMENT 
------- 
 
¶15.  (SBU) COMMENT: Industry experts believe China's 2010-2012 
Forestry Industry Stimulus Plan will have a limited impact on the 
global environment.  On the one hand, upgrades in technology, energy 
saving measures, and pollution controls will reduce emissions of 
carbon and other pollutants, which could contribute to China's 
stated goals for reductions in energy and carbon intensity. 
Additional trees planted in the creation of new plantation forests 
also may be environmentally beneficial.  The stated intent to 
increase the use of forest certification schemes would inject 
greater transparency into the chain of custody into and out of 
China.  Moreover, measures to address product safety concerns would 
benefit consumers if adequately enforced.  However, these positive 
measures are still geared largely toward improving environmental 
conditions domestically, with seemingly little regard for impact on 
forest areas outside of China's borders.  For example, it is 
troubling that that the Plan specifically calls for increased 
logging and timber processing activity to take place in key producer 
areas like Russia, Southeast Asia, and Africa, and identifies 
incentives to facilitate the export of Chinese processing equipment 
to those zones.  It appears that in this economic downturn, and 
despite (or due to) the upcoming climate change negotiations in 
Copenhagen, where forest-based mitigation will be a key feature, 
China appears to have every intent to strengthen its timber industry 
and China's access to carbon credits, even if it comes at the 
expense of forest-rich developing countries elsewhere. 
 
¶16. (SBU) The skepticism about the impact of the Plan is not only 
limited to the lack of consideration of foreign resources.  Chinese 
business is particularly skeptical of the Plan because there is no 
real money behind it.  The forest products industry is 
overwhelmingly privately-owned and small.  This type of enterprise 
is reactive to the market, particularly overseas demand.  Small 
players tend not to listen or take heed of broad "Plans" from the 
government.  Second, the lever that moves the forestry industry more 
than any other is the VAT rebate for exported products, of which the 
Plan makes no mention.  Industry believes that the government will 
"get serious" only when the VAT rebate is increased or decreased to 
promote or discourage exports, respectively.  Thus, this forestry 
plan probably lacks meaningful policy tools to impact significantly 
either the processing of wood products in China or the harvest of 
resources in third countries that fuel the industry's growth.  END 
COMMENT 
 
HUNTSMAN