VZCZCXRO0846
RR RUEHCN RUEHGH
DE RUEHGZ #0626/01 3100801
ZNR UUUUU ZZH
R 060801Z NOV 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1083
INFO RUEHBJ/AMEMBASSY BEIJING 0864
RUEHGH/AMCONSUL SHANGHAI 0265
RUEHSH/AMCONSUL SHENYANG 0275
RUEHCN/AMCONSUL CHENGDU 0266
RUEHHK/AMCONSUL HONG KONG 0338
RUEHGZ/CHINA POSTS COLLECTIVE 0329
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0192
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC 0312
RUEKJCS/DIA WASHDC 0308

UNCLAS SECTION 01 OF 03 GUANGZHOU 000626 
 
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 ETRD EINV PGOV CH
SUBJECT: Optimism Returning to Manufacturing Heartland of the Pearl 
River Delta 
 
Ref: A) Guangzhou 613, B) Guangzhou 598, C) Guangzhou 397, D) Hong 
Kong 1898 
 
(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: Things are looking up for Dongguan, the export 
manufacturing powerhouse at the heart of the Pearl River Delta.  A 
year ago business leaders in the city raised dire alarms of 
impending factory closures and massive layoffs.  During meetings 
last month, contacts told the Consul General that conditions have 
stabilized with export orders improving again and a tighter labor 
market.  The local government has taken steps to help firms tap the 
domestic market, but industry leaders representing Hong Kong 
investors believe obstacles remain that will keep many firms focused 
on export sales.  End summary. 
 
Situation Stabilizing 
--------------------- 
 
¶2. (SBU) A year after dire predictions of factory closures and mass 
layoffs left local businesses and officials concerned about economic 
stagnation and social unrest, the economic outlook has dramatically 
improved in the export manufacturing center of Dongguan.  Leaders of 
the Dongguan Association of Enterprises with Foreign Investment (DG 
FIE Association), whose members are mostly Hong Kong-invested 
companies, told the Consul General during an October 16 visit that 
the situation had now stabilized as indicated not only in Customs 
statistics but also in the association member surveys and recent 
sales results at the executives' own factories.  Chu Kwok Kai, the 
association chair, pointed out that Dongguan's total export value 
for the January-September 2009 period was down approximately 21% 
from a year ago, but rising sales in recent months led the 
association to predict exports would finish the year down just 
16-17%.  Eddie Leung, the association's honorary chair, noted that 
comparing 2009 to 2008 wasn't very useful because 2008 was actually 
a very good year overall.  He said that 2009 exports would only be 
down about 7% from 2007 (ref B). 
 
¶3. (SBU) Leung further commented that expected factory closures 
around the Chinese New Year holiday had failed to materialize.  The 
association had predicted that 3,000 - 4,000 factories would close 
by February-March 2009; but by the time March rolled around, it was 
clear that many companies had figured out how to survive the crisis 
and were doing better.  Leung said that official figures showed that 
about 2,000 firms had shut down in Dongguan but noted that the vast 
majority were very small companies. 
 
¶4. (SBU) Other contacts in Dongguan share the view of the DG FIE 
Association.  Dongguan Mayor Li Yuquan told the Consul General that 
the public impression that many FIEs had moved out of Dongguan or 
shut down during the global financial crisis was mistaken.  He said 
the number of firms that had left Dongguan during 2008 was actually 
lower than in a typical year.  Li emphasized that the Dongguan 
government at all levels had been proactive about helping companies 
survive the crisis. 
 
¶5. (SBU) Vice President Liu Minzhong of Nine Dragons, the world's 
second largest paper company, said that his firm had chosen to close 
several manufacturing lines for maintenance around the end of 2008 
because of the impact of the global financial crisis on sales. 
However, since February things have "pretty much returned to 
normal," he said.  Whereas government officials had previously 
visited the firm every week to monitor its status during the crisis, 
Liu noted that the visits had stopped around June/July 2009.  He 
explained that Nine Dragons had actually increased capacity by 20% 
between 2008 and 2009 but was still able to sell all its output, 
albeit at lower margins. 
 
Labor Market Tightening 
----------------------- 
 
¶6. (SBU) Balance has also returned to Dongguan's labor market, 
according to Mayor Li.  He said that once again it had become 
difficult for firms to recruit workers, which he said was typical 
 
GUANGZHOU 00000626  002 OF 003 
 
 
during the busy summer months from July to October.  The DG FIE 
leaders echoed his comments, saying that layoffs had been fewer than 
expected during the downturn with many companies reducing hours 
instead of cutting employees.  They reported that, with business 
improving again, many companies said they couldn't hire enough 
workers.  Nine Dragons' Liu also indicated that turnover at the 
firm's factory had started to return to pre-crisis levels after 
dropping substantially during the early part of the year.  He noted 
that many factories in Dongguan had reopened or resumed higher 
levels of production while some migrant laborers were choosing to 
stay in their hometowns due to strong local economic growth. 
 
Domestic Market Growth Helping Some 
----------------------------------- 
 
¶7. (SBU) DG FIE Association leaders praised the Dongguan municipal 
government's recent exposition to help export manufacturers in the 
city to tap the domestic Chinese market (ref A).  Chairman Chu said 
that association members were able to get exhibit space at the 
exposition free of charge and that the municipal government 
subsidized up to 50 percent of printing costs for promotional 
materials distributed at the event.  However, Leung also noted the 
obstacles that make it difficult for many firms to transition away 
from reliance on export markets, especially value-added-tax rebates 
that continue to make export processing more profitable.  He also 
pointed out that export manufacturers don't have the relationships 
they need to develop marketing channels within the domestic market. 
 
 
¶8. (SBU) Nine Dragons, on the other hand, has become increasingly 
reliant on the domestic Chinese market as the global downturn has 
reduced export demand.  Liu told the Consul General that exports had 
previously accounted for about 44% of revenue but now accounted for 
less than 10%.  He said that business in less-developed parts of 
China, especially Guangxi and Hunan, was booming for the paper 
firm. 
 
Double Transfer Gets Mixed Reviews 
---------------------------------- 
 
¶9. (SBU) In response to the Consul General's question on the 
progress of Guangdong's double transfer policy, which aims to move 
labor-intensive factories and migrant labor populations, Dongguan 
Mayor Li emphasized that the policy benefited firms that transfer 
but no companies were forced to move.  He said the policy was based 
on market rules and claimed that enterprises with investment worth 
RMB 100 billion (about US$15 billion) had already chosen to move to 
other cities in Guangdong.  However, Leung of the DG FIE Association 
said that most companies were willing to stay in Dongguan despite 
government incentives to move.  According to Leung, the government 
has been relatively hands-off about encouraging firms to transfer 
their operations except in the cases of specifically targeted 
industries like highly polluting electro-plating factories in the 
city center.  Liu of Nine Dragons said that his firm's factories had 
not been affected by the double transfer policy because it qualifies 
as a high-tech industry due to its advanced industrial process.  He 
emphasized that moving to less-developed areas would not make 
business sense because the firm depends on economies of scale to 
keep costs low. 
 
CEPA Starting to Bring Service Industries 
----------------------------------------- 
 
¶10. (SBU) The DG FIE Association leaders also reported that they had 
begun to see more Hong Kong investment in Dongguan in service 
industries, in part due to the expansion of the Closer Economic 
Partnership Agreement (CEPA) (ref D).  Leung said that Hong Kong 
logistics firms, in particular, had been active in expanding into 
Dongguan.  The association has added 20-30 new members from the 
logistics industry, he said, noting that they had formed a separate 
logistics industry association under the umbrella of the DG FIE 
Association two months earlier.  In addition, Leung said the Hong 
Kong Chamber of Commerce in Guangdong had recently added an 
accounting sector sub-division to its organization.  Medical and 
legal services firms, however, do not appear to be expanding into 
the area, according to Leung. 
 
GUANGZHOU 00000626  003 OF 003 
 
 
 
GOLDBECK