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RR RUEHCN RUEHGH RUEHVC
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R 300327Z DEC 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1226
INFO RUEHBJ/AMEMBASSY BEIJING 0987
RUEHGH/AMCONSUL SHANGHAI 0337
RUEHSH/AMCONSUL SHENYANG 0347
RUEHCN/AMCONSUL CHENGDU 0338
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RUEATRS/DEPT OF TREASURY WASH DC
RUCPDOC/DEPT OF COMMERCE WASHDC
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RUEKJCS/DIA WASHDC 0375

UNCLAS SECTION 01 OF 02 GUANGZHOU 000711 
 
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: Growth Returns to Guangdong with Rising Domestic Demand and 
Ongoing Efforts at Industrial Upgrading 
 
GUANGZHOU 00000711  001.2 OF 002 
 
Ref: 
 
(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: Officials in Guangdong are declaring victory over 
the global financial crisis's impact on the trade-dependent 
province's economy.  They point to projections that growth for the 
province will exceed 8% for the year after falling to a 30-year low 
in the first quarter.  Our contacts attribute much of the success to 
the government's stimulus package and rising local demand.  However, 
officials and business leaders alike acknowledge that state-owned 
enterprises (SOEs) have benefitted disproportionately from the 
stimulus and more needs to be done for (SMEs).  Guangdong's efforts 
to move labor-intensive industries out of the Pearl River Delta 
(PRD) to make room for more advanced industries have continued and 
will likely strengthen as the economy continues to improve.  End 
summary. 
 
Growth Returning to Guangdong 
----------------------------- 
 
¶2. (SBU) After the chilling effect of the global economic downturn 
on Guangdong's trade-dependent economy, growth is returning with 
vigor to the province, according to local government, academic and 
business contacts.  Guangdong Development and Reform Commission 
(GDDRC) Deputy Director Cai Yunge recently explained to the 
Minister-Counselor for Economic Affairs visiting from Beijing that 
2009 first quarter growth was just 5.8% -- almost nine percentage 
points lower than the provinces growth in 2007 and the lowest rate 
in the past 30 years.  The impact of the global downturn was 
particularly severe in Guangdong because the province relies so 
heavily on trade, Cai said.  He pointed out that Guangdong's total 
foreign trade was 155% of the province's GDP in 2007, 89 percentage 
points higher than China as a whole.  Moreover, Cai noted that the 
U.S. market, which suffered dramatically from the downturn, 
accounted for 40% of Guangdong's exports.  But the resurgence in 
growth has been strong.  Cai said Guangdong's growth in the third 
quarter reached 8.6%.  Guangdong Academy of Social Science (GDASS) 
President Liang Guiquan told the Consul General on December 4 that 
he expected the province's growth to be 8.5% for the year overall. 
 
 
¶3. (SBU) Businesses in the province also report improving 
performance.  American Chamber of Commerce in South China President 
Harley Seyedin told us that power consumption in the province had 
rebounded since April, orders for member companies were improving 
and that the local labor market was showing signs of shortages 
again.  Seyedin highlighted that one foreign-invested manufacturer 
of electronic components had recently announced that it would hire 
6,000 new workers due to increased orders and another 10,000 after 
the Lunar New Year holiday in February 2010.  FedEx separately told 
us that cargo volumes at its Guangzhou Asia-Pacific hub were 
returning to to pre-downturn levels.  Guangzhou-based China Southern 
Airlines Chief Economist said that the firm expected its revenue 
growth for the year to be 10.8%. 
 
Taking Steps to Stimulate Demand 
-------------------------------- 
 
¶4. (SBU) Stimulating domestic demand has been a key component of the 
province's strategy emphasized by provincial government 
interlocutors.  GDDRC's Cai claimed that Guangdong was ahead of most 
provinces in its programs to increase demand.  No effort had been 
spared to promote sales of automobiles, household appliances, real 
estate and information technology products, according to Cai, who 
pointed out that retail sales in the province had gone up 16.2% from 
January through October 2009.  He also reported that the province 
would allocate RMB 2.37 trillion (about US$350 billion) for 222 
investment projects from 2008 to 2015.  For the first ten months of 
2009, investment had already totaled RMB 303 billion (about US$45 
billion), he said.  GDASS's Liang echoed Cai's comments on the 
province's efforts to increase demand.  Noting the strong increase 
in retail sales, he said consumers were willing to spend despite the 
global financial crisis.  Liang also explained that much of the 
 
GUANGZHOU 00000711  002.2 OF 002 
 
 
government's investment spending was going toward infrastructure 
development.  He believes the next stage for efforts to stimulate 
demand should be directed toward SMEs, which create more employment. 
 
 
¶5. (SBU) However, Standard Chartered Branch Manager Irving Law 
called for additional action.  He argued that expanding domestic 
consumption would require changing the habits of Chinese people to 
save less and spend more.  The government needs to reform pension 
schemes and the medical care system to make people feel more secure, 
according to Law.  He believes that further expansion of domestic 
consumption is critical to China's economy because U.S. demand for 
China's exports going forward will not be sufficient to drive growth 
the way it did in the past. 
 
SOEs Benefit at SMEs' Expense 
----------------------------- 
 
¶6. (SBU) Many observers in south China continue to point out that 
stimulus policies have favored SOEs at the expense of struggling 
SMEs.  Guangzhou Academy of Social Sciences (GZASS) President Li 
Jiangtao told us that most of the money in the stimulus money went 
to SOEs because they were seen as a safer investment.  However, Li 
identified local efforts aimed at addressing the problem: the 
Guangzhou municipal government is working on a plan to select one 
high-tech enterprise from each district in the city to receive RMB 5 
million (about US$740 million) in support.  (Comment: Li indicated 
that SOEs would also be eligible to apply for the support, 
suggesting that, depending on implementation, this measure may not 
do much to fix the imbalance.  End comment.)  GDASS's Liang also 
emphasized the need to encourage SME growth, noting that the city of 
Foshan had seen 13% growth this year in part because of the strong 
contribution from SMEs.  But Liang did not elaborate on what local 
governments should do to promote the sector. 
 
¶7. (SBU) Standard Chartered's Law argued that SOEs did not have 
enough good projects to fully absorb stimulus funding.  He 
speculated that much of the money had gone into real estate and the 
stock market, raising the risk of bubbles.  Law said that SMEs 
continue to have difficulty finding financing, estimating that only 
one-third have formal relationships with commercial banks.  The 
other two-thirds, he said, rely on underground banks or apply for 
personal loans in the name of the owner. 
 
Moving up the Value Chain 
------------------------- 
 
¶8. (SBU) Guangdong will use the impact of the global economic 
downturn to further drive efforts to upgrade industry in the PRD, 
according to GDASS President Liang.  Cai of the GDDRC emphasized 
successful efforts to upgrade Guangdong's industries that had had a 
positive environmental impact.  He explained that Guangdong had 
closed inefficient, heavy-polluting steel mills with total capacity 
of almost 10 million tons in 2009 so far, as well as cement plants 
with 43 million tons of capacity and heavy-polluting power plants 
capable of generating 10.8 megawatts of electricity.  Although 
Standard Chartered's Law suggested that industrial upgrading efforts 
and Guangdong Party Secretary Wang Yang's complementary "double 
transfer" policy to move labor-intensive, low-tech industry out of 
the PRD had been placed on the back burner during the downturn, he 
believes they will take priority again as the economy rebounds. 
 
JACOBSEN