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RR RUEHCN RUEHGH
DE RUEHGH #0059/01 0571104
ZNR UUUUU ZZH
R 261104Z FEB 10
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8572
INFO RUEHBJ/AMEMBASSY BEIJING 3327
RUEHCN/AMCONSUL CHENGDU 2412
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0869
RUEHHK/AMCONSUL HONG KONG 2579
RUEHLO/AMEMBASSY LONDON 0078
RUEHML/AMEMBASSY MANILA 0183
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHFR/AMEMBASSY PARIS 0053
RUEHUL/AMEMBASSY SEOUL 0695
RUEHSH/AMCONSUL SHENYANG 2403
RUEHIN/AIT TAIPEI 2202
RUEHKO/AMEMBASSY TOKYO 0906
RUEHGH/AMCONSUL SHANGHAI 9239

UNCLAS SECTION 01 OF 05 SHANGHAI 000059 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/CM 
NSC FOR MEDEIROS, LOI, SHRIER 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP 
TREASURY FOR IMFP -- SOBEL/CUSHMAN 
STATE PASS CEA FOR BLOCK 
STATE PASS CFTC FOR OIA/GORLICK 
MANILA FOR ADB USED 
PARIS FOR US/OECD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV CH
SUBJECT: BANK LENDING REVIVES GROWTH IN EAST CHINA'S ZHEJIANG 
 
REF: SHANGHAI 041 
 
¶1.  (SBU) Summary:  Despite the downturn in traditional export 
markets, East China's Zhejiang Province kept pace with average 
Chinese lending growth last year, helping to boost GDP growth by 
year end.  Zhejiang has issued support plans for eleven 
industries, but is attempting to focus new financing on small- 
and medium-size enterprises (SMEs) -- the traditional industrial 
base of this entrepreneurial province.  Zhejiang's financial 
regulators greatest concerns lie with combating inflation 
expectations in the wake of this lending boom.  End Summary. 
 
============================================ 
Government Jumpstarted Growth in 2009 . . . 
 
============================================ 
 
¶2.  (SBU) The Central Government's relaxed monetary policy and 
fiscal stimulus played the major role in Zhejiang's economic 
growth of 8.7 percent in 2009, according to Hangzhou-based 
banking regulators and bankers who spoke with EconOff on January 
¶21.  Li Hong, deputy president of the Hangzhou Sub-branch of the 
People's Bank of China (PBOC), said new lending in Zhejiang last 
year was over RMB900 billion (approximately US$132 billion), 
amounting to about one-tenth of total new lending in China 
during the period.  (Note: One-tenth is in line with the 
historical ratio of total loans in Zhejiang to total loans in 
China, according to PBOC data.  End note.)  Tian Dazhang, Deputy 
Head of the Zhejiang Regional Headquarters of the Industrial and 
Commercial Branch of China (ICBC), confirmed his bank lent out 
an "enormous amount" -- RMB70 billion (approximately US$10 
billion) in 2010 -- although he noted ICBC was third in new 
lending in 2009 behind Bank of China, which took top place with 
RMB97 billion (approximately US$14 billion), and the China 
Construction Bank. 
 
 
 
¶3.  (SBU) In terms of fiscal stimulus, PBOC's Li noted Zhejiang 
issued support plans for eleven industries, one more than the 
number of industries specified for national support by the 
Central Government in connection with the 2008 stimulus package. 
 Zhejiang included construction and transportation, but not the 
logistics sector, which was in the Central Government's plan. 
(Note: The nine other industries enjoying support from both the 
Central Government and Zhejiang are iron and steel, automobiles, 
shipbuilding, petrochemicals, light industry, textiles, 
nonferrous metals, equipment manufacturing, and electronics and 
information industries.  End note.)  Li said 16 to 17 percent of 
new lending in the province went into stimulus projects, 
acknowledging this was a low percentage compared with other 
provinces because of the predominance of Zhejiang's private 
sector.  ICBC's Tian said his bank has a share in lending to all 
government stimulus projects. 
 
 
 
¶4.  (SBU) The traditionally low share of the government sector 
in Zhejiang's economy placed some limits on the number of 
official stimulus projects that could be rolled out on short 
notice, said PBOC's Li.  (Note:  According to Zhejiang 
officials, 99.9 percent of Zhejiang enterprises are SMEs, most 
of which are privately owned.  End note.)  Zhejiang provincial 
officials did not have as many infrastructure projects lined up, 
because, for example, the highway system is already relatively 
complete, and there are few large state-owned enterprises.  (See 
reftel.)  ICBC's Tian said his bank's headquarters required that 
infrastructure loans be tied to future returns, such as user 
 
SHANGHAI 00000059  002 OF 005 
 
 
fees or land sales, so ICBC will not lend for "pure" public 
works projects, such as parks. 
 
 
 
============================================= = 
. . . Pulling Enterprises Back from the Abyss 
 
============================================= = 
 
 
 
¶5.  (SBU) Contacts pointed to the winter of 2008-09 as the low 
point for Zhejiang's economy during the current crisis.  Yang 
Xiaoping, director-general of the Zhejiang Office of the China 
Banking Regulatory Commission (CBRC), said in 2009 growth was 
slowest in the first quarter, and thereafter picked up quarter 
by quarter.  According to the National Bureau of Statistics, 
first quarter 2009 economic growth in Zhejiang was 3.4 percent 
compared with the same period the previous year, while national 
growth for the same period was 6.2 percent; for the first half 
of 2009 Zhejiang grew 6.3 percent, compared to 7.1 percent 
nationally; for the first three quarters, both figures were 7.7 
percent; and for the full year, both figures were 8.7 percent. 
 
 
 
¶6.  (SBU) ICBC's Tian said the fourth quarter of 2008 was the 
worst time for Zhejiang's SMEs, and SME bankruptcies were 
clearly reflected in ICBC's books.  However, Tian said following 
the 2009 Lunar New Year holiday 70-80 percent of Zhejiang 
companies had recommenced production -- ICBC confirmed this by 
visiting clients to determine if, among other indicators, they 
could hear machinery running in the factories.  (Note: Lunar New 
Year 2009 began on January 26.  End note.) 
 
 
 
===================================== 
Automobiles a Focus in Zhejiang, Too 
 
===================================== 
 
 
 
¶7.  (SBU) The nationwide boom in car sales was cited as a 
specific factor driving Zhejiang's growth in 2009.  CBRC's Yang 
said stimulus policies helped to promote domestic consumption of 
cars and home appliances.  Yang pointed to the Wanxiang Group as 
an example of companies benefitting from the stimulus, with 
sales and profits each up 60 percent for the year 2009, while 
revenues have increased monthly since March of last year. 
(Note:  Wanxiang is a Zhejiang-based conglomerate that has major 
business lines in auto parts, agricultural goods and farm 
equipment, and real estate.  End note.)  China Development 
Bank's marketing of consumer automobile loans was cited by 
PBOC's Li as an example of financial innovation driving economic 
growth in the province.  The value of Zhejiang's car sales rose 
30 percent in 2009, according to the Zhejiang Bureau of 
Statistics, in line with the National Bureau of Statistics 
figures of 32 percent growth for all China. 
 
 
 
========================================= 
Tailored Help for Local Businesses . . . 
 
 
SHANGHAI 00000059  003 OF 005 
 
 
========================================= 
 
 
 
¶8.  (SBU) The Zhejiang government reached out to aid local 
businesses during the global financial crisis.  Chen Zhou, 
deputy director of the Foreign Capital Utilization Section of 
the Zhejiang Development and Reform Commission, said provincial 
leaders organized teams from various provincial departments to 
establish temporary offices in towns around the province to help 
firms cut through red tape -- for example, in registering 
businesses with the State Administration of Industry and 
Commerce.  Yang said the CBRC asked banks to "help firms get out 
of trouble," while at the same time pushing undesirable firms -- 
such as heavy polluters -- out of the market. 
 
 
 
¶9.  (SBU) Zhejiang has special conditions that call for policies 
different from those of the Central Government, our contacts 
said.  For instance, PBOC's Li said the Central Government is 
concerned about overcapacity in textiles, but Zhejiang's 
approach is different.  Since textiles is a pillar industry in 
Zhejiang, the province has decided it would be better to help 
textile manufacturers become more competitive and profitable, 
rather than pushing them out of business, said Li.  Li also 
cited the support China Construction Bank in Zhejiang is giving 
to the local shipbuilding industry. 
 
 
 
===================== 
. . . Including SMEs 
 
===================== 
 
 
 
¶10.  (SBU) Given the predominance of Zhejiang's private sector, 
the provincial authorities are promoting new channels for SME 
finance.  The Zhejiang CBRC -- in line with national CBRC 
guidelines -- ordered all banks to establish dedicated 
departments for SMEs.  CBRC's Yang said these departments are 
required to be separated from other operations by having special 
performance ratings for SMEs, special pricing of SME financial 
products, and personnel dedicated to SME-related operations.  In 
2009, 85 percent of new lending province-wide went to SMEs, said 
PBOC's Li.  (Note:  According separate PBOC statistics, just 
over 58 percent of new lending to corporations nationwide went 
to SMEs in 2009.  End note.) 
 
 
 
¶11.   (SBU) ICBC is exemplary in efforts to finance SMEs, said 
CBRC's Yang, and by year end 2009 has established 100 
subbranches in Zhejiang Province for SME business.  However, 
ICBC's Tian detailed the difficulties China's biggest commercial 
banks face in serving SME clients.  He noted 70 percent of ICBC 
Zhejiang Branch loans went to SMEs in 2009 -- below the 
provincial average cited by the PBOC -- which would be further 
reduced to 50 percent if ICBC Zhejiang lending through the 
headquarters asset pool is included.  ICBC is having some 
success putting SME financial services online, for the 
convenience of clients, but nonetheless faces high SME client 
turnover -- 30 percent of SME clients go out of business each 
year -- and the vetting of new SME clients must be done in 
person. 
 
SHANGHAI 00000059  004 OF 005 
 
 
 
 
 
============================================= = 
High January Bank Lending Not Worrisome . . . 
 
============================================= = 
 
 
 
¶12.  (SBU) Contacts downplayed the possibility of a Central 
Government crackdown on bank lending in the wake of a large 
volume of new lending in early January.  PBOC's Li said new 
lending in January was not a good indicator of trends in 2010, 
since there is always a rush to lend at the beginning of the 
year -- this then locks in a full twelve months of interest 
payments -- and that in addition, there was pent up demand from 
the low lending at the end of 2009.  ICBC's Tian also suggested 
the January surge was a one-off, saying many of the loans issued 
in January were for projects prepared in the fourth quarter last 
year. 
 
 
 
¶13.  (SBU) Our contacts also denied the PBOC had moved in late 
January to penalize overly fast lending.  Chinese media widely 
reported some banks were being required to set aside reserves, 
an administrative move the PBOC can use to restrict the bank 
lending base.  CBRC's Yang said she knew of no Zhejiang-based 
banks being penalized in this manner, and ICBC's Tian also 
asserted his bank was not facing these restrictions.  Yang noted 
that regulators may have to wait for the end of the month, as 
banks are not required to report mid-month statistics.  (Note: 
Subsequently on February 11 the PBOC announced new lending in 
January soared to RMB1.39 trillion -- from RMB380 billion the 
previous month -- and on February 12 raised required reserve 
ratios (RRRs) by an additional half percentage point, a move 
that many analysts say signals a PBOC bias toward a somewhat 
tighter monetary policy.  End note.) 
 
 
 
====================================== 
. . . But NPLs and Other Risks Rising 
 
====================================== 
 
 
 
¶14.  (SBU) Regulators in Zhejiang are increasing oversight of 
new lending to reduce the potential for future problem loans and 
inflation.  According to PBOC's Li, the overall balance of 
nonperforming loans (NPLs) increased by RMB4.5 billion in 
Zhejiang Province last year, although the ratio of NPLs dropped 
by 0.26 percentage points because the overall amount of lending 
increased.  (See reftel.)  Local governments have also increased 
funding to bail out firms that get into trouble, said Li. 
While Li acknowledged that momentum in lending will stay high, 
in order to service projects begun last year, the PBOC is 
requiring that 80 percent of lending by large banks -- and 70 
percent of lending by smaller banks -- go to existing projects; 
new projects will have to be "carefully evaluated."  CBRC's Yang 
said that by January 23 banks needed to submit a draft oversight 
system for ensuring that loans do not flow into speculation in 
the real estate and stock markets.  Currently, Zhejiang banks 
have attained a 180 percent coverage ratio for NPLs, said Yang. 
 
 
SHANGHAI 00000059  005 OF 005 
 
 
 
¶15.  (SBU) One problem with combating inflation expectations, 
said Li, is that "it is very difficult to forecast."  The 
consumer price index (CPI), he observed, does not actually 
reflect what consumers are experiencing with respect to 
increases in their cost of living, because the CPI components 
are not weighted correctly.  Compounding the problem from Li's 
perspective, inflation is increasingly based on international 
factors, such as commodity prices.  CBRC's Yang said the Central 
Government may put controls on some prices to stave off 
inflation, but that currently the government's main job is 
controlling inflationary expectations.  The PBOC RRR increase 
was a signal to the market that it is serious about this task, 
said Li. 
 
 
 
 
 
======= 
Comment 
======= 
 
¶16.  (SBU) Zhejiang's financial regulators appear well aware of 
the potential danger of increasing nonperforming loans following 
2009's lending boom but, as of early 2010, also have little 
incentive to apply the brakes too hard on local enterprises -- 
best exemplified by their "wait and see" attitude on stanching 
new loan growth.  An additional danger is that Zhejiang 
authorities will be tempted to support the growth of larger 
enterprises, or even encourage the formation of new state-owned 
conglomerates, in order to better tap Central 
Government-approved financing.  Hints of that approach can be 
seen in the enhanced delivery of government services to local 
businesses during the financial crisis, but more worrisomely in 
the case of the potential benefits channeled to a local 
autoparts manufacturer.  Nonetheless, Zhejiang continues to be 
an exemplar of private entrepreneurship, and buoyed by its late 
2009 recovery, will most likely remain largely on that path. 
BEEDE