Identifier
Created
Classification
Origin
06BEIJING17937
2006-08-25 08:07:00
CONFIDENTIAL
Embassy Beijing
Cable title:  

CENTRAL-PROVINCIAL FRICTION OVER EFFORTS TO CURB

Tags:  ECON EIND ENRG ELAB EINV PGOV CH 
pdf how-to read a cable
VZCZCXRO0723
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #7937/01 2370807
ZNY CCCCC ZZH
P 250807Z AUG 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 5187
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 017937 

SIPDIS

SIPDIS

USDOC FOR 4420
TREASURY FOR OASIA/ISA - DOHNER/CUSHMAN
NSC FOR ALTBACH
STATE FOR EAP/CM, EB
STATE PASS USTR FOR STRATFORD, WINTER, WELLER
STATE PASS CEA FOR BLOCK
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRB FOR DAGES/CLARK

E.O. 12958: DECL: 08/25/2016
TAGS: ECON EIND ENRG ELAB EINV PGOV CH
SUBJECT: CENTRAL-PROVINCIAL FRICTION OVER EFFORTS TO CURB
INVESTMENT

REF: A. (A) BEIJING 12549


B. (B) BEIJING 11705

C. (C) BEIJING 566

Classified By: (C) CLASSIFIED BY ACTING MINISTER COUNSELOR FOR ECONOMIC
AFFAIRS CHRISTOPHER BEEDE, 1.4 (B) AND (D).

SUMMARY/COMMENT
---------------

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 017937

SIPDIS

SIPDIS

USDOC FOR 4420
TREASURY FOR OASIA/ISA - DOHNER/CUSHMAN
NSC FOR ALTBACH
STATE FOR EAP/CM, EB
STATE PASS USTR FOR STRATFORD, WINTER, WELLER
STATE PASS CEA FOR BLOCK
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRB FOR DAGES/CLARK

E.O. 12958: DECL: 08/25/2016
TAGS: ECON EIND ENRG ELAB EINV PGOV CH
SUBJECT: CENTRAL-PROVINCIAL FRICTION OVER EFFORTS TO CURB
INVESTMENT

REF: A. (A) BEIJING 12549


B. (B) BEIJING 11705

C. (C) BEIJING 566

Classified By: (C) CLASSIFIED BY ACTING MINISTER COUNSELOR FOR ECONOMIC
AFFAIRS CHRISTOPHER BEEDE, 1.4 (B) AND (D).

SUMMARY/COMMENT
--------------


1. (C) Beijing has recently become more forceful in its
efforts to control investment at the provincial level and
went so far as to publicly reprimand officials in Inner
Mongolia for pursuing unauthorized power projects. The
Central Government separately announced in early August that
it would dispatch economic inspection teams to key provinces
to compel them to more closely follow Beijing's direction.
Local officials in Inner Mongolia as well as Hunan appear
dismissive of the Central Government's push, perhaps
reflecting how existing career incentives and local
conditions motivate the continued pursuit of high rates of
investment even when verbally encouraged by the Central
Government to do otherwise. END SUMMARY/COMMENT.

GOING AFTER THE LOCALS
--------------


2. (C) With second quarter GDP growth at a blistering 11.3
percent and signs of overcapacity in key industries such as
steel and cement (Ref A),Chia has no shortage of reasons
for its contiued concern about economic overheating, driven
primarily by very rapid growth in fixed asset investment at a
rate of approximately 30 percent annually. (Note: In 2005,
fixed asset investment amounted to approximately 48.6 percent
of China's total GDP. End Note.) Over the past month, the
Central Government, in its push to cool things down, at least

in certain sectors, has adopted a more forceful posture
towards provincial and regional governments. Premier Wen
Jiabao made several statements in July about controlling land
use, reining in investment, and curbing polluting industries.
In early August, the State Council indicated that it would
send special economic inspection teams throughout the country
to compel local government officials to implement policies in
line with preventing economic overheating and rebalancing
growth.

MAKING AN EXAMPLE OF INNER MONGOLIA
--------------


3. (C) The State Council has publicly reprimanded leaders
from Inner Mongolia, blaming the region's chairman, Yang
Jing, and vice-chairmen Yue Fuhong and Zhao Shuanglian, for
an unauthorized investment project which resulted in the
deaths of six workers, according to an August 17 report in
state-controlled media. The USD 350 million project involved
the Xinfeng Power Plant constructing two 300,000 kilowatt
coal-burning generators. A decision last year to speed up
construction led to the workers, deaths when one of the main
structures collapsed. The State Council,s recent response
included reprimanding the leaders as well as a reported
halting of other "unauthorized" power plants in Inner
Mongolia.


4. (C) The Central Government's actions make an example of
Inner Mongolia, which has the highest growth rate over the
past three years among Chinese provinces and autonomous
regions, said Wang Tongsan, Director of the Institute of
Quantitative and Technical Economics at the Chinese Academy
of Social Sciences (CASS). Inner Mongolia's Gross Domestic
Product (GDP) increased by 21.6 percent in 2005 and 19.4
percent in 2004. Wang said that the high growth rate is
predominately due to construction of these unauthorized coal
plants. In his view, the Central Government hopes to
indicate to other provinces that they too will be punished if
they pursue investment projects without Beijing's approval.

A DEFIANT ATTITUDE...
--------------


5. (C) Despite the recent reprimand by the State Council,

BEIJING 00017937 002 OF 002


Inner Mongolia officials in the capital city of Huhehote told
us on August 21 that Beijing's more forceful approach likely
would have little impact on their region's investment
strategy. Ma Yongzhen, Vice Chairman of the Inner Mongolia
Academy of Social Sciences (IMASS),said that the Central
Government's comments would not affect the level of
investment in Inner Mongolia. Wu Ente, also of IMASS,
agreed, stating that provincial-level government leaders
remain unconcerned about what the Central Government thinks.
It is unclear to us whether this suggests Inner Mongolia will
find a way to continue the affected projects or whether the
officials were merely expressing a general intention to
maintain an overall high rate of investment.


6. (C) Comments from Inner Mongolia officials over the past
year are perhaps more broadly indicative of regional
officials' posture towards reprimands from Beijing. During a
December 2005 visit to Huhehote, these officials emphasized
to us the value of boosting investment in industrial
development and the energy sector, going so far as to say
they hope Inner Mongolia will become northern China's energy
hub (Ref C). At the March 2006 session of the National
People's Congress in Beijing, Wang Zhimin, the Huhehote
correspondent for Ta Kung Pao (pro-PRC mainland/Hong Kong
daily newspaper) commented that Inner Mongolia's leaders
believe the region's rapid economic development is a national
success story.

... AND SKEPTICISM FROM ANOTHER PROVINCE
--------------


7. (C) On August 22, Hunan Provincial Officials based at
Hunan's Foreign Affairs Office in Beijing told us that from
the provincial perspective, the only sector where the Central
Government's overheating concerns are valid is real estate.
Hunan, like Inner Mongolia, would plan to continue to pursue
its own investment strategy with little regard for Central
Government policies, according to these officials.

CONTINUATION OF A TREND
--------------


8. (C) The State Council's concern about overinvestment in
the provinces is not new. Li Jianwei, a macroeconomic
researcher at the State Council's Development Research
Center, said in June that local government leaders are
primarily to blame for higher than projected GDP growth rates
during the first half of 2006 (Ref B). According to Li,
China's national promotion system for officials remains an
obstacle to balanced economic growth as new local officials,
eager to earn promotions, often launch investment projects
that are ill-advised or even unauthorized by Beijing.

COMMENT
--------------


9. (C) The Central Government's new measures to cool growth
in the provinces, including its public criticism of officials
from Inner Mongolia, seem to reflect desperation on Beijing's
part with regard to controlling investment in certain
sectors. Local officials continue to promote rapid growth,
however, for the sake of social stability, local employment,
and personal political gain. If the reaction of officials in
Inner Mongolia to Beijing's public reprimand is any
indication of the likely response from other provinces (and
we see no reason why this would not be the case),then the
Central Government is already facing an uphill battle to
control high rates of fixed asset investment in the
provinces. End Comment.

SEDNEY
SEDNEY