COMMENTS ON STABILITY AND DEVELOPMENT FROM A HUNAN

C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 022125

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E.O. 12958: DECL: 10/18/2016
TAGS: ECON PGOV EAGR ELAB EFIN SOCI CH
SUBJECT: COMMENTS ON STABILITY AND DEVELOPMENT FROM A HUNAN
RURAL EXPERT

REF: A. (A) 05 BEIJING 17604

B. (B) 05 BEIJING 20124

C. (C) BEIJING 19662

Classified By: (C) CLASSIFIED BY MINISTER COUNSELOR FOR ECONOMIC AFFAIR
S ROBERT LUKE; REASON 1.4 (B) AND (D).

SUMMARY
--------------


1. (C) Hunan Province's economic "growth at all costs"
approach to development threatens to undermine social
stability in the province in the view of a provincial
economic policymaker who focuses on rural issues. He cited
water pollution, land seizures, and the state of public
finances in the wake of the elimination of the agricultural
tax as ongoing concerns with potential implications for
social stability. While policymakers in Hunan Province hope
that the Central Government's New Socialist Countryside
initiative will provide modest benefits to farmers in terms
of improved social services, the expert acknowledged that
increasing the proportion of rural income from non-farm
sources is a greater priority for the provincial government.
To this end, Hunan's current rural policy emphasizes road
construction over social services. END SUMMARY.

MEETING IN HUNAN
--------------


2. (C) Peng Shunxi, Director of the Rural Economy Division at
the Hunan Provincial Development and Reform Commission,
recently met with Econoff in Changsha, the capital of Hunan
Province, and discussed rural conditions in the province.
During a previous trip to Changsha in October 2005, Peng had
told us of his optimism at the time concerning economic
prospects for the countryside in Hunan (Ref A).

ON THE ROAD TO THE NEW SOCIALIST COUNTRYSIDE
--------------


3. (C) Peng remains mostly upbeat about economic prospects
for China's rural areas, and he is hopeful that the Central
Government's New Socialist Countryside initiative, launched
in late November 2005 (Ref B),will benefit Hunan's rural
residents. He said that for Hunan Province, which includes
many remote, mountainous areas, the New Socialist
Countryside's education component, which calls for nine years
of compulsory education, is particularly important.
According to Peng, Hunan's view of the New Socialist
Countryside initiative is that it reflects the government's
increasing recognition that a widening urban-rural income gap
has implications for social stability in rural areas.
Resources for the New Socialist Countryside are insufficient,
however, and the initiative certainly is inadequate to
address immediate concerns in rural areas, Peng said.


4. (C) Hunan Province's primary rural policy focus, according
to Peng, is not on social services but on rural
infrastructure, especially highways. Peng stated that under
the Eleventh Five-Year Plan, the provincial government hopes
to connect each village in the province by paved road.
(Comment: Road construction also was a major topic among
Hunan deputies during the National People's Congress (NPC)
session in March 2006. End Comment.) This construction not
only will facilitate the movement of agricultural goods to
market, but more importantly for Hunan, will enable more
farmers to move to urban areas, Peng said.

FARMERS INCREASINGLY RELYING ON NON-FARM INCOME
-------------- -


5. (C) Hunan officials continue to believe that
rural-to-urban migration remans the most important mechanism
to promote balanced economic development, Peng stated.
Agricultural work will continue to employ the largest number
of people in the province, but the share of rural incomes
from non-farm employment will continue to increase steadily,

BEIJING 00022125 002 OF 003


Peng opined. With an estimated 8 million rural laborers (out
of a provincial population of approximately 68 million)
already having moved outside the province to work in
Guangzhou, Shanghai, or cities in Central China, local
policymakers are actively promoting urbanization as a means
to help the countryside. Peng stated that Hunan's goal is to
increase its current urbanization rate of 37 percent to 43
percent by 2010. In addition, the provincial government is
promoting non-farm employment for those rural residents who
remain in the countryside, and one area of increased emphasis
is the tourism sector (see septel).

POTENTIAL THREATS TO STABILITY
--------------


6. (C) Peng stated that efforts to promote balanced and
continuous development will be unsuccessful if local
governments do not address emerging threats to stability in
the countryside. Hunan's rapid economic growth in recent
years has resulted in serious social costs in the province,
he said. Peng cited water pollution, land seizures, and
public finance as three major on-going concerns.

WATER POLLUTION
--------------


7. (C) On water pollution, Peng said that local government
officials are to blame for "blindly developing" at the
expense of the environment. He endorsed the Central
Government's stated objective to consider the environmental
costs of GDP growth. Peng stated that local government
awareness about environmental problems remains poor, and the
Central Government should increase funding for environmental
protection in the countryside. A major challenge for
improving environmental awareness in Hunan, Peng added, is
that neither the Central Government nor local governments
have sufficient economic incentives to rein in polluting
industries, many of which are state-owned enterprises (SOEs).


8. (C) In early September, the Xinhua News Agency reported
that two senior managers from chemical plants in Hunan were
detained in connection with illegal discharges of a highly
toxic arsenic compound into the Xinqiang River, causing the
suspension of drinking water for 80,000 residents in Yueyang
County. Peng claimed that although Xinhua reported that
local environmental protection officials discovered the
pollution during a routine water quality check, the reality
was that farmers triggered the investigation when they
complained to the media about poor water quality.

LAND SEIZURES
--------------


9. (C) Peng also expressed concern about land seizures in the
countryside and their impact on social stability. In Hunan,
most land seizures are the result of either water and
hydropower project construction or rural road construction.
On water and hydropower projects, Peng said that the Central
Government's new initiative to revise regulations on
compensation standards for land that is expropriated for dam
construction (Ref C) is a welcome development in Hunan.
Regarding highways, Peng pointed out that a negative
by-product of promoting rural road construction is that land
seizures likely will worsen in the near future. While many
farmers are willing to leave their land in exchange for
adequate compensation, others do not want to leave their
ancestral homes, commented Peng.

PUBLIC FINANCE
--------------


10. (C) Peng remains worried about local governments' debt
burden (Ref A). He echoed the concerns of officials in other
provinces about the elimination of the agricultural tax,
which, although benefiting poor farmers, also causes a
revenue loss that affects local government efforts to provide
social services, including education and health care. The

BEIJING 00022125 003 OF 003


Central Government needs to reform the tax and revenue system
to transfer additional funding to local governments for
social services; otherwise, the New Socialist Countryside
policy will fail, in Peng's view. (Note: A farmer in Shao
Shan, 50 km west of Changsha, told Econoff that the New
Socialist Countryside has been unsuccessful to date as the
local government has failed to provide additional services or
to reduce the tax and fee burden. "Everything we do to
improve our lives, we do without the help of the government,"
she said. End Note.)

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


11. (C) Adding in our experiences from other travel as well
as discussions with contacts in Beijing, we assess that what
we saw in Hunan represents a more general case: China's
"growth at all costs" campaign of the past several years
instilled a short-term perspective concerning economic
development. While the Central Government aims through its
Eleventh Five-Year Plan to take other development factors,
including environmental costs, into consideration,
translating this into on-the-ground objectives, incentives,
and supportive local structures will be a complicated and
lengthy undertaking. In Hunan's case, inadequate local
government attention to water pollution, ongoing land
seizures, and eroding public finances could make rural
stability concerns an area of focus for some time to come.
END COMMENT.

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