CENTRAL CHINA EXPO 2006: RHETORIC BUT FEW RESULTS

C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 022299

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E.O. 12958: DECL: 10/20/2016
TAGS: ECON EINV ETRD ELAB PGOV ENRG CH HK
SUBJECT: CENTRAL CHINA EXPO 2006: RHETORIC BUT FEW RESULTS

REF: BEIJING 10969

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

SUMMARY
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1. (C) Central China Expo 2006, held in Changsha, Hunan
Province in late September, officially launched the Central
Government's Central China Rising initiative to balance
geographical development by bolstering economic prospects in
the region's six provinces. Although the Expo had high-level
support, including the attendance of Vice Premier Wu Yi and
Minister of Commerce Bo Xilai, the tangible results were
confined primarily to limited opportunities for selling
higher-quality consumer products and investing in the
information technology sector. In response, most potential
investors we talked to assessed few viable business
opportunities in the region. A notable exception was the
significant Hong Kong presence, with many of those
participants encouraged by Central China's progress. Several
American investors already operating in Changsha shared the
Hong Kongers' outlook. These optimistic views
notwithstanding, current trends suggest that for the short
term, most investment in Central China will continue to be
large government-sponsored fixed asset investment projects.
END SUMMARY.

TRAVEL TO HUNAN
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2. (C) Econoff and Conoff visited Hunan Province September
24-29 and attended Central China Expo events in Changsha, the
provincial capital, on September 25-27. Emboffs attended
Expo events, including the Central China Business Summit,
which Vice Premier Wu Yi opened, and met with the Deputy
Governor of Hunan Province. Emboffs also interviewed
business managers, government officials, and academics in
Changsha and Beijing for this report.

BEIJING PROMOTING "CENTRAL CHINA RISING"
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3. (C) Central China -- consisting of 360 million people in
the six provinces of Henan, Hunan, Hubei, Anhui, Jiangxi, and
Shanxi -- lags far behind many of China's coastal regions in
terms of wealth and industrial development, in great part
because of the economics of transporting goods to ports using
the limited infrastructure in place to date (a situation that
is set to improve rapidly). Zhang Jun, a researcher
specializing in Central China at the China Academy of Social
Sciences in Beijing, commented that this legacy has left
Central China oriented towards old-style central economic
planning with a resulting dependence on state-owned
enterprises (SOEs) in the industrial sector. Economic
planners in Beijing have been sensitive to Central China's
challenges over the years and began conceptually pondering
the Central China Rising initiative as early as the
mid-1990s, explained Zhang.


4. (C) Central China already has established itself as a
transportation hub and a base for energy projects, but with a
dense population and a large percentage of rural residents,
the Central Government now recognizes that it cannot afford
to ignore central China, Zhang told us. The six provincial
governments remain committed to funding fixed asset
investment (FAI) projects to improve infrastructure, he said.
One goal of the Central China Expo also was to complement
their efforts by encouraging increased private sector
participation in the economy. Zhang does not believe the
Central Government views FAI in Central China as an economic
overheating issue but rather as an instrumental part of
promoting balanced regional development. Separately, Wang
Zili, Director of the Institute of International Relations at
the Hunan Academy of Social Sciences, said that the Central
China Rising initiative finally elevates the region's status
and demonstrates that the Central Government no longer
intends to ignore Central China in favor of the industrial
Northeast or the impoverished West (reftel).


5. (C) The Central China Rising initiative aims to encourage
provincial governments to pool resources, labor, and capital.

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To this end, Shanxi Province has now been officially added
as Central China's sixth province. At a press conference on
September 27 in Changsha during the Expo, Minister of
Commerce Bo Xilai and Shanxi Provincial Governor Yu Youjun
emphasized that Shanxi will be the primary supplier of energy
resources for Central China under the new six-province
orientation, and they announced that Taiyuan, Shanxi's
provincial capital, will host the first China International
Coal and Energy New Industry Exposition (CICEN Expo) in
September 2007.

HIGH-LEVEL SUPPORT AT CENTRAL CHINA EXPO 2006
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6. (U) At the Central China Expo's opening event, the Central
China Business Summit, Commerce Minister Bo stated that the
participation of Vice Premier Wu Yi demonstrated the Central
Government's commitment to Central China. The Vice Premier
encouraged the six provinces to take advantage of the
opportunity and utilize the region's comparative advantages,
including energy resources, industrial capability, and its
strong agricultural base. Xu Kuangdi, Vice Chairman of the
CPPCC, stated that Central China's biggest challenge will be
to manage the region's urbanization and rural-to-urban
migration, particularly given the large rural population in
provinces such as Henan and Hunan. Governors from all six
provinces attended the Expo, and all of them delivered
speeches at the Business Summit, each emphasizing respective
resource bases and investment opportunities.

LOOKING TO HONG KONG
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7. (C) Leading a large delegation to Changsha, Hong Kong
Chief Executive Donald Tsang said his city can play a role in
Central China in three ways: 1) Attracting investors and
capital to the region, 2) Assisting enterprises based in
Central China in upgrading their industries and promoting
brand-name products, and 3) Enhancing the quality of the
region's service industries. Tsang also cited several
examples of increasing economic cooperation and integration
between Hong Kong and Central China.


8. (C) Zhou Yilei, Marketing Executive for the Hong Kong
Trade Development Council (HKTDC),told Econoff that the
official Hong Kong delegation at Central China Expo exceeded
150 people. Zhou, whose office was established in Wuhan in
1994, noted big changes in Central China and its relationship
with Hong Kong in the intervening period. Hong Kong's
primary interest in the region remains the service sector,
Zhou said, but there are also manufacturing opportunities
closer to home in Hunan and Jiangxi.

OPPORTUNITY KNOCKS FOR SMEs...MAYBE
--------------


9. (C) Representatives of small- and medium-sized enterprises
(SMEs) told Econoff that development in coastal areas is
increasingly saturated, making the interior more attractive.
Leo Lam, General Manager of ELM Computer Technologies in Hong
Kong, said that saturation in the information technology (IT)
industry leaves him more likely to explore opportunities in
Changsha or Wuhan than in Guangzhou or Shenzhen.


10. (C) Gary Zou, Chief Economist at Ameribankers
Corporation, disagreed with Lam's assessment, saying that his
U.S.-based clients are not yet interested in investing in
Central China primarily because investment incentives in the
region are not good enough to compete with time-tested
opportunities on China's coast. Although Central China's
Hunan Province offers a 33 percent income tax break, it is
not enough to convince a typical foreign investor to move to
the interior, which still is an unknown quantity.

SOME U.S. COMPANIES SEE OPPORTUNITY...
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11. (C) Large U.S. companies that already have invested in
Central China told Econoff that they are pleased with the
results. Zheng Jian, Sales and Marketing Director for Hunan
COFCO Coca-Cola (a share-holding company 35 percent owned by
Coca-Cola) said that Coca-Cola sales in Hunan Province have
grown 30 percent annually on average, and he expects sales to

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increase further with more urbanization, as 60-70 percent of
sales are in urban areas. Coca-Cola expects to open a
production factory in Jiangxi Province within the next two to
three years, Zheng said, due to increasing sales in that
province. Steven Jiang, Walmart's Regional Corporate Affairs
Manager, said that Central China's market presents many
opportunities for good quality consumer products. Walmart
now has nine stores in Central China's six provinces,
including three outlets in Hunan Province, and two each in
Jiangxi and Hubei. The company plans to expand to at least
25 stores in the region the next three years, according to
Jiang.

...BUT OTHER NOT IMPRESSED
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12. (C) Lily Young, Events Executive at the American Chamber
of Commerce in Beijing, agreed that companies selling
consumer products provide the best opportunity for U.S.
firms, but she said that representatives from the twenty-four
U.S. companies (including Cargil and Oracle) who she
accompanied to Changsha were disappointed with the Expo.
Yuen Yee Jing, Advisor to California Industrial City in
Zhengzhou, added that he believes the Expo was too
government-driven and failed to attract potential investors
who could be matched with investment opportunities in the
region. James Liu, Manager of Government Affairs for
Honeywell's office in Beijing, told Econoff in mid-September
that Honeywell would not send anyone to the event. Without
clear incentives for investing in the region, Liu said,
Central China is just one more region that is "rising" with
the Northeast Revitalization and the Great Western
Development Program both already underway. If all of China's
regions are rising, Liu noted, then in reality, none of them
are.

COMMENT, PART ONE: LICENSE FOR OVERHEATING IN CENTRAL CHINA
-------------- --------------


13. (C) Central Government officials have made clear their
intention to continue with plans for infrastructure
improvements in Central China, in contrast with other parts
of China (such as Inner Mongolia) where the Central
Government has voiced concerns about overheating. No one we
talked with expressed concern about possible efforts to slow
high rates of FAI in the six provinces. With a low
industrial and infrastructure base and extensive public works
improvements on the drawing board, continued high FAI growth
in Central China appears to have been deemed acceptable in
the context of national efforts to balance regional
development.

COMMENT, PART TWO: SLEEPING IN CHANGSHA
--------------


14. (C) Changsha lacks the economic dynamism of Wuhan, or
even Zhengzhou, and many participants wondered what kind of
backroom political maneuvering led to its hosting the
region's first major trade and investment event. Zhengzhou
in 2007 and Hefei in 2008 may be better equipped to host the
Central China Expo, but they will have to overcome Changsha's
legacy of a poorly organized event that featured little
participation by serious investors. There were, for example,
so few visitors on the second day of the Expo that Emboffs
found many booths either vacant or with booth attendants
sleeping soundly. END COMMENT.

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