CONSUMPTION LAGGING IN HUBEI'S NEW COUNTRYSIDE

UNCLAS SECTION 01 OF 02 BEIJING 023786

SIPDIS

SENSITIVE
SIPDIS

USDOC FOR 4420
STATE PASS USTR FOR STRATFORD, WINTER, ALTBACH
STATE PASS CEA FOR BLOCK
TREASURY FOR OASIA/CUSHMAN
USDA/ERS FOR LOHMAR, TUAN, SYLVANA LI
USDOL FOR ILAB

E.O. 12958: N/A
TAGS: ECON EAGR ELAB PGOV SOCI CH
SUBJECT: CONSUMPTION LAGGING IN HUBEI'S NEW COUNTRYSIDE

SUMMARY
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1. (SBU) In rural Hubei Province, incomes remain low and
government policies have failed to boost consumption,
according to Provincial Government officials. Local
governments are facing a financial crunch due to loss of
tax revenue and increasing pressure to provide compensation
to farmers for land that is seized for public works and
development projects. Hubei's economy is still highly
agricultural, but non-farm income earned in Wuhan, other
Hubei cities, and in China's coastal areas is increasingly
important. Efforts to launch the Central Government's New
Socialist Countryside initiative have been largely limited
to training local officials and building model villages.
END SUMMARY.

TRAVEL TO HUBEI
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2. (SBU) Econ Macroeconomic Unit Chief, Econoff, Econ
Assistant, and Conoff traveled to Wuhan, Hubei Province,
from October 31 to November 2. Emboffs met with Provincial
Government officials at Hubei's Development and Reform
Commission, Foreign Affairs Office, Bureau of Land
Resources, Statistics Bureau and Academy of Social
Sciences. They also discussed rural issues with an
American businessman who sells wind turbines in rural Hubei
and the Assistant Mayor of Chi Bi City.

SHARE OF INCOME FROM NON-FARM ACTIVITIES INCREASING
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3. (SBU) Hubei's rural residents derive a growing share
(approximately 40 percent) of their income from non-farm
sources, according to Sun Xiaohong at the Hubei Provincial
Development and Reform Commission (HPDRC). Many of Hubei's
rural residents have migrated to factory jobs in Guangdong
Province, Fujian Province, and Shanghai and their
remittances remain an important contributor to rural
incomes, Sun said. A researcher at the Hubei Academy of
Social Sciences (HASS) said that he believes the number of
farmers moving to the cities is growing rapidly.


4. (SBU) Remittances notwithstanding, Hubei's rural per
capita income is RMB 3099 (less than USD 400),below the
national average rural income of RMB 3254. Low incomes and
high precautionary savings mean that one year after the
Central Government launched the New Socialist Countryside
initiative to improve living standards in non-urban areas,
Hubei's Provincial Government is struggling to achieve its
goal of boosting consumption in rural areas, according to
Sun. The HASS researcher added that a stark contrast
exists between Wuhan, which is attracting large
international retailers such as Wal-Mart, and Hubei's
countryside, where branded companies are unwilling to
venture due to a low rate of consumption.

HUBEI'S NEW COUNTRYSIDE PROMOTING MODELS OVER SUBSTANCE
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5. (SBU) Hubei's top economic priority in 2006 was the
improvement of rural livelihoods, with extensive focus
given to training local government officials on rural
policy and social service delivery. The province placed
even greater emphasis on building 500 model villages in
Hubei Province to exhibit high standards of health and
sanitation, education, and culture and demonstrate an
overall improvement in farmers' livelihoods, Sun
said. HPDRC coordinates government bureaus' model village
projects, but Sun could not say what percentage of the
Provincial Government's New Countryside budget is allocated
to model villages. (Note: The day after we met with Sun,
an editorial in the China Daily criticized model villages
as an example of local government leaders looking for
"political achievements to boost their chances of promotion
(and) make profit for themselves." End Note.)

PUBLIC FINANCE CRISIS LOOMING

BEIJING 00023786 002 OF 002


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6. (SBU) Sun said that Provincial Government officials face
a looming public finance crisis created by the elimination
of the agricultural tax for rural residents. Consequently,
county governments in Hubei Province, like counties in
other areas of China, are contending with a drop in tax
revenue without a parallel reduction in obligations to
provide increased social services such as health care and
education that are important components of the Central
Government's New Socialist Countryside initiative. Wu
Zhengyu, Assistant Mayor of Chi Bi City near Wuhan, told
Econoff that the public finance crunch is particularly
acute in the rural areas of his district and is a common
problem at the grass-roots level. The elimination of the
agricultural tax has benefited farmers and attracted back
to the countryside many rural dwellers who had temporarily
left their farms, but now local governments lack funds to
provide services, and there are no signs that the Central
or Provincial Government will provide additional funding to
make up the shortfall.

HUBEI'S LAND COMPENSATION DILEMMA
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7. (SBU) Another factor in Hubei Province potentially
threatens to exacerbate the government's financial
shortfall. According to Provincial Government officials,
compensation required for farmers from whom government
bureaus seize land for public works and development
projects is likely to increase rapidly. Zhang Jianren,
Vice Director, Hubei Provincial Bureau of Land Resources,
cited three reasons for the disproportionate pressure on
Hubei to offer land compensation to rural residents:

--the Provincial Government's intention to abide by the
Central Government's recently announced directive on
compensation for hydropower and water projects and provide
the maximum level of compensation to farmers;

--the Provincial Government's plan to increase the
province's urbanization rate to 50 percent by the end of
the Eleventh Five-Year Plan (in 2010),which will require a
significant number of new road and water projects that will
necessitate additional land seizures; and

--the continued pressure on local government officials in
Hubei Province to follow through on resettlement
commitments to the 260,000 people relocated by the Three
Gorges Dam project in the western part of the province.

COMMENT
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8. (SBU) What we saw is in line with the views of many
observers: Wuhan, China's fifth-ranked city by population,
is enjoying sufficiently rapid growth and investment so as
to possibly join Beijing, Shanghai, and Guangzhou as one of
China's few first-tier cities. The expansion of Wuhan and
nearby up-and-coming cities in Hubei like Chi Bi is an
important adjunct to the coastal cities for the
countryside's excess labor supply. Reliance on this kind
of successful urban growth is likely to continue --
policies to promote rural-urban balance notwithstanding --
because efforts to boost standards of living and
consumption in the countryside are clearly flagging.

RANDT