FEDERAL RESERVE LOOKS AT SOUTHWEST CHINA DEVELOPMENT

UNCLAS SECTION 01 OF 02 CHENGDU 001250

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STATE PLEASE PASS FEDERAL RESERVE SYSTEM FOR WARSH AND FRB SAN
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E.O. 12958: N/A
TAGS: ECON EFIN PGOV SENV CH
SUBJECT: FEDERAL RESERVE LOOKS AT SOUTHWEST CHINA DEVELOPMENT
PROSPECTS

CHENGDU 00001250 001.2 OF 002



1. (SBU) Summary. A Federal Reserve delegation visited Chengdu
from November 28-30. According to local government leaders, the
economies of Sichuan and Chengdu will continue to grow rapidly,
although environmental protection is a concern. Representatives
of smaller U.S. businesses operating in Chengdu complained of
lack of government transparency and human resource problems.
End summary.


2. (U) Federal Reserve System Governor Kevin Warsh, San
Francisco Federal Reserve Bank (SFFRB) President Janet Yellen,
SFFRB International Research Group Vice President Reuven Glick,
and SFFRB Group Vice President and Deputy for Banking
Supervision and Regulation Teresa Curran visited Chengdu
November 28-30 to meet with local officials and to discuss
economic prospects for China's southwest with representatives of
U.S. businesses.

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HARMONY, HARMONY, HARMONY
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3. (SBU) Sichuan Development and Reform Commission (SDRC)
Director Xie Hong used the term "harmonious" at least three
times during his description of the provincial and central
government's plans for the area's economic development. He said
that Chengdu was not "representative" of the province generally,
noting that Sichuan's population was heavily rural. Therefore,
authorities needed to ensure that the benefits of economic
development were spread fairly throughout society, so
development could be both "sustainable" and "harmonious," said
Xie. Strict environmental protection was also necessary to
ensure "harmony between man and nature." Asked about the
province's efforts to attract FDI, Xie acknowledged that to
succeed the province must "do better than Shanghai or Beijing."


4. (SBU) On the question of province's revenues, SDRC Finance
Director Guo said that local taxes and fees were sufficient to
cover approximately one-half of the province's expenditures,
with the rest coming from the central government. She explained
that the province received revenues from the central government
both in the form of refunds of taxes paid by local and
provincial authorities, and in the form of direct payments.

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BUT NOT JUST HARMONY, ALSO CONTENTMENT
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5. (SBU) Chengdu Executive Vice Mayor Liu Peizhi outlined the
factors driving the city's recent growth, which he stated had
averaged 13 percent per year over the previous five years. He
seemed particularly proud of one result, which was an increase
in the city's fiscal revenues from 36 billion RMB (approx. USD
4.5 billion) in 2005 to a projected figure of 43 billion RMB
(approx. USD 5.4 billion) in 2006. He claimed that only seven
percent of the city's economy was based on agriculture, while
heavy industry accounted for over 41 percent, the remainder
coming from "tertiary" industries, including the service sector.
However, he admitted that the city's logistics sector was
"lagging." Summing up Chengdu's advantages, he said that it was
a "happy place to be," due to its "harmonious society" and the
ability of its residents to "live and work in peace and
contentment."


6. (SBU) Asked about environmental concerns, Liu pointed to
water pollution on the upper Yangtze as one of his primary
worries. With heavy population pressure along the river's upper
stretches and tributaries, Liu said that it was almost
impossible to stop the discharge of untreated wastewater, even
though modern treatment plants have been built. Following the
meeting, a Foreign Affairs Office (FAO) representative tried to
downplay Liu's comments about Chengdu's environmental problems.

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THE U.S. BUSINESS COMMUNITY SOUNDS OFF
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7. (SBU) At a luncheon event organized by AmCham Sichuan, local
representatives of U.S. businesses aired their concerns over the
province's business environment. With heavy representation from
U.S. SMEs, attendees complained of difficulty getting commercial
credit from local banks, and problems in dealing with China
Customs and agricultural inspection services. The transparency
of government decision-making was a common grievance, along with
human resource problems. One representative of a firm
manufacturing precision instruments said that he had to spend up
to 50 percent of his time on personnel issues, while in the

CHENGDU 00001250 002.2 OF 002


United States he would expect to spend less than ten percent of
his time on such matters.


8. (SBU) The delegation visited Intel's assembly and packaging
facility in Chengdu to meet with managers. Intel Chengdu's
Chief Financial Officer David Schmid told the delegation that
the main reason for locating the plant there was to take
advantage of low labor costs (which he said were one half to two
thirds those of Shanghai) and to be closer to the firm's markets
in southeast Asia. He added that the plant had experienced a
very low rate of confidentiality or trade secret violations,
which he attributed to a low turnover rate and to good business
practices. Unlike the SME attendees at the lunch event, Schmid
had few complaints about government transparency, China Customs,
or the availability of credit.

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FRANK TALK FROM THE NEW HOPE GROUP
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9. (SBU) New Hope Group Chairman Liu Yonghao gave the delegation
a brief history of his firm's rise from selling bicycles and
watches in 1982 to its present status as one of China's leading
agribusiness concerns (it also has finance, chemical, and
construction divisions). His major concerns for the continued
development of southwest China's economy included the quality of
its workforce, along with the need to improve the
transportation, energy, and logistics sectors. He called U.S.
investment in China's banks "very positive." Asked about his
worries for China's overall political and economic future, Liu
said that stability was the most important thing, but that
continued market opening and political reform were necessary to
maintain that stability. He added his view that the economy
(and especially the agricultural sector) remained vulnerable to
"external shocks" such as SARS and avian influenza.

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COMMENT
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10. (SBU) Concerns over workforce quality, the environment, the
banking system, and social stability are hardly unique to
southwest China. However, transportation and logistics problems
as well as local government attitudes seem to remain significant
obstacles to the area's development. In the short term at
least, large investors here will likely continue to enjoy
significant advantages over SMEs in their dealings with local
officials.
BOUGHNER