WESTERN CHINA'S ECONOMY CONTINUES TO LAG BEHIND COAST

UNCLAS SECTION 01 OF 02 BEIJING 003719

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E.O. 12958: N/A
TAGS: ECON EINV ELAB ETRD PGOV SOCI INRB CH
SUBJECT: WESTERN CHINA'S ECONOMY CONTINUES TO LAG BEHIND COAST
DESPITE GAINS -- SHAANXI'S STORY

SUMMARY
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1. (SBU) During a May 19-23 visit, officials in Shaanxi Province
lamented the relatively slower pace of economic development in
Western China. Shaanxi, considered to be China's gateway to the
West, has enjoyed rapid growth during the past 10 years, but the
province's economy remains far weaker than its coastal counterparts.
Government officials in Xian, the provincial capital, hope that a
strong university system and a hi-tech development zone, combined
with low labor costs, will accelerate growth in the region.
Investors in Xian, however, find businesses that are less savvy and
infrastructure that is less developed than in coastal cities. END
SUMMARY.

WHITE HOUSE FELLOWS VISIT TO CHINA
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2. (SBU) A delegation of 12 White House Fellows visited China May
19-26 with stops in Xian and Beijing. The visit covered a wide
range of issues but focused primarily on economic development. In
Xian, the White House Fellows exchanged views on economic
development in Western China with the Vice Governor of Shaanxi
Province, researchers at the Shaanxi Academy of Social Sciences, and
representatives of the Xian Hi-Tech Industries Development Zone.

PROVINCIAL GOVERNMENT'S VIEWS ON ECONOMIC DEVELOPMENT
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3. (SBU) Zhao Zhengyong, Executive Vice Governor of Shaanxi
Province, said on May 19 that Western China has enjoyed 10 percent
growth per year since the launch of the Great Western Development
Program in 1999, but economic development remains slow for
historical and geographic reasons. Zhao said that average urban
income in Western China amounts to only 70 percent of the national
average and rural incomes are at 65 percent of per capita rural
income in China. Zhao said he is confident that Shaanxi Province --
the gateway to Western China -- can accelerate development and
improve living standards, but he repeated the oft-heard refrain that
it will be difficult for the province to catch up to the coast.
(Note: See Bio Note on Zhao Zhengyong in para 8. End Note.)

WESTERN CHINA LAGGING BEHIND THE COAST
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4. (SBU) Zhang Haoting, a researcher in the Economics Department at
the Shaanxi Provincial Academy of Social Sciences, outlined Western
China's problems in terms of the region's lack of resources and slow
pace of urbanization and industrialization relative to Coastal
China. Zhang said Western China has 71.5 percent of total area but
only 28 percent of the populatio and 16.9 percent of the GDP.
Western China poduces only 14.8 percent of the nation's industial
output, 13.8 percent of its services, and25.8 percent of
agriculture's contribution tothe GDP. According to Zhang, the
Central Government's emphasis on rural reform with the lanch of the
New Socialist Countryside initiative in 2005 is important for
Western China as the region aims to raise incomes and improve
livelihoods through improved infrastructure and increasing incomes,
as well as improved social services.

HI-TECH ZONE HOPES TO ACCELERATE DEVELOPMENT IN REGION
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5. (SBU) Given these challenges, XQn's Municipal Government
established China's first hi-tech development zone (there now are
53) on three square kilometers of land southwest of the city in

1991. Located within a 12-hour transportation circle of 10
provincial capitals and approximately 600 million potential
consumers, the zone hopes to accelerate economic development by
attracting outside investors. The Xian Hi-Tech Industries
Development Zone (XHTZ) now has expanded to 35 square kilometers and
includes more than 8,000 companies and 672 research and development
institutes. The XHTZ's annual growth rate exceeds 30 percent per
year, and there are more than 40 MNCs operating in the zone,
including NEC, ABB, Emerson, Micron, Daikin, Intel, Siemens,
Honeywell, Robert Bosch, Brother, and Infineon.


6. (SBU) Investors are attracted to the XHTZ primarily by low labor
costs. With more than 900,000 college students in Xian, companies
can draw from a constant stream of graduates for all of their human

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resource needs. Even managers and PhDs make less than USD 10,000
per year, and average university graduates earn only USD 3,000 to
USD 5,000. Employers take advantage of Xian residents' preference
for staying close to home after graduating from university, and as
the XHTZ is a government entity, companies rely completely on the
Municipal Government to address labor, intellectual property and
other concerns, XHTZ-based business leaders said. Reflective of the
gap between companies in Western China and their counterparts on the
coast, business representatives at the XHTZ said they need a much
better understanding of consumers and the market in the region, and
they also need to improve standards to meet international accounting
practices and to provide better customer service.

COMMENT: LONG WAY TO GO
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7. (SBU) Discussing economic development with interlocutors in
Western China and visiting business sites such as the XHTZ provides
visitors to China with a much better understanding of the country's
challenges than they would have if they only visited Beijing and
Shanghai. Despite gains in recent years, Western China remains
economically backward when compared to the Coast. Investors may
chase lower labor costs further inland, but they will find business
representatives who are less savvy than their coastal counterparts
and an infrastructure that is less developed. The region's economy
still has a long way to go. END COMMENT.

BIO NOTE: ZHAO ZHENGYONG, EXECUTIVE VICE GOVERNOR
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8. (SBU) Zhao Zhengyong was born in 1951 and is a native of Anhui
Province where he previously served as Deputy Secretary of the
Huangshan City CPC Committee and Director of Anhui's Public Security
Bureau. He was named Vice Governor of Shaanxi Province in 2005, and
the Central Government will sponsor him to attend Harvard
University's John F. Kennedy School of Government for a short-term
course later this year. Zhao said his view on leadership is that
Chinese leaders need to pay attention to the people's needs. If
leaders study hard and understand the local situation, their work
will benefit local people, he said. Zhao said he grew up in a
worker's home but had an opportunity to go to school (he later
attended the Central Party School),and he experienced first-hand
that knowledge can change a person's life. Like many of China's
current generation of leaders, Zhao majored in engineering and
worked in a factory before becoming a government official in the
1980s. Zhao previously studied in Germany for a short period. END
BIO NOTE.

PICCUTA