SICHUAN RESEARCHER ON CHALLENGES TO ECONOMIC DEVELOPMENT

C O N F I D E N T I A L SECTION 01 OF 03 CHENGDU 000143

SIPDIS

SIPDIS

STATE FOR EAP/CM AND EB

E.O. 12958: DECL: 6/5/2017
TAGS: ECON PGOV CH
SUBJECT: SICHUAN RESEARCHER ON CHALLENGES TO ECONOMIC DEVELOPMENT

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CLASSIFIED BY: James Boughner, Consul General, United States
Consulate, Chengdu.
REASON: 1.4 (b),(d)




1. (C) Summary: Sichuan Province, the third largest in China,
ranks only tenth in terms of economic development, according to
Wang Xiaogang (strictly protect),Deputy Director of the Sichuan
Development Research Institute. While the purpose of
"Scientific Development" is to bridge the gap between East and
West China, the quality of Sichuan's development is "not good
enough," and minority regions of the province pale in comparison
to non-minority regions. Wang told us that Sichuan cannot
compete with China's coastal regions, and that it needs to focus
more on development of heavy equipment and power equipment
manufacturing, natural resource development, agricultural
products and value-added processing of food products, and
promotion of high-tech products. One reason for China's fast
economic growth is competition between local governments to get
ahead. Wang opined the central government should enact better
regulations in favor of the environment, energy efficiency, and
peoples' livelihoods, including more favorable policies for
transfer of funding from wealthy coastal areas to poorer western
areas. Even though the investment environment has improved,
Sichuan is still ten years behind the coast due to its inland
location and transportation infrastructure. The province should
nevertheless be able to attract new companies in light of its
current very low investment base. End Summary.


2. (C) Wang Xiaogang (strictly protect),Deputy Director of the
Sichuan Economic Development Research Institute, an institute of
the Sichuan Development and Reform Commission, recently met with
Washington visitors from the Bureau of Intelligence and Research
(INR) and Congenoff. We had a broad-ranging discussion of
issues affecting the development of Sichuan Province's economy.

Sichuan: Third in Population,
Tenth in Economic Development
--------------


3. (C) Wang noted that Sichuan Province is the third largest in
the country and that its population is rising. In terms of
economic development, however, the province ranks only tenth.
Per capita income is RMB 10,000 (USD 1,300) per year, which is
66 percent of the national average of RMB 16,000 (USD 2,105).
While there are a lot of natural resources in Sichuan, they are
not so abundant when considered on a per capita basis. Wang
noted that environmental conditions in Sichuan are important to
all of China because of the initial flow of the Yangtze and
Yellow Rivers through the province.

"Scientific Development" to Bridge Gap
Between East and West
--------------


4. (C) Wang opined the quality of Sichuan's development "is not
good enough," and the profitability is "not high enough." He
said the purpose of the "Scientific Development" concept was to
coordinate different economic areas across China. However, in
Sichuan, the growth in individual income is not up to the
national level, nor is the return on capital or labor, which is
60 percent of the national level. Wang explained the two
indexes the government uses to assess economic development: the
predictive index -- what is planned/hoped for, and the
compulsory index -- what the central government dictates for
growth and environmental standards. According to Wang, if the
compulsory measures cannot be attained by provincial
authorities, the central government will decide that either 1)
the provincial government has not tried hard enough, or 2) there
were objective reasons why the goals could not be met. Wang
added that Wen Jiabao already knows China will not meet the goal
of equalizing development, but feels compelled to promote the
goal.

Sichuan Urban-Rural Gap Expansive
--------------


5. (C) Just as there is a large gap between East and West
China, Sichuan has an expansive rural-urban gap. Northeast
Sichuan is a good example. Large reserves of natural gas have
recently been found there, and within 10 years, there should be
30 billion cubic meters of production. However, the region
lacks water, is not economically developed, and has "too many
people."


6. (C) Minority regions of Sichuan pale in comparison to
non-minority regions, Wang said. Liangshan (an Yi nationality
region in the southwest) and Ganze and Aba (Tibetan regions in
the west) are all extremely poor. The area of these regions is

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two-thirds of Sichuan's territory, but only seven percent of the
population (6 million people) lives there. While the resource
per capita ratio is satisfactory, the population quality is low,
he asserted. (Note: When Chinese mention "low quality"
population, they are generally referring to low education and
"cultural" levels. End Note). The minority populations are
principally farmers or herders who are not interested in trade,
Wang stated. These minority areas do have abundant tourism
resources and hydropower capacity amounting to two-thirds of
Sichuan's total. Nationally, 20 percent of potential hydropower
resources have been exploited, but in Sichuan, only 10 percent
have been exploited, so there is still great potential for
development of this resource.

Sichuan Cannot Compete with the Coast
--------------


7. (C) Wang said Sichuan cannot compete with China's coastal
regions. It needs to use its own resources to develop, and it
should develop industry. Large state-owned companies in Sichuan
include those in the fields of natural gas, steel production,
and hydropower. The National Development Reform Commission
(NDRC) controls prices in these industries which means profits
go to the central government.


Five-Year Plan Targets Development of Industry
-------------- -


8. (C) Wang said the Economic Development Research Institute
was involved in the development of Sichuan's 11th Five-Year
Plan. In the plan, institute scholars emphasized the
development of heavy equipment and power equipment
manufacturing, natural resource development including clean
energy, agricultural products and value-added processing of food
products, and promotion of high-tech products. In addition,
they recommended further development of tourism, creation of a
modern services industry, and development of large industrial
groups.


9. (C) Wang said there was also a New Socialist Countryside
project to create a modern agricultural economy. It sets out
five economic regions of Sichuan that need to develop
scientifically: 1) Chengdu, 2) southern Sichuan, 3) northeast
Sichuan (the poorest area),4) northwest Sichuan, 5) and
southeast Sichuan. The Sichuan 11th Five-Year Plan predicts a
GDP growth rate during 2006-2010 of nine percent. Wang noted
that internally, however, the provincial government thinks it
will achieve a ten percent rate.

Local Governments Compete to Get Ahead
--------------


10. (C) When queried whether China has achieved fast growth
because it has taken the market economy route, Wang responded
negatively. He pointed out that India also has a market economy
and it has not achieved such fast growth, so having a market
economy is not the only cause. China's fast economic growth can
be partially attributed to that fact that the central government
gave local governments the incentive to develop, so local
governments became competitors. Wang stated that the central
government now wants to strengthen its control again. The
problem, as he sees it, is with the environment and natural
resources, where protection is not necessarily aligned with
interests in local development.

Central Government Funding Key to Sichuan Development
-------------- --------------


11. (C) Wang opined the central government should take an
overall view of development in the country and enact better
regulations in favor of the environment, energy efficiency, and
peoples' livelihoods. He asserted the amount of funding being
transferred to the western areas from the coastal region of
China is only a percentage of local funding, and he thinks it is
far from enough. While Wang noted that in some areas of the
province, 80 to 90 percent of local funding comes from the
central government, he still advocated more transfers. To
accomplish higher transfers, Wang believes taxes should be
raised to increase the fiscal income of the government.
Further, he thinks taxes in coastal areas should be increased,
and the revenues transferred to the west. Wang also argued for
the adjustment of local government functions, including the
provision of education in rural areas. He stated that every
citizen needs basic public services, which depend on the
economic power of the government, and concluded by wondering
aloud how this could be accomplished now that agricultural taxes
have decreased.

Problems Attracting Foreign Investment

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--------------


12. (C) Even though the investment environment has been
"perfected" and conditions have improved, Sichuan is still ten
years behind the coast, Wang stated. Several problems cannot be
easily resolved. Due to the inland location, transportation
infrastructure is underdeveloped. In addition, inland Chinese
have fewer contacts with overseas Chinese than residents of
coastal areas. Initially, much of the investment in China came
from Hong Kong and Taiwan, because of close relationships with
coastal communities on the mainland, Wang commented.


13. (C) In spite of the challenges, Sichuan does have the
ability to attract enterprises from abroad and from coastal
areas for a number of reasons:

- Labor costs are low;
- The transportation infrastructure has improved (air and
roads);
- The technical infrastructure is strong (because of the
"third-line" industrial base from Mao Zedong's redistribution of
industrial and technical resources inland to survive a nuclear
attack from the former USSR);
- Sichuan is a hub for the Great Western Development Strategy;
and
- There is a large market here.

Sichuan still needs a lot of foreign investment in order to
develop modern management and administrative expertise, Wang
stated. In the end, the province will be able to attract new
companies because the investment base is still very low.
Economic growth will be fast, he predicted.


13. (C) This report has been coordinated with INR visitors.
BOUGHNER