SED ENVOY HOLMER SEES WESTERN CHINA'S DEVELOPMENT

UNCLAS SECTION 01 OF 03 CHENGDU 000088

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM AND EB
TREASURY FOR TAIYA SMITH

E.O. 12958: N/A
TAGS: ECON EAGR EFIN KIPR PGOV SENV CH
SUBJECT: SED ENVOY HOLMER SEES WESTERN CHINA'S DEVELOPMENT
CHALLENGES

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1.(SBU) Summary. Treasury Department Special Envoy to the
Strategic Economic Dialogue (SED) Ambassador Alan Holmer visited
the western China cities of Xi'an and Chengdu from March 3
through March 6. Visits to nearby rural communities in both
provinces underscored how poverty alleviation projects can only
go so far in improving living standards: most obvious wealth in
such communities comes from residents securing non-rural income
by obtaining work in nearby urban areas or in China's coastal
provinces, enriched by the manufacturing of goods destined for
foreign markets. End summary.

2.(SBU) Ambassador Holmer, accompanied by Deputy Chief of Staff
Taiya Smith, U.S. Embassy Beijing Minister-Counselor for
Financial Affairs David Loevinger, and Beijing Econoff David
Meale visited Xi'an on March 3-4, and Chengdu on March 4-6.
Also accompanying Ambassador Holmer were three Beijing-based
officials from the Ministry of Finance.

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EXPOSURE TO VILLAGE LIFE IN XIAN
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3.(SBU) Vice Governor Zhao Zhengyong expressed appreciation to
Ambassador Holmer that Shaanxi Province was his first stop in
China outside of Beijing. Zhao reviewed for an extended period
of time a wide array of publicly available data about the
province and then discussed tourism development, emphasizing
local pride in Shaanxi's cultural offerings. Zhao also
underscored the importance to Shaanxi of its extensive network
of correspondent relationships with provinces and states
throughout the world, including Minnesota in the U.S. Holmer
saw first-hand the commercial links between Shaanxi and the
United States when he visited a Janssen pharmaceutical plant the
following day (Janssen is a Belgian subsidiary of Johnson &
Johnson).

4.(SBU) To further understand Shaanxi's rural challenges,
Ambassador Holmer visited the village of Gongwang, approximately
90 minutes from the center of Xi'an. Local officials
representing the village, township, and county levels told him
that 308 of the village's 1,027 residents could be classified as
impoverished, but that overall living standards were on the
rise. The fundamental impediment to poverty alleviation, they
said, is a shortage of arable land. Shaanxi's per-capita
farming area is 0.7 mu, less than one-eighth of an acre.
Holmer's interlocutors observed that living standards are far
worse in the nearby mountainous areas, which cover the majority
of Shaanxi Province. Central Government policies supporting
higher-value agriculture, along with subsidies for school fees
and expanded rural medical care, are all positive factors in
improving lifestyles. All that said, one participant pointed
out that even though there are now in theory an adequate number
of teachers for Gongwang's students, there are absenteeism
issues among them, reflecting their chronic health problems.

5.(SBU) Ambassador Holmer walked through Gongwang, talking at
random to villagers, with questions focusing on how outside
employment is boosting their incomes. Many villagers, he
learned, seek part-time work in nearby urban areas when time
permits. It was clear that the phenomenon of "surplus labor"
migrating to coastal areas is not widespread in this part of
Shaanxi. However, in one dramatic case, a 24-year-old cook who
had been working in Hangzhou (Zhejiang Province) proudly showed
Holmer the new house he was building next door to the
dilapidated home occupied by his parents. He said the
opportunity to work in Hangzhou had not only improved the life
of his family in Gongwang, but had also given him sufficient
status to ask (and receive) permission from his fiancee's father
to marry his daughter, a success that had come his way just the
previous day.

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THE RABBIT KING AND HIS COURT
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6. (U) In a rural area outside of the small western Sichuan town
of Dayi, Ambassador Holmer visited farmers who had benefited
from a poverty alleviation project managed by the NGO Heifer
Project International (HPI). Thanks to HPI's initiative, the
farmers in and around Dayi are now raising substantial numbers
of rabbits, and earning badly needed cash as a result. An HPI
representative said that there are now 17,000 beneficiary
families in and around Dayi, and 1.8 million rabbits are raised
there every year.

7.(U) After touring the farmer's houses and visiting the rabbit

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raising pens, Ambassador Holmer met with a group of farmers,
many of whom had traveled substantial distances to see him. A
typical story was that of a young woman named Zhang Mingshan,
who said that the 500 rabbits she had raised and sold to a
nearby processing plant in 2006 earned her RMB 3500 (USD 450) in
net profit.

8.(U) Ambassador Holmer then met with Ren Xuping, who has become
famous as the "Rabbit King" due to the size of his rabbit
rearing operation and his media prominence. Ren gave the
Ambassador a tour of his operation, which covers 70 mu (8.4
acres),and includes pens holding many thousands of rabbits.
Ren emphasized that he planned to expand his sales of rabbit
meat overseas, and noted the European Union appeared to be a
particularly lucrative market. At the same time, he emphasized
his concern for his neighbors and his desire to see them
participate in the benefits of his expansion. He also claimed
he had donated breeding rabbits to North Korea and Nepal, hoping
to contribute to the alleviation of poverty in those countries.

9.(SBU) Asked about the profitability of his operation, Ren
claimed that in 2006 he had made RMB 50 million (USD 6.4
million) in gross profit, and RMB 4 million (USD 513,000) in net
profit. He stated he paid no taxes on most of his operation,
since it had been classified as a poverty alleviation project,
but he had to pay a value added tax on the processing stage in
which rabbit meat was turned into sausage. Ren stated 80
percent of his profits were reinvested into his operation, with
ten percent held as a capital reserve, and another ten percent
going to HPI's poverty alleviation center.

10.(SBU) Asked for his opinion on the area's greatest
development needs, Ren mentioned transportation infrastructure
and environmental protection as most pressing. In response to
an inquiry about the quality of the area's drinking water, a
local official claimed there was a major rural area drinking
water safety project underway, and he expected 100 percent of
the area's rural population to receive potable water within the
next four years. The project supposedly requires an investment
of RMB 10 million (USD 1.28 million) per year.

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IRRIGATION AND HEALTH CARE
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11.(SBU) Provincial officials took Ambassador Holmer on a tour
of the ancient Dujiangyan irrigation project, which has been
developed into a major tourist destination. Afterwards, the
delegation visited the Zhongxing Township Hospital, a relatively
large and clean facility specializing in delivering heath care
to rural residents. The doctor leading the tour said the
hospital employed 40 doctors and 57 nurses, and claimed he had
never heard of any AIDS cases coming through the facility.
After a brief look at the traditional Chinese medicine clinic,
the Ambassador toured the remainder of the facility. One clinic
was labeled "family planning," and when the Ambassador asked
about the frequency of abortions, the doctor responded
(improbably) that the hospital performed "very few," relying
instead on birth control education.

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PROVINCIAL LEADERSHIP
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12.(U) The Ambassador participated in a courtesy visit and an
official banquet hosted by Sichuan Provincial Vice Governor Wang
Huaichen, whose portfolio includes tourism and statistics. Wang
noted Sichuan had lagged behind other areas of China in
attracting FDI, and claimed the province's rough terrain
contributed to uneven development patterns. While he expressed
concern over the province's urban-rural income gap, he insisted
the province provided an excellent environment for foreign
investment.

13.(U) The next day, the delegation met with Sichuan Great
Western Development Office Director Mr. Yang Shizuo, who
outlined the basics of China's Great Western Development
Initiative (GWDI),which he said applied to 71 percent of
China's territory. Critical elements of the GWDI, according to
Yang, were the need to increase cash income in rural areas,
greater attention to energy generation (especially hydropower
and natural gas development),and improvement of the area's
transportation infrastructure. To accomplish these and other
GWDI objectives, Yang listed seven goals: (1) reconstruction of
rural villages; (2) greater assistance to migrant workers; (3)
improvement of village-level education, and especially

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vocational training; (4) greater attention to public health
issues; (5) an increase in the quantity and quality of social
services; (6) an increase in FDI; and (7) increased construction
of roads and highways.

14.(SBU) Ambassador Holmer raised several important points with
Yang, including the need to improve the area's climate for FDI.
Most basic was the need to improve rule of law, including better
dispute resolution and increased protection for IPR. Customs
clearance procedures needed to be made more "customer friendly."
Business community concerns such as better international
schools and western-style health care were also important. And
of course, the SED itself was aimed at opening China's financial
markets, while civil air negotiations could help the province in
its efforts to improve transportation links. Finatt Loevinger
also mentioned the desirability of exchange rate reform, which
would remove distortions in China's investment climate, and
ultimately bring more FDI to China's western areas.

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THE AMERICAN BUSINESS COMMUNITY HAS ITS SAY
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15.(SBU) At a lunchtime meeting with local representatives of
U.S. businesses (mostly SMEs) hosted by Sichuan AmCham, the
Ambassador discussed the purposes and accomplishments of the
SED, and detailed the points he had made during his trip west on
issues such as rule of law, logistics and customs clearance
procedures, and governmental transparency. Attendees spoke
frankly about the challenges of doing business as SMEs in
China's western areas. In addition to subjects such as customs
procedures, transparency, and lack of high-quality international
schools, several attendees complained of difficulties
encountered in hiring qualified staff. Another common concern
was China's corporate income tax structure, and especially the
post facto cancellation of a three percent discount in the rate
applied to Foreign Invested Enterprises (FIEs). Later, the
Ambassador toured Intel's assembly and packing facility just
outside Chengdu, which at USD 450 million is the largest
U.S.-invested project in Sichuan.

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COMMENT
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16.(SBU) Although many of the rural areas visited had no doubt
been carefully prepared by local authorities in advance of the
delegation's visit, the contrast with China's (relatively)
wealthy coastal areas remained striking. As the delegation
stressed to local officials, these contrasts to a great extent
reflect distortions caused by Central Government policies. The
absence of open financial markets and the consequences of an
inflexible exchange rate system are not Beijing issues alone.

17.(U) This cable has been coordinated with Embassy Beijing, and
has been cleared by Ambassador Holmer.
BOUGHNER