Export Processing in the PRD Hit with New Deposit

UNCLAS SECTION 01 OF 02 GUANGZHOU 000952 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ETRD EINV ECON PGOV CH HK TW SUBJECT: Export Processing in the PRD Hit with New Deposit Requirement (U) This document is sensitive but unclassified. Please protect accordingly. ¶1. (SBU) SUMMARY: On August 23, China started requiring export processing firms to pay large deposits, which could have a substantial negative impact on businesses in the Pearl River Delta (PRD). Hong Kong and Taiwan industry associations in southern China have expressed serious concerns about the new policies. (Note: Few U.S. investors will be affected. End note.) To adapt to the new requirement, local authorities have encouraged export processing companies to shift to high-tech and high-value-added products, move to western or central China, or target China's domestic market. END SUMMARY. New Deposit Requirement for Export Processing -------------- ¶2. (SBU) On July 23, 2007, China announced a new deposit requirement for export processors that make labor-intensive products in China's coastal provinces (Beijing, Fujian, Guangdong, Hebei, Jiangsu, Liaoning, Shandong, Shanghai, Tianjin, and Zhejiang). Effective August 23, enterprises in these areas are required to pay guarantee deposits when they register export processing contracts for any products which appear on a list 1,853 labor-intensive commodities. "The List of Commodities Restricted for Processing Trade" includes certain plastic goods, furniture, textiles and other consumer goods. The deposits will be forfeited if the contracts are not fulfilled. This move is part of China's efforts to move labor-intensive industries out of the more developed coastal regions and to rein in its growing trade surplus. Guangdong Firms Bear the Brunt of the New Requirement -------------- -------------- ¶3. (SBU) Statistics show that, of 90,000 enterprises engaged in the production of the blacklisted products in China, 70,000 are located in Guangdong. These firms employ more than 160,000 people and produced 69 percent of Guangdong's export in 2006. Many have complained that the new policy will have a negative impact on their cash flow and profit margins. According to a report released by the Greater Pearl River Delta Business Council (GPRDBC) in July, RMB appreciation, fierce market competition, and newly lowered export tax rebate policies narrowed profit margins for export processors to 10 percent. GPRDBC estimates that paying additional deposits could increase costs by 20 to 30 percent and will likely force many small and medium sized enterprises (SMEs) to close down or relocate to central or western China. Large, financially strong enterprises may be capable of paying the deposits, but will still find it more difficult to stay profitable. Hong Kong and Taiwan Investors Feel the Pinch -------------- ¶4. (SBU) Liu Zhanjing, Vice Chair of the Federation of Hong Kong Industries (FHKI) claims that over 40,000 Hong Kong-owned factories in the PRD will be affected by the new deposit requirement. GPRDBC predicted in its July report that 55 percent of these enterprises would face financial difficulties due to the new requirement. The Hong Kong Chamber of Commerce estimated that 1,500 Hong Kong-owned processing companies would be forced to shut down their operations in the PRD, resulting in the loss of 370,000 jobs in Guangdong and another 10,000 jobs in Hong Kong's logistics and service sectors. ¶5. (SBU) The new requirement will likely have a strong impact on Taiwan investors as well. Wu Zhenchang, Chair of the Guangzhou Taiwanese Businessmen Association, said only 12 percent of the Taiwan-owned enterprises in Guangzhou had the capacity to pay the extra costs created by the new policy. He indicated that 40 percent of Taiwan-owned enterprises might have to relocate their manufacturing facilities. Similarly, Huang Zhiming, Chair of Shenzhen Taiwanese Businessmen Association, said most of the 4,000 Taiwan companies in Shenzhen would be affected. He commented that some firms might have to leave the mainland or shut down their factories. (Note: In contrast, few U.S. investors in southern China will be affected by the new deposit requirement. U.S. investment is more concentrated in technology- and capital-intensive industries. End note.) Go High-Tech, Go West, or Go Local -------------- ¶6. (SBU) To adapt to the new policy, local authorities have suggested three options for southern China's export processors. The first is to shift from labor-intensive export processing to manufacturing high-tech and high-value-added products. The second recommendation is to move export processing operations to central or western China. The third choice is to give up the export business GUANGZHOU 00000952 002 OF 002 and target the domestic market. SMEs complain that the cost of upgrading to high-tech or high-value-added manufacturing is too great. Local media reports estimate that the moving export processing facilities to inland regions could increase transportation costs by 7 percent. Instead, it appears that some Hong Kong and Taiwan companies have chosen to shift their focus to the domestic market. Many of these firms are reportedly changing their business license registration type from "processing trade" to "wholly-owned foreign enterprise" in order to get better access to the mainland market. JACOBSEN