SOUTH CHINA REPORTING OFFICERS CONFERENCE, SEPTEMBER 24-27,

UNCLAS SECTION 01 OF 02 GUANGZHOU 000590 SENSITIVE SIPDIS STATE FOR EAP, EAP/CM, EAP/TC, EAP/MTS E.O. 12958: N/A TAGS: OTRA PREL ECON PGOV CH TW HK SUBJECT: SOUTH CHINA REPORTING OFFICERS CONFERENCE, SEPTEMBER 24-27, WRAP-UP ¶1. (U) Summary: The September 24-27 2008 South China Reporting Officers Conference - with participation by officers from Embassy Beijing, Consulate General Shanghai, Consulate General Hong Kong, the American Institute in Taiwan (AIT),and Consulate General Guangzhou - addressed four main themes: regional integration and development strategies, whither cross-Strait relations , the Strategic Economic Dialogue (SED) in south China, and economic and other challenges to Chinese provinces south of the Yangzi. The participants emphasized the importance of examining local perspectives on national level policies and priorities and how the latter are actually interpreted "on-the-ground." End Summary. Regional Integration - Cooperation and Competition -------------- -------------- ¶2. (SBU) The first conference session, on "Regional Integration," highlighted the competition in south China among provinces that are desirous of expanding economic linkages with one another while looking for a larger share of the economic pie for themselves. ConGen Hong Kong Econ/Poloff underscored the shifting impact of Guangdong's development and its growing competition with Hong Kong in some service sector industries, notably port operations. Nevertheless, Hong Kong maintains its advantage in rule of law and financial services, which continue to attract international investment. In addition, Hong Kong Econ/Poloff noted that a growing focus on labor and environmental protection in the Pearl River Delta is hitting Hong Kong businesses hard, resulting in many enterprises looking to other parts of China and Southeast Asian countries, such as Vietnam, to relocate. However, participants pointed out that Guangdong still benefits from its highly developed supply chains and infrastructure, compared to other areas of China and Southeast Asia, as well as access afforded to China's increasingly open domestic market. ¶3. (SBU) Shanghai Econoff described some of the trends in financial sector reform and the challenges facing reform efforts, including the recent U.S. financial crisis and the sinking value of the dollar. Trends include the reform of regulatory bodies, with a focus on shifting more authority from Beijing toward Shanghai, as well as innovative initiatives such as the raising of foreign equity caps. In addition, monetary incentives are being offered to attract professionals to financial centers. Participants also discussed the expansion and political implications of Chinese investment in the U.S. market, in light of the economic downturn. ¶4. (SBU) AIT Econoff noted that cross-Strait economic opening was moving forward on several fronts: tourism, the establishment of frequent charter flights, the increase of Chinese students studying at Taiwanese universities, and likely further liberalization of direct shipping. China remains the predominant destination for Taiwan external investment, and is unlikely to change despite some diversification into Southeast Asian markets. AIT Econoff said Taiwan contacts reported that as many as 30,000 Taiwanese-owned enterprises have shut down in the Pearl River Delta (PRD) due primarily to rising costs. Taiwan investment continues to be strong in the Yangzi River Delta. Some Taiwan investors have indicated they are considering relocation to Southeast Asia, where supply-chain management conditions are reportedly improving. Cross-Strait Relations - Intl Space Still a Problem -------------- -------------- ¶5. (SBU) Conference participants from Beijing and Taipei agreed that expansion of Taiwan's international space would be a contentious issue even as cross-Strait relations improve under the Ma Ying-jeou administration. According to the AIT Deputy Director, Taiwan's new leadership has brought stability to the cross-Strait relationship and much potential for further opening. However, further economic opening will be easier than expanding Taiwan's international space or addressing other issues that touch on sovereignty and security. Taiwan's ruling Kuomintang (KMT) believes Taiwan has made major compromises in cross-Strait policy and the ball is now in Beijing's court. Embassy Beijing Poloff agreed that one of the main points of contention between Beijing and Taiwan was the expansion of Taiwan's role on the international stage, including its interest in participating more fully in the World Health Organization (WHO). Beijing Poloff pointed out that President Hu Jintao had significantly softened his rhetoric on cross-Strait relations, though there was considerable discussion on how rhetoric will translate into political changes. ¶6. (SBU) From Hong Kong and Macau's perspective, cross-Strait relations are mainly an economic concern. ConGen Hong Kong Econ/Poloff said that increased ties between Taiwan and mainland China were expected to have the greatest impact on Macau. As direct cross-Strait transportation opens further, the number of Taiwan travelers transiting Macau, which currently make up approximately 47% of Macau's air travelers, will decrease significantly. ConGen GUANGZHOU 00000590 002 OF 002 WRAP-UP Shanghai Econoff commented that Taiwan businesses in Shanghai simply hoped that the status quo continues and political stability further enhances the investment environment. ConGen Guangzhou Econ/Poloff noted that the more challenging environment in the PRD for Taiwan investors would likely affect cross-Strait and U.S.-Taiwan-China trade flows, but it was not likely to have much impact on cross-Strait political ties. The Strategic Economic Dialogue and South China -------------- -- ¶7. (SBU) Embassy Beijing Econoff described the SED process and current status of discussion. He commented that the Ten-Year Framework on Energy and the Environment would help institutionalize the SED process. The SED will have an impact on south China to the degree that local officials, NGOs, and enterprises implement projects on key SED issues such product safety, environmental protection/energy efficiency and transportation reform. Greater China Challenges -------------- ¶8. (SBU) Guangzhou Congenoffs also highlighted some of the challenges facing the PRD that have broader implications for U.S. interests in Greater China: labor issues, intellectual property rights (IPR) and environmental protection. ConGen Guangzhou Poloff commented that the region's labor market was changing due to rising wages and China's new Labor Contract Law. Companies must work harder to recruit skilled employees while workers are becoming more proactive at exercising their rights. Unions and NGOs are more engaged in organizing labor, which has in some cases led enterprises to crack down. ConGen Guangzhou's IPR Officer pointed out that enforcement was the main IPR concern in south China compared to Beijing's focus on policy. Regulations are enforced inconsistently and local officials lack the will and capacity to take action against infringement. ConGen Guangzhou Econoff pointed out that a growing interest in environmental protection in Guangdong was driven by a desire for higher living standards. In general, south China continues to face challenges with regard to local implementation of national environmental and energy efficiency goals. Exploring the PRD: Welcome to the World's Factory Floor -------------- -------------- ¶9. (SBU) The following day participants visited Shenzhen's Huawei and Foxconn companies. The visit to Huawei, China's leading producer of telecommunications equipment, included a campus tour, and a briefing with top-level management. A senior Huawei executive told us that the firm is still looking to strengthen investment relations with the United States and is in the process of getting its Washington, D.C., government relations office up and running. At Foxconn, the Taiwan-invested contract manufacturer of consumer electronics goods and components, participants saw the sprawling manufacturing campus that employs approximately 270,000 and toured testing labs. According to a senior Foxconn executive, the manufacturing giant is looking to expand its operations in the areas of nanotechnology, and to strengthen its joint design/manufacturing relations with leading brand-name companies, such as Apple. It is drawing down employment at the Shenzhen facility to focus on design and other high-end processes there as it expands manufacturing in other parts of China and in Southeast Asia. ¶10. (U) This cable was coordinated with Embassy Beijing, Consulate General Shanghai, Consulate General Hong Kong, and AIT. GOLDBERG