ZHEJIANG'S YIWU: BEARING THE BRUNT OF GLOBAL ECONOMIC

UNCLAS SECTION 01 OF 02 SHANGHAI 000313 SENSITIVE SIPDIS TREASURY FOR OASIA/INA/CUSHMAN AND WINSHIP DEPT FOR EAP/CM E.O. 12958: N/A TAGS: ECON PGOV ELAB ETRD KIPR ENRG CH SUBJECT: ZHEJIANG'S YIWU: BEARING THE BRUNT OF GLOBAL ECONOMIC FORCES SHANGHAI 00000313 001.2 OF 002 ¶1. (SBU) Summary. Zhejiang's Yiwu is home to one of the largest wholesale markets in the world. During a July 21 visit, the Consul General discussed the impact of global economic trends on Yiwu with Yiwu Party Secretary Wu Weirong and Mayor He Meihua. In addition, the CG visited Huahong Home Decoration, a privately-owned Chinese company supplying picture frames and other decorations to the United States. Huahong's CEO explained how inflation, burgeoning labor costs, high transportation costs, RMB appreciation, and the downturn in the U.S. economy are buffeting the company. As a result, Huahong is taking dramatic measures to reduce its work force, hedge currency, and cut input costs. Party Secretary Wu said Huahong's difficult circumstances are shared by many other small and medium enterprises in Yiwu and elsewhere in Zhejiang. Yiwu will begin publishing an IPR white paper in April of 2009. End Summary. Yiwu's Economy: A Picture Worth A Thousand Words -------------- -------------- ¶2. (SBU) Huahong Home Decoration Company CEO Wang Aixiang painted a bleak picture of the home decoration export market. Huahong's biggest customers include American chains such as Michael's, Home Depot, and Target, and exports to the United States represent 70 percent of the firm's revenue. As the U.S. economy soured, particularly the real estate market, sales for home furnishings have plummeted. Huahong's sales have contracted by twenty percent over last year. Wang also estimated that in the current climate, 30 percent of China's home decoration companies that rely on exports to the United States would go belly up. He also predicted the downturn would last a minimum of two to three years. ¶3. (SBU) Wang lamented that high fuel prices, RMB appreciation, inflation, and increasing labor costs are all eating into Huahong's margins. As the RMB appreciates, the company is increasingly feeling the pinch. Its orders are largely denominated in dollars and U.S. buyers are unwilling to absorb the additional costs due to those several factors. Although Huahong is using hedging instruments to soften the blow, the company has lost "big money" due to RMB appreciation. In addition, basic expenses have grown over the past year by 16 �00A;percent and credit is very "tight" and interest rates high. Huahong has raised its prices somewhat, but only by 5 percent. Huahong sources much of its material locally, and many of the basic material costs are rising at a rapid clip. Since the majority of Huahong's business is in the United States, exploding transportation costs have also undermined its business. Wang noted that the average price of container shipments to the U.S. West Coast has jumped from USD 1,500 to USD 2,000 within the last year. Huahong has also taken a series of measures to cut costs such as cutting out "middlemen" traders, laying off workers, and switching to lower cost materials. For example, the company has switched from producing wooden frames to plastic frames made from recycled material. Labor Contract Law's Price Tag -------------- ¶4. (SBU) According to Wang, the Labor Contract Law that went into effect on January 1 of this year has increased the company's labor costs by 20 percent. This increase in the cost of labor, along with the other economic factors, has forced the company to reshape the size of its workforce. Huahong has cut a vice president and several mid-level managers as well as a large number of factory workers. Before the rough times began, the company employed 2,000 full-time workers and had a network of over 20,000 temporary workers. The company has now shrunk to 1,600 full-time workers and rarely uses the temporary hires. The average wage of the full-time workers is roughly USD 300 per month and the company has scaled back benefits to the bare minimum. ¶5. (SBU) Wang suggested that workers are beginning to "rethink" the benefits of the new Labor Contract Law. Before, they saw that foreigners have certain rights, and they "began to demand the same." However, they did not realize that these increased demands might bring less employment opportunities as companies have had to scale back. Previously, workers would "hop between jobs" without thinking twice. Now companies are more reluctant to take on workers because of the law and current economic conditions, reducing the number of jobs available. Wang said the government is also just beginning to wake up to the problem as more people are put out of work, adding the government needs to pay more attention to the problems of small and medium size businesses such as his. However, he said Yiwu generally has a SHANGHAI 00000313 002.2 OF 002 good business environment and the local government is generally "service oriented." Not the Only One with Economic Troubles -------------- ¶6. (SBU) In a separate meeting, Yiwu Party Secretary Wu Weirong emphasized that Huahong is not alone in its problems; many companies in the area are facing similar challenging circumstances. Inflation, spiraling transportation prices, and the RMB appreciation are taking a toll on Yiwu's economy. In a subsequent meeting, Mayor He added that Yiwu's economy was particularly vulnerable because 60 percent of the city's economy depended on trade. Many businesses in the area are simply not able to cope with the rapid changes in the economy and are being forced into bankruptcy. Wu acknowledged that unemployment is an increasing problem, but the government is seeking to solve the problem by finding other ways to develop the economy, particularly by stimulating domestic demand. ¶7. (SBU) When asked, Wu agreed that China's tightened visa issuance policy during the Olympics has had an effect on Yiwu's economy and wholesale markets. However, he quickly added that the general economic downturn in the world economy was a much bigger factor. (Comment: A subsequent visit to Yiwu's normally bustling Commodity Wholesale Market revealed a dearth of buyers. The shopkeepers all lamented the lack of foreign buyers for the past few months and attributed the problem to China's visa restrictions.) Wu described a new effort the city is unfolding to attract more business to its wholesale market. The wholesale market is now expanding from its traditional base of Chinese-made goods to products imported from around the world to be sold in the market. The vision is to make the Yiwu Wholesale Commodities market a "market for the world." The CG subsequently visited the newly built U.S. section of the market, which largely consists of U.S. wines. Yiwu Announces IPR White Paper -------------- ¶8. (SBU) Party Secretary Wu took the opportunity of the CG's visit to announce Yiwu would begin producing a yearly intellectual property rights (IPR) protection white paper. He said that the idea came from the CG's suggestion during an earlier meeting, noting that the regular publication of a white paper would "allow foreigners to know what Yiwu is doing to protect IPR." Yiwu will publish the first IPR white paper before April 2009. Wu noted this decision also demonstrates that the Chinese Government takes IPR very seriously and is part of Zhejiang Province's plan to promote innovation through strong IPR protection. This is "100 percent our own requirement" Wu noted, emphasizing that China's protection of IPR is in its own interest. (Note: When the CG later mentioned the white paper in his meeting with the Mayor, Mayor He seemed unfamiliar with this plan.) Mayor He emphasized that Yiwu is making a great effort to curb the counterfeit trade, noting the city has set up a special IPR tribunal which combines administrative, civil, and criminal cases. While it was difficult to ensure Yiwu is 100 percent compliant on IPR, it is making every possible effort, the Mayor asserted. An "Old Friend" of Yiwu -------------- ¶9. (SBU) Party Secretary Wu also reviewed the close cooperation and exchanges between the Consulate and Yiwu over the past three years and welcomed further cooperation. He noted that he met the CG eight times, and said there were many other opportunities for economic and cultural exchanges with the Consulate. Yiwu's Support for the Sichuan Earthquake Victims -------------- -------------- ¶10. (SBU) According to Wu, Yiwu has been active in giving support to the victims of the Sichuan earthquake. The Yiwu Government gave official donations and 99 percent of individual party members made contributions. Many cadres were also dispatched to assist in the quake-stricken area. JARRETT