UNCLAS SECTION 01 OF 02 SHANGHAI 000320

SENSITIVE
SIPDIS

TREASURY FOR OASIA/INA/CUSHMAN AND WINSHIP
DEPT FOR EAP/CM

E.O. 12958: N/A
TAGS: ECON PGOV ELAB ETRD EINV ENRG CH
SUBJECT: ZHEJIANG LEADERS CONFIDENT IN TRADE TIES WITH UNITED STATES
DESPITE CURRENT DIFFICULTIES

REF: SHANGHAI 313

SHANGHAI 00000320 001.2 OF 002


(U) This cable is sensitive but unclassified and for official
use only. Not for distribution outside of USG channels or via
the internet.

Summary
--------------


1. (SBU) Zhejiang Province enjoys a good relationship with the
United States built on a foundation of strong trade ties,
provincial and local officials told the Consul General on his
farewell trip to Hangzhou, Zhejiang's provincial capital on
August 6-7. Zhejiang officials remain concerned that the
slowing economy in the United States, as well as other factors,
including RMB appreciation and rising labor costs, is adversely
affecting the province's exports, but they hope the challenging
economic landscape will provide needed impetus to reform the
structure of the province's economy towards more
energy-efficient production. Zhejiang companies also are
looking outwards to invest globally and within China to offset
slowing exports. End Summary.

Zhejiang's Good Relations with the United States
-------------- ---


2. (SBU) Zhejiang Provincial Party Secretary Zhao Hongzhu told
departing Consul General and Poloff on August 6 that Zhejiang
has a strong relationship with the United States, as evidenced
by his many meetings with Ambassador Randt and the Consul
General since Zhao assumed office in March 2007. Business and
cultural exchanges with the United States are growing and Party
Secretary Zhao said he hopes to visit the United States in the
next year. Zhejiang's relations with the United States remain
primarily trade-related. U.S.-Zhejiang trade exceeded USD 28
billion in 2007, and the Party Secretary said total trade is on
pace to exceed last year's total, having reached USD 14.7
billion through the first half of 2008. During a separate
meeting August 7, Hangzhou Mayor Cai Qi conveyed similar

sentiments. In fact, Cai had just returned from a visit to San
Francisco and Boston the night before.

Impact of the U.S. Economic Slowdown on Zhejiang
-------------- ---


3. (SBU) With a heavy reliance on exports, Zhejiang definitely
is adversely affected by the economic slowdown in the United
States, officials said. Party Secretary Zhao said trade with
the United States will continue to increase but he expects the
rate of increase to be slower in the future. Not surprisingly,
low-end processing industries that are geared towards exports
have been hit hardest by the U.S. economic situation, officials
said. Zhao stated that the slowing U.S. economy, higher global
energy prices, RMB appreciation, and the new Labor Contract Law
all are factors in Zhejiang's own economic difficulties. During
an August 7 visit to the Wanxiang Group, China's largest auto
parts supplier, Chairman Lu Guanqiu agreed that there are a
number of factors contributing to slower growth, and companies
will need to stay ahead of the curve by cutting costs. (Note:
Businessmen in Zhejiang's Yiwu shared similar concerns with the
Consul General during his recent visit there (see reftel). End
Note.)

Zhejiang's Focus on Economic Restructuring
--------------


4. (SBU) Our contacts uniformly told the Consul General,
however, that Zhejiang's current economic difficulties provide
the impetus for economic restructuring towards production that
is less energy-intensive and more hi-tech. Mayor Cai, for
example, said Hangzhou wants to transform Hangzhou's economy
from processing industries to hi-tech, outsourcing, financial
services, and tourism. Cai said he was favorably impressed by
Silicon Valley during his visit to the United States. Silicon
Valley, Cai said, takes advantage of bright, young minds,
bringing investors together with a top university (Stanford) to
build innovative new companies. In addition to developing new
hi-tech companies, Hangzhou is building a new convention center
in the hopes of attracting more tourists, Cai said.


5. (SBU) Party Secretary Zhao added that the province will move
away from processing industries, such as textiles, in an effort
to develop in a more environmentally friendly way as per the
Central Government's mandate. Zhejiang's private sector also is
likely to move away from highly labor-intensive industries as

SHANGHAI 00000320 002.2 OF 002


labor costs rise. Wanxiang's Lu said his company is encouraging
more mechanization in the face of rising labor costs, which have
increased 20 percent in the past two years.

Outward Investment
--------------


6. (SBU) To offset losses on the export front, Zhejiang
companies increasingly are looking outside the province for
investment opportunities, officials said. Party Secretary Zhao
stated that Zhejiang companies are investing both globally and
in other parts of China. Geely, the Zhejiang-based auto
manufacturer, for example, has factories in Mexico, Thailand,
Russia, and Vietnam, he said. Zhejiang companies also are
investing in Central China, as those textile mills and other
processing industries that close in Zhejiang may relocate to
Jiangxi Province or Hubei Province.

Investment Disputes
--------------


7. (SBU) During the meeting with Mayor Cai, the Consul General
raised a dispute involving Ewing Management Group, a U.S.
company. The Mayor was not familiar with the problem but asked
staff from the foreign trade commission to look into the
situation. During the dinner with Party Secretary Zhao, the CG
asked about the impact of the Wahaha-Danon dispute on
perceptions of Zhejiang's investment climate. Zhao said the
provincial government has spent considerable time trying to
mediate the dispute. He did not believe the altercation would
hurt Zhejiang's image. At this stage, the main outstanding
issue is agreeing on a price for ending the partnership.

Olympics
--------------


8. (SBU) Party Secretary Zhao said he is looking forward to the
Olympics, and the Chinese Government is encouraged by President
Bush's visit to Beijing to watch the Games. Zhejiang Province
has 26 athletes on the Chinese Olympic team with a chance for
possibly five gold medals, Zhao said. (Note: Zhao attended the
Olympic Opening Ceremony in Beijing on August 8. End Note.)

Ambassador John Leighton Stuart
--------------


9. (SBU) The Director General of Zhejiang's Provincial Foreign
Affairs Office confirmed that he is familiar with plans to
return Ambassador John Leighton Stuart's ashes to Hangzhou in
November. The Provincial Government is supportive of the event
and does not foresee any problems, he said. (Note: Stuart was
born in Hangzhou in 1876 and later was U.S. Ambassador to China
from 1946 to 1949, departing China just weeks before Mao Zedong
proclaimed the founding of the People's Republic of China. End
Note.)
JARRETT