(C) ZHEJIANG: FACTORY CLOSURES RAISE SOCIAL STABILITY

C O N F I D E N T I A L SHANGHAI 000522


STATE FOR EAP/CM, INR AND DRL
TREASURY FOR AMBASSADOR HOLMER
TREASURY FOR OASIA HAARSAGER, CUSHMAN, WINSHIP
NSC FOR LOI

E.O. 12958: DECL: 12/5/2033
TAGS: PGOV ECON EFIN ELAB PHUM CH
SUBJECT: (C) ZHEJIANG: FACTORY CLOSURES RAISE SOCIAL STABILITY
CONCERNS

REF: A. (A) SHANGHAI 518

B. (B) SHANGHAI 521

C. (C) SHANGHAI 467

D. (D) CPP20081129968140

E. (E) CPP20081123968048

F. (F) CPF20081125538001

G. (G) GUANGZHOU 696

H. (H) CHENGDU 275

I. (I) BEIJING 3933

J. (J) SHANGHAI 444

CLASSIFIED BY: CHRISTOPHER BEEDE, POL/ECON CHIEF, US CONSULATE
SHANGHAI, DEPARTMENT OF STATE.
REASON: 1.4 (b),(d)


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


1. (C) Social and political analysts in Zhejiang Province said
the province's economy may recover from the current financial
crisis (Refs A and B),but factory closures could result in
social unrest, particularly as Lunar New Year approaches.
Zhejiang-based observers worry that the Central Government's
economic policy responses have been inadequate, and they said
the upcoming Central Economic Work Conference will be critical
to address the problems. Poloff's visit to Shaoxing, the
epicenter of Zhejiang's economic downturn (Ref A),demonstrated
the degree to which the province's textile manufacturing base
has collapsed. Many migrant workers already have returned home
for their annual Lunar New Year visit, including many unemployed
workers who have been sent home by local governments concerned
about social stability. Whether or not there will be enough
jobs in cities like Shaoxing to support migrant workers after
the holiday remains an open question, our contacts said. Rural
experts warned that the countryside could experience social
unrest due to an influx of unemployed migrant workers. End
Summary.


The Plight of Zhejiang's Manufacturers
--------------


2. (C) Contacts in Hangzhou, Zhejiang's provincial capital, and
Shaoxing told Poloff during a December 2-4 visit they are
concerned about the possible social impact of the economic
slowdown in East China. Ye Hang, an economics professor at
Zhejiang University, said on December 2 that Zhejiang's
exporters continue to be hit hard by the global economic
slowdown (Refs A, B, and previous),and factory closures have
become commonplace. According to Ye, Zhejiang's exporters began
to face serious problems in late 2007 when small- and
medium-sized enterprises (SMEs) struggled to cope with new
domestic economic policies, including renminbi (RMB)
appreciation and the elimination of the export tax rebate. Ye
believes the Labor Contract Law (LCL) did not have a significant
impact on companies' economic difficulties, but in sectors such
as the textile industry, where profit margins are small, any
cause of rising costs is a contributing factor.


3. (C) Beginning in June 2008, Ye said, Zhejiang and other
manufacturing areas felt the effects of China's tighter monetary
policy, which began to hurt not only SMEs but larger companies
as well (see also Ref A). Facing liquidity problems, larger
companies in Zhejiang began to amass mounting debt, and
factories started to close in Hangzhou, Shaoxing, and Yiwu. In
October, Ye stated, suppliers of the larger firms also started
to fail, leading to more light industry factory closures.


Jianglong's Fall From Grace
--------------


4. (C) Ye cited the case of Shaoxing's Jianglong Group as an
example of the impact on suppliers. The boss of Jianglong Group
-- a textile firm that employed 4,000 workers and posted a
profit of USD 14 million last year -- locked the factory and
fled the province after the company could not pay its rising
debts. On November 3, the Los Angeles Times reported on the
Jianglong closure, highlighting that as many as 300 of the
company's suppliers would not be paid as a result. Since early
November, more factories -- big and small -- have closed in
Zhejiang, Ye said.


Not All Cities Are The Same
--------------


5. (C) Ye was quick to point out that not all cities in Zhejiang
have been affected equally by the economic downturn. Shaoxing
is representative of coastal China's economic problems because
it is major textile producing center, but Yiwu faces brighter
prospects because it is more diversified in both its product
lines and export destinations (see Ref C). In a conversation
together with Li Xuhang, Vice Mayor of Yiwu, and Zhou Ying, Vice
Director of the Shaoxing Foreign Affairs Office, in Shanghai on
November 28, Poloff asked about the economic impact on the two
cities. Zhou acknowledged that several large factories have
closed in Shaoxing, whereas Li told Poloff Yiwu's commodity
product line somewhat insulated the city from slowing external
demand, reiterating his view that "people will always need
socks." (Note: Yiwu is a world-leading manufacturer of socks.
End Note.)


Policy Responses to Date Inadequate
--------------


6. (C) Several of these Zhejiang-based contacts stated that the
Central Government's policy responses to date have been
inadequate. The Central Government's economic stimulus package,
for example, may address some "short-term" infrastructure needs,
but it does not address the core problem, which is a low rate of
domestic consumption, Ye said. Economists in Zhejiang paid
close attention to President Hu Jintao's comments during a
November 29 meeting of the CPC Political Bureau when Hu
reportedly warned that China is losing its competitive edge (Ref
D),Ye said, and the upcoming Central Economic Work Conference
will be critically important to address the growing economic and
social problems in manufacturing centers.


7. (C) The Central Government is paying particularly close
attention to Zhejiang, and Premier Wen Jiabao visited the
province -- including Shaoxing and Yiwu -- in late November (Ref
E),but contacts criticized the visit because they said Wen did
not see the "real situation." Wen Kejian, an independent
journalist, summarized the views of many others when he told
Poloff on December 3 that "the Premier only visited the big
companies -- he didn't see the people's problems." The economic
stimulus package might provide some economic benefits but it
will not be useful for pacifying possible social unrest, Wen
Kejian said, adding that official unemployment statistics
grossly underestimate the scope of Zhejiang's economic crisis
since migrant workers are not included in the figures as they
technically still are rural residents.


Shaoxing: When a Boom Town Turns Into a Ghost Town
-------------- --------------


8. (C) Poloff visited Keqiao, known as Shaoxing's "textile
city," with Wen Kejian on December 3. At the Qinfangcheng
market, there was little foot traffic and few foreign buyers.
One salesman said his business is managing to stay afloat
because he is exporting to Africa and Latin America and already
has orders, but prospects for next year may not be good. A
pedicab driver said fewer foreigners are going to Keqiao to
place orders, and he and other service sector workers are
worried about their resulting falling incomes. A factory owner
said several nearby factories have closed in recent months, and
his operation is barely holding on. Keqiao was eerily quiet for
an area known to be a hub of economic activity. Poloff also
visited the Tianlong Factory where 4,000 - 5,000 migrant workers
were employed until recently but which now sits dormant. The
notable absence of factory and traffic noise and lack of
pedestrian traffic was further evidence of the downturn.


9. (C) Shi Xiaoyu, a Shaoxing stockbroker, predicted the
economic situation would worsen in 2009, as slowing internal and
external demand hurts light manufacturers. Shi expressed
concern that Shaoxing's economic plight will lead to social
instability. One likely cause of instability, Shi said, is that
local governments are strapped for cash, and they need more
money to prop up businesses and keep the economy going. The
only means for local governments to earn money is to illegally
confiscate land and sell it, Shi said, adding that he is
concerned confrontations between the government and local
residents whose land is taken are increasingly likely in the
current environment. Shi and Wen Kejian told Poloff they also
are interested to see how Zhejiang taxi drivers react to the
economic slowdown, as drivers now believe Chongqing Party
Secretary Bo Xilai's willingness to negotiate with drivers in
that city legitimized the grievances of drivers elsewhere (Ref
F).


Migrant Workers Headed Home Early
--------------


10. (C) Most of the focus on the social impact of the economic
crisis, however, continues to be on migrant workers (see also
Ref G and H),many of whom already have departed early for their
Lunar New Year holiday (which does not begin until late
January). Contacts disagreed with the provincial government's
contention that most of Zhejiang's migrant workers are remaining
in the province (Ref B),stating that a mass exodus is underway.
Feng Gang, a Zhejiang University sociology professor, said
anecdotal proof of the departures will be evident in mid-January
when train stations experience significantly fewer crowds than
normal prior to Lunar New Year. Wang Xiaozhang, a sociology
professor who specializes in migrant worker issues, agreed,
stating that it is not only the manufacturing sector that has
been affected by the economic slowdown, but migrants previously
employed in Hangzhou's service sector also are going home early
because falling consumption is affecting restaurants, tea
houses, and hotels. Migrant workers who currently do not have
good job prospects are choosing to go home early for the
holiday, Wang said.


11. (C) While some migrant workers are able to choose when to
leave, others are being pushed out. According to Ye Hang, in
many cases, factory bosses are paying off workers and telling
them to go home. In other cases, such as the Jianglong example,
bosses are closing the factory and skipping town, leaving local
governments with the burden of paying workers. In Shaoxing, Ye
said, the local government has spent approximately RMB 500
million (approximately USD 70 million) in recent months to pay
workers' salaries and send them home quietly. For the sake of
social stability, local governments do not want unemployed
migrant workers to hang around in cities, Wang Xiaozhang said.
Added Zhuang Daohe, a Zhejiang lawyer: "Government officials
want to get the malcontents out as quickly as possible."


A "February Crisis" in Zhejiang?
--------------


12. (C) Contacts said it remains unclear what will happen after
the Lunar New Year. Responding to Poloff's question about a
November report in the Hong Kong-based Dagongbao on a possible
"February crisis," Wen Kejian said he believes Zhejiang might
reach a crisis point if migrant workers cannot find jobs. Wang
Xiaozhang said he does not think there will be large-scale
upheaval in the province in February, but he believes there may
be protests by unemployed workers in different places. Feng
Gang added that discontent among taxi drivers and other service
sector workers could lead to unrest in the coming months, and
Wen Kejian said university graduates facing poor job prospects
also may more openly voice their concerns.


Uncertainty in the Countryside
--------------


13. (C) Several contacts also expressed concern about the social
and economic impacts of migrant workers returning to the
countryside. Huang Zuhui, Dean of the China Academy for Rural
Development (CARD) at Zhejiang University, said social
instability in the short-term is not likely because many
migrants were able to save enough earnings prior to going home.
If migrants are unable to find jobs after the Lunar New Year,
however, rural areas in Zhejiang Province, as well as those
provinces that send migrants to Zhejiang, are likely to
encounter two significant problems: (1) unemployed migrant
workers in the countryside will not want to resume farming,
resulting in an idle, restive segment of the rural population,
and (2) rural residents will lose the benefit of their
relatives' migrant worker remittances, which will be a
significant financial loss and potentially a source of social
unrest. (Note: In Zhejiang, Huang estimated that 85 percent of
rural incomes are from non-farm employment. End Note.)


14. (C) Huang said the economic slowdown and the return of
migrant workers to the countryside is exactly the reason why the
CPC Central Committee took the correct step during the Third
Plenum to liberalize transfer of land use rights but not allow
for privatization of land (Refs I and J) because migrants can
return to the countryside more easily than if they had been
allowed to sell their land. The Central Government's error in
judgment, however, is that in reality, migrant workers who have
been living in coastal China's urban centers for several years
have neither the desire to return to farming nor the willingness
to invest in agricultural inputs, Huang stated. It matters
little, therefore, whether migrant workers have land in the
countryside or not -- they still will be upset if they cannot
find non-farm employment, he warned.


Comment
--------------


15. (C) Officials in Zhejiang Province have regularly expressed
their concerns about the economic downturn in recent months.
Not every city in the province faces the same problem --
Shaoxing may be an extreme case because of the city's heavy
reliance on the textile sector. Our contacts appear
increasingly worried, however, that Zhejiang's economic problems
could result in social instability of some form or another. End
Comment.


CAMP