SHANGHAI COFCOM DG: SHANGHAI'S ECONOMY ON SOLID GROUND, BUT

UNCLAS SECTION 01 OF 03 SHANGHAI 000571

SENSITIVE
SIPDIS

TREASURY FOR OASIA/INA/CUSHMAN AND WINSHIP
DEPT FOR EAP/CM, INR/B, EEP/TRA/AN
USDOC PASS BUREAU OF ECONOMIC ANALYSIS
USDOC FOR ITA DAS KASOFF, MELCHER, OCEA
STATE PASS USTR FOR STRATFORD, WINTER, KATZ
NSC FOR LOI, SHRIER

E.O. 12958: N/A
TAGS: ECON PGOV EFIN ETRD ELAB EAIR CH
SUBJECT: SHANGHAI COFCOM DG: SHANGHAI'S ECONOMY ON SOLID GROUND, BUT
TRADE FALLING, CONCERNS INCREASING

REF: SHANGHAI 477

SHANGHAI 00000571 001.2 OF 003


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


1. (SBU) Summary: During a courtesy call with Shanghai
Municipal Commission of Commerce (Shanghai COFCOM) Director
General Sha Hailin, the Consul General discussed a wide range of
economic and business-related issues, including Shanghai's
response to the financial crisis, the city's long-term plans,
concerns about foreign express delivery services, the growing
number of business disputes involving U.S. businesses, and the
October 23 Municipal Government restructuring. Sha said the
economic fundamentals of the city are still "sound," but
import/export companies are being adversely impacted. He added
that it is in both sides' "mutual interest" to receive prior
notification of any U.S.-invested factory shutdowns for reasons
of social stability. Shanghai is on the path to becoming a
service-based economy, but is still unsure of its way to
becoming an international trade center. Sha was unaware of
potential liabilities for foreign express delivery services
created by the draft Postal Law; however, he would welcome more
information on the matter. He also noted that municipal-level
reforms creating Shanghai COFCOM are a reflection of national
level reforms. End Summary.

Focus on Containing Financial Crisis
--------------


2. (SBU) Sha told the CG during her December 18 introductory
meeting that the new Shanghai COFCOM's main focus is the global
financial crisis and how to mitigate its effect on Shanghai's
economy. Shanghai's economic fundamentals are still healthy -
from January through November 2008, Shanghai's contracted FDI
was USD 17 billion and realized FDI was USD 10 billion, both
highest on record since 1997. The main issue now is falling
export orders. Shanghai's exports dropped five percent from
October to November. Sha predicted that the first quarter of
2009 would be "difficult" for Shanghai. Shanghai firms
dependent on imports and export are not only having difficulty
with slumping business, but they are also having difficulty
raising capital. As a result, import/export companies are under
pressure to lay off employees. Sha emphasized that it is in
"our mutual interests" for reasons of social stability and the
reputation of companies involved for the Consulate and the
Shanghai government to receive prior notifications of any
production stoppages or factory closures at U.S.-invested
companies in Shanghai. Another difficulty Shanghai faces is
declining tax revenue; from October to November, Shanghai tax
revenue fell by ten percent.


3. (SBU) Sha said Shanghai is streamlining policies to assist
struggling companies, in response to the financial crisis. In
total, Shanghai is implementing 36 measures to create a better
business environment. Some of the 36 policies are in the hands
of the Central Government and cannot be changed immediately.
However, those Shanghai can change are quickly being put into
effect. According to Sha, Beijing is also showing a great deal
of interest in Shanghai's economic conditions. In succession,
Premier Wen Jiabao and Vice Premier Li Keqiang each recently
visited Shanghai to study the state of the city's economy.
Shanghai officials will also participate in a December 23 and 24
Ministry of Commerce (MOFCOM) conference, which will outline
2009 plans for how to deal with the economic crisis. Sha opined
that in the short-term, the government can and will intervene to
help alleviate the financial crisis, but in the long-run the
problems should be solved by the market itself.


4. (SBU) Shanghai is relying on three measures, Sha said, to
deal with the crisis: boosting trade, spurring domestic demand,
and attracting additional investment. To increase domestic
demand, the property market must be stabilized. Once
stabilized, it will be "the most powerful driver" of domestic
demand. Shanghai has a number of incentives to boost its
property market. Other mechanisms the city is using to support
the economy include "investments, utilities and social
programs."

Shanghai's Long-Term Priority Is to Become a "Service City"
-------------- --------------


SHANGHAI 00000571 002.2 OF 003



5. (SBU) According to Sha, Shanghai's second priority is to how
to build the city's service-based economy. Although this is a
long-term priority, Shanghai will become a "service-based city."
While city leaders are still mindful of Shanghai's
manufacturing sectors, such as in the automotive, petrochemical,
shipbuilding and aircraft industries, they knows what direction
the city's economic development should take: services are the
city's future. Sha acknowledged that although Shanghai has
already plotted paths to become a world financial and
international shipping center, it still "does not have a clear
path" how it will reach its goal of becoming an international
trade center.

Response on Express Delivery Service Concerns
--------------


6. (SBU) The CG noted concerns that the draft Postal Law now
before the National People's Congress could potentially harm
U.S. express delivery services if enacted in its present form.
Sha responded that he was unfamiliar with those draft
provisions, but promised to read and reflect on the points that
the CG provided on the issue. Shanghai COFCOM's Deputy Director
of the Europe and America Business Office Shen Qing interjected
and (incorrectly) remarked that the issue is solely about
"foreign express delivery companies trying to get involved in
domestic delivery, which is not allowed." The CG responded that
the issue is complex and could affect Shanghai's business
environment. (Note: The Consulate raised the issue in order to
ensure local authorities are aware of the potential negative
impact for U.S companies and competition in their own markets.
East China is home to major distribution centers for both Fedex
and UPS. In seeking to raise the issue at higher levels,
however, the Consulate has met some resistance. The Shanghai
Foreign Affairs Office rejected a mid-December request by the
Consul General to meet Executive Vice Mayor Yang Xiong about the
draft Postal Law, on the grounds that it would be inappropriate
to "discuss" a draft law under consideration by the NPC. End
Note.)


7. (SBU) The Consul General also raised the issue of allowing
express delivery company vehicles in downtown Shanghai during
the day time. (Note: Shanghai, like many large cities in
China, limits truck and commercial vehicle access to urban areas
during the day. Consequently, express and small parcel
delivery companies make urban deliveries in "passenger" cars and
vans, not in registered commercial vehicles. End note.) Sha
was interested in finding out more about the issue and appears
genuinely eager to assist. He would welcome more information
about the issue from the Consulate.

An Increasing Number of U.S. Business Disputes in Shanghai
-------------- --------------


8. (SBU) The CG noted that the Consulate has been seeing an
increasing number of business disputes involving U.S. companies
in Shanghai, and the Consulate would like to work with the city
to resolve the disputes early, before they become too big. She
also recognized that Shanghai is a leader on intellectual
property rights protection in China and welcomed continued work
with Shanghai on this important issue. Sha replied that
Shanghai is committed to "the path of reform and economic
openness." He added that particularly because foreign invested
companies may feel they are in a precarious situation with the
financial crisis, Shanghai is committed to helping foreign firms
settle business disputes as expeditiously as possible. Sha
emphasized that Shanghai wants to maintain close contact with
the U.S. business community and welcomes a friendly, frank and
constructive dialogue with the Consulate in resolving business
disputes.

COFCOM Formation Reflects Changes in Beijing
-------------- -


9. (SBU) Sha said the local government reforms that created the
Shanghai Municipal Commission of Commerce were a reflection of
recent national level reforms. (Note: Shanghai established the
new government entity and appointed Sha as the Director General
on October 23. End note.) As with the reforms at the national
level, the municipal-level changes included consolidating some
government functions under Shanghai COFCOM's umbrella, merging
others into separate agencies, and abolishing of some functions

SHANGHAI 00000571 003.2 OF 003


or agencies all together. (Reftel reports further on the
Shanghai Municipal Government reorganization.) According to
Sha, these changes are necessary so that the Municipal
Government agencies parallel the Central Government in structure
and responsibilities. The newly formed Shanghai COFCOM oversees
four main functions - foreign trade, foreign direct investment
(FDI),outbound economic cooperation, and domestic business
development. The Shanghai Foreign Economic Relation and Trade
Commission (SMERT) and the Shanghai Economic Commission have
both been absorbed into the new Shanghai COFCOM.
CAMP