LIAONING'S ECONOMY: DOWN BUT NOT OUT

C O N F I D E N T I A L SECTION 01 OF 04 SHENYANG 000173

SIPDIS

E.O. 12958: DECL: 12/03/2013
TAGS: CH EAGR ECON EFIN ENRG PINR PREL
SUBJECT: LIAONING'S ECONOMY: DOWN BUT NOT OUT

Classified By: CONSUL GENERAL STEPHEN B. WICKMAN; REASONS 1.4 (b/d).


1. (C) Summary. Local leaders in three of the Liaoning
Province's less well-off urban areas put a good front on
this province's relative resiliency in the face of
recession but privately conceded their worries. The most
telling statistic is electricity demand, which was flat in
October and dropped 11 percent in November, showing that
manufacturing is clearly in recession. One Deputy Mayor
said it was very unlikely that China's provinces would be
able to meet the local stimulus targets set by Beijing
unless the center provided additional funding. Meanwhile,
Liaoning governor Chen Zhengao has taken a team of mayors
and vice mayors on a mission to Guangzhou to help nearly
bankrupt
Guangzhou enterprises relocate or invest in Liaoning at
bargain prices. End Summary.


2. (U) The Consul General and two local assistants paid
first visits to two of Liaoning Province's poorest cities -
- Fuxin and Chaoyang -- October 28-November 1 and to nearby
Tieling, November 20-21. Joined by the Principal
Commercial Officer and her staff for the Chaoyang segment,
the visit to Western Liaoning was heavy on commercial
content. The schedule also included a speech at the
Liaoning Engineering and Technology University -- to our
knowledge, the first ever outreach event at this venue --
and a heartwarming stop a school for orphans - one of only
two such schools in the country (the other is in Jilin
Province). The Tieling visit featured a visit to the "new
city" development project, which will open this month.

King Coal in Fuxin...
--------------


3. (SBU) It's been a long time since anyone from the
consulate visited Fuxin, one of the poorest of Liaoning
Province's fourteen municipalities, but it's a lot easier
now that we can fly along the province's newest expressway
(opened in late September). The signage is so new that our
Foreign Affairs Office (FAO) handlers could not tell us
where to turn off, but Fuxin is working hard to take
advantage of the new link. Among our discoveries: Fuxin
has one of the best-run government-owned guest houses in
these parts; hosts a renowned international Agate Festival;
is the "Basketball Capital" of the northeast; and is
dominated by state-owned power companies expanding
aggressively toward Inner Mongolia. Fuxin has also just
established a sister-city relationship with Gary, Indiana
and hopes for more cooperation with U.S. and other foreign
enterprises.


4. (SBU) Mayor Pan Liguo gave the usual virtuoso recap of
Fuxin history, especially its 60-year record as a coal-
mining and power-production center, noting that reserves
are nearly exhausted. At the current extraction rate --
around 20 million tons per year - Fuxin's reserves will
last only another 20 years. The 35,000 miners currently
employed at state-owned facilities are down from a peak of
200,000, and there are now only 30,000 miners working in
private mines. The city is trying to develop substitutes:
coal-mine gas, wind turbines, and coal-based chemicals
linked to Inner Mongolia's Xilin Gol Area, whose rich
reserves may reach 200 billion tons. In 2007, the National
Railway Corporation began construction to link Fuxin and
the Xilin Gol area. A coal gasification project with an
investment of RMB 26.4 billion (USD 3.86 billion) has
received the National Development and Reform Commission's
first-stage approval and is in the final "assessment"
period. The development will more than fill Liaoning's
annual gap in demand for coal and products of around
800,000 tons per year. Fuxin is also building the
country's largest wind power plant, located next to the
Kerqin Grasslands of Inner Mongolia, which will have 600
megawatts of installed capacity by year end, about a third
of the final target. The mayor was sanguine about the real
estate industry, reporting that prices are continuing to
rise even for "economic" housing to replace the old slums.


5. (SBU) Liaoning Engineering and Technology University
(LETU) Vice President Wang Jiren, an expert on mine
safety, told us that 100 percent of China's current
coal mine accidents are caused by "human error" stemming from
a lack of strict management controls and poor education.
Wang said there is an unflattering saying that
"one only becomes a miner if one can do nothing else and
has no other choice." So the key to increased safety --
and Fuxin has had its share of disasters -- is how to
educate the miners and improve their quality. Wang added

SHENYANG 00000173 002 OF 004


that small-scale mine owners are especially reluctant to
invest in safety facilities, another reason for the high
frequency of accidents. Wang reported that Liaoning has
"begun" to close all its private mines (about 100 in all) and
prohibits owners from becoming involved in production and
management; they simply own shares and receive
dividends. Each private coal mine will be assigned a
qualified mining management company.


6. (U) During a brief visit to a coal-mine-gas generating
station run by Fuxin Mining Group, Deputy Chief Engineer
Wei Huaxing told us the group had built 47 such generators
at different pumping stations. Total capacity has reached
24,600 kilowatts --one quarter of group's in-house needs.
The pumping stations use the existing coal-mine gas
emission wells, which used to let the gas into the air,
causing pollution and waste. Wei reported that gas having
a density of over 30 percent can be used directly for
combustion engines while a density of 10 percent can be
converted easily to power. Density inside the mines must
be limited to 0.5-0.7 percent to prevent explosions, which
occur at levels exceeding 0.75 percent. The group is
researching the utilization of even these very low
densities. Wei also noted that Fuxin Mining Group
cooperates with Japan on a gas purification project and
receives pollution offset subsidies through the UN
programs. The site we visited had a 10,000-cubic-meter
storage tank, which Wei said they would tap when prices
spiked. On the road, for example, we passed a crowded
queue at one of the city's two coal-mine gas stations for
converted taxis, which have proven extremely popular with
local drivers. Fuxin Mining Group and the state-owned
gasoline companies helped re-equip the taxis at a cost of
only RMB 200 (USD 30) per engine so that the taxis can use
either coal gas or gasoline through the flip of a simple
switch. The coal gas is only one third of the price of
gasoline.

...Burns Less Brightly for Now
--------------


7. (C) Over lunch, Deputy Mayor Zhang Bengang went into an
animated critique of the NDRC approval system, which
was the biggest obstacle to getting things done at the
local government level. He said getting NDRC approval was
more difficult than for any of the line ministries
required for project development and that the system was
non-transparent and slow. Over breakfast, Zhang continued
critiquing the growing number of unfunded mandates being
dictated by the central government, a theme that he
returned to during a Thanksgiving event held on November 30
in Shenyang. Zhang said that the stimulus package enacted
by the central government in response to the global
economic recession required each province to achieve
unrealistic expenditure targets that had to be financed
locally. He said that relatively prosperous provinces like
Liaoning might come close to meeting their targets but that
poorer provinces in the South and West would never be able
to meet the mandates without additional central government
funding. Zhang had praise for Liaoning governor Chen
Zhengao, who he was joining on a mission to Guangzhou the
following day. Chen's mission was to entice nearly bankrupt
Guangzhou enterprises to relocate or invest in Liaoning.
Chen planned to offer old factories and land at bargain prices
in an effort to both save the southern enterprises and
expand employment in Liaoning.

Chaoyang's Fossil Imagination
--------------


8. (SBU) Chaoyang Deputy Mayor Chen Lie described his
administration of over 20,000 square kilometers,
Liaoning's largest district in terms of area and fourth
largest in terms of population (3.7 million). Covering
five counties, two county-level cities, two districts, and
one provincial-level development zone, Chaoyang remains
the least-developed area in Liaoning, though the growth
rate in local GDP and government revenue
skyrocketed to first place in 2007. Chen predicted another
leap in GDP this year, from RMB 33.4 billion in 2007 to RMB
43 billion, while government revenues climb from RMB 2.2
billion to RMB 3 billion. Chaoyang has seen a big increase
in fixed asset investment, especially as reflected in the
expansion of Lingyuan Iron and Steel, a joint venture with
Anshan Steel. By the time expansion is completed in 2010,
Chaoyang will have an annual steel capacity of 10 million
tons.


9. (SBU) Chaoyang Mayor Zhang Tiemin boasted about the

SHENYANG 00000173 003 OF 004


city's world-class fossil museum that has hosted two
international conferences on paleontology and that will
soon double in size (replete with golf courses for an
expected up tick in Japanese and Korean visitors) and the
construction of a new museum downtown. Despite the area's
relative poverty, the rate of college enrollment is high
(third highest in Liaoning) and the government provides
generous assistance to the poor through direct financial
subsidies, vocational training, and farming aid. He said
the average net income for a farmer in Chaoyang is now
about RMB 4,300 (USD 630) per year. Asked about the
effects of the international economic downturn, Zhang
mentioned that the Feima Group's exports of tires and
hubcaps to North America had fallen off substantially but
he was otherwise sanguine. He similarly shrugged off the
fact that his district was the only district in the
province to suffer a net decline in agricultural production
this harvest year, saying that the peasants expected this
to happen one out of every four or five years. He also
remarked on the growing relationship between Navistar
International (a U.S. firm) and state-owned Dongfeng
Chaoyang Diesel.


10. (C) Note: Tieling Vice Mayor Zhou Yiying contradicted
both Mayor's accounts when we met with her at lunch in
Tieling on November 20. She said the mayor had complained
to her that reduced demand was seriously affecting the
steel and mining industries in Chaoyang and she did not
expect Chaoyang to reach its targets. (Zhou's staff
toasted her repeatedly at lunch about her recent "election"
to the Standing Committee of the Tieling Communist Party
Committee. Zhou, who speaks almost fluent English,
received an MBA at Chicago's Roosevelt University and is
clearly an up-and-comer in this province.)

A Peek at Chaoyang's Welfare Institutions
--------------


11. (SBU) Chaoyang's earthy Director of the Civil Affairs
Bureau (also the Director of the Chaoyang Charity
Federation) took the CG on a tour of one section of
the Chaoyang Municipal Welfare Institute, which consists
of a Children's Center and Senior Citizens Home.
The director of the children's facility said there were
currently some 40 abandoned children and orphans, most of
whom had severe physical or mental disabilities. The
orphanage works with two U.S.-based charities, AWA or the
American International Adoption Center, to sponsor annual
visits to the children for one to two weeks at a time,
helping the children with rehabilitation. One other U.S.-
based medical organization also has a relationship with the
facility. About 20 children have been adopted overseas.
Compared to the Shenyang facility we have visited, this
facility was clearly understaffed and the rehabilitation
equipment hardly used.


12. (U) By contrast, the Liaoning Provincial Orphans
School in Chaoyang appears to be a stunning success that
dates from the Cultural Revolution (the school was
established in 1965). One of only two such institutions in
China (the other is in Jilin Province),the school combines
nine years of compulsory education with vocational training
to help abandoned or orphaned children succeed in
mainstream society. The vocational school, for example,
trains students in computer accounting, computer
application and maintenance, preschool teaching, fashion
design and tailoring, cooking, beauty and hair styling, and
other vocations and boasts a perfect placement rate.
Recently, the middle school reports a 100-percent success
rate in placing its graduates in high school or vocational
school, of which another 80 percent make it into college,
including many in graduate programs. All the students
board on campus, some 6-8 students per room with a resident
teacher to insure care outside of the classroom. All of
the financing comes from the provincial government and the
Liaoning Charity Federation, and the children come from 14
cities all over the province. U.S. NGOs, including the
Casey Cares and Half the Sky Foundations have worked with
the school in the past, but only a dozen or so children
aged 8-10 have been adopted oversees.


13. (U) The school's dynamic principal, Tong Zixinm, told
us he has worked in the school for 14 years and spends
every spring Festival with the children: "It's like a big
family." Tong had been a Youth League Secretary at
Chaoyang Teachers College before transferring. Since then,
the number of students has more than tripled to the current
level of 648 and Tong proudly looked forward to being able
to handle over 1,000 students in the large, new facility

SHENYANG 00000173 004 OF 004


which opens in Shenyang in 2010. The school has had 3,000
graduates overall since its founding.

Tieling's Gleaming Aluminum Future
--------------


14. (C) Tieling Mayor Zhang Jiangqiang was extremely
upbeat about his successful trip to the United States last
spring when he visited Alcoa headquarters in Pittsburg and
signed contracts with five U.S. and Canadian investors,
including Alcoa. He stressed that Tieling will not be
affected by the global economic crisis because the city has
few export-oriented factories and relies instead on producing
lathes and mining machinery. Despite the downturn, moreover,
Alcoa confirmed that it will follow through on its plan to
build an
aluminum fixture fabrication plant in Tieling even though
Alcoa decided to scrap a similar plant in Eastern Europe.
Zhang admitted, however, that electricity demand had dropped
11 percent in November province-wide, proving there was
indeed a recession in manufacturing. (Note: When he was
Party Secretary of Liaoning Province, Vice Premier Li Keqiang
told the Ambassador that electricity production was one of
only two
consistently reliable indicators of economic activity in
China; the other was bank credit.)


15. (SBU) Tieling's "New Town" is being built with aluminum
fittings that will eventually be produced in Alcoa's
planned factory in the industrial zone. Located 4.5
kilometers south of the old city, the new town will
hopefully propel real estate development in a city that has
seen its share of economic woes. Prices for housing in the
new town have actually risen over the past few months. The
government will formally move to its new headquarters on
the banks of a man-made lake sometime in December. One of
the features of the new government headquarters appears
particularly apt, if not unique: the government building
is flanked by the local People's Congress, on the right,
and the Political Consultative Committee, on the left, and
the central office structure is split evenly down the
middle between the city government and the communist party
offices. Communication should be excellent.
SWICKMAN