SENIOR HEILONGJIANG OFFICIALS ON STABILITY-RELATED

C O N F I D E N T I A L SECTION 01 OF 03 SHENYANG 000019

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MOSCOW PASS VLADIVOSTOK

E.O. 12958: DECL: 02/13/2028
TAGS: PGOV PINR PREL ECON EIND ETRD CH KN RS
SUBJECT: SENIOR HEILONGJIANG OFFICIALS ON STABILITY-RELATED
ISSUES: INFLATION, SOE WAGE ARREARS, LAND DISPUTES AND
"MINSHENG"

REF: A. (A) SHENYANG 14

B. (B) 2007 SHENYANG 252

Classified By: Consul General Stephen Wickman; reasons 1.4 (b)/(d).


1. (C) SUMMARY: Inflation is a pressing concern for senior
Heilongjiang officials, who are implementing a full range
of countermeasures not always made public in order to avoid
a panic. Along with new export taxes, the policy of
supplying grain and coal nationwide to cover excess
domestic demand is likely to shrink Heilongjiang's exports
to Russia, North Korea and elsewhere. In a bid to
stimulate growth and stem potential social discontent,
Heilongjiang will be a major beneficiary of a massive
repayment of back wages to employees of the province's many
state-owned enterprises. Senior officials privately
acknowledged recent events in Fujin--where a land-rights
dispute late last year attracted international media
attention--but dismissed the farmers involved as
"unreasonable." Officials gripe that Heilongjiang's
disproportionately large contribution of revenue to Beijing
has constrained development. The province is still
struggling with economic restructuring, and U.S. firms may
have a role to play. END SUMMARY.


2. (SBU) CG and Congenoffs traveled January 30-31 to
Heilongjiang Province, a national agricultural powerhouse
still home to a substantial portion of the PRC's heavy
state-owned industry, for meetings with senior officials,
including the province's newly-appointed governor, Harbin's
mayor, and scholars at the Heilongjiang Academy of Social
Sciences (HASS).

INFLATION CONCERNS; GRAIN, COAL EXPORT PULLBACK LIKELY
-------------- --------------

3. (C) Inflation remains one of the key concerns among
senior Heilongjiang officials right now, a point
consistently echoed in ConGen's meetings throughout
northeast China of late. New Governor LI Zhanshu cited
rising commodity prices as a major worry, while Harbin
Mayor ZHANG Xiaolian told the CG that Heilongjiang
officials are purposely not "publicizing" the full range of
countermeasures they are taking, lest the publicity
encourage a panic among the public. But despite concerns
about the impact that domestic inflation and new export
controls will have on the province's exports--particularly
in the agricultural sector--officials seemed to suggest the
province was better positioned to weather the proverbial
storm than others elsewhere in China.


4. (SBU) Heilongjiang's agricultural sector has remained
"fundamentally stable" over the past year, according to
HASS President QU Wei. Qu noted that Heilongjiang's ample
grain production (39.5 billion kilograms in 2007) continues
to grow, bolstering the country's national strategic
reserve (to which Heilongjiang's contribution is unclear).
Heilongjiang this year will "export" most of its surplus
domestically; Qu reasoned new Chinese export tariffs would
likely shrink grain exports abroad, including to neighbors
like Russia and North Korea (refs A and B). Governor Li
agreed that the Heilongjiang crop was currently sufficient
to fill shortfalls in other provinces, but he worried that
prices in Heilongjiang might be forced up if too many sales
outside the province are made at once. Coal, of which
Heilongjiang is also a major national producer, seems to be
headed in the same direction. The Governor claimed "some"
exports abroad will continue this year (e.g., to Japan) but
that most of this year's production is slated for domestic
use. Qu Wei noted that the rising price of oil has been a
boon to Heilongjiang's mostly state-owned coal companies,
which after years of sustaining losses of "several billion"
renminbi (RMB) per year, are now turning a profit.

SOE WAGE REPAYMENT AND LOW-COST HOUSING FOR "MINSHENG"
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5. (SBU) "Minsheng" (the people's livelihood),a key
concern of President Hu and Premier Wen, tinged with
stability-related undertones, is also weighing heavily on
Heilongjiang officials. They are looking to two major
initiatives to stimulate demand in response to a rate of
development that Governor Li admitted privately is "too
slow." The first is the massive repayment of back wages to
current and former employees of state-owned enterprises

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(SOEs). Heilongjiang is home to roughly one-third of the
PRC's SOEs, which owe "several billion" RMB in back wages
to workers throughout the province, according to Harbin
Mayor Zhang. Starting this year, Beijing and Heilongjiang
will together repay all the back wages in the province. In
Harbin alone, roughly 180,000 former SOE workers are still
owed over RMB 1 billion (USD 138 million). The central
government in Beijing, matched to a lesser extent by
Heilongjiang, will repay sixty percent of the arrearages by
April, and the remainder by the end of 2008, according to
Zhang.


6. (SBU) The second initiative, also clearly a beneficiary
of generous funding from Beijing, is a rapid expansion in
the construction of low-income, urban housing, a program
that has generated important goodwill for responsible
officials elsewhere in northeast China (e.g., Li Keqiang's
successful slum-renovation program in Liaoning Province).
Harbin is one major locus. Mayor Zhang Xiaolian said the
city's program started seven years ago--rather early
compared to others nationwide--and initially functioned via
a lottery of sorts. Under the new program, the neediest
families immediately qualify, and "many" in the city are
already beneficiaries of new housing. More residents will
join their ranks as additional regulations phase in by 2011
to "capture" the slightly less needy. In 2007, Harbin
moved 3000 families into new low-income housing, which
residents have an option to purchase after five years.
Mayor Zhang concluded with a "conservative" estimate that
envisions the addition of one million square meters of new
low-income housing space in 2008, followed by an additional
16 million square meters within five years. HASS' Qu Wei
claimed Beijing would assume between one-quarter and one-
third of the total tab.

LAND-RIGHTS DISPUTES: FUJIN AND BEYOND
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7. (C) Senior officials privately acknowledged but offered
an incomplete "take" on recent events in Fujin--a city near
Jiamusi where a land-rights dispute that had attracted
international media attention came to an abrupt end in
December/January after authorities incarcerated the two
farmers-turned-land-rights-activists leading the charge.
GUO Xiaohua, the new Secretary General of the Heilongjiang
provincial government following several years as Party
Secretary of Jiamusi (which administratively supervises

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Fujin),said the government had dispatched investigation
teams "several times" to look into the Fujin conflict,
which media reports say erupted in late 2007 when local
farmers started redistributing collective farmland among
themselves, demanding private ownership. Guo, selectively
omitting unfavorable details documented in media reports,
claimed that rights to use the land had been ceded to a
South Korean land developer pursuant to a contract signed
by the farmers many years ago. Guo criticized the Fujin
farmers' demands as "unreasonable," alleging that they were
simply seeking to rewrite a contract with which they were
no longer satisfied. (NOTE: According to media reports,
local officials actually reclaimed the land in the 1990s
after the ROK firm walked away and the farmers had already
made improvements of their own. END NOTE.)


8. (C) HASS President Qu Wei, who said he has researched
land-rights issues for the provincial Party Committee,
claimed Heilongjiang has not seen "too many" problems on
this front, in part because of the province's vast size and
relatively low population density--one-thirty-fifth of the
PRC's population on one-tenth of its land mass. Qu, like
other scholars and several journalists we encountered,
claimed not to have heard of the Fujin dispute, but he did
acknowledge that land-use abuses occur and are not helped
by the "underdeveloped" legal system. Heilongjiang, he
said, is starting to pay increasing attention to land-use
regulations, as well as various models for
relocation/compensation when residents must be moved for
new development.

OFFICIAL CARPING ON REVENUE-SHARING
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9. (C) A surprisingly critical refrain we heard on a number
of occasions concerned Heilongjiang's disproportionately
large contribution of revenue to Beijing, something
Governor Li suggested had constrained the speed of

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provincial development. Heilongjiang, for instance, is
contributing RMB 6 billion (USD 833 million) in national
taxes every year, not including RMB 10 billion (USD 1.4
billion) in proceeds from the Daqing oil fields, which are
used outside Heilongjiang to fund western China's and
overseas oil exploration/development projects, according to
Qu and Governor Li.

COMMENT
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10. (SBU) With its new SOE wage-arrears scheme, Beijing
seems to be redirecting the "northeastern revitalization"
drive, which was launched in 2003 and which thus far has
disproportionately benefited Liaoning Province. Harbin in
particular looks set to benefit. The city is already
humming along, with a per capita income of RMB 12,700 (USD
1760)--some 25 percent higher than in the rest of the
province. The provincial capital now comprises 36 percent
of Heilongjiang's total production, 40 percent of its
fixed-asset investment, half of its service sector, and
more than one-quarter of its grain production, according to
Mayor Zhang.


11. (C) Even in Harbin, however, one is still struck by the
weight of the past. Over one million of Heilongjiang's
laid-off SOE workers are now seeking higher wages elsewhere
in China (or in Russia). Industrial restructuring is slow,
and manifold difficulties remain. Although officials
pepper their talking points with pleas for U.S. firms to
invest, happily reporting that the United States is
Heilongjiang's second largest trading partner and a source
of investment from over 300 firms, there are few examples
of successful joint ventures involving SOE partners.
Gleason Cutting Tools, for example, is seeking to dissolve
a venture it set up only a few years ago with Harbin Number
One Machine Tool Company, a city-owned SOE that owns a
less-than-controlling, 30-percent stake in the joint
venture. The SOE partner is using every means at its
disposal--including mobilizing laid off workers to threaten
the U.S. partner--to keep its retail arm from having to pay
out millions of dollars in arrears and possibly to seize
Gleason's equipment and technology. The U.S. company is
seeking to save its equipment and form a wholly-owned
venture. Harbin is not out of the question, the
beleaguered U.S. managers say, but the tactics of the
Harbin partner have caused Gleason to think long and hard
about investing here even though many important clients are
nearby.
WICKMAN