China's Qinghai Province Slow to Rebalance Economy and

C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 001242

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TREASURY FOR OIA CWINSHIP AND TTYANG
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E.O. 12958: DECL: 05/08/2029
TAGS: ECON EFIN EAGR PGOV SOCI CH
SUBJECT: China's Qinghai Province Slow to Rebalance Economy and
Address Rural Needs, Including those of Tibetans

REF: A. Beijing 649

B. Beijing 590

C. Beijing 693

D. 08 Beijing 3857


Classified By: Econ Minister-Counselor Rob Luke for Reasons 1.4
(b) and (d)


1. (C) SUMMARY: Tibetan and other minority communities in rural
Qinghai Province see only limited benefits from China's rural
development efforts. Like much of rural China, weak local
government capacity hinders Chinese Government development efforts
throughout rural Qinghai. These problems are exacerbated by
remoteness and poor infrastructure. The Provincial government is
devoting resources made available by China's economic stimulus
package for environmental and rural livelihood projects, but
rebalancing the local economy toward one that nurtures small
businesses and achieves broad-based rural development and poverty
alleviation is a distant goal. Large enterprises, mostly dominated
by Han-Chinese, will continue to see the lion's share of benefits
from recent stimulus package measures and ongoing economic
development efforts. END SUMMARY.


2. (SBU) During an April 12-16 Virtual Presence Post trip to
Qinghai, Econoff, ESTHOff and ConOff met with officials from the
Qinghai Province Development and Reform Commission, Agriculture
and Animal Husbandry Bureau, Poverty Alleviation and Development
Bureau, and the Environmental Protection and Science and
Technology Bureau, as well as professors from Qinghai University
and student advisors from Qinghai universities to discuss visas.
EmbOffs also visited Ta'er (Kumbum) Monastery near Xining and
sites on the shores of Qinghai Lake.


Responding to the Economic Slowdown in Qinghai
-------------- --


3. (SBU) Hu Wenjuan, Division Chief,Rural Economy Division,
Qinghai Development and Reform Commission said the impact of the
global financial crisis on Qinghai has been limited because the
province has very few international exports and is a resource-
based economy supplying raw materials to the rest of China. GDP
growth in 2008 was an acceptable 12 percent. There are some
indications of slower growth in early 2009, such as lower fiscal
revenues, and large industries (mostly producing commodities) have
seen business slow somewhat, but Hu claims the economy is already
responding to government stimulus measures.


4. (SBU) As one of China's poorest provinces, according to Hu,
Qinghai is following the Central Government's lead in trying to
use stimulus package funds to focus on "livelihood" issues like
housing, healthcare, education, rural poverty, developing
agriculture and animal husbandry, and the environment. Despite
this emphasis, however, Hu said the Provincial Government is using
investment to drive (ladong) the economy, and is supporting large
enterprises and industry, since industry comprises 50 percent of
provincial GDP and supports (zhicheng) the local economy. Li
Shengcai, Director of the Qinghai Budget Bureau Forecasting
Division, said Qinghai has the lowest per capita and overall
fiscal revenue in China, and therefore relies heavily on the
Central Government for budget support. Central government
investment in roads, airports and railroads is important, although
Qinghai also places priority on environmental protection. He added
that infrastructure investment through the Great Western
Development Plan has been important and that Qinghai hopes such
Central Government support will continue (Ref A). (Note:
According to recent media reports, fixed asset investment (FAI) in
Qinghai increased 57.2 percent year-on-year in the first quarter
of 2009, the highest percentage increase in seven years. Under the
Central Government's stimulus package, in the first quarter of
2009 urban and township investment projects over 500,000 yuan (USD
71,000) increased 22.7 percent compared to the same period last
year. End Note.)


5. (SBU) Hu said Qinghai received 30 billion RMB (USD 4.4 billion)
in transfer payments in November and December of 2008 under the
first phase of the fiscal stimulus package. This comprised 80
percent of Qinghai's budgetary spending in that period. (Note: In
general, 80 percent of Qinghai's budget consists of Central
Government transfers and 20 percent comes from local revenue. End
Note.) The second phase consists of over 20 billion RMB from the
Central Government. Some budget execution during the second phase
was delayed during the winter, but the entire amount will be spent
by June or July, according to Li.


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6. (SBU) Li said Qinghai is considering issuing local bonds to
raise revenue to cover the Province's share of the stimulus
package, but no decision had been made. He offered his personal
opinion that local bonds were important because they would allow
provinces like Qinghai with limited fiscal resources to increase
income and therefore provide the increased matching funds required
as the Central Government increased transfer payments. (Note:
According to the World Bank's March 2009 China Quarterly Update,
the pilot program to allow some local governments to officially
issue debt will not help those local governments with the weakest
financial positions, since the pilot is likely to involve more
prosperous localities with stronger repayment capacity. End Note.)
Hu explained that Qinghai is using tax preferences and subsidized
loans to help local enterprises, but emphasized that Qinghai was
not using any "buy local" (Ref B) or other local protectionist
measures because it primarily exports raw materials to the rest of
China. She said Qinghai had no ability to be protectionist and
was therefore "forced to be open."

Rural Livelihoods: Claiming Success, but Admitting Challenges
-------------- --------------


7. (SBU) Discussing Qinghai generally, Hu said the Central
Government has dramatically increased spending on rural
infrastructure and improving agricultural and animal husbandry
production in recent years, but the focus is now shifting to rural
livelihood issues. Hu said the Central Government's expenditures
on rural Qinghai are relatively high because of preferential
policies toward Tibetan areas. She said counties in Tibetan areas
do not need to match rural development funds from higher levels
with their own funds. Hu also claimed that performance of local
officials is being evaluated according to environmental, poverty
alleviation, and other criteria, not just GDP growth.


8. (SBU) Ma Xiaofeng, Vice Director of Planning and Financing at
the Qinghai Poverty Alleviation and Development Bureau, claimed
Qinghai's poverty alleviation efforts had been successful overall.
In addition to promoting business development and conducting
vocational training, Ma explained that Qinghai's poverty
alleviation efforts include relocation of residents from poor
areas, with a goal of moving 2,000 households (approximately
10,000 individuals) per year. He said these programs aim to
decrease the number of herders in remote, difficult grassland
environments and move them to better land farther north and east,
but declined to elaborate further on how these programs are
carried out and whether resettlement safeguards are in place. Ma
also claimed that officials elicit direct input from local rural
residents on the types of projects to be funded and on their
implementation. (Comment: Although most officials in China are
aware of policies requiring at least some degree of consultation
from impacted residents, in practice this is rarely done and
decisions end up being made by officials or in consultation with a
few village elites. End Comment.)


9. (SBU) Ma admitted officials were struggling to meet the needs
of the high percentage of impoverished residents in Qinghai (21
percent compared to a nationwide average of 4.6 percent). He also
said they will have difficulty handling the larger numbers of
rural residents who are now eligible for rural poverty alleviation
benefits under recently instituted higher minimum income criteria.
Reflecting nationwide concerns about maintaining rural income
growth (Ref C),Hu said 2008 rural income growth in Qinghai was 14
percent, but is estimated to be only 7 to 9 percent in 2009. Hu
said rural residents' income is derived from farming/animal
husbandry, government transfers, and wages. She said only wage
income has been affected by a weaker business environment due to
the current economic slowdown, but claimed even this is limited
because migrant labor is less common and comprises a small part of
rural incomes.


10. (SBU) Officials from the Qinghai Bureau of Agriculture and
Animal Husbandry said ongoing efforts to link rural residents to
markets by developing cooperatives and "leading firms" (longtou
qiye) have only recently begun and are progressing slowly (Ref C).
Hu said the higher costs of implementing programs benefitting
Tibetans and many other rural residents in remote areas makes it
difficult to provide service levels equal to those received by
rural residents in less remote areas of China. When asked about
corruption and the lack of transparency as barriers to effective
implementation of rural development projects, Li from the Finance
Bureau said the Province requires local Government entities to
carefully manage funds. Agriculture and Animal Husbandry Bureau
officials recognized corruption as a problem but said they are
increasing inspection and monitoring. They also said many central
government funds are released directly to households, thus
avoiding various levels of bureaucracy where funds can be siphoned

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off. (Comment: Premier Wen Jiabao and other officials have made
recent appeals to address transparency and corruption issues in
the implementation of the economic stimulus plan, but it is
unclear how well they are being implemented in Qinghai or
elsewhere. End Comment.)

Comment: Economic Colonialism, the Stimulus, and Tibetans
-------------- --------------


11. (SBU) China's efforts to maintain overall economic growth
during the global crisis appear to be achieving success. Recent
GDP and other data show the national economy may have bottomed out
in the first quarter of 2009. But much stimulus package funding
is going to the old stand-by's of infrastructure and construction,
and increased bank lending is being channeled to state-owned
enterprises and large companies rather than small and medium
enterprises. Although Tibetans and other minorities in Qinghai
may work in construction, in general they are less likely to own
large businesses or otherwise benefit directly from Central
Government economic stimulus funds.


12. (C) In many ways Qinghai uses a softer touch dealing with
sensitive Tibetan issues than the Tibetan Autonomous Region, but
Chinese Government economic development efforts still occur within
the context of the Government's policies aimed at maintaining
broader security and political control of areas with majority
Tibetan populations. Policies focused on improving economic
livelihoods of Tibetan and other minority populations, whether
successful or not, have to be viewed as part of this overall
effort to maintain stability and control.

PICCUTA