China/Economic Plans: Continued Reform Endorsed

UNCLAS SECTION 01 OF 03 BEIJING 001602

SIPDIS
SENSITIVE

TREASURY FOR OASIA/DOHNER
USDOC FOR 4420, 5130 and 6510
STATE PASS USTR FOR STRATFORD

E.O. 12958: N/A
TAGS: ECON ETRD EINV EIND EFIN EAGR ENRG EDEV SENV CH

SUBJECT: China/Economic Plans: Continued Reform Endorsed

REF: A) Beijing 592, B) Beijing 1571, C) Beijing 1556, D) Beijing
39, E) Beijing 665 and previous, F) Beijing 693, Beijing 829, Hong
Kong 421 G) Beijing 422, Beijing 359

This cable is Sensitive but Unclassified (SBU) and
for official use only. Not for transmission outside
USG channels.


1. (SBU) SUMMARY. Beijing's 2009 economic planning document, in
contrast to last year's version and some of the trends evident in
China's recent economic support and stimulus plans, endorses
liberalization and economic transformation. Financial reform
continues. China's largest state-owned enterprises (SOEs)--and in
particular the giant services monopolies--are singled out for
increased private investment and competition, while financial and
logistical support is offered to smaller private companies. The
document calls for further progress in ending energy price
manipulation that encourages energy inefficiency, as well as
provision of social services and SOE profit-sharing to spur
domestic consumption. The plan shows little support for exports,
although outward bound investment is encouraged. The plan settles
for merely re-stating past commitments on rural reform and
backtracks slightly in the area of exchange rate flexibility; with
millions of migrants returning home to their land and falling
exports, there seems to be little appetite for major new steps in
these areas. China's current economic support policies certainly
emphasize industrial and infrastructure investment and
consolidation; the State Council, however, has indicated in this
annual planning document that (at least in theory) China's future
lies with increased marketization and liberalization. END SUMMARY.



2. (SBU) China has released its 2009 economic plan, the "Opinions
Regarding the Work on Deepening Systemic Economic Reforms in 2009."

The annual plan, issued by China's State Council and coordinated
by the National Development and Reform Commission (NDRC),is
designed to set the overall economic direction for the coming year.

In all, it lays out more than seventy specific policy tasks, and
for each one names the ministry (or ministries) responsible for
implementation. NDRC is tasked with providing overall interagency
coordination and reporting to the State Council on progress. The
full translated text of the document is posted on the Embassy
Economic Section website at
http://www.intelink.gov/communities/state/chi naecon/.

Continuing Reform
--------------


3. (SBU) The 2009 plan is a clear endorsement of continued
economic liberalization and marketization. In the first paragraph
the plan asserts that, in spite of the economic down turn, China
cannot diverge from continuing opening and reform. Its stated
goals are consistent with fundamental economic transformation,
including increasing domestic demand and improving livelihoods.
Although government regulation is welcomed, the endorsed mechanism
is the market, which should be perfected as opposed to managed.

Government as Regulator, Not Manipulator or Primary Investor
--------------


4. (SBU) Tracking with this endorsement of market primacy, the
plan calls for further adjustment of the role of the government in
the economy. Specifically, it calls for the government to adopt a
supervisory role. Investments subject to government approval are
to be reduced and approvals decentralized. The plan has
completely new language calling for caution in government-led
investment, to ensure that it attracts, as opposed to crowds out,
private investment. Even government-led programs to foster
indigenous innovation, a mainstay of many of China's recent
industrial revitalization plans (REF E),must be "market oriented"
with "enterprises at the core."

Cracking Open the Monopolies, Transforming the Economy
--------------


5. (SBU) Continuing with the theme of valuing private investment,
the plan opens the door to private investment in many of China's
largest state-dominated services monopolies, specifically
mentioning petroleum, railroads, electricity, telecom, and
municipal services. Private sector investment in services SOEs is
welcomed, with promises to open the services sector to greater

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market access. The long-awaited establishment of a security
review mechanism for foreign mergers and acquisitions is to be
speeded up (REF D for background of security review). Services
are also emphasized in the context of trade, with the plan calling
for a new regulatory framework for trade in services and creation
of an outsourcing industry.


6. (SBU) The plan, as in previous years, calls for further reform
of China's controlled pricing for grains and energy. What is
different this year is the reason stated: prices must be
marketized and liberalized in order to transform China's economic
growth model. Singled out for particular focus are electricity
and water prices that subsidize industrial users at the expense of
services and retail consumers. Similarly, the plan endorses the
various healthcare, wage, unemployment insurance, housing, and
pension reforms introduced in the past few months, but with the
rationale that these reforms are important to spur consumption
(REF F).

Small (and Medium-sized) is Beautiful
--------------


7. (SBU) Despite government lending and stimulus projects that
benefit China's largest enterprises and revitalization plans that
aim at industry wide consolidation (REF E),the 2009 plan focuses
on small and medium sized enterprises. SOEs are mentioned as
institutions in need of reform, while SMEs will receive credit
guarantees and other new financing facilities. Start-ups are
welcomed as a means to increase employment opportunities, and
small- and medium-sized financial enterprises will be promoted.


8. (SBU) In the section on improving the people's livelihood, the
plan calls for regulating SOE managers' salaries in order to keep
income disparity within reasonable limits. A somewhat cryptic
clause in the section on taxes appears aimed at going after SOE
excess profits and operating budgets, which have come under great
criticism this year for taking money out of the pockets of
consumers and using it for over-investment. The section calls for
returns to "state-owned capital" to go into a social security
budget.

Financial Reform Continues
--------------


9. (SBU) Financial sector reform is extensively addressed in the
plan; there is little evidence of back-tracking many observers
speculated could result from the global financial crisis.
Continued reform of banks, private asset management companies,
rural credit, deposit insurance, interest rates, and equity and
bond markets are all endorsed. Pushing forward, the plan adds
requirements for reform of the insurance industry and development
of private equity funds.

Exports not Emphasized, but Outward Investment Is
--------------


10. (SBU) Despite a serious downturn in China's exports, there is
no evidence in the plan of an attempt to prop up exports. A
concern with potential trade protectionism is apparent in the
endorsement of a "mechanism to deal with trade frictions" and
calls to pursue Free Trade Agreements (FTAs). Imports are dealt
with only in the context of management of advanced technology and
strategic inputs, although there is also mention of an "early
warning system" to inform Beijing of surges in imports, exports,
or investment in certain sectors. Outbound investment gets a
boost through regulatory liberalization and financial and
logistical support for enterprises to "go-out" and use foreign
earnings to invest overseas (REF A Chinalco cable).

Rural and ForEx Reform Not/Not Evident
--------------


11. (SBU) The plan calls for rural reform and development, but the
specific programs mentioned as well as the wording used is
consistent with past years, indicating little appetite for
breaking new ground (REF G).


12. (SBU) While the plan, as in previous years, calls for an
improved RMB exchange regime, it notably drops language in
previous plans calling for increased foreign exchange flexibility.

As Vice Premier Wang Qishan recently told Treasury Secretary
Geithner (REF B),China intends to maintain a stable yuan exchange

BEIJING 00001602 003 OF 003


rate until the international economic situation stabilizes.

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


13. (SBU) Many of China's programs and policies over the last year
have raised concerns that the government might be backtracking on
opening and reform (REF C). China's recent fiscal and monetary
stimulus packages have funneled resources to and through China's
state sector. Further, the fruits of the stimulus' resources have
accrued disproportionately to traditional large, industrial
companies, most of which are SOEs. The accompanying industry
revitalization plans have almost without exception emphasized
industry consolidation and government support over structural
economic reform. To be fair, these measures should be seen as
rapid and decisive responses to the global financial crisis, but
they reinforced other preferential policies aimed at strengthening
central government-owned SOEs that pre-dated the outbreak of the
crisis.


14. (SBU) The themes echoing throughout the "Opinions Regarding
the Work on Deepening Systemic Economic Reforms in 2009" stand in
stark contrast to these statist trends. The State Council,
through this document, largely has endorsed a vision of a smaller,
less controlling government. China's leadership has apparently
accepted the view of many Chinese economists that the state-owned
monopolies, particularly the large service monopolies, are
preventing fundamental structural reform. Likewise, the plan
addresses other standard liberal-economists' complains, such as
the lack of a social safety net and inefficient financial markets
leading to excess savings and poor allocation of capital,
respectively.


15. (SBU) China's current policies, aimed to support short-term
economic growth and thus social stability, may in practical terms
set back overall economic restructuring. The State Council,
however, has indicated in this annual planning document that the
general trend should be towards increased marketization and
liberalization.


16. (SBU) We strongly recommend that USG agencies engaging with
Chinese counterparts on any of the issues covered in the plan
reference its relevant sections. It is likely that U.S. arguments
for further liberalization of the Chinese economy would be
strengthened by citing, where appropriate, this State Council
guidance.

Piccuta