Shandong's Economy Hit by Economic Slowdown but Still

UNCLAS SECTION 01 OF 02 BEIJING 000777

SENSITIVE
SIPDIS

STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, READE,
VENKATARAMAN, KEMP, MILLER, MALMROSE
DOC FOR MELCHER, SAUNDERS; LORENTZEN AND SHOWERS (5130); HEIZNEN
(6510)

E.O. 12958: N/A
TAGS: ECON EWWT EIND ETRD CH KS

SUBJECT: Shandong's Economy Hit by Economic Slowdown but Still
Plodding Along
This cable is Sensitive But Unclassified (SBU) and for official use
only. Not for transmission outside USG channels.


1. (SBU) Summary: Shandong Province, China's second largest in
terms of GDP and population, has witnessed a significant drop in
trade and foreign investment during the first two months of 2009,
according to contacts in Jinan and Qingdao who recently met with
EconOff. However, contacts asserted that the province has weathered
the global economic slowdown better than China's other coastal
provinces because Shandong is home to many favored state-owned
firms. Declining trade has slowed growth in cargo volume at the
Qingdao port but has not forced lay-offs or affected expansion
plans. Many smaller Korean enterprises have been particularly hard
hit and have left Shandong, although one contact downplayed the
impact of their departure on the overall economy. End Summary.


2. (SBU) EconOff visited Shandong's provincial capital of Jinan and
coastal city of Qingdao February 25-27 under the framework of the
Embassy's Virtual Presence Post (VPP) program. EconOff met with
Director of the Chinese Academy of Social Sciences (CASS) Shandong
Economic Research Institute Zhang Weiguo, Director of the America
and Oceania Division of the Shandong Foreign Trade and Economic
Cooperation Department Fang Xiaojie, Vice Director of the Qingdao
Port General Office Han Baolin, and Republic of Korea (ROK)
Consulate official Lee Xiangzhen.

Sharp Decline in Trade and Investment
--------------

3. (SBU) Trade and investment in Shandong have both suffered from
the global economic slowdown, according to Shandong Foreign Trade
and Economic Cooperation Department Director Fang Xiaojie. In 2008,
Shandong's total trade increased 29 percent, with exports rising 23
percent and imports increasing 37 percent. Shandong's trade volume
started to decrease in November and December, a trend that continued
in January 2009, when exports fell 10.1 percent, imports decreased
44.7 percent and total trade declined 25.3 percent. February was
another difficult month, with a 25.3 percent decline in exports,
12.1 percent drop in imports and 19.8 percent decrease in total
trade. Fang predicted further drops in trade in the coming months.
As for investment, FDI in Shandong in 2008 increased 10.2 percent
y-o-y to reach USD8.2 billion, with 65.7 percent invested in
industries, 29.7 percent in the service sector and 4.7 percent in
agriculture. In January 2009, FDI was down 21.4 percent y-o-y to
USD438 million.

Shandong's Elephant Economy Weathers the Storm
-------------- -

4. (SBU) In spite of declining trade and investment, the impact of
the global financial crisis on Shandong Province has been relatively
limited, CASS's Zhang Weiguo told EconOff February 25. He
attributed Shandong's relatively strong position to several factors.
First, Shandong's economy is not as export-oriented as the Southern
coastal provinces of Guangdong, Zhejiang and Jiangsu. Second,
Shandong is characterized as an "elephant" economy, with many large
state-owned enterprises (SOEs) that enjoy strong government support
and are in a better position to withstand the crisis than private
firms. Industry makes up 58 percent of Shandong's GDP, while the
service sector accounts for 33 percent and agriculture less than 10
percent.

Government Response: Rebates, Investment, New Trade
-------------- --------------

5. (SBU) Zhang claimed the Shandong provincial government's 1.6
trillion yuan stimulus package is providing a boost to industries
affected by the economic slowdown. The stimulus funds are being
used for large-scale infrastructure projects including railway, port
and airport construction as well as projects that promote rural
development, industry restructuring, energy saving, emission
reductions and environment protection. Before the central
government announced its 4 trillion yuan stimulus package, Shandong
Province already had plans to build a new port, four east-west
railways and four north-south railways. According to Zhang, some of
these large infrastructure projects will receive stimulus package
funds from the central government.


6. (SBU) Fang Xiaojie said the provincial government has responded
to declining trade and investment by adopting a number of measures
that aim to increase liquidity, expand domestic demand and promote
trade. Shandong has encouraged investment in alternative energy
sources such as wind power, promoted the export of agricultural
products and increased export rebates on certain products. Fang
will lead a delegation of more than 30 Shandong agricultural

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companies to Texas and Ohio later this month to seek trade partners.
He also noted that Shandong was hoping to develop new markets in
developing economies in Africa.

Qingdao Port: Slower Growth but Continued Expansion
-------------- --------------

7. (SBU) The global financial crisis has slowed growth in Qingdao's
port cargo volume but has not led to layoffs or affected expansion
plans, Qingdao Port Vice Director Han Baolin told EconOff. The
Qingdao container wharf was opened in 2004 with a total investment
of USD887 million from three shipping companies - Chinese-owned
COSCO, Danish-owned Maersk and British-owned P&O. Port volume has
grown steadily since that time but only increased 12 percent in
2008, considerably less than the originally projected 18-20 percent
increase. January 2009 saw a 5 percent y-o-y increase in port
volume. (Note: A 5 percent increase over the previous January
probably translates into a real contraction over the previous month.
End note.) Han claimed that none of the 22,000 port employees had
been laid off but acknowledged that some port companies had reduced
workers' hours or adopted flexible working hours. He said the
economic slowdown had not affected their expansion plans, noting the
ongoing construction of a new wharf with 10 berths and plans to
build a new port with capacity of 300 million tons in the next three
to five years. The new port will handle iron ore, crude oil and
bulk shipments.

Korean Firms Are Leaving
--------------

8. (SBU) Many South Korean firms have gone bankrupt and left
Shandong Province in the last year, according to Lee Xiangzhen, an
official at the Republic of Korea Consulate in Qingdao. Lee
estimated that approximately 15 percent of Qingdao's sizable Korean
population has left the province since the beginning of 2008.
(Note: The South Korean Chamber of Commerce estimates that as many
as 30 percent of the 100,000 Koreans have left, but Lee expressed
doubt about this figure. An American businessman in Qingdao told
EconOff that enrollment has dropped 14 percent at one of Qingdao's
largest international schools, where 75 percent of the student body
was Korean.) Those paid in Korean currency have been particularly
hard hit by the significant devaluation of the Korean Won. Some
firms have abruptly left Shandong without paying their workers'
salaries, creating a "big headache" for the Korean Consulate, which
has faced angry complaints from local authorities. In some cases,
the local government has provided compensation to the laid-off
workers. CASS's Zhang said that most of the South Korean firms that
left the province were small family firms whose departure did not
significantly impact Shandong's overall economy.

Comment: An Elephant Wearing Rose-Colored Glasses?
-------------- --------------

9. (SBU) Shandong boasts some of China's largest state-owned
enterprises, including the mammoth white-goods producer Haier. Many
of these SOEs expect to benefit from the Chinese government plans to
spur domestic demand and allow industrial consolidation. However,
Shandong also faces some serious problems. While less dependent on
exports than some of its neighbors, much of Shandong's wealth and
development has come from processing trade centered on Japanese and
Korean investors. This sector of the export market has been
particularly hard hit by the global economic downturn and is not
expected to recover quickly. Further, as a major agricultural and
petroleum producer, the collapse of international commodity prices
has hit Shandong hard. The government response is important, and in
the near-term government infrastructure investment should start to
replace local private production. In the medium- to long-term
Shandong's SOEs will almost certainly benefit from a gradually
increasing reliance on domestic demand to drive the Chinese economy.
But Shandong, like the rest of China's coastal provinces, still
faces several months of economic pain.
PICCUTA