GUIZHOU: POOR PROVINCE GROWS FASTER THAN NATIONAL AVERAGE;

UNCLAS SECTION 01 OF 04 CHENGDU 000279

SENSITIVE
SIPDIS

DEPT FOR EAP/CM

E.O. 12958: N/A
TAGS: ECON EFIN EINV ENRG PGOV SENV CH
SUBJECT: GUIZHOU: POOR PROVINCE GROWS FASTER THAN NATIONAL AVERAGE;
INFRASTRUCTURE AND ENERGY INVESTMENT BRING HOPE FOR FUTURE

REF: CHENGDU 253

CHENGDU 00000279 001.2 OF 004



1. (U) This cable contains sensitive but unclassified
information - not for distribution on the Internet.




2. (SBU) Introduction and Summary: Guizhou, an ethnically
diverse province 92 percent covered by mountains, remains one of
China's poorest. In two recent meetings, officials from the
Guizhou Economic and Information Department and the Guizhou
Development and Reform Commission told Consul General that
Guizhou had grown faster than the national average during the
past decade, in part due to Beijing's "Great Western
Development" strategy. The global financial crisis only
moderately impacted Guizhou's economy, which is less dependent
on foreign trade, while Beijing's economic stimulus is allowing
Guizhou to update its highway and railway infrastructure as an
engine for future growth, and escape route from poverty.




3. (SBU) Officials also hope to exploit Guizhou's energy sector
to drive economic growth, but claim some national policies force
Guizhou to subsidize the wealthy economies of the eastern
provinces through, e.g. underpriced electricity. Guizhou has
been boosting energy efficiency by closing old factories, and
seeks to shift its industrial structure to higher--tech, lower
polluting sectors; however, it recently received a poor score
card from the central government in meeting these goals. End
Introduction and Summary.





Financial Crisis Reaches Guizhou With a Lag



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4. (SBU) The financial crisis was slow to reach Guizhou, with
its 2008 provincial GDP growth of 10.2 percent exceeding the
national average. GDP growth was a robust 15.9 percent in the
first quarter of 2009, but the financial crisis finally left its
mark in the second quarter as growth fell to about five percent.
Guizhou's third quarter economy stabilized, with industrial
output rising to 10.38 billion RMB in August and 10.89 billion
RMB in September. For the first three quarters of 2009,
Guizhou's average GDP grew 9.9 percent, well above the national
rate of 7.7 percent. Guizhou has minimal foreign trade, a mere
0.14 percent of China's total foreign trade, which explains the
lagged and milder effects of the financial crisis. Instead, the
financial crisis indirectly affected Guizhou as demand fell for
its energy and raw materials in export--oriented coastal
provinces.



Successes of the Great Western Development Strategy



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5. (SBU) The GWD strategy was implemented in 2000 in an effort
to close the gap between the wealthier eastern coastal provinces
and the poorer inland western provinces, and has been important
in allowing Guizhou's GDP growth rate to outpace the national
rate nine of the last 10 years. As the policy approaches its
ten--year anniversary, on January 1, 2010, a new strategy will
be worked out for the coming decade. Due to massive government
investment, Guizhou has made huge improvements to its outdated
infrastructure. Ten years ago, Guizhou had no expressways, but
by 2008 it had built 924 km. All counties have now been
connected with paved highways and 78 percent of villages have
roads. The policy has also emphasized ecological protection,
improving water quality, and reforestation. Low--yield hillside
farms have been shut down and reforested. The policy also seeks
to attract foreign investment.

CHENGDU 00000279 002.2 OF 004





And Failures: Are Western Provinces Subsidizing the East?



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6. (SBU) Officials expressed frustration at national policies
that have led to what they alleged to be subsidization by
(poorer) western provinces of China's (richer) eastern coastal
provinces. They cited three specific examples:



a. Energy Prices: Guizhou relies heavily on its coal industry,
ranking fifth in China in total coal output. Due to government
price controls, however, the price at which eastern provinces
buy Guizhou coal is lower than the price Guizhou customers pay.
According to a November 13 article in the "21st Economic Century
Business Herald," Guizhou sells about 50 billion kWh of power to
Guangdong every year. In 2008, the sale price to Guangdong was
fixed at 0.333 RMB per kWh, yet Guangdong could sell to its
customers at 0.731 RMB per kWh. Guizhou only receives about
1.28 billion RMB in tax revenue, while Guangdong receives a 14
billion RMB windfall profit. This also leads to social
pressure, as farmers are relocated due to the "Western Power
Transmitted to the East" policy. An official from the Guizhou
Economic Commission has said, "Those farmers relocated due to
power projects, they get nothing."



b. Cleaner Rivers: Guizhou and other western provinces have
spent a large amount of resources to clean up rivers flowing
from west to east. This has improved water quality in the
eastern provinces, led to fewer floods, and boosted agricultural
output, yet Guizhou receives no compensation for this benefit
spillover.



c. Fresh Water Diversion: Every year Guizhou is forced to
provide fresh water to coastal provinces to prevent sea water
from flowing into the eastern rivers, such as the Pearl River in
Guangdong. This forces Guizhou to store more water in the
winter, reducing its agricultural output. Officials told CG
that Guizhou receives nothing in return, save oral thanks from
leaders of the coastal provinces.



GWDP and Post--Financial Crisis Stimulus Package

Lead to Boom in Highway and Railway Infrastructure Investment



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7. (SBU) Guizhou is rich in natural resources and positioned to
act as a transshipment point between parts of China and ASEAN
countries, but had been unable to fully exploit these advantages
largely due to poor transportation infrastructure. Both the
GWDP and the post--financial crisis stimulus package have given
Guizhou the financing needed to greatly expand badly--needed
infrastructure projects. Despite comprising only three percent
of China's population, Guizhou received four percent of stimulus
funds.




8. (U) Guizhou is currently building 600 km of expressways, with
plans to build another 1,150 km this year, for a total of 4,000
km by 2018. The Shanghai--Kunming highway will pass through
Guizhou from east--west, while the Chongqing--Beihai highway
will cut through Guizhou from north--south. By 2030, officials
hope provincial capital Guiyang will be an eight--hour drive to
the capitals of neighboring provinces. Guizhou is currently

CHENGDU 00000279 003.2 OF 004


making huge investments in its railroads as well, which are
crucial for shipping coal to the eastern provinces. Guizhou is
currently building a Guiyang--Guangzhou line, which will cut
transportation time by about one--third. They also plan to
build a Guiyang--Chongqing line. The goal is to make Guizhou a
major transportation hub for southwest China, ultimately linking
to ASEAN countries via Guangxi and Yunnan provinces.



Importance of the Energy Sector



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9. (SBU) Guizhou also hopes to leverage its rich energy
resources, particularly coal and hydroelectric, to boost future
growth:



a. Coal: With 58.7 billion tons of proven reserves, another 49.9
billion tons easily exploited, and several hundred billion tons
deeper underground, Guizhou is heavily reliant on its coal
industry. About 70 percent of Guizhou coal is high--quality,
higher--priced anthracite. Guizhou has thus far been able to
keep pace with the increasing coal demand, with a 68 percent
increase in coal output expected for the 11th five--year plan
('06--'10) versus the previous five--year plan. Officials
mentioned that they are interested in coal gasification and
liquification, but at present it is too expensive to pursue.

b. Coalmine Gas: Guizhou hopes to use coalmine gas as an energy
source. Coalmine gas is the surrounding gas, primarily methane,
found in coal beds. Significant technological challenges
remain, and rules restricting foreign investment make it
difficult for foreign companies to acquire the necessary mining
rights from the National Land Resource Bureau. (Coalmine gas
also poses a great explosion risk to miners, but recent
regulations have imposed stricter rules on mining companies to
pump out coalmine gas before mining activity begins (reftel).)

c. Alternative Energy: Guizhou hopes to further develop the
following alternative energies:

i) Hydropower: In 2008, Guizhou increased its total hydropower
capacity by 700,000 kW. The total installed hydropower capacity
stands at 7.7 million kW, over a quarter of the total electric
capacity. Guizhou is estimated to have about 16.83 million kW
of hydropower reserves, and they plan to vigorously develop
them. Officials commented that, due to the mountainous
topography of Guizhou, hydropower projects are easier to pursue
than other provinces because fewer villagers must be displaced.

ii) Garbage Power: Zunyi city recently built a high--tech power
plant which burns garbage to generate power. Guizhou is very
interested in expanding the generation of electricity through
garbage incineration, and claims to have studied the most
effective technologies to minimize resulting emissions, e.g. of
dioxins.

iii) Solar: Solar energy is still being assessed for potential
usefulness in Guizhou, which receives relatively little sunshine
(but whose use could still be expanded in areas such as heating
water in households).



Energy Savings

--------------




10. (SBU) Concurrent with development of its energy resources,
Guizhou also hopes to both boost its economy through greater
energy efficiency, and address climate change/pollution. The
11th 5--year plan emphasizes efforts to reduce energy
consumption, with a specific goal of a 20 percent reduction in
energy consumption per unit of GDP. To realize this goal, the
Guizhou Economic Commission established the Guizhou Energy
Savings Office, and the Guizhou Environmental Protection Agency
set up an Emissions Reduction Office. Officials outlined

CHENGDU 00000279 004.2 OF 004


several energy--savings measures they are pursuing:

a. Enforcement of Energy Targets: All new projects must meet the
energy savings standards. 105 enterprises are under the direct
supervision of the provincial government to enforce these
targets. All other enterprises are under the authority of city
and county governments.

b. Closings of Non--Compliant Enterprises: Typically
non--compliant businesses are given a grace period to meet the
new efficiency standards, or face closure. In certain
instances, closed factories are given economic compensation,
such as the Kaili and Zunyi thermal power plants, but in most
cases they are not.

c. Adjusting Industrial Structures: Heavy industry such as coal,
non--ferrous metals, and energy account for 70% of Guizhou's
total industrial output. Officials hope to capitalize on the
province's natural beauty and shift the economy towards tourism
and other service sectors. They also hope to shift industry
away from processing of raw materials to high--tech, lower
energy intensity industries.


11. (U) Despite these efforts, China's Environmental Protection
Ministry warned November 27 that Guizhou's emissions reductions
in the first half of 2009 had lagged behind most other provinces.
BROWN