ANHUI FACING SOBERING ECONOMIC REALITY

UNCLAS SECTION 01 OF 05 SHANGHAI 000104

SENSITIVE
SIPDIS

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DEPT FOR EAP/CM, INR
USDOC PASS BUREAU OF ECONOMIC ANALYSIS
USDOC FOR ITA DAS KASOFF, MELCHER, OCEA
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EMBASSY BEIJING FOR HHS/FDA

E.O. 12958: N/A
TAGS: ECON PGOV EFIN ETRD ELAB PREL CH
SUBJECT: ANHUI FACING SOBERING ECONOMIC REALITY

REF: A. (A) SHANGHAI 96

B. (B) 08 SHANGHAI 449

C. (C) SHANGHAI 103

(U) This cable is sensitive but unclassified and for official
use only. Not for distribution outside of USG channels or via
the internet.

Summary
--------------


1. (SBU) During the Deputy Principal Officer's February 24-27
visit to Anhui Province, provincial and local government
officials said that despite initial optimism in the 4th quarter
of 2008 that Anhui might avoid the worst of the economic
downturn, conventional wisdom now holds that the province will
face serious economic challenges in 2009. The Provincial
Government continues to emphasize the importance of rural health
but is beset by a lack of trained medical personnel, according
to officials. The DPO discussed village elections and rural
finance with scholars in Hefei, the provincial capital, and also
visited a village in northern Anhui. Local officials in Fuyang
expressed concern about the impact of the economic downturn at
home and directed some of the blame at the United States. End
Summary.

The View from an Economic Planner
--------------


2. (SBU) Guo Hao, Director of the National Comprehensive Economy
Division at the Anhui Development and Reform Commission, said on
February 25 that there are signs Anhui's economy is slowing.
The economic crisis has had a bigger impact on coastal
export-oriented industries than on Anhui, but the province is
starting to feel the adverse effects of the slowdown,
particularly in core manufacturing industries such as steel and
autos, which rely in part on exports. Anhui is the home of
Ma'anshan Steel and Chery Automobiles, both of which are
affected by slowing trade (see Ref A). According to Guo,
Anhui's total trade volume decreased by 20 percent year-on-year
in January 2009. Investment also has declined recently, and the
real estate sector is struggling, Guo said.


3. (SBU) The Provincial Government hopes that hosting the 4th
Central China Expo in Hefei in April 2009 will help attract
investment to the province. Anhui's GDP growth slowed from 12
percent in 2007 to just over 10 percent in 2008, so the
province's goal of maintaining 8 percent growth will be more
difficult in 2009, Guo stated, as the economic slowdown is
likely to continue into the second half of the year. (Comment:
Guo's sobering assessment was more pessimistic than the upbeat
analysis offered by Anhui officials in October 2008, who at that
time were confident the economic slowdown would have little
impact on the province. See Ref B. End Comment.)


4. (SBU) The Provincial Government is paying close attention to
conditions for Anhui's migrant workers, many of whom were laid
off by factories on the coast and returned to the province early
to celebrate Lunar New Year and may not yet have found new jobs,
Guo said (see Ref C). The most significant problem is in the
northern part of the province where population density is the
highest. Guo pointed out that several counties in northern
Anhui have populations of close to 1 million while counties in
the southern and eastern areas have only 300-400,000 people.
Local governments have been tasked to help migrant workers find
work, by providing both labor information and short-term
training. University student employment also is receiving much
attention from local governments, he said.


5. (SBU) Anhui welcomes the State Council's announcement in its
Number One Policy Document that rural policy would be the
Central Government's top priority for the sixth year in a row.
Rural issues are very important in Anhui, Guo said, who added
that the Provincial Government aims to increase rural

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consumption in line with Central Government objectives. Guo
said the impact of this year's drought on the province's wheat
harvest is not yet clear, but it is likely to hurt Anhui's total
production for 2009. (Note: Zhang Deyuan at Anhui University's
San Nong Institute told DPO on February 25 that he is optimistic
the drought's impact will be limited. End Note.)

Facing Rural Health Challenges
--------------


6. (U) Rural health remains very important in Anhui where 70
percent of the population lives in the countryside. According
to Xu Hengqiu, Deputy Director of the Anhui Provincial Health
Bureau, since 2007, Anhui has placed greater emphasis on
resolving rural residents' difficulties seeing a doctor and
affording medical care. The Health Bureau's 2007 plan calls for
strengthening the province's rural health infrastructure, and
aims to build new medical facilities so that within three to
five years there will be 1,233 township hospitals and 10,000
village clinics in the province.


7. (U) Constructing new facilities is a small problem, however,
compared to the shortage of trained medical personnel in Anhui's
countryside, Xu said. The Health Bureau's strategy to improve
the quality of the province's rural health professionals focuses
on four areas: (1) providing short-term training in Hefei, the
provincial capital, as well as county seats, (2) improving
on-the-job training, (3) encouraging university graduates with
medical specialties to work in the countryside with support from
subsidies from rural county governments, and (4) requiring urban
doctors to volunteer at least six months for an assignment in
the countryside in order to be promoted.


8. (U) Since the launch of the Rural Cooperative Medical
Insurance Scheme (RCMS) in 2003, Anhui Province has expanded the
coverage of the program to 90.12 percent of rural residents in
all of the province's counties. The funding for the program in
Anhui has grown to RMB 100 (USD 15) per person with RMB 20 paid
by the farmer, RMB 40 by the provincial and local governments,
and RMB 40 by the Central Government. A reimbursement-based
program, the Anhui Health Bureau also has steadily increased the
level of repayment. Xu claimed that because the RCMS system is
organized according to hukou resident registration, migrant
workers from Anhui who are living outside the province still can
be covered by the RCMS if they continue to pay into the program.
They can be reimbursed for medical care received outside Anhui
if they can produce receipts and proof of care, Xu stated.


9. (U) Because northern Anhui is a poor region, rural residents
there receive subsidized medical care, paying lower rates for
basic care and to pay into the RCMS program. The Health Bureau
is monitoring the return of migrant workers to Northern Anhui.
Xu said she does not foresee new health policy-related problems
as a result of the workers' return, but all Provincial
Government bureaus are following returning migrants and their
impact on social stability.


10. (U) According to Xu, Anhui's health reforms are in line with
the State Council's January 2009 reform plan, which focuses on a
more community-based approach. The State Council's plan has been
in the works for three years, Xu said, so the final document had
no surprises, and there are no conflicts or contradictions
between the Central Government's strategy and Anhui's plan. Xu
said Anhui has not had any reports of human cases of Avian
Influenza (AI),but the Provincial Government is paying close
attention to the problem.

Promoting Democracy in the Countryside
--------------


11. (SBU) DPO also discussed Anhui's rural situation with Zhang
Deyuan, Deputy Director of Anhui University's San Nong Institute
(see also Ref C). Zhang assured the DPO that the funding the

SHANGHAI 00000104 003 OF 005


institute had received from the China Mission's small grants
program would be put to good use in 2009-10, as the San Nong
Institute works towards spreading and strengthening the
"combined election system" in Anhui's countryside. Under this
system, villagers are able to nominate and freely vote for
candidates for village committee positions. The experiments
have increased villagers understanding of democracy as well as
governmental accountability in these villages, and Zhang hopes
the small grant funding can help to pinpoint areas of
improvement and to also conduct seminars and media campaigns to
encourage other villages to adopt the system. Zhang said the
project would help strengthen grassroots democracy efforts in
Anhui. He believes the economic downturn will not have a
significant impact on rural political reform, but he
acknowledged that process on village elections remains slow.

Rural Finance and Start-up Businesses
--------------


12. (SBU) Lack of access to finance remains an impediment for
farmers as well as for returning migrant workers who want to set
up new businesses. According to Xie Peixiu, the Deputy Director
of the Agricultural Institute at the Anhui Academy of Social
Sciences (AASS),rural financial institutions still are not well
developed in the countryside, and local governments in Anhui
have replicated efforts in other parts of China to develop rural
cooperative banks. Pilot rural financial cooperative programs
in Huailin and Heshan Counties already have been launched under
the supervision of the China Banking Regulatory Commission, Xie
said. Without reliable collateral or a developed insurance
industry, however, progress on rural finance remains limited, he
said.


13. (SBU) The Provincial Government would like to encourage
returning migrants to set up businesses in rural areas, but the
poorly developed financial sector is an even greater obstacle in
this case, researchers told the DPO. According to Sun Ziduo, a
researcher at AASS and an Advisor to the Provincial Government,
migrant workers may be able to utilize their savings to set up
small businesses in development zones, but it is next to
impossible to apply successfully for business loans because
migrant workers do not have collateral. Some banks are
exploring ways to solve this problem, but it remains a major
challenge, Sun said.

On the Road to Fuyang: Omiao Village
--------------


14. (SBU) Heading northwest by road from Hefei, the DPO Visited
Omiao Village, Yinzhou District in Fuyang near the Anhui-Henan
border. DPO met with villagers who are beneficiaries of
U.S.-based NGO Heifer International project, which was launched
in March 2006 and has received USD 221,000 in support in the
past three years. Heifer International plans for 600 families
in the area to receive assistance over the course of the
project, and 310 families already have participated, including
more than 100 in Omiao. With the funding provided by Heifer
International, farmers in the area have purchased more than 200
pigs, 80 goats, and 5650 geese to supplement their income
through raising livestock, and they also have treceived training
in aquaculture technology, production management, and health.


15. (SBU) Visiting the homes of several villagers, DPO noted the
contradictions in a place with numerous cell phone towers but no
paved roads and DVD players in houses which until recently had
no running water. Farmers acknowledged that most of their
disposable income is derived from their children who work as
migrant laborers in Shanghai and other coastal areas (Ref C).

Fuyang Officials Have Local Concerns...
--------------


16. (SBU) Wang Bin, Director of Fuyang's Development and Reform

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Commission said Fuyang has a population of 9.78 million and
remains an agricultural base in northern Anhui, producing wheat,
beans, and sweet potatoes. Fuyang's agricultural policy seeks
to continue to increase the quantity of production and improve
the quality, he said. Northern Anhui is more backward than
Hefei or Wuhu, so Fuyang also aims to promote industrial
development, building on the region's petrochemical industry and
coal resources. The most significant contribution to Fuyang's
economy, Wang acknowledged, is made by migrant workers.
Approximately 2 million of Fuyang's workers go outside the city
to work in factories and the service sector in Guangdong,
Shanghai, Jiangsu, Zhejiang, and Beijing. Migrant worker
remittances boost rural incomes in Fuyang, and the majority of
migrant workers retain Fuyang hukou resident registrations, so
they remain tied to the area. In order to promote Fuyang's
urbanization and industrialization, Fuyang has eliminated the
urban-rural distinction in the local hukou policy.


17. (SBU) Fuyang's government is placing a greater emphasis on
social welfare programs, Wang said, including elder care
(yanglao baoxian),health insurance (yiliao baoxian),and basic
welfare (dibao),but he did not provide statistics on
expenditures. He said that migrant workers who have Fuyang
hukous can "take the insurance with them" according to the
city's insurance reform policy (liudong baoxian gaige). Wang
said Fuyang also boasts a strong transportation infrastructure,
which he hopes will help attract new investment. Fuyang has four
rail lines, is located at the intersection of 3 major highways,
ships goods on the Huai River, and now has an airport with
flights to Shanghai.


18. (SBU) Wang said the local government is taking steps to
assist migrant workers who were laid off from their jobs in
coastal regions and returned early to celebrate Lunar New Year
in Fuyang. (Note: Fuyang identified as a major problem area for
early returners by Wall Street Journal Article in December 2008.
End Note.) Fuyang's government is promoting industrial
development in the city so that the estimated 20,000 migrant
workers who have not yet found new jobs outside Fuyang can work
at home. There is a new development zone with several new
factories in the city, and Wang claimed 40 food products,
pharmaceuticals, and clothing companies have opened new
facilities in Fuyang. The city's GDP increased by 12 percent in
2008, so Wang is hopeful Fuyang can maintain at least 8 percent
growth (bao ba) per the Central Government's exhortation. In
fact, Wang asserted, given Fuyang's industrial development
efforts, he hopes the city can maintain GDP growth of at least
10 percent. He acknowledged, however, that the agricultural
sector's GDP would be hurt in 2009 by the recent drought in
Anhui. Fuyang hopes to encourage domestic consumption,
including increasing auto sales. (Note: The first floor of the
hotel where our meeting took place was packed with Midea (a
Guangdong-based company) refrigerators, which according to Wang
would be sold to farmers at discount prices. End Note.)


19. (SBU) When asked about Anhui's recently announced "Buy
Local" guidelines, Wang strongly denied that the guidelines were
government policy, rather, they must come from a trade
association. The Central Government opposes local protectionist
measures, and while a local official "might talk about it in a
meeting," the government "never would issue a document like this
one." If provincial and local governments succumb to
protectionist tendencies, it will "divide the whole country" and
"China will be finished." That said, however, the local police
forces in Anhui purchase Wuhu-based Chery automobiles in bulk.
Local government officials, he said, still prefer driving "more
prestigious" foreign brand automobiles. (Note: Guo Hao at
Anhui's Provincial Development and Reform Commission also said
on February 25 that he does not know of any new "Buy Local"
policies in Anhui, and he insisted that companies in the
province make business decisions strictly on the basis of price.
End Note.)


SHANGHAI 00000104 005 OF 005


...And a Global View
--------------


20. (SBU) Fuyang's Vice Mayor, Hu Mingying, told the DPO during
dinner on February 26 that the city maintains a global view. On
the economic crisis, Fuyang does not rely very much on exports
(although some Fuyang-based companies do export to the U.S.) so
external factors do not directly affect Fuyang's economy, he
asserted. However, there are two major indirect effects of the
global economic crisis on Fuyang: (1) the "market" has changed
as a result of the crisis in many unforeseen ways, and (2) the
Central Government will have to adjust its macroeconomic control
policies, which will affect Fuyang.


21. (SBU) Hu expressed disappointment that there is no U.S.
Investment in Fuyang, and he hopes the upcoming Central China
Expo will be a good opportunity for Fuyang and other Anhui
cities to attract more foreign investment, exchange information
with other Central China provinces, and improve coordination
with the Central Government.


22. (SBU) On President Obama's stimulus plan, Hu was dismissive
of the United States own economic problems, said the United
States "just better hurry up its economic recovery" for China's
sake, and said we had better stop protecting American
automakers. Fu was puzzled by U.S. policy decisions to bail out
some American banks but not others (Lehman),saying some of
those decisions were misguided. (Comment: It sounded a lot like
Fu was blaming the United States for all of China's economic
problems, almost desperately suggesting that the US "better
start consuming again." Although not pointing specifically to
Anhui's "buy local" policy, Fu did say China would act in its
own economic self-interest and do whatever it takes to protect
China's economy. End Comment.) DPO emphasized that the United
States and China have a long history of cooperation on many
issues, and U.S.-China cooperation would be critical to solve
current global problems, including the financial crisis.
CAMP