NO "FEBRUARY CRISIS" IN EAST CHINA, BUT ANXIETIES ABOUT

C O N F I D E N T I A L SHANGHAI 000118


STATE FOR EAP/CM, INR AND DRL
NSC FOR LOI, KUCHTA-HELBLING

E.O. 12958: DECL: 3/13/2034
TAGS: PGOV ECON ELAB PHUM EFIN CH
SUBJECT: NO "FEBRUARY CRISIS" IN EAST CHINA, BUT ANXIETIES ABOUT
SOCIAL STABILITY REMAIN

REF: A. (A) BEIJING 400

B. (B) 08 SHANGHAI 522 AND PREVIOUS

C. (C) SHANGHAI 66

D. (D) BEIJING 448

E. (E) SHANGHAI 39

F. (F) GUANGZHOU 114

G. (G) SHANGHAI 23

H. (H) SHANGHAI 28

I. (I) SHANGHAI 103

J. (J) SHANGHAI 51


CLASSIFIED BY: CHRISTOPHER BEEDE, POL/ECON CHIEF, U.S. CONSULATE
SHANGHAI, U.S. DEPARTMENT OF STATE.
REASON: 1.4 (b),(d)


SUMMARY
--------------


1. (C) The global economic slowdown has not led to significant
social unrest in East China during early 2009 as was predicted
by those analysts who warned of a possible "February Crisis"
brought on by the nexus of rising numbers of unemployed migrant
workers and university students' fears of poor job prospects
after graduation (see also Ref A). Concerns remain, however,
about potential triggers for social instability in the region,
particularly resulting from factory closures and subsequent
migrant laborer lay-offs in the Yangtze River Delta's
export-oriented areas. Frequent travel by CongenOffs throughout
the Consular District since early December underscored the
unique socio-economic differences between provinces -- and even
within provinces -- further indicating that social unrest in
East China would not likely take the form of a unified reaction
by unemployed migrant workers or students in the region.
Variances in local conditions make it more likely that in the
event of incidents of social instability in 2009, protests
probably would be localized rather than directed at the Central
Government. For more details on CongenOffs' recent travel and
related reporting cables, please see Appendix below. End
Summary.

EAST CHINA: AN ECONOMIC JUGGERNAUT
--------------


2. (SBU) Consulate Shanghai's East China Consular District --
comprising Shanghai Municipality, Zhejiang Province, Jiangsu
Province, and Anhui Province -- is one of China's wealthiest
regions. Shanghai, Zhejiang, and Jiangsu constitute the Yangtze
River Delta (YRD) economic juggernaut, and the three
province-level entities rank among the top five in GDP in China.
East China boasts a well-developed service sector, and services
account for more than 40 percent of the region's GDP (and the
service sector accounted for 53 percent of Shanghai's GDP in
2008). The YRD region also has an abundance of export-oriented
firms in industries ranging from electronic components to
textiles to automobiles. Like the trade-oriented Pearl River
Delta (PRD) in Southern China, the YRD has not been immune to
the twin effects of China's domestic economic slowdown and the
global financial crisis.

EXPORT-ORIENTED FIRMS FACING THE DOWNTURN
--------------


3. (C) East China's export-oriented firms began feeling the
crunch of declining demand as early as late 2007. Providing an
introduction in early December 2008 on the woes of
Zhejiang-based exporters, Ye Hang, an economics professor at
Zhejiang University, summarized the difficulties of many East
China firms, stating that renminbi (RMB) appreciation,
elimination of the export tax rebate, and the Labor Contract Law
(LCL) contributed to rising costs, particularly in sectors such
as the textile industry where profit margins are small (Ref B).
By mid-2008, Ye said, Zhejiang and other manufacturing areas
felt the effects of China's tighter monetary policy. Facing
liquidity problems, larger companies in Zhejiang began to amass
mounting debt, and factories started to close in Hangzhou,
Shaoxing, and Yiwu. Suppliers of large firms started to fail in
October 2008, Ye said, leading to more light industry factory
closures. During a second meeting in early February 2009, Ye
told PolOff that the economic situation was unchanged, and he
ominously predicted that retail consumption likely would
nosedive in Zhejiang in the second half of the year (Ref C).

IMPACT ON MIGRANT WORKERS...
--------------


4. (C) While authorities in Shanghai, Jiangsu, and Zhejiang have
watched worriedly as their exports dropped during 2008 and early
2009, resulting in some factory closures, government officials
in Anhui Province and northern Jiangsu Province have been
focusing on the impact of those closures on employment
opportunities for migrant workers. Poor rural residents in
Anhui and northern Jiangsu typically rely on remittances from
the YRD for 50 to 70 percent of rural income. Officials in
these areas are increasingly nervous about recent Central
Government reports that 20 million migrant workers throughout
China lost their jobs prior to the Lunar New Year holiday.
According to Dong Baohua, a well-known labor expert who is a
professor at the East China University of Political Science and
Law, however, the true number of unemployed migrant workers is
possibly as many as 40 million. Rural-to-urban migrants do not
want to return home to farm, Dong stated, and while many
laborers in East China have saved a considerable amount of money
(perhaps more than in other parts of the country as they have
enjoyed the YRD's higher wages),many of them will run out of
savings by September or October 2009.

...AND STUDENTS, TOO
--------------


5. (C) There remains concern that many of East China's current
university students will not be able to find jobs after
graduation this year, leading to another potential source of
discontent. Generally-speaking, however, Consulate contacts are
optimistic that university students will not be a source of
social unrest (similar to views reported Ref D from Embassy
Beijing). Professor Dong pointed out that many of his students
are planning to attend graduate school. Ding Hong, a researcher
at the Jiangsu Provincial Academy of Social Sciences, added that
many graduates will return home to live with their parents.
"Migrant workers are a bigger problem than students," Ding said.
"Because the workers have nothing else to do."

OUTBREAKS OF SOCIAL UNREST LIMITED SO FAR
--------------


6. (C) Despite the severe strains on East China's socio-economic
situation, including large-scale layoffs of migrant workers,
there have been few reported outbreaks of social unrest to date,
and Consulate contacts commented on the notable lack of
incidents during the "February Crisis" period. Among the few
accounts were media reports of social unrest in the following
cases dating back to 2008 Q4, when the economic slowdown
accelerated:

--According to the Los Angeles Times, 2000 workers in Shaoxing,
Zhejiang Province jammed the streets outside a textile factory
after it closed in October 2008. The protestors blocked traffic
and scuffled with the several hundred police officers who were
called to restore order.

--Approximately 1000 laid off migrant workers in Shanghai's
Minhang District protested on December 8, 2008 after they were
locked out by a Taiwanese electronics company that had closed
its factory.

--Hundreds of migrant workers reportedly clashed with police in
Tongxiang, Zhejiang Province in mid-February 2009 after a
migrant worker was injured in a traffic accident. According to
the South China Morning Post, although not directly related to
factory closures, the incident illustrated the tensions between
migrant workers and locals in East China as a result of the
economic downturn.


7. (C) While it is difficult to predict where future incidents
might occur, travel by Consulate Pol/Econ Officers throughout
the Consular District since early December, as well as meetings
with Shanghai-based experts, uncovered areas of concern
throughout East China. The below analyses of Shanghai
Municipality, Jiangsu Province, Zhejiang Province, and Anhui
Province track socio-economic trends in each part of the
Consular District, highlighting possible trouble spots, as well
as factors likely to mitigate the probability of outbreaks of
social unrest in 2009.

SHANGHAI: FOCUS ON KEEPING THE ELITES HAPPY
--------------


8. (C) As China's economic and financial capital, Shanghai
remains focused on keeping educated elites content. Shanghai
Party Secretary Yu Zhengsheng told the Consul General on January
16 that securing employment for university graduates would be
the municipal government's top concern in 2009, echoing an
emphasis heard during Shanghai's "Two Meetings," the annual
plenary sessions of the Shanghai Municipal People's Congress
(SMPC) and Shanghai Committee of the Chinese People's Political
Consultative Conference (CPPCC) (Ref E). A possible slowdown in
Shanghai's service sector, including real estate, however, could
further dampen university graduate job prospects.


9. (C) The Shanghai Municipal Government is taking steps to ease
employment pressures. Mayor Han Zheng announced in mid-February
that the municipal government would reform hukou residency rules
to make it easier for talented job seekers to qualify for
permanent residency in the city. The reform may be insufficient
to effect real change -- Tongji University professor Wang Xiaoyu
told PolOff on March 10 that the impact of the reform would be
"extremely limited" because of restrictions on who can qualify
-- but the move indicates that the Shanghai Municipal Government
may have policy room to maneuver to prevent unrest. Shanghai
also benefits from a wealthier population that is able to absorb
unemployed college graduates, as they most likely can afford to
live at home or move on to graduate school.

ZHEJIANG: SENDING MIGRANTS BACK TO SICHUAN
--------------


10. (C) Zhejiang, the Chinese province that is most reliant on
the private sector for economic growth, has been the part of
East China that has been most vulnerable to the external shocks
resulting from the global financial crisis. Several Consulate
contacts have referred to Zhejiang as a "small Guangdong" by
which they mean a province full of private export-oriented firms
that have struggled in the face of the economic slowdown (Ref
F). Zhejiang's low-end labor-intensive industries, especially
textiles, have struggled, and the result has been that many
factories have closed in Shaoxing, Yiwu and other Zhejiang
cities (see also Refs B and G).


11. (C) The bulk of Zhejiang's migrant laborers are from outside
the province with many historically coming from Sichuan. For
local government officials concerned about social instability
resulting from factory closures, therefore, the standard
operating procedure prior to the Lunar New Year holiday was for
local governments to pay unemployed migrant workers their
remaining wages, as well as provide money for the trip home,
thereby preventing large numbers of disgruntled workers from
gathering in cities like Shaoxing. Zhejiang now is ramping up
the province's transformation to a high-tech knowledge economy
centered in Hangzhou, the provincial capital, and is banking on
a strong university education system that produces a
well-trained work force, hoping the talented labor pool will
attract more foreign investors. Commodities firms in Yiwu and
elsewhere hope product innovation and product market
diversification, coupled with hopes for increasing domestic
demand, will help insulate them from the downturn and alleviate
labor unrest.

JIANGSU: FALLING BACK ON STATE-OWNED ENTERPRISES
-------------- ---


12. (C) Jiangsu's economic growth slowed significantly during
the final quarter of 2008, and a January 8 Reuters report stated
that Jiangsu should expect zero export growth in 2009. From a
social stability perspective, Jiangsu is unique because it is
both a sending area and receiving area for migrant workers.
With Jiangsu Province bisected by the Yangtze River, more than
50 percent of the migrant workers in wealthy southern Jiangsu
Province are from less developed northern Jiangsu Province. The
labor cycle between southern Jiangsu and northern Jiangsu is a
formalized relationship, said Suzhou University Sociology
Department Head Gao Feng, with northern Jiangsu providing labor
for factories in southern Jiangsu (Ref H). With many
export-oriented firms in southern Jiangsu struggling, migrant
workers from northern Jiangsu are losing their jobs. Gong
Pixiang, President of the Jiangsu Provincial High Court,
announced during the March session of the National People's
Congress in Beijing that the number of labor lawsuits in Jiangsu
increased 139 percent in 2008, skyrocketing to 29,862 cases
primarily as a result of the economic slowdown.


13. (C) Consulate contacts say the Jiangsu Provincial Government
will take a more interventionist approach in 2009, seeking to
further improve the province's social insurance system (which
already is among China's best for medical care, pensions, and
welfare),and by falling back on state-owned enterprises (SOEs).
Party and government officials in Lianyungang, a port city in
northern Jiangsu, told Consulate EconOffs during a March 2-4
visit that the city is offering free training in factory
assembly line and other basic job skills to returning migrants,
for instance, and exhorting local companies to hire such
returnees. The rich-poor gap between the northern and southern
parts of the province may be serious, said Ding Hong from the
Jiangsu Academy of Social Sciences, but local officials are
confident the more impoverished north will weather the economic
storm and avoid major social stability incidents because: (1)
northern Jiangsu's countryside is wealthier than in other parts
of China, and (2) better-off southern Jiangsu cities will
continue to support their northern neighbors.

ANHUI: RURAL MIGRANTS WITHOUT A DESTINATION
--------------


14. (C) Local government officials in Anhui, East China's
poorest province, initially expressed optimism that China's
economic downturn would have little impact on the province's
economy because of its lack of export-oriented firms. As a
primarily rural province that serves as a source for many of the
YRD's migrant workers, however, Anhui (particularly in the
impoverished northern part of the province) is increasingly
concerned about labor unrest resulting from the return home of
unemployed migrants. Lin Fei, a researcher at the Anhui Academy
of Social Sciences (AASS),estimated that approximately 11
million migrants (roughly one-sixth of Anhui's total population)
are working outside the province, mostly in the YRD, and those
migrants are facing difficulties readjusting to life in the
countryside since being laid off by cost-cutting employers prior
to the Lunar New Year (Ref I). With low levels of investment in
Anhui, there are few non-farm job opportunities for returning
migrants.


15. (C) Anhui officials hope the province will be able to
further develop its agricultural sector, attract outside
investors in search of lower labor costs, bolster SOEs'
production, and benefit from the Central Government's economic
stimulus package (Refs I and J). Recent travel to Anhui
indicates that utilizing these tools to avoid unrest likely will
be more successful in more prosperous southern and eastern Anhui
than in the northern part of the province, which is burdened by
high population density, limited land (which recently
experienced a significant drought),and dependence on migrant
remittances for its economy.

COMMENT: FUTURE PROTESTS LIKELY TO BE LOCAL AFFAIRS
-------------- --------------


16. (C) Investigating the social stability situation with
contacts in Shanghai and on travel to Zhejiang, Jiangsu, and
Anhui underscores the unique socio-economic differences between
provinces -- and even within provinces -- further indicating
that possible social unrest in East China is not likely to take
the form of a unified reaction by unemployed migrant workers or
students in the region. Residents of Anhui likely will view the
economic downturn much differently than residents of Zhejiang,
for example. Consulate Officers also have observed distinct
differences between northern and southern Anhui, northern and
southern Jiangsu, and labor-intensive industries and hi-tech
industries in Zhejiang. Variances in local conditions make it
more likely that in the event of incidents of social instability
in East China in 2009, protests probably would be localized and
not directed at the Central Government. Unemployed migrant
workers in northern Anhui Province, for example, may protest
against local officials for failing to help them find jobs as
their savings run out, but we do not foresee social unrest
spreading behind localized cases unless some other political
event triggers more widespread discontent.

APPENDIX
--------------


17. (C) Consulate Shanghai Pol/Econ Officers drafted more than
30 reports related to social stability in East China during a
three-month period beginning in early December 2008 and
including the Lunar New Year when many migrant workers returned
to their hometowns to celebrate the holiday. Consul General,
DPO, and Pol/Econ Officers frequently met with Shanghai-based
contacts to discuss social stability concerns and traveled
outside Shanghai 16 times during the period to discuss social
stability issues with contacts in other parts of the Consular
District, covering Zhejiang Province (Hangzhou, Yiwu, Wenzhou,
and Ningbo),Jiangsu Province (Nanjing, Suzhou, and
Lianyungang),and Anhui Province (Hefei, Fuyang, and Hanshan).
See below the list of related cables to date:

--SHANGHAI 111 - Economic Slowdown Puts the Brakes on Shipping
Traffic in the Yangtze River Delta

--SHANGHAI 105 - Yangtze River Delta Property Developers Feeling
the Downturn

--SHANGHAI 103 - Rural Anhui: Calm on the Surface But Sea
Monsters Lurking Below

--SHANGHAI 96 - Anhui's Auto Industry Hurt By Economic Downturn,
Benefits from Government Stimulus Measures

--SHANGHAI 90 - Economic Issues Dominate Jiangsu Court,
Procuratorate Workload

--SHANGHAI 89 - Jiangsu Scholars Seek Clearer U.S. Policies on
Financial Crisis, and Quick Efficacy of Same

--SHANGHAI 85 - Taiwan Businesses in Nanjing Hurt By Economic
Downturn, Labor Law, Financing Difficulties

--SHANGHAI 79 - Japanese Manufacturers in East China Hit Hard by
Economic Downturn, But Not Laying Off Workers

--SHANGHAI 78 - Government Housing Stimulus Plans Focused on
Low-Income Families

--SHANGHAI 74 - U.S. Corporations Limiting Layoffs Despite
Global Crisis

--SHANGHAI 70 - Bao Steel Gloomy on Quick Economic Recovery

--SHANGHAI 66 - Social Stability in Zhejiang: Calm for Now

--SHANGHAI 63 - Shanghai Reforming Migrant Children Education,
But Challenges Await

--SHANGHAI 57 - Zhejiang Economic Engine Still Moving, But Trade
Sector Struggling

--SHANGHAI 51 - Rural Eastern Anhui Stable and Prosperous in the
Year of the Ox, But Concerns in Province's North

--SHANGHAI 50 - Social Stability in Jiangsu: Scholars Offer
Different Views

--SHANGHAI 46 - Wenzhou - A Canary in China's Economic Mineshaft

--SHANGHAI 44 - Nanjing Bankers Note Surge in Government Project
Loans

--SHANGHAI 39 - University Graduate Unemployment Shanghai's Top
Concern

--SHANGHAI 28 - Southern Jiangsu's View on Social Stability

--SHANGHAI 25 - Shanghai Mayor's Work Report Follows
Extraordinary -- But Challenging -- Year

--SHANGHAI 24 - Shanghai "Two Meetings" Open: Leaders Facing
Economic and Social Challenges

--SHANGHAI 23 - Some Economic Optimism Persists in Yiwu

--SHANGHAI 19 - Shanghai Labor Conditions Remain Stable as
Migrants Head Home for Lunar New Year

--08 SHANGHAI 581 - Economic Crisis Crimping Revenues of
Zhejiang Export Hub

--08 SHANGHAI 571 - Shanghai COFCOM DG: Shanghai's Economy on
Solid Ground, But Trade Falling, Concerns Increasing

--08 SHANGHAI 562 - (C) Shanghai Lawyers Say They are Told to
Stay Away from "Sensitive" Cases

--08 SHANGHAI 558 - Real Estate Website Offers Window on Social
Stability

--08 SHANGHAI 554 - Shanghai Leaders Look Ahead But Challenges
Loom

--08 SHANGHAI 547 - (C) Shanghai Contacts: "08 Charter" Gaining
Momentum, Concerns About "February Crisis"

--08 SHANGHAI 526 - Global Economic Crisis Hurting Taiwan
Businesses in Kunshan

--08 SHANGHAI 522 - (C) Zhejiang: Factory Closures Raise Social
Stability Concerns
CAMP