THIRTEEN PERCENT GDP GROWTH TARGET: PORT CITY LIANYUNGANG

UNCLAS SECTION 01 OF 06 SHANGHAI 000156

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E.O. 12958: N/A
TAGS: ECON EWWT EIND EFIN PGOV EAIR CH
SUBJECT: THIRTEEN PERCENT GDP GROWTH TARGET: PORT CITY LIANYUNGANG
SLOWING DOWN IN CHALLENGING 2009

REF: A. A) 08 SHANGHAI 239

B. B) SHANGHAI 111

C. C) SHANGHAI 117


1. (SBU) Summary. Officials in Lianyungang, a major Chinese
port in Jiangsu Province, have set their 2009 GDP growth target
at 13 percent, a modest decrease from recent years' growth.
Municipal Government and Party officials say that the Central
Government and Jiangsu Provincial Government have committed to
new infrastructure and industrial projects to foster growth in
northern Jiangsu Province and surrounding areas and to make the
port a locomotive for growth for seven inland provinces linked
to the city by rail. The city can rezone for industrial use
land originally set aside salt fields without time-consuming,
cumbersome Central Government approvals. Lianyungang
development projects include new rail and highway links, plans
for a new international airport to be operational by 2016, new
urban developments, and container terminal expansion and harbor
dredging. The city aims to attract new investments to expand
and diversify its new energy, new materials and pharmaceutical
industries. The Chinese Academy of Sciences is involved in
establishment of a new energy research center in Lianyungang,
and an integrated gasification combustion cycle (IGCC) clean
coal project should be soon announced, local officials said.
The global financial crisis has had a serious impact on certain
traditional industries in Lianyungang, but officials remain
optimistic that those industries could be well on there way to
recovery by summer 2009 and new projects and training for
returned migrant workers would bode well for the city. Still,
at the time of Congenoffs' early March visit, construction of
several apartment projects appeared to have stopped, while a
shipping container manufacturer had ceased operations, putting
its workers on subsistence wages rather than formally laying
them off. End summary.




2. (U) Pol/Econ Chief, Econ-coned Consular Section officer and
Economic Assistant visited Lianyungang March 2-4 to discuss
local economic development prospects and the impact of the
global economic downturn. Our meetings included Lianyungang
Party Secretary and People's Congress Chairman Wang Jianhua;
Vice Mayor Shi Yan; Municipal Government Office Secretary Chen
Chuang; senior officials from the Foreign Affairs Office,
Foreign Trade and Economic Cooperation Bureau, Small and Medium
Size Enterprise Bureau, and Lianyungang Economic and
Technological Development Zone Management Committee; Port of
Lianyungang staff; and senior managers at the COSCO
(Lianyungang) Shipyard Co. (ref C). We also met with professors
from four local colleges and their students (hailing from as far
away as Urumqi in China's northwestern Xinjiang Uighur
Autonomous Region) to conduct the Consular Section's first visa
outreach event in Lianyungang.




3. (U) With a population of 4.7 million and an area of 7,444
square kilometers, Lianyungang is comprised of three districts
and four counties. In 2008, Lianyungang's imports from the
United States (USD 390 million) exceeded its exports to the
United States (USD 311 million),due to the large volume and
value of U.S. soybeans brought into China through the Port of
Lianyungang, according to Liu Mingtai, Vice Director of the
Lianyungang Foreign Trade and Economic Cooperation Bureau. Liu
and port officials noted that the port handled 3 million TEU
(container movements) in 2008, making it the largest port in
Jiangsu Province and one of the ten largest ports in China. Ten
container shipping lines serve the port. The port handled$4.4
billion in import and export trade in 2008, an increase of 36
percent over 2007.



Throttling Back to Only 13 Percent Growth Target
-------------- ---



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4. (U) Because of its location, assets, policy support and
expected benefits under China's economic stimulus plans,
Lianyungang has set a 13 percent GDP growth target for 2009,
Municipal Government Office Secretary Chen Chuang said. Small
and Medium Enterprise Bureau Director General Li Jianxing
further explained that in 2008, Lianyungang's GDP growth was
14.8 percent, 2.3 percentage points below 2007 and below its
2008 growth target of 15 percent. In 2008/Q4, GDP only grew
10.8 percent, 5.1 percentage points below the first nine month
in 2008, mainly attributed to spillover effects from the global
financial crisis. While China has set itself a national `bao
ba' (maintain eight percent) GDP growth goal for 2009, it is
appropriate, if admittedly challenging, for Lianyungang to set
its aim high to fulfill its assigned role as a locomotive of
regional economic growth within China, Li said.



Lianyungang's Assets: Location and Preferential Policies
-------------- --------------




5. (U) Vice Mayor Shi Yan said the Central Government and
Jiangsu Provincial Government both are placing emphasis on
development of Lianyungang due to its location between the
Yangtze River Delta and the Bohai Rim, and because the Port of
Lianyungang provides access for inbound raw materials and
outbound exports for seven Chinese provinces linked to the city
by railroads. Lianyungang is also the eastern terminus of the
European-Asian Rail-Land Bridge linking Lianyungang to
Rotterdam. One of the most important factors for attracting
businesses to Lianyungang, Shi and other officials emphasized,
is that land zoned as salt fields may be converted to industrial
use by the Municipal Government; China's land policies make land
zoned for agricultural use much more difficult to convert
lawfully to industrial use. Planners and industries alike can
envision major new initiatives in Lianyungang with some
realistic hope of acquiring necessarily large pieces of land for
such development with comparative ease.




6. (U) Vice Mayor Shi pointed to three examples of important
policy support to Lianyungang's economic development. First, in
2008, the State Council issued guiding opinions on development
of the Yangtze River Delta, in which Lianyungang's huge economic
potential was noted. Development of Lianyungang will provide a
locomotive force to development of Lianyungang and inland along
the rail corridor to Xuzhou (also in northern Jiangsu) and on to
Zhengzhou (in Henan),as well as along Jiangsu Province's
coastal areas and up the Yangtze to Nantong. Second, the
Jiangsu Provincial Government and Jiangsu Communist Party
Committee have held special meetings about Lianyungang's future
development and will provide full support to Lianyungang.
Lianyungang will be a leader in rejuvenating the economy of
northern Jiangsu. Third, the National Development and Reform
Commission, in accordance with a request from the State Council,
has established a team to plan for the development of Jiangsu's
coast region, and Lianyungang plays the leading role in those
plans. Many important industries will be placed in Lianyungang
as part of those plans. Those plans will be formalized and put
forward to the State Council for approval, after which the plans
will be enacted. Party Secretary Wang emphasized that the city
will benefit from Central Government plans to accelerate
Lianyungang's economic development, through infrastructure
construction funding, and encouragement of innovation and
advanced technology. (Note: Lianyungang Foreign Affairs Office
(FAO) officials said Wang spent much of December and January in
Beijing successfully lobbying the National Development and
Reform Commission for inclusion of Lianyungang development
projects in stimulus plans released later in 2009/Q1. End
note.)



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Future Development: Targeted Industries and Infrastructure
-------------- --------------




7. (U) The city will promote investment in industries in three
major categories in the near-term, Party Secretary Wang said,
namely: new materials, new energy and the pharmaceutical
sector. While pharmaceuticals, new energy and new materials are
the important industrial directions for the city's future
economic development, infrastructure development projects are
planned as well, Vice Mayor Shi elaborated. For instance,
construction will begin before year's end on a new berth in the
port that will be able to handle ships of up to 300,000 dwt, and
the Central Government will fund harbor dredging and development
of additional container terminals. Landfill has already been
completed along much of the 6.2 kilometer causeway linking the
city to a nearby island, providing improved shelter for the
harbor and the platform on which to build those new container
terminals. Construction should begin in 2009 on a coastal
railroad linking Qingdao (to the north in Shandong Province)
through Lianyungang and Nantong on to Shanghai. Another new
railroad awaits approval to provide another link between
Lianyungang and the Jiangsu provincial capital, Nanjing; the
Vice Mayor said that construction of that future line's section
between Lianyungang and Huai An was awaiting approval at the
time of our March 2-4 visit.



New International Airport Also Planned
--------------




8. (SBU) Lianyungang has also been selected as the site for a
future large international airport, the Vice Mayor and other
officials said, with predictions that the new airport would be
built and operational by 2016. The airport would serve northern
Anhui, northern Jiangsu and southern Shandong Provinces. Party
Secretary Wang Jianhua noted that one issue that will require a
Beijing decision is whether the People's Liberation Army (PLA)
Air Force will also use the planned new airport; the
single-runway modest airport currently serving Lianyungang is a
dual-use airport. The current airport presently has no
scheduled international flights, but will soon add another daily
flight to Shanghai. Lianyungang officials acknowledged that a
limited number of international flights already serve the
provincial capital, Nanjing, but downplayed the likelihood of
significant international service expansion there in coming
years. They also said the airport at Wuxi, in eastern Jiangsu
not far from Shanghai, would grow in importance in the next few
years, but do not regard possible growth there as impeding plans
for the international airport to be sited in or near
Lianyungang.



Continuing Urban Development
--------------




9. (U) Lianyungang also has ambitious plans for a coastal city
development area, 58 square kilometers on the north side of the
city, which will use wetlands and reclaimed land to develop new
residential, industrial and park areas. That development has
already received Central Government approval, Vice Mayor Shi
said, and the state-owned enterprise China Communication
Construction Corporation (owned by the Ministry of Construction
and listed on the Hong Kong Stock Exchange) and the Jiangsu
Provincial Government held a signing ceremony in Beijing on
February 20, 2009 about that company's commitment to invest RMB
20 billion in the project. A Lianyungang FAO official
separately commented that the urban development plans could

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increase Lianyungang urban population in three districts from
the current level of 780,000 persons to one million within three
years; about 4 million more persons reside in the four
neighboring counties that lay within Lianyungang's
administrative area.



10. (U) Notwithstanding all the planned development, the city
aims to preserve scenic beaches and mountain parks within its
urban areas. (Indeed, Jiangsu Province's highest point of more
than 600 meters is in one of Lianyungang's urban districts.) So
the city's future aim is to be a famous coastal city, an
important industrial port, and a location famous for sea and
mountains, Vice Mayor Shi summarized.


New Energy, New Materials - and Old Industries to New
Lianyungang Facilities
--------------
-------------- --




11. (U) Lianyungang also has become home to a range of
companies that manufacture blades, turbines and other parts of
wind power windmills, Vice Mayor Shi further explained.
Lianyungang's Donghai County is rich in silicon resources, and
the city has already built a good foundation for development of
materials manufacturing for composites and silicon. Two Chinese
pharmaceutical companies listed on the Shanghai Stock Exchange
have large manufacturing facilities in Lianyungang, Vice Mayor
Shi said, and he further noted that their business performance
during the economic slowdown has remained almost unaffected,
stating that `people still get sick, after all.' Lianyungang is
home to a Russian-built commercial nuclear power reactor, which
provides the city with steady and reliable electricity supplies.
(FAO officials said that Russians remain the largest group of
registered long-term foreign residents, even if the current
airport terminal has signage in Chinese, English and Korean.) A
project with the support of the Chinese Academy of Sciences
(CAS) and investments by CAS, the Jiangsu Provincial Government
and the Lianyungang Municipal Government to establish an
advanced technology energy and power research center in
Lianyungang was launched in 2008. A clean industrial park will
be established around the research center, utilizing clean coal
technologies with a goal of emitting no carbon. Delegations
from BP and General Electric have been to Lianyungang to discuss
possible project participation (including a GE Energy delegation
from Houston in late February 2009) in R and D and the
industrial park. Other officials said foreign company
participation in a planned ICGG clean coal power plant is likely.




12. (U) Further out chronologically, Shi said, Lianyungang
hopes to build a new manmade harbor south of the current natural
port area at which to locate petrochemical, oil refinery and
steel industries. (Asked whether adding to Chinese steel
production capacity makes sense, Foreign Trade and Economic
Cooperation Bureau Vice Director Liu Mingtai explained that the
steel mill could target specialty steels that China does not
produce in large quantities or replace energy-inefficient, more
highly polluting older and smaller steel mills elsewhere. Liu
also pointed to Lianyungang's reliable year-round electricity
supply from the nearby nuclear power plant and the ability to
move large volumes of iron ore to the planned port and existing
and future road and rail links elsewhere to move products.)
Plans for this harbor and heavy industrial park of up to 200
square kilometers could be completed this spring, Shi added.


Impact of Global Financial Crisis and Responses
-------------- -



13. (SBU) Despite the evidence confidence of our interlocutors

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about much brighter days ahead for the city, some signs of
economic slowdown were in clear display. Several incomplete
high-rise apartment projects had no workers visible on two
consecutive weekdays. While trucks were delivering or picking
up containers at the Port of Lianyungang when we toured the
waterfront on March 3, there was substantial open space in the
terminal area and not a single container ship in sight in the
harbor (cf. ref B). A China Shipping-affiliated container
factory was idle, with several thousand new containers stacked
seven-deep, higher than the factory buildings themselves, spread
over several tens of acres. FAO officials informed us that
operations at the container factory had ceased several months
earlier, and all workers have been put on basic wages (rather
than formally laid off) to maintain social stability during the
downturn in trade.




14. (SBU) Employment - especially, coping with factory layoffs
- remains the top priority for the municipal government. Party
Secretary Wang Jianhua said one hundred thousand migrant workers
hailing from Lianyungang had returned before the Chinese New
Year period, many of them having lost jobs elsewhere in the
autumn and winter. What had been a trickle of unemployed
returnees as early as September and October became a torrent in
the last several weeks leading up to late January's Chinese New
Year. Lianyungang's rapid economic development in 2008 had
created 60,000 job openings, Wang said, and he emphasized that
Lianyungang enterprises are now encouraged not to layoff any
workers and further encouraged to find work for unemployed
returned Lianyungang laborers. Lianyungang Foreign Affairs
Office Director General Li Ya said that local government is
providing free training to unemployed returnees to broaden their
basic work skills and also assisting in local job placements.
Lianyungang Economic and Technological Development Zone Vice
Director Wang Qiang averred that unemployed returnees also
include some skilled workers whose talents will prove to be a
great asset for the city's future development.




15. (U) Small and Medium Enterprise Bureau Director General Li
Jianxing presented a quick synopsis of developments in specific
industrial sectors and made a case for Lianyungang's imminent
recovery in many of them. Speaking on March 4, Li said
investment had begun to pick up earlier in the first quarter of
2009, leading to signs of recovery in the city's manufacturing
sector. Sector by sector, Li said Lianyungang sees that:



--The pharmaceuticals sector continues to perform strongly;
mechanical and electrical equipment manufacturers almost
unaffected.



--The textile industry was the worst hit sector in 2008,
suffering from declining orders and higher labor costs. In
early 2009, however, new orders have increased slightly as
exporters are switching their target markets from the United
States and Europe to emerging markets.


--Eighty percent of the mineral crystal companies in
Lianyungang's Donghai County had closed by year-end 2008 due to
weak external demand. (The multicolored rocks are used for
low-end bracelets and trinkets.) In 2009, a few companies have
already resumed production, but demand remains weak. Mr. Li
believed it would take at least until June of this year for most
of the crystal companies to fully resume production; and surely
some of the smaller players in this industry will ultimately
stay closed or merge with bigger players.


--Lianyungang's food and beverage industry mainly exports to

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Japan, followed by South Korea. Despite increased raw material
prices in 2008, sales prices declined, dampening companies'
profitability. Lianyungang firms lost many export orders to
Japan due to the `poisoned dumpling scandal' in 2008.
Lianyungang's food companies did not participate in a food
product exhibition in Japan in 2008. The city and companies are
intent on participating in exhibitions in Japan in 2009 to
rebuild sales in that important export market.


--As of early March, Lianyungang's plywood industry was running
at thirty percent of its production capacity. Li said local
plywood companies principally blamed renminbi appreciation
against the dollar for a deterioration in their competitiveness.


--Eighty percent of chemical products manufacturers in the
Lianyungang area closed for periods longer than the required
seven-day shutdown at the Chinese New Year (late January in
2009),Li said, reflecting their lower business volumes. Some
companies in this sector had accumulated raw materials when oil
prices peaked in 2008, concerned that prices may have been
headed even higher. These companies do not feel much incentive
to sell to date unless selling prices allow them to recover
their input costs. High inventory ratios will cause cash flow
problems in these companies. Chinese banks have not been eager
to lend to such companies which in retrospect are seen to have
demonstrated such poor business judgment.


--Metals and minerals companies in the Lianyungang area face
some of the same problems as chemical products manufacturers.
Some companies purchased raw materials when commodity prices
were at their peak in 2008. The 2008/Q4 freefall in global
commodity prices seriously hurt these companies' profitability.
Li asserted that nonetheless, as a whole, these companies will
be more resilient in the economic downturn than some other
industries.


--Auto and auto components companies in the Lianyungang area saw
negative sales growth last year; while the new auto industry
revitalization plan has helped to registered modest positive
growth year to date.


--Local shipbuilding companies are still completing orders
placed in 2008 or earlier, but have not received new orders
recently. Therefore, local shipbuilding industry worries about
their business situation in 2010 are beginning to rise.



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




16. (U) Lianyungang officials hold ambitious development
plans, and appear to be adroitly moving to secure stimulus plan
funding while matching those plans to Central Government
initiatives to facilitate interior development and development
of innovative and advanced technologies. A sustained global
economic downturn would likely call into question the
development timelines envisioned by these officials, as a
principal component of the local and regional economy, the Port
of Lianyungang, has suffered a serious downturn in throughput.
CAMP