Identifier
Created
Classification
Origin
09SHANGHAI187
2009-04-24 07:50:00
CONFIDENTIAL
Consulate Shanghai
Cable title:  

(C) SHANGHAI OFFICIAL REVEALS FINANCIAL POLICY DETAILS

Tags:  CH ECON EFIN PGOV 
pdf how-to read a cable
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R 240750Z APR 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7864
INFO RUEHBJ/AMEMBASSY BEIJING 2724
RUEHCN/AMCONSUL CHENGDU 1931
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0387
RUEHHK/AMCONSUL HONG KONG 2099
RUEHGH/AMCONSUL SHANGHAI 8509
RUEHSH/AMCONSUL SHENYANG 1922
RUEHIN/AIT TAIPEI 1718
RUEHKO/AMEMBASSY TOKYO 0625
C O N F I D E N T I A L SECTION 01 OF 03 SHANGHAI 000187 

SIPDIS

E.O. 12958: DECL: 4/24/2034
TAGS: CH ECON EFIN PGOV
SUBJECT: (C) SHANGHAI OFFICIAL REVEALS FINANCIAL POLICY DETAILS

REF: HONG KONG 708

CLASSIFIED BY: Christopher Beede, Pol/Econ Section Chief, U.S.
Consulate, Shanghai, U.S. Department of State.
REASON: 1.4 (d),(e)



C O N F I D E N T I A L SECTION 01 OF 03 SHANGHAI 000187

SIPDIS

E.O. 12958: DECL: 4/24/2034
TAGS: CH ECON EFIN PGOV
SUBJECT: (C) SHANGHAI OFFICIAL REVEALS FINANCIAL POLICY DETAILS

REF: HONG KONG 708

CLASSIFIED BY: Christopher Beede, Pol/Econ Section Chief, U.S.
Consulate, Shanghai, U.S. Department of State.
REASON: 1.4 (d),(e)




1. (C) Summary. According to a leading Shanghai government
finance official, the Central Government will probably seek to
limit Hong Kong's role as a financial center, and bolster
Shanghai's. For now, said the official, Beijing has no intent
to make the renminbi convertible, but it is taking a first step
in that direction by allowing renminbi to be used for trade
settlement. The national government's GDP figures are "an
opinion," said the official. He predicts that--absent further
financial reforms--Chinese growth will remain "stuck" at 7-8
percent for many years. Rich provinces can block transfers of
government revenues to poorer regions under China's consensus
decisionmaking system, said the official. End summary.


2. (U) This is the first of two cables on ConGenOffs' recent
meetings with Fang Xinghai, Director-General of the Shanghai
Metropolitan Government Financial Services Office. This cable
covers Fang's April 19 breakfast meeting with President of the
Dallas Federal Reserve Bank Richard W. Fisher; septel covers an
April 2 meeting with Economic Minister-Counselor Robert Luke.

============================
Shanghai Will Outpace Hong Kong as China's Financial Center
============================


3. (C) Fang pointed out several medium-term advantages that
Shanghai has over Hong Kong as a financial center for China.
Hong Kong's financial sector is under administration independent
from Beijing, and therefore it can be more innovative, admitted
Fang. But not being tied directly to the mainland Chinese
economy is also a disadvantage: Hong Kong will never be central
to powering economic growth on the mainland. Also, Hong Kong
will not become a center for renminbi-based currency
transactions, said Fang. Beijing does not want Hong Kong to
have too large a renminbi market, since this would probably lead
to a separate renminbi interest rate and exchange rates, over
which Beijing would have less control, said Fang. Fang believes
that the trend will be for Shanghai's financial sector to grow

larger than Hong Kong's, while Hong Kong will remain more
innovative, becoming essentially an offshore banking center for
China.

============================
No Plans to Make the Renminbi Convertible
============================


4. (C) Moving the renminbi towards convertibility on the
capital account will take a long time, said Fang. He said the
first step is allowing the renminbi to be used for trade
settlement (see reftel),which will lead to renminbi
accumulating in overseas markets. Once this happens, investors
in those markets will look for opportunities to use the
renminbi, for instance by investing it back in China or by
converting it into other currencies. In anticipation of this,
the People's Bank of China is working with other central banks,
and the first currency conversions or investments will be made
central bank-to-central bank. Fang pointed to Malaysia as an
example of where this cooperation might begin.


5. (C) Fang noted that currency swap agreements that China has
recently signed with several countries were essentially trade
financing. Foreign importers will be allowed to borrow from
these facilities to buy goods from China, he said.

============================
"GDP Is an Opinion"
============================


6. (C) With regard to the reliability of China's economic
statistics, Fang commented that "GDP is an opinion, cash is a
fact." He said that he does not trust the headline Chinese GDP
numbers when tracking economic trends. Rather, he looks at
other indicators, including: 1) Tax revenue. These statistics
are generally accurate, because local tax authorities have no
incentive to either overreport or underreport the numbers. If
they overreport, the Central Government authorities will expect
the full amount to be remitted; if they underreport, their

SHANGHAI 00000187 002 OF 003


superiors will think that the local tax authorities are not
doing their job. 2) Import and export data. 3) Financial data.
For instance, said Fang, money supply measures such as M1 and
M2 are easy to calculate. 4) Electricity usage. In fact, noted
Fang, China Bank Regulatory Commission Chairman Liu Mingkang
believes that electricity usage is the most accurate measure of
Chinese economic health.


7. (C) Fang noted that localities now have to first clear their
local GDP statistics with the Central Government before
releasing them. That is why the national first quarter GDP
growth figure has already been announced, but Shanghai has not
released its local figure. Fang said that Shanghai's first
quarter growth would come in at around 5 percent.


8. (C) Shanghai has been significantly affected by the global
financial crisis, said Fang. Industrial value-added has been in
decline since September 2008, he said--there is less production
because there are fewer exports. Connected with this,
value-added tax revenues are down, said Fang. The real estate
market is also in a slump, although Fang noted that the decline
was smaller than elsewhere around China. Hotel occupancies and
related services are down, said Fang, because there are fewer
overseas business delegations. Realized foreign direct
investment (FDI) in Shanghai is barely holding steady, at around
1 percent year-on-year growth, while contracted FDI is falling.
Fang says that the stock market remains a bright spot in the
local economy. (Note. See septel for Fang's concerns about the
Shanghai stock market performance. End note.)

============================
Economic Growth Will Remain "Stuck" at 7-8 Percent
============================


9. (C) Fang predicted that China will remain "stuck" at 7-8
percent annual GDP growth for "many years." China was growing
in the double digits in recent years thanks to exports, and this
situation will not return, said Fang. Fang held out the
prospect that growth could be higher if China was willing to
implement more significant economic reforms, but he did not
appear to be optimistic on this front. He said that while China
has managed its affairs conservatively, and thus avoided a
financial crisis, it now needs to introduce financial and
technical innovations to achieve higher growth. For instance,
said Fang, China needs to provide better financing to small and
medium-size enterprises. China should decentralize its
financial system, said Fang, although "less government control
does not mean less regulation."



10. (C) In the short term, Fang expects national growth to pick
up from the first quarter's rate of 6.1 percent GDP growth,
which he called the "bottom" of the economic cycle. China is
still a "young economy," said Fang, and there is still
significant demand from young people for housing, automobiles,
and other consumer goods. Household consumption can stay
strong, said Fang, because households are not leveraged.

============================
Rich Provinces Blocking Pension Reforms
============================


11. (C) Fang said that some economic reforms would be difficult
because they are being blocked by interest groups. He cited as
an example the need to create a national pension system, which
would reduce precautionary savings and increase domestic
household consumption. (Note: China's pension system has
funding mismatches because benefits are not portable across
provincial, and in some cases municipal, lines. This also
incentivizes household to save for retirement, since the
government-operated pension is not assured. End note.) What
really needs to be done, said Fang, is to tax the rich regions
and subsidize the pension plans in poor regions. However, China
currently has a consensus system, and "if a few rich provinces
resist, the decision will not be made."

============================
Mega-Cities are Right for China
============================


12. (C) Another idea for increasing consumption is to create
mega-cities, said Fang. This idea was first raised by a
McKinsey consultant report, and is "absolutely the right

SHANGHAI 00000187 003 OF 003


strategy for China," said Fang. Under this plan, China would
develop thirty mega-cities of 30 million residents each.
Provision of public services would improve, because it could be
provided more efficiently: healthcare, education, public water
and sewage. In addition, said Fang., land would be used more
efficiently, and there would be more land for farming.


13. (C) Fang said that China also needed to change the
one-child policy within the next 5-10 years. He implied that
this would increase domestic consumption as families spend on
the needs of their children. (Note: See septel for a
cross-section of East China public opinion on the one-child
policy as seen through the visa window. End note.)

============================
Fang's Personal Observations
============================


14. (C) Fang proudly admitted that he is a fan of President
Barak Obama. He said that he recently watched the President's
entire speech in Prague, Czech Republic, on CNN via his illegal
satellite TV dish. "I think he will be a great president," said
Fang. Fang also said he read one of the President's
autobiographies even before the President was elected. Fang
added that every November he travels to New York in his role on
the international advisory board of Marsh & McClellan. In
addition, Fang revealed that is brother is an employee of the
environmental protection agency of a southern U.S. state.

============================
Comment
============================


15. (C) Fang, being one of the top financial officials in
Shanghai, almost certainly reflects senior Shanghai
decisionmakers' views on Shanghai's interests with respect to
national policies. His remark that the Central Government will
support Shanghai to eventually outgrow Hong Kong as an
international financial center probably also reflects some
wishful thinking on his part. Many of our contacts--including
others in Shanghai's financial bureaucracy--admit that Shanghai
will not catch up to Hong Kong for decades, if at all. They
cite Shanghai's less certain regulatory environment and
less-developed rule of law, as well as the lack of renminbi
convertibility, as indicating the long-term changes Shanghai
would need to implement before it could rival, let alone
overtake, Hong Kong.


16. (U) The Dallas Fed delegation did not have an opportunity
to clear on this cable.
CAMP