CONSUMPTION COUPONS IN HANGZHOU: BOOSTING CONSUMPTION, OR

UNCLAS SECTION 01 OF 05 SHANGHAI 000228

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E.O. 12958: N/A
TAGS: PGOV ECON EFIN SOCI CH
SUBJECT: CONSUMPTION COUPONS IN HANGZHOU: BOOSTING CONSUMPTION, OR
JUST BOOSTING LOCAL GOVERNMENT FISCAL WOES?


1. (SBU) Summary: One of few cities in China to issue its own
consumption coupons, Hangzhou has taken the lead in local
government efforts to boost consumption. The Hangzhou
Government issued the first tranche of consumption coupons in
mid-January 2009, followed by a second tranche in March 2009.
The second tranche includes coupons for the purchase of daily
goods, electronics, and household appliances as well as coupons
for tourism sites and educational/training programs. The
coupons also include an 18 percent subsidy for the purchase of
select Hangzhou-made electronics and household appliances.
Local government officials are mixed in their assessment of the
program's impact on local consumption, though they hope the
program can serve as a model for other cities in China. Our
academic interlocutors are skeptical of the program's long-term
benefits. Implementation appears to be inconsistent, as each
store can choose which products to include in the program.
Fraud does not appear to be a serious concern so far. The
Hangzhou Party Secretary has taken an active interest in the
program, according to an academic and media reports. End
summary.

Background: First Tranche
--------------

2. (U) In an effort to boost local consumption in Hangzhou
(population 7.9 million; the capital of Zhejiang Province),the
Hangzhou Finance Bureau issued its first tranche of consumption
coupons in mid-January 2009. The coupons were given to retired,
disabled, and low income residents as well as students for the
purchase of groceries, household goods, electronics, and
household appliances in 535 designated stores throughout
Hangzhou. The coupons could also be used at designated tourist
sites and entertainment venues, such as theaters, restaurants,
and health clubs. Each qualifying resident was issued 200 RMB
(USD 29) worth of coupons, which could be used between January
15 and April 30, 2009. The coupons came in 20 RMB (USD 2.90)
denominations, with each coupon having an actual value of 5
percent above the face value for the purchase of goods. In
other words, each 20 RMB coupon could actually purchase 21 RMB
worth of goods. The 5 percent additional benefit was borne by
the retailer while the face value of the coupon was financed by
the local government. For designated Hangzhou-made electronics
and household appliances, such as televisions, refrigerators,
washing machines, and mobile phones, the coupons had an 18
percent additional benefit, meaning that each 20 RMB coupon
could purchase 23.6 RMB worth of goods. Of the 18 percent
benefit, 5 percent was borne by retailers and 13 percent by the
local government. For tourist sites and entertainment venues,
the coupons had a 20 percent additional benefit, meaning each 20
RMB coupon was worth 24 RMB, with half of the additional benefit
financed by the local government. There was a total of 220
million RMB (USD 32.11 million) worth of coupons issued in the
first tranche, 120 million RMB (USD 17.5 million) of which was
financed by the city-wide Hangzhou Finance Bureau, 40 million
RMB (USD 5.84 million) by the Yuhang district government (within
Hangzhou),and 60 million RMB (USD 8.76 million) by the Xiaoshan
district government (within Hangzhou). According to Wu Wenxing,
Vice Director of the Hangzhou Finance Bureau, of the 120 million
RMB (USD 17.5 million) in coupons issued by the Hangzhou Finance
Bureau, 108 million RMB (USD 15.77 million) had been used by the
time we met with Wu in Hangzhou on May 7. (Note: Our Hangzhou
interlocutors were not sure how many of the coupons issued by
Yuhang and Xiaoshan districts had been used, but said "most" of
the coupons had probably been used. End note.)

Second Tranche of Coupons
--------------

3. (U) The Hangzhou Finance Bureau issued a second tranche of
consumption coupons in March 2009. The second tranche was
expanded in both scope and scale, with five different categories
differentiated by recipient and use, as explained to us by

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officials from the Hangzhou Finance Bureau on May 7:

--Government Consumption Coupon: The Hangzhou Finance Bureau
financed 20 million RMB (USD 2.92 million) in coupons issued to
retired, disabled, and low income residents as well as students.
For the purchase of groceries, household goods, electronics,
and household appliances in 2300 designated stores throughout
Hangzhou between March 20, 2009 and June 30, 2009. The coupons
can also be used at designated tourist sites and entertainment
venues, including theaters, restaurants, and health clubs.
Additional 5 percent, 18 percent, and 20 percent benefits are
the same as those for the first tranche of coupons.

--Social Consumption Coupon: 100 million RMB (USD 14.60 million)
in coupons for individual purchase by any Hangzhou resident at
Hangzhou banks. For the purchase of groceries, household goods,
electronics, and household appliances in 2300 designated stores
throughout Hangzhou between March 20, 2009 and June 30, 2009.
The coupons can also be used at designated tourist sites and
entertainment venues, including theaters, restaurants, and
health clubs. Additional 5 percent, 18 percent, and 20 percent
benefits are the same as those for the first tranche of coupons.

--Transferable Consumption Coupon: The Hangzhou Finance Bureau
provided a total of 480 million RMB (USD 70.07 million) in
subsidies to local companies. The companies can use these funds
to pay for their employees' social security or to invest in new
technology to upgrade production. The Hangzhou Finance Bureau,
however, has been "encouraging" companies to convert most of
these funds into consumption coupons to be handed out to
employees, said Shou Xuejun, Department Head of the Hangzhou
Finance Bureau. The coupons can then be used for the purchase
of groceries, household goods, electronics, and household
appliances in 2300 designated stores throughout Hangzhou between
March 20, 2009 and June 30, 2009. The coupons can also be used
at designated tourist sites and entertainment venues, including
theaters, restaurants, and health clubs. Additional 5 percent,
18 percent, and 20 percent benefits are the same as those for
the first tranche of coupons.

--Educational Training Consumption Coupon: A total of 150
million RMB (USD 21.90 million) in coupons financed by the
Hangzhou Finance Bureau. The coupons are issued to students
from poor families, new high school graduates, and unemployed
persons for vocational and technical training. The coupons can
be used between April 1, 2009 and June 30, 2010.

--Tourism Consumption Coupon: A total of 250 million RMB (USD
36.50 million) in coupons issued by the Hangzhou Finance Bureau.
These coupons can be used by anyone between March 1, 2009 and
May 31, 2009 at 823 designated locations in Hangzhou, including
tourist sites, restaurants and hotels. Though they are
primarily targeted at non-Hangzhou residents, Hangzhou residents
can also use them, according to Wang Xinzhang, Deputy Director
of the Hangzhou Tourism Commission. Non-Hangzhou residents can
obtain these coupons online or at Hangzhou banks and tourism
agencies in other cities, including Shanghai, and there is no
limit to the number of coupons per person. Each coupon has a
face value of 10 RMB (USD 1.45),and one coupon can be used for
every 40 RMB (USD 5.84) of consumption (i.e., every 40 RMB of
consumption has a 25 percent subsidy, so one would only pay 30
RMB out of pocket for a purchase worth 40 RMB). (Note: Econoff
and LES used a 10 RMB coupon to purchase 50 RMB worth of lattes
at a Starbucks in Hangzhou, paying only 40 RMB out of pocket. A
nearby Haagen-Dazs said it would also accept the tourism
consumption coupons. A local businesswoman commented that the
tourism coupons are "very convenient" since she can use them at
many local restaurants. End note.) Of the 10 RMB subsidy, 5
RMB is financed by the Hangzhou Finance Bureau and the other 5
RMB by the vendor.

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Criteria For Joining Program
--------------

4. (SBU) According to Shou Xuejun, the 2300 stores that accept
the Government, Social, and Transferable coupons have to fulfill
certain requirements to be included in the program, such as
having no criminal record and signing an agreement to observe
the rules of the program. Although these stores have to
subsidize 5 percent of purchases, they feel it is worth it since
it may attract more customers. Regarding the tourism coupons,
Wang Xinzhang did not mention specific criteria but said that
most economy class hotels in Hangzhou do not want to participate
since the coupons would cut into their already low profit
margins. Other vendors also do not want to join, said Wang,
because of the paperwork they would need to file to get 5 RMB of
every 10 RMB coupon reimbursed from the government. (Comment:
Based on our discussions and general observations, Econoff did
not detect any bias in the selection of stores for the program.
It appears both Chinese and foreign-invested stores are eligible
to participate. End comment.)

Favoring Hangzhou-Made Products
--------------

5. (SBU) In terms of the products included in the program, Shou
said there are generally no restrictions and that most, if not
all, groceries, household goods, and appliances can be purchased
using the coupons at designated stores. Certain Hangzhou-made
products, however, receive favorable treatment in that the local
government provides a 13 percent additional subsidy for the
purchase of these products (the coupons will be valued at 18
percent above their face value, with the local government paying
13 percent and the retailer 5 percent, as opposed to only the 5
percent benefit provided by the retailer for other non Hangzhou-
made products). Products in this category include Huaru
refrigerators, Goldfish washing machines, Motorola mobile
phones, and Panasonic washing machines. These are all Chinese
or foreign-invested enterprises manufacturing in Hangzhou, and
there are now 7 or 8 brands included in the program (up from 4
in the first tranche),according to Shou. (Note: See paragraph
9 for more on implementation of the program. End note.)

Murky Results, Many Skeptics
--------------

6. (SBU) Shou Xuejun of the Hangzhou Finance Bureau said the
goals of the program are to boost local consumption, strengthen
consumer confidence, and show the public that the government is
taking action to stimulate the local economy. Although the
Hangzhou Finance Bureau's documents indicate that local
consumption grew by 11.10 percent year-on-year in Q1 2009, Shou
downplayed this figure and acknowledged that it is not clear
what concrete impact the consumption coupons have had on the
local economy. He said there is "no target figure," and that it
is "difficult to measure the effects." Shou reminded us that
the total 1 billion RMB (USD 146 million) in consumption coupons
issued under the program is only a "small part" of the 160
billion RMB (USD 23.36 billion) in total annual consumption in
Hangzhou. The main goal for now is to boost consumer
confidence, Shou reiterated.


7. (SBU) Wang Xinzhang of the Hangzhou Tourism Commission said
the tourism coupon's goals are to improve Hangzhou's
competitiveness as a tourism destination and, by bringing in
more tourists, boost local consumption. He was upbeat about the
program's impact, citing a recent Ctrip (a popular Chinese
travel website) survey ranking Hangzhou as the top city for
tourism in China (Hangzhou was previously ranked 4 or 5). Wang
said 82 percent of tourists in Hangzhou who used the tourism
coupons said they visited Hangzhou because they received the
coupons. Although Wang could not quantify the economic impact
of the program, including if and by how much the number of

SHANGHAI 00000228 004 OF 005


tourists had increased, he said that (as of our discussion on
May 7) 684,000 RMB (USD 99,854) worth of tourism coupons had
been used. This is a small number, admitted Wang, adding that
coupons used during the holidays in early May (when many Chinese
travel) had not been counted yet.


8. (SBU) Academic interlocutors were skeptical of the impact of
the consumption coupons. Ding Jianping, Professor and Director
of the Research Center for Modern Finance at Shanghai University
of Finance and Economics, believes that the coupons will only
have a short-term impact and will not boost consumption in the
long-run. Fan Xiaoping, Professor and Director of the EMBA
Program at Zhejiang University who has been quoted in local
media on the subject, told Econoff during a separate discussion
on May 7 that it will take at least one or two years to analyze
the impact of the program. He said that most of the Government,
Social, and Transferable coupons are being used to purchase
daily necessities that people would buy anyway, so the coupons
will not necessarily boost new consumption. Though the
headlines tout this as a 1 billion RMB (USD 146 million)
program, Fan argued that much of the money being poured into the
program is actually not new. The funding for the Education and
Transferable coupons, he said, were already part of the original
government budget. The Hangzhou Government provides education
allowances and company subsidies every year, and it just
repackaged these funds under the coupon program, he said. Fan's
other concern is that by issuing coupons that can be used like
cash, the Hangzhou Finance Bureau is becoming a de-facto bank
issuing its own currency and creating market distortions.
Nevertheless, the consumption coupons are a good start, said
Fan, but in the long-run, the government has to think about how
to change the people's mindset about consumption. "Chinese
people have a lot of money in banks," said Fan, but they do not
know how to spend it (aside from daily necessities) nor do they
want to spend it given the economic downturn.


Complex Rules, Inconsistent Implementation
--------------

9. (SBU) The program's complexity and implementation appear to
be another problem. Econoff visited several stores in Hangzhou
that have been designated to accept the coupons. At Trustmart,
a foreign-invested megastore chain selling everything from food
and clothes to electronic products, the cashiers told Econoff
that they accept the Government, Social, and Transferable
consumption coupons with the additional 5 percent benefit for
all products in the store. They, however, were not familiar
with the 18 percent benefit for Hangzhou-made products and
referred us to a store manager. The store manager told Econoff
that the store carries Hangzhou-made appliances, like Huaru and
Goldfish, and that he is aware of the 18 percent rule. However,
he said the store would not provide more than the 5 percent
additional benefit since it is too "troublesome" ("mafan") to
file the paperwork to get reimbursed the other 13 percent from
the government. At a nearby Gome, a domestic electronics and
household appliance chain, the manager said the store would
accept the Government, Social, and Transferable coupons for only
limited products and provide the 18 percent additional benefit
for Hangzhou-made Panasonic washing machines (but not all
Hangzhou-made products). They, however, would not even provide
the 5 percent additional benefit for certain brands and
products, such as Sony, Philips, Haier televisions, all mobile
phones (including Motorola),and all computers. The manager
explained that profit margins on these products were too low.
At the entrance to the Gome store was a large poster, listing
several dozen products that would not receive the 5 percent or
18 percent benefit with the coupons.

Fraud Not a Serious Problem
--------------

SHANGHAI 00000228 005.2 OF 005



10. (SBU) Wu Wenxing and Shou Xuejun of the Hangzhou Finance
Bureau said that fraud has not been a serious problem so far.
Because of the short duration of the coupon program,
counterfeiters have not had a strong incentive to produce fake
coupons. However, some stores that have not been designated to
take part in the program have recently started accepting the
coupons. The owners of these stores accept the coupons at face
value without providing the additional 5 percent or 18 percent
benefit, and then use the coupons themselves in designated
stores that provide the additional benefits, according to Shou.
He added, however, that there have only been few cases of such
abuse in the program.

Hangzhou A Model for Others?
--------------

11. (SBU) Shou Xuejun said very few cities in China have
implemented similar consumption coupon programs. He noted that
Chengdu (capital of Sichuan Province) had issued 30 million RMB
(USD 4.38 million) in consumption coupons in December 2008, with
each member of poor households receiving 100 RMB (USD 14.60) in
coupons. Wang Xinzhang mentioned that Nanjing (capital of
Jiangsu Province) recently issued tourism coupons worth 20
million RMB (USD 2.92 million),but that these coupons were
given to only Nanjing residents for use in rural districts of
Nanjing. Shou said that officials from Qingdao (Shandong
Province) and Shaoxing (Zhejiang Province) had recently visited
Hangzhou to learn more about the city's consumption coupon
program, but he was not sure whether these cities had
implemented any program. Shou and Wu Wenxing expressed their
hope that Hangzhou's program would serve as a model for other
consumption-boosting programs throughout China. (Note: These
discussions took place before the Chinese Central Government
announced a plan on May 19 to provide 5 billion RMB (USD 730
million) and 2 billion RMB (USD 292 million) in subsidies for
the replacement of cars and home appliances respectively,
starting in select cities and provinces. End note.)

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

12. (SBU) The Government and Transferable consumption coupons
will not be continued beyond the second tranche, according to Wu
and Shou, due to budgetary constraints. Hangzhou officials have
yet to decide whether to continue issuing the other category
coupons beyond the current tranche, though ones like the Social
consumption coupons, whose costs are borne mainly by consumers
themselves, have a chance of being continued. The officials
instead are taking a wait and see approach. As noted by our
interlocutors, it is difficult to gauge the success or failure
of this program. The program does not appear to be
significantly boosting sales of Hangzhou-made products, at
least, as the local government has so far only paid out 1.2
million RMB (USD 175,000) for the 13 percent subsidy on these
products. Like the scholars, the Hangzhou Finance Bureau
officials themselves do not sound optimistic that the program
would significantly boost local consumption. Rather, it appears
they were placed under political pressure from Hangzhou's Party
Secretary, who took a strong personal interest in this issue,
according to Zhejiang University Professor Fan Xiaoping and
local media reports.SCHUCHAT