(SBU) SHANGHAI EMPHASIZES ECONOMIC GROWTH TO KIRK, LARSEN

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E.O. 12958: N/A
TAGS: CH ECON EFIN KIPR PGOV PREL SENV
SUBJECT: (SBU) SHANGHAI EMPHASIZES ECONOMIC GROWTH TO KIRK, LARSEN

REF: SHANGHAI 191


1. (SBU) Summary. During a May 27-28 visit by U.S.
Representatives Larsen and Kirk, a variety of interlocutors
painted a picture of Shanghai responding to a sharp downturn in
the local economy, but optimistic that the elements of
longer-term growth are in place. AmCham Shanghai noted that
multinationals now have to bring their "A team" to China in
order to profit, and that the previous model of using China
merely for low-cost labor assembly has become outdated.
Shanghai is hungry for new technology, and in some cases is
using regulatory measures to force technology transfer or to
protect local industries in the process, said the AmCham
Shanghai interlocutors. Shanghai officials met by the
delegation said that Shanghai was seeking to lend a short-term
stimulus to the economy, while simultaneously moving gradually
towards a more sustainable, domestic consumption-led growth
model. A senior Shanghai legislator outlined examples of the
legislature impacting local policies. As for China's
international economic policy, interlocutors said that China
would place greater attention on the U.S. making "responsible"
economic choices, and China will seek a greater voice in
international financial institutions. End summary.


2. (U) U.S. Representative Rick Larsen (D-Washington) and U.S.
Representative Mark Kirk (R-Illinois),Co-Chairs of the
U.S.-China Working Group in the House of Representatives, led a
delegation sponsored by the National Committee on United
States-China Relations (NCUSCR) and the National People's
Congress of the People's Republic of China on a May 27-28 visit
to Shanghai to look at local trends in advanced manufacturing.
The delegation included Steve Orlins, NCUSCR President. On May
28, the delegation held a roundtable of local businesses
arranged by the U.S.-China Business Council and the American
Chamber of Commerce, Shanghai; met with local business
representative offices of their home constituencies; had lunch
with Shanghai Municipal People's Congress (SMPC) Vice Chair
Madame Yang Dinghua; met with Fang Xinghai, Director-General of
the Shanghai Financial Services Office (SFSO); and held a
roundtable with local academics on the topic "2011: What Will
China's International Financial Role be Post-Crisis?"

==========================
Shanghai Manufacturing Moving Up the Value-Added Chain
============================


3. (SBU) Ted Hornbein, Managing Director for Asia, Richco
International Trading, and a member of the AmCham Shanghai
committee studying trends in the local manufacturing sector, set
the tone for the delegation's first meeting, saying that
multinationals now have to bring their "A team" to China in
order to profit. He said that the previous model of using China
merely for low-cost labor assembly has been outdated by the
combined pressures of the Labor Contract Law, exchange rate
appreciation, and environmental restrictions, among other
factors. In addition, the committee's study also identified
companies manufacturing "in China, for China" as more
successful. (Note: The China Manufacturing Competitiveness
Study 2008-2009 is available on the AmCham Shanghai website.
End note.) Jeff Song, President China, Ingersoll Rand, a
manufacturer of industrial air chillers and other products,
confirmed these trends, saying that his company starts out with
only 20 percent local content, but eventually sources 70 percent
locally. However, he added that fears of intellectual property
theft and other factors contributed to the company always
retaining some imports.


4. (SBU) Several representatives noted concerns about forced
technology transfer or local protectionism. For instance,
Charles McElwee, a lawyer with Squire, Sanders, and Dempsey's
Shanghai office, said that local governments are requiring 70
percent local content for companies bidding for windpower
projects. In addition, he said, there is an expectation among
Chinese officials that advanced windpower technology will be

SHANGHAI 00000248 002 OF 004


compulsorily licensed at low profit margins to Chinese firms,
and that this is one of the three central elements of Beijing's
negotiating position heading into the upcoming Copenhagen talks
on climate change. James McGill, President Asia Pacific, Eaton
Corporation, a maker of hybrid engines for buses and other
equipment, said that his company is close to closing a deal to
provide dozens of green-technology buses for the 2010 Shanghai
Expo, but that because Eaton uses Cummins engines built in Wuhan
rather than SAIC engines built in Shanghai, some problems
remain. (Note: McGill separately indicated to ConGenOffs that
the decision not to move forward on the purchase had apparently
risen to the level of Shanghai Executive Vice Mayor Yang Xiong.
End note.) Mitch Barns, President for Nielson Greater China,
said that the company a few weeks ago dropped its television
ratings business in China because regulators had made it clear
that CCTV's own ratings service was preferred, even though
advertisers complain that programs are able to purchase higher
ratings from CCTV.

============================
Shanghai Slowly Adapting to Global Financial Crisis
============================


5. (SBU) SMPC Vice Chairwoman Yang Dinghua at a reception and
lunch for the delegation said that despite the difficult
circumstances Shanghai faces as a result of the global financial
crisis, the short-term stimulus measures introduced by the
Central Government are having a positive impact, and, longer
term, the city's economy is being gradually restructured. Yang
noted that Shanghai is shifting away from manufacturing and
towards services; in fact, services now accounts for 52 percent
of the city's GDP, and this is expected to grow further this
year. Industrial restructuring is one of Shanghai's major tasks
this year, as is maintaining unemployment at a stable level
below 4.5 percent. (Note: Yang was most likely referring to
the official unemployment number, which does not count migrant
workers and probably undercounts layoffs in the private sector.
End note.)



6. (SBU) Yang said that, while Shanghai received little in
direct stimulus funding, the Central Government had recently
approved two related measures that would help support Shanghai's
growth: naming Shanghai as China's international financial
center and international shipping center (see reftel) and
arranging for Pudong District to absorb the neighboring Nanhui
District. Yang explained the possible synergies opened up by
these policies, including tapping Pudong's financial industry to
develop the shipping industry and its associated financial
service needs--including insurance and trade finance--while
drawing on the undeveloped land in Nanhui to give Pudong growing
room.


7. (SBU) SFSO's Fang Xinghai later emphasized a similar theme,
that changes to China's financial structure would take time.
Consumption is hard to increase in the short term, said Fang:

- the Chinese people are poor, and have an inadequate social
safety net, so it is appropriate for them to save for
necessities;

- for this same reason, further appreciation of the renminbi
will not stimulate domestic consumption, because this will not
put more money in poor people's pockets;

- in a similar way, lowering the savings rate also will not
stimulate domestic consumption, as savings have come from the
corporate sector, including exporters;

- even for people that do have money, there is a dearth of
consumption goods in China, as with rich Shanghai people who
tell Fang that there is not enough high-quality private
education in the city.

SHANGHAI 00000248 003 OF 004




8. (SBU) Fang added his impression that Chinese economic
decision makers would switch tracks from using banks to finance
the bulk of China's stimulus, as currently is the case. First,
banks are still at around a .75 : 1.00 loan-to-deposit ratio,
but they are beginning to tell that government that they are
unable to continue at the current lending growth rate. In
addition, Chairman Liu Mingkang of the China Banking Regulatory
Commission (CBRC) has been warning that the banks are taking on
undue risk. For instance, said Fang, CBRC has recently
reaffirmed the rule that people contribute a 40 percent down
payment when taking out a second mortgage, a rule that was not
being observed.

============================
Shanghai Legislature Exercising Its Oversight Powers
============================


9. (SBU) SMPC Vice Chairwoman Yang and Yuan Yining, who serves
on the SMPC budget committee, offered the delegation some
examples of oversight functions of the legislature. Yang noted
that "the government needs to report" to the SMPC regarding
"issues that are on the agenda of the SMPC." Yang and Yuan
cited two cases where legislative oversight had resulted in
policy changes. In one case, the government had allocated RMB1
billion (Note: Approximately US$150 million. End note.) for
energy savings and pollution reduction, but the funds had not
been spent because there were no implementing regulations.
There were "beautiful plans," said Yang, but no concrete
procedures for carrying them out. The legislature asked the
government to issue implementing regulations so that businesses
could use the allotted funds. In a second case, said Yang, the
government was offering a 150 percent tax rebate on businesses
involved in creating products based on indigenous Chinese
innovation. Again, the implementing policies were unclear so
the rebates were going unclaimed, and the SMPC stepped in to ask
for changes.

============================
China Developing Its Foreign Economic Policy
============================


10. (SBU) Fang said that People's Bank of China Chairman Zhou
Xiaochuan issued his pre-G-20 paper calling for a dollar
substitute in international trade to call attention to China's
concern over the "irresponsible" way that the United States was
handling its financial affairs. China realizes that it would be
impossible to create a dollar substitute without the consent of
the United States, and also that the United States would not
agree to this change. At the same time, Fang agreed that China
was working to reduce the average maturity of its official U.S.
debt instruments. Beijing's promotion of the use of the
renminbi in international trade is in part a reaction to the
drying up of trade finance in the wake of the global financial
crisis, said Fang. China should "aggressively push" for greater
south-south trade denominated in renminbi, said Fang, including
in countries such as Indonesia.


11. (SBU) At a subsequent academic roundtable, Professor Pan
Rui of the Center for American Studies at Fudan University
continued this theme, noting that more lesser developed
countries are trying to learn from the "Beijing
Consensus"--which Pan said entailed economic growth without
Western-style democracy--in the wake of the global financial
crisis, turning to China as their exemplar rather than the
United States. China is set to gain political clout by
maintaining its growth rate during the crisis, said Pan. With
respect to what China expects from the United States, Pan
invoked a phrase first used during the Bush Administration, that
China be a responsible stakeholder in the international system.
Now China wants to raise this same question with the United
States, said Pan. If China is to continue to purchase large
amounts of U.S. debt, China hopes that the United States will

SHANGHAI 00000248 004 OF 004


act in a "responsible" manner, which includes not weakening the
U.S. dollar.

============================
China Seeking a Greater Role in IFIs
============================


12. (SBU) Pan also noted that China would gradually seek a
greater voice in the international financial institutions,
although it would probably seek to maintain its developing
country status. One way to achieve both simultaneously, said
Pan, was to work together with the BRIC countries (Note:
Brazil, Russia, India, and China. End note.). Professor Frank
Peng of Tongji University's World Bank Studies Center said that
even if the large developing countries were to act more in
concert, this would probably not lead to an end of the guiding
influence of the developed countries, since at the World Bank,
major rules changes require a 60 percent vote, and developed
countries hold over 40 percent of the vote currently.


13. (U) The delegation did not have an opportunity to clear on
this cable.
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