LIFE IN CHINA'S NORTH: SNAPSHOTS FROM HARBIN TO

C O N F I D E N T I A L SHENYANG 000031

SENSITIVE
SIPDIS

C O R R E C T E D COPY ADDED ADDEE

MOSCOW PASS VLADIVOSTOK
E.O. 12958: DECL: 02/26/2019
TAGS: EAGR ECON ENRG ETRD KN KS PREL RS SENV
SUBJECT: LIFE IN CHINA'S NORTH: SNAPSHOTS FROM HARBIN TO
THE SOUTHEAST BORDER WITH RUSSIA

REF: A. (A) 08 SHENYANG 7

B. (B) 08 SHENYANG 76

C. (C) 08 VLADIVOSTOK 38

Classified By: Consul General Stephen B. Wickman. Reasons 1.4 (b) and
(d).


1. (C) SUMMARY: Leaders in Heilongjiang Province displayed a
well-informed interest and concern about the global economic
slowdown while remaining upbeat on prospects for
development, particularly in the transportation and
environmental areas. Sector-specific industries related to
exports and Russian ruble-denominated trade are experiencing
the most difficulty, commensurate with the province's
isolated, undiversified, and underdeveloped status, but the
full effects have yet to touch China's northernmost areas.
Local leaders continue to think big, embarking on capital
infrastructure projects and proposing yet another regional
logistical link with the Russians and the Koreans. As
Mudanjiang Party Secretary (PS) XU Guangguo bluntly put it,
"we are a backward and remote region to begin with" and
then, quoting Deng Xiaoping roughly, "if the sky falls, then
the tall people will be around to hold it up (while the
short people survive)." END SUMMARY.


2. (SBU) Taking advantage of a chance to drop in on the U.S.
skating teams and attend the opening of the 24th Winter
Universiade in Harbin, the Consul General and congenoff
explored Heilongjiang's southeastern quadrant, visiting
Harbin February 16-19 and the border cities of Dongning,
Suifenhe, and Mudanjiang February 19-22. The themes were
consistent throughout. While the leadership was concerned
about the economic slowdown, most of the difficulties were
sector-specific.

EVIDENCE OF THE ECONOMIC SLOWDOWN AND ENVIRONMENT
-------------- --------------

3. (C) Heilongjiang PS JI Bingxuan dispensed with all small-
talk and opened with a polished and well-rehearsed, half-
hour diatribe that could have come straight from the Party
School, chiefly regarding American complicity and
foolishness in precipitating the economic slowdown (NOTE:
Like most of the high-level leadership in Heilongjiang, PS
Ji is not a native but from Henan. He reportedly had been
considered for the PS slot in Lhasa but settled for the
irreverent northernmost province of China instead.) PS Ji
worried that the economic slowdown would have dire
implications for inflation and global stability and he was
most puzzled about the reasons behind the gyrating price for
crude oil, which is produced in Heilongjiang at China's
oldest field in Daqing (NOTE: PS Ji was a real departure
from his predecessor, who had nervously clutched his notes
during his 2007 meeting with the CG and reportedly did not
like meeting with foreigners.)


4. (C) PS Ji's initial exposition avoided a strict analysis
of Heilongjiang's experience with the slowdown. He
subsequently admitted, however, that the most intractable
problem facing the local economy was the effect of imports
of American genetically modified (GMO) soybeans, which had
more to do with China's WTO concessions. The central
government continues to buy soybeans at a higher price to
support its local farmers, but Heilongjiang's soybeans are
ultimately uncompetitive with American GMO soybeans. PS Ji
cited falling oil prices and reduced trade with Russia as
equally troublesome, but returned repeatedly to the soybean
issue, reiterating its paramount importance to the province.


5. (C) PS Ji also commented on the need to protect the
environment, pledging RMB 50 billion over 10 years to
protect regional forests, grasslands, and rivers as part of
the government's package to improve the productivity of
existing farmland by upgrading infrastructure and equipment.
Certain species of trees are specifically protected, such as
Korean pine and larch. PS Ji boldly stated that
Heilongjiang would cultivate no new land, "cutting not a
single tree nor a single blade of grass" and pledged not to
construct any factories near the relatively clean Amur
(Heilongjiang) and Ussuri Rivers along the Russian border.
PS Ji proudly pointed to the clear ice blocks from the
Songhua River used in the popular Harbin Ice and Snow
Festival as evidence that the river had recovered from the
disastrous 2005 benzene incident in upstream Jilin Province
(NOTE: Benzene is, of course, colorless.)


6. (C) Harbin PS DU Yuxin also showed keen interest and
knowledge about the global slowdown and seemed confident
that the United States would rise to the challenge. He
agreed with the CG on the importance of addressing climate-
change issues and described his city's efforts to hit some
low-hanging fruit: building sewerage treatment plants on the
Songhua River and a municipal central heating system that
eliminates the need for household coal- and wood-burning
stoves. PS Du also cited the cost of clean technology as
prohibitively high and hoped that the Secretary and others
in the USG would facilitate technology transfer to China.
If so, China would not repeat the mistakes of the
industrialized world and the "the rest of the world would
not suffer as much" (NOTE: PS Du is an anomaly in this part
of the country as he is one of the only Party leaders that
calls Heilongjiang home. He is an avid reader and does not
shy away from scholarly topics; his latest book of choice
was on American environmentalism.)

LOCAL PERSPECTIVES ON THE ECONOMIC SLOWDOWN
--------------

7. (SBU) Harbin's economy seems not to have been terribly
affected by the economic slowdown, and in some cases there
is room to grow. The Harbin Power Equipment Group, for
example, manufactures large machinery, such as turbines for
hydroelectric plants, after receiving rough casts from
Qiqihar and Sichuan. During our drop by, managers noted a
marked decrease in incidental demand from Southeast Asia but
said most of their products are procured as part of long-
term capital projects that are less vulnerable to market
fluctuations than other, lighter industries. Harbin's
wholly U.S.-owned Pepsi-Cola bottling operation documented
continuing strong growth, particularly outside of Harbin.
Pepsi is even launching new products in the non-carbonated
beverage sector in anticipation of increased demand.


8. (SBU) Sawmills and other lumber industries along the PRC-
Russia border tell a different, gloomier story though their
representatives maintained an outwardly rosy outlook during
out visits. Dongning's Huayu Wood is owned by a Sino-Korean
and is the largest industrial operation in Heilongjiang's
southeastern corner, sandwiched between Russia and Jilin
Province's Yanbian Autonomous Korean Prefecture. All the
wood is imported from Russia, as are the (now-laid-off)
Sichuanese carvers brought in to produce ornate heirloom
furniture sets for the domestic market. Domestic and
Japanese demand for flooring from a sister plant owned by
Huayu was also down and the shop totally idle even one month
after the spring festival break. This factory no longer
exports to the United States or Europe because, unlike in
Japan, margins are thin and there is no premium for the
unblemished hardwood produced by Huayu. Suifenhe's brand
new Daya Wood sawmill is one of the five largest in China
and produced its first sheet of particleboard in December

2008. Plant management evinced no worries about the
slowdown, but even in this start-up phase with German and
Swedish engineers breaking in the equipment, operations were
far from robust. Suifenhe officials privately noted that
much less wood comes in from Russia, the result of Russian
authorities imposing higher tariffs and the lack of
international demand.


9. (SBU) Mudanjiang is home to a unique experiment, Celluon,
a Chinese-Korean joint venture utilizing Silicon Valley
technology to manufacture Bluetooth-capable, laser-
propelled, projection keyboards for smart phones. A U.S.
company, Canesta, sold the key patents for this seven-year
old technology, partly in return for a 6-percent share in
the majority Chinese-owned parent. Uniquely headquartered
in Mudanjiang, the company is the brainchild of a Korean-
American who used to work for Samsung and a well-connected
native Mudanjiang Sino-Korean businessman, ostensibly to
utilize low-cost (RMB 1,000-2,000 per month) Mudanjiang
labor to assemble these sophisticated devices that are just
hitting the markets. Celluon hopes someday to design its
"keyboard" into such products as Samsung's just-released
projector smart phone, which uses any flat surface as a
"monitor." Although not 100-percent certain about the
prospects for their technology - which aims to bridge the
medium-term gap between current smart-phone demand and long-
term solutions, such as voice-recognition software - company
officials say the advantages of production in Mudanjiang
made their operation worthwhile, even against the backdrop
of the economic slowdown. Celluon also has offices in
Beijing and Seoul to carry out patent law, R&D, and
marketing responsibilities.

FORWARD LOOKING - CAPITAL PROJECTS AND THE GOLDEN CORRIDOR
-------------- --------------

10. (SBU) Heilongjiang will take advantage of the central
government's stimulus package by throwing some quick money
at easy-to-realize transportation projects. PS Ji described
an initiative to spend RMB 10 billion in three years on
additional freeways. RMB 3 billion will be spent to build
six airports over the next three years, completing airports
in Daqing, Yichun, and Jixi by the end of this year alone.
Further north along the Amur River, airports at Fuyuan,
Jiagedaqi, and Wudalianchi are expected to come online by

2012. Heilongjiang has also received approval from China
Railways to spend another RMB 3 million on an electrified,
interurban railway network spanning out from Harbin.


11. (SBU) Mudanjiang has even grander plans that involve
Russian and Korean regional transportation cooperation.
Perhaps emboldened by long-running delays in the Tumen River
Area Development Program (Ref A) or the more recent Tumen-
Tumangang-Khasan accords (Ref B),PS Xu spoke
enthusiastically about a "Golden Corridor" that bypasses
decrepit North Korean railways and inadequate Russian port
facilities further south by connecting Mudanjiang and the
world-class deepwater port Nakhodka. Mudanjiang's only
current port, Dalian, is located over 1700 kilometers away,
while a link through Suifenhe to Nakhodka is only 330
kilometers away. PS Xu said he had just met with officials
from the Busan Port Authority (BPA) who plan to invest USD
100 million to improve container-handling capabilities at
Nakhodka; Mudanjiang need not contribute anything.


12. (C) (NOTE: PS Xu spoke openly about the fact that the
Russians would not accept a Chinese company to build the
port and that a Korean cut-out was needed to accomplish this
project. He also spoke critically about the Chinese way of
conducting business, tersely joking that the Chinese "do
many things that we do not need to do.")


13. (C) Things seem to be moving quickly on this project as
representatives from BPA, Russian Railways, and the Russian
Far Eastern Transportation Group met with the Mudanjiang
leadership in November 2008 to discuss the construction of
an inland container depot (ICD) at Suifenhe in support of
the Golden Corridor. They met again earlier this month to
sign a deal that plans to break ground in May 2009. With
the Suifenhe ICD and improved facilities at Nakhodka, BPA
expects to process an additional 600,000 TEUs (twenty-foot
equivalent units) annually. The only catch is whether the
Russians will ultimately deliver sufficiently reasonable
transportation tariffs that would justify the link.
Mudanjiang and BPA have already agreed upon a cost structure
for overland transport to Nakhodka and marine transport from
Nakhodka to Busan, but the Russians have yet to come up with
a concrete commitment. PS Xu admits that Russian
intransigence could eventually make the entire project
unviable - similar to the fate of the languishing Suifenhe
duty-free, cross-border trade zone (Ref C). There, the
Chinese side is complete but the Russians seem to have no
desire to move forward.

COMMENT
--------------

14. (SBU) Despite protestations that the structure of the
economy has largely insulated its people from the economic
turbulence further south, there are some mixed signs.
According to the ranking of all China's regions, as sampled
by the State Statistical Bureau, during the first three
quarters of 2008, Heilongjiang was next to last in terms of
average wages and benefits paid to urban workers at state-
owned enterprises and collectives (some USD 2800 and USD
1600 per year, respectively.) However, wages and benefits
at private and foreign-invested enterprises (about USD 3200
per year) were above the median for all regions, and real
rates of growth were above the national average for all
three categories. Per capita cash income for farming
households ranked seventh in the nation, just ahead of
neighboring Jilin Province, but net of expenditures, the
cash balances were negative for both provinces (some 6-7
percent of income.) Our interlocutors sighed, moreover,
when they related that Heilongjiang overbuilt its power-
generation needs by some 40 percent without any way to
export this oversupply. This statistic alone may keenly
demonstrate how isolated Heilongjiang is from the rest of
the country and how much scope there is for development.
END COMMENT.

WICKMAN