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