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O 151024Z MAR 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5728
INFO RUEHOO/CHINA POSTS COLLECTIVE
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C O N F I D E N T I A L SECTION 01 OF 04 BEIJING 001760 

SIPDIS 

SIPDIS 

EO 12958 DECL: 03/15/2032 
TAGS PGOV, PREL, ECON, SOCI, CH 

SUBJECT: FIFTH GENERATION STAR LI KEQIANG DISCUSSES 
DOMESTIC CHALLENGES, TRADE RELATIONS WITH AMBASSADOR
REF: SHENYANG 26

Classified By: Ambassador Clark T. Randt, Jr. Reasons 1.4 (b) and (d).

Summary
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¶1. (C) Liaoning Party Secretary Li Keqiang, a front runner for elevation to the Politburo this fall and potential successor to President Hu Jintao in 2012, described the challenges he faces as a provincial leader to the Ambassador over dinner on March 12. Engaging and well-informed, Li related that despite brisk economic growth, Liaoning’s income gaps remain severe. To create a “harmonious society,” he has tried to guarantee minimum living standards by providing new housing to the destitute and a job to every household. The public is dissatisfied with education, health care and housing, but it is corruption that truly incenses them. On foreign policy, Li said United States-China relations are developing smoothly, welcoming bilateral cooperation on North Korea. Turning to trade relations, Li claimed that China is boosting imports, domestic consumption and social safety nets both to balance trade and further its own development. Concerned by protectionist sentiment in the United States and what he described as a lack of understanding about China in Congress, Li passionately argued in defense of free trade and said more Members of Congress should visit the PRC. Regarding China’s ongoing National People’s Congress session, Li judged that passage of the draft property law and promoting programs to address social issues are most important. End Summary.

NPC: Focus on Property Law, Social Issues
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¶2. (C) Liaoning Party Secretary Li Keqiang, identified as a potential “fifth generation” leader and possible successor to President Hu Jintao, joined the Ambassador for dinner at his residence on March 12. In town for the ongoing National People’s Congress (NPC) session, Li judged the draft property law and social issues to be the most important subjects for the Liaoning delegation. The property law, which will impact the foundation of China’s economic system, demonstrates just how far China has come in 30 years of reform. Most Deputies believe the bill’s passage is “assured,” given the nearly unanimous support it received from the NPC Standing Committee just prior to the opening of this year’s legislative session.  Liaoning is also focused on Premier Wen Jiabao’s commitment to deal with social issues, particularly those designed to raise living standards and better the people’s livelihood.

The Economy: Not By the Numbers
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¶3. (C) Describing some of the challenges he faces as Party Secretary, Li related that despite brisk economic growth of
SIPDIS 12.8 percent in 2006, Liaoning’s income gaps remain severe. Liaoning ranks among the top 10 Chinese provinces in terms of per capita GDP, yet the number of its urban residents on welfare is among the highest in the country and average urban disposable income is below the national average. By contrast, rural disposable incomes are above the national average. Even so, incomes for Liaoning farmers are only half that of urban residents.

¶4. (C) GDP figures are “man-made” and therefore unreliable, Li said. When evaluating Liaoning’s economy, he focuses on three figures: 
1) electricity consumption, which was up 10 percent in Liaoning last year; 
2) volume of rail cargo, which is fairly accurate because fees are charged for each unit of weight; and 
3) amount of loans disbursed, which also tends to be accurate given the interest fees charged. By looking at these three figures, Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are “for reference only,” he said smiling.

Harmonious Society Means Jobs
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¶5. (C) In an attempt to create a “harmonious society” in Liaoning, Li said he has tried to guarantee a minimum standard of living for all residents. For example, the province moved over 1.2 million urban slum dwellers into new, heavily government-subsidized apartments over the past two years. Premier Wen visited Liaoning during this past Chinese New Year Holiday to inspect this program. Although the new apartments provide only 40 to 50 square meters to each family, they are far superior to the slums in which residents previously lived. The Central Government provided a great
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deal of support for this program, with local governments and government-backed loans providing the most of the funding. In exchange for a modest amount of money, residents receive the deed to their new homes at a small fraction of the market rate. Li said he also guaranteed that every Liaoning household would have at least one member with a job. In 2005, there were 240,000 provincial households in which not a single family member had work. Today there are none, he proudly declared. Li’s standing promise is that his government will find a job for every “unemployed household” within 20 days of notification.

Governance: Corruption, Public Feedback
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¶6. (C) Although Liaoning residents are dissatisfied with education, health care and housing issues, it is corruption that makes them most angry, Li told the Ambassador. The most effective way to combat official graft is to create a transparent system of rules and adequate supervision that leaves corrupt officials no room to act. This is the method Liaoning employed to manage the vast sums spent on its massive slum relocation project. Once a corrupt official is discovered, he is promptly punished, which provides a good lesson to bureaucrats taking up new posts. The province has also increased efforts to “strictly educate” public officials, Li said. Part of this education involves prison tours that force bureaucrats to visit incarcerated officials convicted of graft in order to witness first hand the consequences of malfeasance.

¶7. (C) To learn what is on the minds of the public, Li said he uses a variety of channels, official and unofficial. These include investigative reports, Li’s own inspection tours of grassroots areas, media reporting and letters addressed directly to him. Sometimes, Li uses friends who are not from Liaoning to gather information about the province that he cannot obtain himself. Finally, there are the “official” channels of the Provincial People’s Congress and Political Consultative Conference. Arguing that these official channels are “highly consultative,” Li warned against assuming that People’s Congress deliberations are rigged. Although every bill is usually passed with an incredibly high number of “yes” votes, he asserted that people don’t see the behind-the-scenes reviews and feedback sessions that result in the original drafts of bills being altered substantially before passage.

Rule of Law
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¶8. (C) China has made great progress in improving its legal system and implementing the rule of law, said Li, who has a degree in law. On the other hand, given that the rule of law has a short history in China, the country still has a long way to go in “perfecting” its legal system. The concept of ruling the country according to law is increasingly becoming rooted in the minds of the people, and there is a recognition that relying on the law allows the government to do its work better and more efficiently. At the same time, the government must cope with the challenges of implementing and following the laws passed by the people’s congresses.

Education
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¶9. (C) Education is crucial for China’s continued development, Li said. The most important task is to increase access to compulsory education. Although all Chinese children are supposed to receive at least nine years of schooling, many do not. Even nine years of education is insufficient, Li said, hoping that in the long term this could be extended to 10 or 12 years. This year’s NPC Government Work Report contains two key measures on education. The first provides government subsidies covering tuition for poor students, especially in rural areas. The second gives totally free schooling to those students majoring in education. Referring to Deng Xiaoping’s appeal to make Chinese education open to the world, to modernization and to the future, Li said he believes China has already succeeded in doing so.

Bilateral Relations, Six-Party Talks
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¶10. (C) United States-China relations are “developing smoothly,” Li said, which benefits both of our countries and the entire world. He agreed with the Ambassador’s assessment that our common interests have led to increased cooperation in a number of areas, including on North Korea. Li welcomed the progress achieved in the last round of Six-Party Talks,
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noting that, above all, Liaoning residents hope to see a stable and peaceful Korean Peninsula. Li alleged that he had witnessed no changes in flows of North Koreans into Liaoning.  He believed, however, that the DPRK has been “strictly controlling” the border.

Trade Relations: Boosting Domestic Spending
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¶11. (C) The Ambassador raised the large trade imbalance between the United States and China, explaining that one of our priorities in the Strategic Economic Dialogue (SED) is to encourage Chinese consumers to spend more by addressing deficiencies in China’s social safety net and healthcare systems that result in large precautionary savings. In reply, Li said China is committed to boosting domestic consumption and imports, as well as further developing its pension, welfare and healthcare systems. China is doing this, in part, because of its international commitments, including under the WTO. But doing so also clearly promotes China’s further development in a globalized economy.

¶12. (C) China’s low consumption rates are due, in part, to the Chinese people’s tradition of frugality and China’s overall low level of development, Li claimed. As China continues to develop and incomes rise, consumption rates will naturally increase. In the past few years, increases in domestic consumption have outstripped GDP growth, a trend that will continue. As Chinese companies continue to grow, they will become strong enough to buy expensive high-end products from overseas, something that is already happening, which was “unthinkable” only 10 years ago. China is also making progress in improving its social safety nets. In Liaoning, all residents are covered under pension and social security systems. The problem is that these systems’ standards remain low and must continue to be raised, Li said.

Free Trade vs. Protectionism
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¶13. (C) Referring to perceived increased protectionist sentiment on Capitol Hill, Li said one problem is that Members of Congress who have never visited China do not understand the great changes that have taken place here over the past 30 years. The best solution is to invite more Members to visit. The Ambassador, while emphasizing American support for free trade, told Li that concern in the United States over the trade deficit and jobs is real. There is a widespread perception in the United States that China is not playing fair, especially with respect to the RMB exchange rate, IPR protection and market access, particularly for services.

¶14. (C) Changing tack, Li launched into a spirited defense of free trade. If we resort to protectionism, we will all lose, he averred. Both China and the United States can make protectionist arguments in virtually every sector. Even in the financial sector, China could use the excuse of protecting jobs, not financial security, to lobby against market opening, given the millions of workers in state-owned banks. The same holds true for the service, distribution and retail sectors. But we cannot resort to protectionism, he emphasized. If China does not open its financial sector, its financial industry will lose competitiveness and the public will be dissatisfied. Moreover, China must play by WTO rules, which requires market opening. Similarly, if Chinese products are barred from the United States, the standard of living for most Americans will be compromised and they will be dissatisfied. “We are in the process of opening up,” Li said. Congress should keep this in mind when looking at China, he asserted, reiterating that the PRC is boosting both domestic consumption and imports.

Intel Investment in Dalian
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¶15. (C) Regarding export licenses for Intel’s possible investment in Dalian (see reftel), the Ambassador told Li that Intel is working closely with the appropriate government agencies to ensure full compliance with United States export-control requirements. Li was grateful for the information, stressing how important major multinational corporations like Intel are to Liaoning’s future development.  More than just the capital invested and the chips produced, Liaoning hopes to learn from Intel’s advanced management techniques. There will be absolutely no obstacles to the investment on the Chinese side, as the Central Government has already approved the investment. Intel’s president will visit China later this month, and if all goes well, there may be a signing ceremony to finalize the deal, Li said.
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Bio Info
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¶16. (C) Li Keqiang remains one of the front runners to ascend to the Politburo this fall, perhaps even to the Politburo Standing Committee, and to succeed Hu Jintao in 2012. With the Ambassador, Li was engaging and well-informed on a wide range of issues. He displayed a good sense of humor and appeared relaxed and confident throughout. Though coy about his hobbies and interests, Li said he likes to “walk,” noting that he builds walking into his work schedule and implying that he has little time for other exercise. Although he spoke almost entirely in Chinese, Li clearly understood some English, correcting his interpreter on several occasions. Li expressed an interest in visiting the United States, noting that his last trip was six years ago, prior to the September 11 attacks. On several previous occasions, he traveled widely in the United States, visiting both coasts and the Midwest. Li said he particularly liked Oklahoma. RANDT