CHINA'S INCREASING COMMERCIAL TIES WITH VENEZUELA

C O N F I D E N T I A L CARACAS 001807

SIPDIS


NSC FOR TSHANNON AND CBARTON
HQ USSOUTHCOM ALSO FOR POLAD

E.O. 12958: DECL: 03/30/2015
TAGS: ECON PREL ENRG ECPS CH VE
SUBJECT: CHINA'S INCREASING COMMERCIAL TIES WITH VENEZUELA

REF: CARACAS 773

Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 D

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SUMMARY
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1. (U) Venezuelan President Hugo Chavez has identified China
as an alternative commercial partner to the "imperialistic"
United States and has moved aggressively to cultivate
Sino-Venezuelan relations. Recent state visits between the
two countries have yielded dozens of agreements; however,
most have been at the "memorandum of understanding" and
"letter of intent" level. Chinese officials concede that,
among Latin American countries, Venezuela's relative
importance to China remains moderate, but the Chinese have
demonstrated a desire to expand the bilateral commercial
relationship. Bilateral commerce has been increasing
rapidly, though from a fairly modest base. The Chinese
continue to increase their investment in Venezuela, primarily
in the energy sector through state-owned enterprises.
Chinese companies are also active competitors to provide
telecommunications equipment to Venezuelan companies and to
Venezuela's new state-owed CVG Telecom and sellling oil field
equipment to state petroleum enterprise PDVSA. Venezuela
would like to sell oil to China, diversifying its markets
away from the U.S. This however is easier said than done.
China appears to view Venezuela in purely economic terms
while politics seems to largely drive Chavez's approach to
the relationship. END SUMMARY

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The Road is Paved With Good Intentions
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2. (U) Visiting China in December 2004, Chavez complimented
China for being a big country without being imperialistic
while criticizing U.S. "imperialism" and referring to
American capitalism as "the road to hell." During this visit
he also affirmed Venezuela's support for China's "one China"
policy with respect to Taiwan. During the visit by Chinese
Vice President Zeng Quinghong to Venezuela in February 2005,
the governments of Venezuela and China signed 19 bilateral
agreements on issues including the opening of 7 new oil
fields to Chinese companies, a grant for $12 million to
Venezuela for unspecified commercial purposes, a $42 million
preferential credit facility to finance Chinese projects,
memoranda of understanding (MOU) covering the oil industry,
aluminum smelting, and an MOU to jointly develop satellites.
As has been seen in other state visits that culminate with a
lengthy signing ceremony, few if any binding contracts were
signed.


3. (U) In April 2005, an additional series of letters of
intent were signed with Chinese enterprise Lang Chao for a
possible joint venture to produce software and computers;
with Haier, China's largest home appliance manufacturer, for
a potential factory in Venezuela, and Shandong Foton Heavy
Industries for the possible local production of farming and
construction equipment.

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China-Venezuela Trade Small, But On The Rise
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4. (C) According to Wan Jian, Commercial Counselor of the
Chinese Embassy in Venezuela, China is working to increase
the level of both trade with and investment in the country.
Jian told econoff that the level of trade with Venezuela --
approximately $1.3 billion in 2004 -- ranks as only the
seventh largest in Latin America behind Brazil, Argentina,
Chile, Mexico, Peru and Panama. (Note: In comparison, Chinese
trade with Venezuela is less than ten percent of that with
Brazil and accounted for about one-tenth of one-percent of
China's global trade in 2004. End Note.) On the investment
side, according to Jian, Venezuela accounts for between 60-70
percent of China's regional investment and is concentrated
primarily in the energy sector. China's energy investments
have been made primarily through the China National Petroleum
Company (CNPC) and a joint-venture with state-owned Bitumenes
del Orinoco (BITOR) (see par. 11).


5. (C) Jian said that he expected the level of

China-Venezuelan trade to continue to accelerate, pointing to
the near doubling of trade from 2003-2004. When asked what
he felt about business conditions in Venezuela, he complained
about the exchange control system and the inefficiencies and
delays caused by Venezuela's foreign exchange control
authority, CADIVI, in repatriating capital. He also pointed
out that Chinese exporters were experiencing significant
delays in payment. This, he said, was because payments could
not be released until goods had been inspected in Venezuela
rather than being paid F.O.B. in the Chinese port of origin.
Jian also confirmed Chinese interest and involvement in
supplying equipment in both the telecommunications and
agricultural equipment sectors.


6. (C) Mimy Mock De Fung, President of the Chinese-Venezuelan
Chamber of Commerce (CAVENCHI),told econoff that Chinese
companies were increasingly looking at Venezuela as a source
of raw materials and a market for Chinese finished goods.
She commented however, that Chinese investment and trade
decisions were made "on the basis of business calculations,"
and not for ideological reasons as appeared to be the case
from the Venezuelan side. She pointed out that the vast
majority of Chinese investment -- about two-thirds -- had
been made by the Chinese state enterprises. She expected,
however that the level of private investment would be
increasing as a result of the trend towards closer
Chinese-Venezuelan relations. (Note: During the visit,
econoff observed construction underway as CAVENCHI was
substantially expanding the size of its office. End Note.)

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Strong Competitors in Public Tenders
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7. (C) In a meeting with emboffs, Lucent Technologies
Venezuela General Manager Raul Socorro said he believed U.S.
companies were being unfairly disadvantaged in GOV
procurement, and cited favoritism shown by the new state
telecommunications enterprise, CVG Telecom, as an example
(see par. 9). He also complained that Chinese firms were
often able to include preferential financing -- supported by
the GOC -- in order to win bids. While he felt that Lucent
could still compete in Venezuela, based on superior
technology and service, Socorro said that Lucent's profit
margins and market share were being quickly eroded. (Note: In
a public forum attended a member of Embassy's commercial
section, Alvin Lezama, Director General of Conatel,
Venezuela's national communications commission, told the
Venezuelan companies in attendance that to be successful,
bidders on government telecommunications projects should have
non-US partners, preferably Chinese, Indian, or French. End
Note.)


8. (C) Cisco Systems Country Manager Juan Carlos Lopez was
more upbeat about the prospects for his country in the face
of Chinese competition. Lopez agreed that the Chinese were
fiercely competitive in the Venezuelan telecommunications
market, were often able to offer excellent terms (including
financing) and were favorably viewed by the GOV. However, he
denied that Cisco was being specifically discriminated
against as a U.S. company and speculated that Cisco's
business model of working through local resellers mitigates
the political pressure. Lopez also identified major
corruption in the procurement process as a hindrance to doing
business and implied that Chinese companies might be behaving
in ways forbidden to U.S. companies by the Foreign Corrupt
Practices Act.


9. (C) Frustrating the efforts of economic observers and
would-be bidders is the fact that government tenders in
Venezuela have become more and more opaque. Recently, CVG
Telecom, a newly formed telecommunications company owned by
the state-owned industrial giant, Corporacion Venezolana de
Guayana (CVG),was reported to be contracting for $150-200
million worth of telecommunications equipment and service.
CVG Telecom plans to use CVG's existing fiber-optic
capabilities and rights of way along with new investments in
mobile telephony to compete eventually with Venezuela's
privately owned telecommunications providers. Venezuelan
representatives of Lucent, which had been pursuing the
contract, were told by CVG contacts that the Chinese firm
Huawei Technologies had been selected for the contract.
Following the ouster of CVG Telecom's President, Hipolido
Izquierdo, Emboffs met with the company's new president,

Julio Duran, who informed them that the contract was still
open and was unaware that Lucent was interested in the
tender. It remains unclear how and when the contract will
ultimately be awarded.

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Petroleum Relations
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10. (U) China, the second largest oil consumer in the world,
has had a presence in the Venezuelan oil business since the
late 1990's when the Chinese National Petroleum Company won
two Operating Service Agreement contracts for the Caracoles
and Intercampo Norte fields. The deals opening seven new oil
fields to Chinese drillers announced in February are in
addition to an operating agreement for 15 fields in eastern
Venezuela that was announced during President Chavez's visit
to China in late 2004. (Note: There is a rumor in the
energy sector in Caracas that, in the flurry of agreements
the GOV signed with countries such as China and India in 2004
and early 2005, the GOV actually signed agreements with two
or more countries that cover substantially the same fields.
End Note.) According to published reports, Chinese companies
have agreed to invest $350 million in oil fields in Venezuela
and $60 million in a natural gas venture.


11. (C) The China National Petroleum Corportion and
Petrochina Fuel also formed a joint venture with Petroleos de
Venezuela's BITOR affiliate in 2001 for the manufacture of
Orimulsion, Venezuela's patented heavy oil/water blend
developed to replace coal in power plants. Since the
December 2002-February 2003 national strike, there has been
an active debate in Venezuela on the value of Orimulsion,
with the current Vice Minister of Energy Bernard Mommer
arguing forcefully that the return on the heavy oil used in
Orimulsion would be greater if it were blended with lighter
oil and sold as crude. PDVSA has in fact announced that
Orimulsion contracts with other nations such as Canada and
Italy will not be renewed upon contract expiration. Despite
this, the "Sinovensa" joint venture has moved ahead and has
started construction of a 7.25 million metric ton per annum
orimulsion manufacturing facility at the Jose Industrial
complex near Puerto La Cruz.


12. (C) A U.S. company executive told econoffs visiting
eastern Venezuela June 7-8 that PDVSA is taking extraordinary
measures to support the continued export of Orimulsion to
China despite its overall desire to withdraw from the
business (leaving customers in Italy and Canada without a
source of supply for power plants specificaly tooled up to
take the fuel). According to this manager, PDVSA employees
have informed members of his staff that as much as 20-25,000
barrels per day of PDVSA's own oil production is being lost
because of the emphasis senior PDVSA management have put on
carrying the orimulsion for China through a pipeline that is
not big enough to carry both the Orimulsion and the
production from all the fields in the area. The U.S. company
manager expressed his increasing concern that his oil will be
squeezed out of the PDVSA pipeline. (Comment: PDVSA seems
to be making a big effort to supply the Chinese despite
persistent reports in the energy sector in eastern Venezuela
that the Chinese are actually running the cheap Orimulsion
through a refinery and using the heavy oil for asphalt. End
comment.)


13. (C) In their recent trip to eastern Venezuela, econoffs
also met with a representative of a U.S. drilling company who
stated that his firm has decided to leave Venezuela in the
face of the competition from Chinese drilling companies.
According to this executive, the presence of Chinese drilling
companies is expanding rapidly, particularly in eastern
Venezuela. The Chinese, he said, are under-bidding other
companies on PDVSA contracts with "rigs made of metal
scraps." The services they provide, he said, do not match
those of other international service companies.


14. (C) Shipments of Venezuelan crude to China (as opposed to
sales of Orimulsion and products such as fuel oil) reportedly
began within the last year with periodic shipments of Boscan
crude from western Venezuela. Public discussion of the idea
of a pipeline through Colombia or Panama to carry Venezuelan
crude to a Pacific port for shipment to China has also
increased in the past year. The GOV has repeatedly claimed
that crude shipments to China would come from increases in

production rather than any reallocation of current supply
commitments. This claim, however, runs contrary to reports
that GOV is actively working through oil traders to divert
shipments to non-US buyers in addition to systematically
replacing supply contracts with US firms with contracts with
firms from India and China as they expire. These moves are
being pursued despite the substantial per barrel discount
that Venezuela reportedly has to offer in order to offset
increased transportation costs to ship oil to China rather
than the U.S. (see reftel).

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Military Relations - No Big Sales Yet
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15. (C) Despite talk of closer military ties between China
and Venezuela, there appears to be little evidence of
progress in that direction. For the first time, the entire
graduating class of Venezuela's war college, some 70
officers, were invited to a two-week orientation in China.
In addition, there have been unconfirmed rumors that the
Venezuelans have been pursuing the purchase of military
radars from China, and the two countries have been discussing
a Venezuelan purchase of a communications satellite, though
it is not known if it would be for civilian or military
purposes.

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Comment
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16. (C) As part of his campaign to create a "multi-polar
world" to diminish U.S. power, Venezuelan President Hugo
Chavez has been working to draw Venezuela closer to countries
such as Brazil, Russia, China, and Iran which he sees as
antipathetic to or in competition with U.S. interests. The
level of bilateral trade and investment is low, but it does
provide China with a destination for Chinese investment and a
source of raw materials including oil and industrial metals,
possibily at preferential prices. President Chavez for his
part gets to claim another "ally" in his fight against the
neo-liberal imperialism of the U.S. and can pursue his
economically questionable policy of oil sales diversion away
from the U.S. What distinguishes the China relationship from
other Venezuelan bilateral relationships somewhat is the
ideological rhetoric gushing from Caracas. President Chavez
has gone out of his way to declare himself a Maoist, a 21st
century socialist and has gone as far as to publicly claim
that Venezuelan national hero Simon Bolivar and Mao Tse Tung
would almost certainly have been friends, and that Bolivar
would no doubt have been a socialist had he lived a few
decades longer. From our perspective, the Venezuelans appear
to be the primary boosters of the relationship, and sources
tell us that the Chinese are happy to come along for the ride
as long as the relationship makeQeconomic sense. For the
time being, the relationship works -- primed both by
convenience and a healthy dose of Venezuelan concessions.
Brownfield


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2005CARACA01807 - CONFIDENTIAL