KENYA'S PRESIDENT GOES TO CHINA - AND WHAT IT MEANS

UNCLAS SECTION 01 OF 06 NAIROBI 003600

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EAID EAIR ECIN ECON EFIN ELAB EINV ETRD PREL CH KE
SUBJECT: KENYA'S PRESIDENT GOES TO CHINA - AND WHAT IT MEANS

REF: A. STATE 153199

B. NAIROBI 3072

Sensitive-but-unclassified. Not for release outside USG
channels.


1. (SBU) Summary: Kenyan President Mwai Kibaki's August
state visit to China was clearly aimed at further developing
a bilateral economic relationship which, while small, is
growing rapidly. Trade and tourism are especially robust.
Investment by Chinese firms in Kenya has yielded
less-spectacular results, partly because it doesn't make much
economic sense for Chinese manufacturers to produce in Kenya
what they can more cheaply export from home. In part as a
result, bilateral trade relations are heavily skewed in
China's favor, and there is a great deal of fear and concern
in Kenya about China's competitiveness, especially in Kenya's
once-fledgling garment sector. While much of the bilateral
China-Kenya economic relationship is private sector-driven,
the Chinese government also greases the skids by providing
grants and concessional loans tied to the use of Chinese
firms, often for the completion of large infrastructure
projects in roads, power, and telecommunications. Kenya
does not offer a significant source of natural resources to
China, but a Chinese firm is reportedly heavily involved in a
new project to mine titanium in Kenya -- and China is
interested in seeing South Sudan oil piped to the Kenyan
coast. While some may see the Kibaki visit as part of an
effort to curry favor with Beijing at the West's expense, we
see it in more prosaic terms: a poor country in Africa
recognizing the need to build ties to a rising economic
powerhouse in Asia. End summary.


2. (U) Kenyan President Mwai Kibaki made a state visit to
China (Shanghai, Shenzhen, and Beijing) August 16-21 in what
one local columnist dubbed "probably the most important
foreign visit of the Kibaki presidency...More important,
even, than the 2003 visit to the United States." Joining
Kibaki were six ministers (Foreign Affairs, Finance,
Information and Communication, Tourism, Land, and Local
Government) and a delegation of lesser officials and
state-owned enterprise executives. Deliverables from the
visit, which Post will continue in the weeks ahead to try to
learn more about and confirm, include the following:

-- Bilateral framework agreement under which the Chinese
government will provide KSh 600 million ($8 million) in
grants to supplement an earlier grant of $6.7 million for
road rehabilitation in Nairobi. The agreement also provides
for a concessional loan of KSh 2 billion ($26 million) for
improvements in Kenya's electricity distribution system.

-- Bilateral air services agreement that will grant Kenya
Airways landing rights in Guangzhou beginning in October, and
thereafter to other Chinese cities.

-- Bilateral agreement on cooperation in radio broadcasting
between the Ministry of Information and Tourism and China's
State Administration of Radio, Film and Television.

-- The official launch of the Kenya Tourism Board's
MagicalKenya website for the Chinese market.

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Trade: Growing Quickly From a Low Base
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3. (U) The Kibaki visit to China appears clearly aimed at
giving added impetus to an economic relationship that has
been growing rapidly in the past two years, albeit from a low
base. Looking first at trade, media reports and the PRC's
Nairobi-based Econ/Commercial Counselor cite a 40% growth in
bilateral trade - perhaps based on Chinese statistics.
However, GOK statistics show that total bilateral
Kenya-Mainland China trade was up just over 60% in 2004 to
KSh 13.7 billion ($183 million),after growing by nearly a
third in 2003. Either way, this trade is skewed
overwhelmingly in China's favor: According to Kenyan figures,
Kenya exported only $12 million to the PRC in 2004 against
imports of $170.5 million. For Kenya, however, this trade
still amounts to only a small proportion of its total trade
with the rest of the world: 2.4% in 2004, but this is up from
1.8% in 2004 and 1.5% in 2003. By comparison, total trade
with the EU accounted for nearly a quarter of Kenya's
worldwide total in 2004; trade with fellow COMESA countries
accounted for 15.4%. The U.S. accounted for around 4% of
Kenya's total trade in 2004, down from 5.1% and 5.7% in 2003
and 2002 respectively.


4. (U) Hard data on the composition of trade is hard to come
by, but according to China's Econ/Commercial Counselor, most
Chinese exports are "light industrial" consumer goods. A
dated Chinese government website lists household appliances,
industrial and agricultural tools, textiles, building
materials, and drugs as the primary Chinese exports to Kenya.
Kenya in turn exports tea, coffee and leather goods to
China.


5. (U) For Kenya, an emerging services export to China is
tourism. In fact, one of the immediate aims of the Kibaki
visit was to promote Chinese tourism in Kenya, both as a
means to boost tourist export revenues, and to diversify
Kenya's tourist industry away from dependence on Europe (the
UK, Germany, and Italy provided over 40% of Kenya's arrivals
in 2004) and the United States. The Chinese government's
decision last year to include Kenya on its list of approved
tourist destinations led in part to the nearly 85% increase
in arrivals from China in 2004. By comparison, arrivals from
the UK were up 36% and from the U.S., 41%. That said, China
still ranks only 18th on the list of top tourist origin
countries for Kenya, accounting for just 1.5% of all visitors
to Kenya in 2004. In comparison, the UK, at nearly 20%, was
first; the U.S. was third with 9.4% - by far the best showing
among non-European countries. Chinese tourism in Kenya is
widely expected to continue to expand at a rapid pace in 2005
and beyond, thanks to better air connections in the wake of
the air services agreement, better tourism marketing by Kenya
in the Far East, and greater prosperity in China generally.

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Foreign Direct Investment: Chinese Find It Easier to Trade
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6. (SBU) Kibaki's visit was aimed as much at luring Chinese
businesses to Kenya as promoting Kenyan exports to the Middle
Kingdom. Without offering details, China's Econ/Commercial
Counselor believes total Chinese foreign direct investment
(FDI) in Kenya exceeds $100 million. This is higher than, but
on the same order of magnitude as the $72 million in Chinese
FDI officially registered at the Kenya Investment Promotion
Center. The latter is spread across 109 Chinese companies
which have since 1990 provided 9,500 jobs. These enterprises
represent a fairly broad cross-section of sectors, including
the importation and processing of food products, the export
of coffee, travel and tourism, restaurants and other
wholesale and retail food establishments, engineering,
telecommunications, and, obviously, general importing and
distribution.


7. (U) Definitive up-to-date data on total FDI in Kenya are
hard to come by, but it is likely that total Chinese FDI
accounts for only a small fraction of Kenya's total stock of
FDI, and recent FDI flows from the PRC have not been growing
at nearly the same pace as trade. Of total Chinese FDI
registered by the Kenya Investment Promotion Center, more
than half ($37.4 million) was invested in the five-year
period between 1995 and 1999. The longer period from 2000 up
to the present has seen less -- an additional $30 million --
and flows in 2004 were actually more than a third lower than
in 2003. Chinese FDI in 2005 is likely to be lower still
based on the current trend.


8. (SBU) Most observers chalk up the relatively slow pace
of Chinese investment in Kenya to the fact that much of the
investment is in small businesses which are not capital
intensive, including in particular import and distribution
firms. It apparently doesn't pay for Chinese firms to invest
in large, capital and/or labor intensive manufacturing
businesses in Kenya, given the economy's high costs and the
relatively small size of the market. Rather, it is far
easier and more cost effective in most sectors for China to
simply export consumer and heavy manufactured goods. That
said, a Chinese firm, AUCMA, recently established a TV and
home appliance assembly plant near Nairobi, and in June 2005,
Chinese firm North China Grid announced its intention to
invest in a $3 million venture in Kenya that will manufacture
concrete poles for power lines. It was reported by the media
as "the biggest single investment by a Chinese company in
Kenya."
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Grants and Assistance: Strings Attached
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9. (SBU) It is apparent that while much of the expansion in
the Kenya-PRC economic relationship is nominally driven by
private sector actors, this drive is in turn pushed along by
the kind of assistance and concessional financing flows that
formed the centerpiece of the August 16-21 state visit to the
PRC. While hard and fast numbers are difficult to come by,
Kenya's total current debt stock to Chinese sources was
around $30 million at the end of 2004, according to Kenya's
Ministry of Finance. This money, while constituting only a
small fraction of Kenya's total external debt of around $5.6
billion, gives Chinese firms an outright lock in winning key
road construction and other infrastructure-related contracts.
The Chinese Econ/Commercial Counselor confirmed to Econ
Counselor that all Chinese grants and concessional credits
are channeled through China's Ministry of Commerce, and that
all are conditional on the use of Chinese firms in carrying
out the projects. For large infrastructure projects, he
said, Chinese firms typically subcontract to local companies,
and have long since abandoned the use of Chinese laborers for
such projects because of cost considerations.

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The Big Three: Roads, Power, and Telecom
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10. (SBU) When looking at trade, aid, and investment
holistically in the context of the overall bilateral economic
relationship, China appears to have comparative advantages in
areas which also happen to correspond to one of Kenya's
greatest needs: namely infrastructure, and in particular,
roads, power, and telecommunications. The PRC has help fund
several road projects over the past several years, and it is
no coincidence that the recent $14.7 million in PRC grants
announced during the Kibaki visit to China are earmarked for
roads in Nairobi, doubtless using Chinese engineering and
construction firms. The $24 million concessional loan
extended by Beijing during Kibaki's visit in turn is
earmarked for upgrades in the power grid. The loan dovetails
with private sector activities: North China Grid's local rep
has been quoted in the international press as saying that his
company's manufacture of concrete poles for power lines is
just the beginning, and that the company has big plans to
also supply power stations, substations, and power lines,
alongside of which it hopes to lay fiber optic lines by
winning government tenders.


11. (U) In the telecom arena, Kibaki is reported to have
signed an agreement during his visit with Huawei Technologies
of Shenzhen under which Huawei will supply a wireless
communications system linking all district government offices
across Kenya. Costs and financing details are unknown at
this time. Kibaki also reportedly noted during his visit to
Shenzhen that the GOK is negotiating with China's Eximbank
for a KSh 1.8 billion ($24 million) soft loan to finance the
upgrading of Kenya's rural phone network. Huawei has
already supplied equipment and technical assistance to
Kenya's monopoly fixed line provider, Telkom Kenya, as has
Huawei's domestic Chinese rival, ZTE Corporation. In recent
visits to meet with Telkom Kenya management, Econ Counselor
has twice bumped into ZTE's local rep, a Shanghai native.

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Natural Resources: Scooping Up Titanium? Oil Too?
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12. (SBU) Much is made in the Western press of China's
relentless pursuit of Africa's natural resources. Beyond its
natural beauty and wildlife resources and the recent
revelation that an Australian company will be drilling
exploratory wells off the Kenyan coast, Kenya lacks
significant natural resource deposits. But where there are
any possibilities, Chinese interests are present. Earlier in
2005, Canadian mining giant Tiomin Resources was granted a
license to strip mine for titanium in Kenya's Kwale District
under terms which were not disclosed. The deal, which took
eight years to negotiate, has been described in the press as
one of the largest single foreign investments in Kenya. In
the midst of Kibaki's visit to China, representatives from
China's Jianchuan Group visited Kenya. Their visit,
apparently hosted by Tiomin, included a visit to the office
of Minister for the Environment and Natural Resources, where
they were exhorted by the Minister to "take interest" in "the
other minerals in this country". Press coverage reported
that Jianchuan had signed an MOU with Tiomin declaring the
former's intent to buy the titanium mined in Kwale. Again,
terms and details are not transparent at this time, but
China's Econ/Commercial Counselor told Econ Counselor in late
August that Jianchuan is also prepared to make a "very large"
investment in the Tiomin project if and when it is confirmed
that the mine has commercially viable deposits.


13. (SBU) Private sector and government officials have also
noted keen Chinese interest in development of oil pipelines
from Southern Sudan (now that a peace agreement has been
signed there) to the Kenyan Indian Ocean port of Mombasa.
Chinese companies are said to be heavily involved in not only
bids to build the necessary infrastructure but in buying the
oil exported. Kibaki, during his visit to China, was quoted
in the press as calling for Chinese assistance and
participation in precisely this area.

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Corruption: Does China Help or Hurt?
--------------


14. (SBU) The nature of corrupt business practices makes it
difficult to say with any certainty that Chinese firms more
readily pay bribes and engage in other corrupt activities as
part of their normal business practices in Kenya. The rumor
mill places a Chinese firm at the heart of the July 2004
last-minute cancellation of the award for a second landline
phone license. As the story goes, when it became clear that
the consortium which included both Chinese interests and
relatives of President Kibaki would not win the tender, it
intervened with Minister of Communications Raphael Tuju (who
joined Kibaki on his trip to China) to have the tender
cancelled. Tuju never sufficiently explained his actions,
and probably exceeded his legal authority in intervening in
the tender process. In April 2004, Chinese firm ZPMC won a
controversial tender to supply eight gantry cranes worth $20
million to the port of Mombasa. The tender had twice been
postponed by Cabinet ministers believed to have interests in
companies competing in the tender. The good news, at least,
is that ZPMC delivered the cranes as promised.


15. (SBU) Such allegations of corruption are difficult to
prove, but without the equivalent of the Foreign Corrupt
Practices Act, and in the context of pervasive corruption at
all levels of Kenyan government and society, it seems
inconceivable that Chinese firms don't contribute actively to
the corruption problem in Kenya. Whether they do so more
readily than companies from other countries is a matter of
debate. On another level, however, the perception that
Chinese firms and the Chinese government are willing to do
business in Kenya without any strings attached is widespread,
and this undermines in small ways efforts on the part of
Western donors and domestic reformers to reduce corruption
and improve governance. Government spokesman Alfred Mutua
summed up the attitude of some in the GOK when he commented
to the press recently: "The Chinese do not peg their economic
activity or aid to political conditions...You never hear the
Chinese saying that they will not finish a project because
the government has not done enough to tackle corruption. If
they are going to build a road, then it will be built."

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China: Also a Scary Competitor
--------------


16. (SBU) Despite the generally positive media blitz
surrounding the Kibaki visit to China, the growing economic
relationship between the two countries is clearly a mixed
blessing for Kenya, and many Kenyans know it. First, there
is recognition on the part of some that China's willingness
to play ball without concern for governance and corruption
issues is in fact a problem, not an advantage. As one local
columnist put it, China's "non-interference foreign policy
does not encourage financial probity, political reform, and
observance of human rights. Its only condition is support
for the 'One China' principle."


17. (SBU) Of greater concern to the average Kenyan, and to
the GOK, however, is China's competitiveness and what it
means for Kenya's own industries. The bilateral trade
deficit is symptomatic of this problem, and there is
considerable acrimony within the Kenyan business community
toward the growing presence of Chinese imports in Kenya,
which many see as a direct threat to their viability, both in
the domestic market and overseas. Even with duty paid, many
Chinese goods, including textiles, garments, batteries, and
electrical components, beat comparable Kenyan products on
price.


18. (SBU) Nowhere do Kenyan fears of being overrun by more
efficient Chinese companies in an increasingly globalized
economy crystallize more clearly than in the garment
industry. As noted ref B, Kenya's garment sector, which
sprang to life over the past several years in large part due
to preferences under the U.S. Africa Growth and Opportunity
Act (AGOA),is now under threat from a combination of high
costs at home, and greater Chinese competitiveness worldwide
following the expiration of global apparel quotas under the
Multi-Fiber Arrangement in January, 2005. Kenya's apparel
workers are both more expensive than their Chinese
counterparts, while also being less productive. As a result,
as Chinese goods increasingly dominate markets in the U.S.
and elsewhere, Kenya's hard-won AGOA gains are slipping away.
As detailed in ref B, at least seven textile companies and
over 11,000 jobs have been lost in the sector just since the
beginning of 2005.


19. (SBU) Some Kenyan business leaders are publicly
questioning China,s global trade posture and its impact on
Kenya,s export opportunities. GOK officials echo these
concerns, but to date, mostly in private. At a June 2005
meeting with members of the Common Market for Eastern and
Southern Africa (COMESA),discussions centered primarily on
figuring out ways of installing safeguard measures against
China,s deluge of cheap exports to the continent. Kenyan
business interests as well as other COMESA members took aim
at China for its alleged unfair trade practices. While
there is also much discussion about the local impact of
"substandard and counterfeit" goods coming in from China, the
fact remains that even legitimate imports undercut local
products on price in many instances. According to Elijah
Manyara, Deputy Director for External Trade and the Ministry
of Trade and Industry, Kenya has requested WTO anti-dumping
consultations regarding Chinese exports of clothing and
dry-cell batteries. A previous anti-dumping notification on
dry-cells has expired, but, according to Manyara, Kenya is
closely watching the situation and "keeping its options
open."

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Comment
--------------


20. (SBU) The Kibaki visit is seen by some observers as more
than just an attempt to build a better economic relationship
with a rising powerhouse in Asia. Some, including doubtless
certain of Kenya's political leaders, see it in more
strategic terms - as part of a policy to diversify Kenya's
interests and build ties to Asia,s tiger economies, to
distance Kenya from a pestering, imperialistic West
(including the United States),and to play the West and China
off of each other for Kenya's gain. We don't see Kenya's
growing economic relationship in quite such Machiavellian
terms, and do not believe we should take any such bait. In
some respects (e.g., China's efforts to improve Kenya's
infrastructure),our interests and those of Kenya and China
clearly intersect. In other areas, they don't. China's
assistance, given without reference to corruption concerns,
for example, make it incrementally harder for Western donors
to maintain pressure on the Kenyan leadership for improved
governance. But at the end of the day, Kenya's economic and
assistance ties to China, while growing rapidly, still remain
peripheral compared to its much older, deeper, and broader
ties to the region, to Europe, and to the U.S. These latter
ties are also strong and growing, and we find it perfectly
natural, indeed unavoidable, for Kenya to simultaneously
reach out to China for help given the PRC's rising political
and economic stature in the world.
BELLAMY