CHINESE ACTIVITY IN HONDURAS

S E C R E T SECTION 01 OF 03 TEGUCIGALPA 001833

SIPDIS

NOFORN

STATE FOR EAP/CM KLEE, WHA/PPC JBISCHOFF, WHA/EPSC
LGUMBINER, WHA/CEN

E.O. 12958: DECL: 09/06/2015
TAGS: ETRD ECON PGOV EAGR ELAB CH TW HO
SUBJECT: CHINESE ACTIVITY IN HONDURAS

REF: SECSTATE 138041

Classified By: CHARGE D'AFFAIRS JAMES G. WILLIARD A.I. FOR REASONS 1.4
(B) AND (D).


1. (C) Summary: This cable is a response to reftel request
for updates on Chinese activity in Latin America and the
Caribbean. Honduras has no significant public or private
sector ties to the People,s Republic of China (PRC). Data
indicate a limited but growing trade relationship between
Honduras and China. Honduran business community and public
opinion reflect great concern regarding the increasing influx
of Chinese goods on the Honduran market, which could displace
locally made products. In addition, the vitally important
maquila sector faces ongoing price competition from the PRC
in apparel and textile sales to the United States, and fears
that Chinese competition will alter the Honduran industry in
the near future. The PRC does not have diplomatic relations
with Honduras, and has no military to military contact. End
Summary.

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Economic Issues
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2. (U) Honduras has a growing trade deficit with China.
China represents a small portion of total Honduran exports
and imports; however, Honduras has seen a marked increase in
Chinese imports over the past year and a half. In the first
five months of 2005, total imports from Honduras are up 23
percent over 2005, but total Chinese imports represent 3
percent of all imports.


3. (U) According to Honduran Secretary for Commerce and
Industry (SIC) in 2003, total Honduran exports to China
totaled only USD 1.9 million. (Note: Post has requested
2004 and will forward data as soon as it becomes available.
End Note.) Silver was Honduras, number one export to China
(USD 1.3 million),followed by aluminum (USD 333,677). In
that same year, Honduras imported USD 28.8 million in Chinese
goods and services. Available data doesn,t clearly break
down which products were imported, with USD 15.9 million in
imports classified as &other8 (likely consumer products).
Of the remaining imported products, Honduras bought USD 1.2
million in dried fish, USD 1.2 million in mussels and
shellfish, and USD 1.1 million in fresh cheese from China.


4. (U) The PRC Xinhua News Agency reports total 2004
Honduran imports of Chinese goods as USD 123 million. In the
first 5 months of 2005, this amount has increased by 23
percent over the first 5 months of 2004. Meanwhile, Honduran
exports to China in all of 2004 totaled USD 11.7 million,
while already in the first five months of 2005 total exports
have increased by 173 percent to USD 10.8 million. Rebecca
Reyes, Director of External Relations at SIC, credits the
increase in imports nearly entirely to increases in consumer
goods imports.


5. (U) While total Honduran imports from the PRC are
increasing quickly, they represented only 3 percent of total
imports in 2004. In comparison, Honduras imported USD 1.358
billion (35 percent) from the United States. (Note: This
figure excludes inputs for re-export by the maquila sector,
which represent another half a billion dollars in U.S. goods
exported to Honduras. As technically offshore entities,
these businesses do not officially import goods, and the
value added from maquila production is booked in the
"services" account. End Note.) Post anticipates an
increased presence of Chinese goods in the Honduran
marketplace, but current volume is small.

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Public Opinion
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6. (U) In a series of roundtable discussions with Chambers
of Commerce members and executives around Honduras, EconOff
noted significant concern within the business community about
the increasing influx of Chinese goods to the Honduran
market, which they believe will come to displace locally made
products. Honduran businesses are equally concerned about
market share in their export markets, particularly the U.S.
Industries as varied as tool manufacturers, artisan shop
owners, shrimp farmers, and textile manufacturers cite China
as the number one obstacle to U.S. market penetration. These
fears are exacerbated by U.S. press attention on increased
Chinese influence in the U.S. economy.


7. (SBU) Shrimp farming in the southern city of Choluteca
has grown into one of the largest industries in that region.
However, industry specialists report price decreases on the
international market of one third versus last year, which
they blame on cheaper shrimp produced in China (under what
they say are environmentally detrimental farming practices
and overcrowded ponds). However, one company commented that
while bulk shrimp prices have fallen, value-added shrimp
product prices have remained stable, and this company intends
to expand its workforce in the coming five years by 1,000
employees. This firm has expanded its sales to one U.S.
buyer by branching out from seafood exports into other frozen
foods. By night, this shrimp processor processes jalapeno
peppers. Through diversification and value added production,
the shrimp company expects continued growth, despite
increased competition from China.


8. (U) We have heard similar predictions from Imapro, a
producer of handicrafts, which intends to compete with
quality rather than price in the export market. Industry
leaders are recognizing areas in which they can compete with
China for U.S. market share, and are making adjustments to
foster those niche advantages. For example, "full package"
maquilas expect to compete with China based upon
time-to-market advantages and by offering full-service,
vertically-integrated production to prospective clients.
Most industry representatives expressed doubt, however, about
the continued viability of companies that do not find and
foster these types of economic advantages.

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Investment
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9. (SBU) According to the Honduran Manufacturers Association
(AHM),there are four Chinese-owned manufacturers in
Honduras: Dong Xian Xu, Dragon Maya, Ensambles Industriales,
S.A. (the latter two both joint Honduran-Chinese ventures,
with the Honduran Kattan family owning significant stakes),
and Dragon Head Textiles. According to Angela Castilla,
Director of Promotion at AHM, Dragon Head recently laid off
all its workers except for five administrators, and is
currently looking for new orders. Though dollar values were
not available, Ms. Castilla went on to note that Chinese
companies represent less than 1 percent of all maquila
investment in Honduras. (Note: These figures do not include
Taiwan and Hong Kong, whose investors own 5 and 6 maquilas,
respectively).


10. (SBU) In numerous conversations with maquila owners and
industry executives, China has been the number one hot topic
of conversation, less for its operations in Honduras than for
the anticipation of competition for the U.S. market. Despite
these private concerns, Honduran industry and government
officials remain publicly optimistic that Honduras, industry
will remain competitive on the world stage. Castillo
emphasized that in the first 6 months of 2005, Honduras
remained the third largest supplier of finished textile and
apparel goods to the U.S. market, and the Central Bank of
Honduras predicts the sector will grow 10 percent in 2005.
Conversations with management of several maquilas, who credit
the positive AHM spin to political pressures, were less rosy.
Several commented that while Chinese rivals cannot yet
compete on consistent quality, it is only a matter of time
before the Chinese will make necessary adjustments. One
firm, Grupo Beta, currently employs 5,000 workers, but
anticipates that it will need to halve its workforce in the
next 5 years in order to compete with the Chinese.


11. (U) There is a general consensus, both within the AHM
and among individual firms, that the textile manufacturers
most diversified into &full package8 regimes are the ones
best poised to compete with increasing Asian competition.
Other &cut and sew8 operations, producing unspecialized
products (and in particular local maquilas that depend on
overflow orders from the larger, foreign-owned maquilas
operating in Honduras) will have a difficult time competing
with China.

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Taiwan
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12. (SBU) Honduras maintains diplomatic relations with the
Republic of Taiwan, and Tegucigalpa maintains a sister city
relationship with Taipei. In a March 29 meeting, then-Vice
Minister of Trade Irving Guerrero (now Minister of Trade)
indicated that the Taiwanese were interested in pursuing a
free trade agreement with Honduras, but Guerrero dismissed
the prospect as being not worth our time., Pointing out
that trade between Honduras and Taiwan is minimal, Guerrero
asked, &What would we gain from a deal with them?8 He went
on to state that only if the Taiwanese offered a significant
Trade Capacity Building program or valuable technology
transfer would an agreement be attractive to Honduras. It
would be not the trade, but the associated aid, that would be
worthwhile.

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Military / Organized Crime Issues
-------------- --


13. (C) There is no military contact and/or assistance
between China and Honduras, nor any Chinese
military-to-military contacts and efforts to sell weapons to
Honduras.


14. (C) Post has information that suggests Greater China
organized crime groups may have a limited presence within the
country.


15. (S/NF) They have been involved in smuggling of PRC
Chinese immigrants into the country for the last 15 years.
According to the Ministry of Government and Justice that
oversees Honduran Immigration, since 2002, 172 foreigners
have been naturalized, including 13 Chinese citizens. Press
reports have estimated that the Chinese have spent
approximately USD 400,000 in Honduras through payoffs to
Immigration officials and other illegal activities.
(Comment: SIMO provided information that the numbers are
much higher. Since January 2002, an estimated 50 illegal
Chinese immigrants per month have entered the country. From
January 2005, those numbers have increased to about 75 - 100
per month. Approximately USD 2,500 in corrupt payments are
made to Immigration for the documentation in each case. Post
believes that a number of these illegal immigrants may have
migrated north across U.S. borders. According to statistics
from the Bureau of Consular Affairs, worldwide since 2001,
approximately 210-215 PRC-born Honduran passport holders have
applied for U.S. visas. End Comment)


16. (C) The evidence suggests that the Chinese organized
crime groups are tied into Chinese restaurants and small
Chinese-owned businesses. Some phony requests for Honduran
visas for Chinese are for workers in these businesses.

Williard
Williard