CHINA/CENTRAL ASIA - URUMQI HIGH LEVEL FORUM

1. (SBU) Summary: At the fourth session of the Central,
West and South Asia Regional Economic Cooperation High-
Level Forum held in Urumqi, Xinjiang on September 2, 2006,
participants effused about the future of regional
cooperation and economic integration. The Executive
Director of the Sunbridge Industrial Group Co. Ltd said
Sunbridge's goal is to take advantage of preferential
policies under consideration for a free trade zone centered
in Horgos as an export processing zone. The President and
CEO of Habib Bank Limited said that Pakistan is building
Gwadar Port and linking it with the Karakorum highway by
road and rail to create a sea access point for trade with
Xinjiang. The Minister for International and Foreign
Economic Relations of Russia's Sverdlosk region noted plans
to hire Chinese labor for Russian construction projects.
In a somewhat discordant note, a representative from the
Turkish Undersecretariat for Foreign Trade noted rising
trade frictions with China. End Summary.



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Kazakhstan - Horgos Land Port Development Begins


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2. (SBU) Ding Jiankui, Executive Director of the Sunbridge
Industrial Group Co. Ltd of Zhejiang, China noted in his
speech that Horgos, the largest land highway port of
western China, is now connected by rail and road to both
Urumqi, capital of northwestern China's Xinjiang Province,
and Yining, 429 miles to the west near the Kazakh border .
Horgos is accessible year round. Ding also noted that
railway construction has started to connect Horgos to
Saliozeke, Kazakhstan.



3. (SBU) Sunbridge's goal, according to Ding, is to take
advantage of preferential policies under consideration for
a free trade zone centered in Horgos as an export
processing zone. The free trade zone will initially
include wholesale and retail outlets. Later the Sunbridge
Group plans to help match Central Asian buyers and Chinese
suppliers of building material equipment, electromechanical
products, automobile parts and other equipment. (Note:
The land port at Horgos is approximately 670km by road from
China's largest western city of Urumqi - an 8 hour drive -
and 378km to Almaty, Kazakhstan. End note.)



4. (SBU) While the land crossing at Horgos is being
developed for formal trade, the vast majority of roads
linking China to Kazakhstan (over forty based on recent
press reporting) are loosely guarded and have no customs or
trade processing facilities. A German businessman who has
lived in Xinjiang for the past ten years commented
privately to Econoff that Kazakh border guards routinely
allow people to cross the border without visas in return
for a few U.S. dollars.



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Pakistan - Link to the Sea and Widen the Karakorum


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5. (SBU) At the Forum, Zakir Mahmood, President and CEO of
Habib Bank Limited (HBL), said that Pakistan is building
Gwadar Port and linking it with the Karakorum highway by
road and rail to create a sea access point for trade with
Xinjiang. He also announced the widening of the Karakorum
Highway to triple its capacity. (Note: The Karakorum runs
from Xinjiang's western city of Kashgar to Islamabad,
Pakistan. A German diplomat at the conference who has
traveled extensively in the region noted that winter

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weather conditions often close the pass for up to six
months per year. End note.)



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Pakistani Habib Bank Buying Stake in Xinjiang UCCB


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6. (SBU) Mahmood told Econoff that Habib Bank is
negotiating to take a 20 percent stake in Urumqi City
Commercial Bank (UCCB). Pricing and due diligence, among
others details, are still under discussion, but Mahmood is
optimistic about the momentum already generated. HBL
opened its Beijing office in December 2005 and within three
months began negotiating for an investment in a Chinese
bank, he noted.



7. (SBU) Mahmood characterized the Chinese as eager to
attract capital and interested in western management
expertise. When asked about potential bookkeeping
irregularities in China, Mahmood noted that UCCB was
willing to use western accounting practices and that HBL
had begun a thorough review of UCCB's loan portfolio.



8. (SBU) HBL Bank had only one year of experience in China
and could not establish its own branches until it has been
in country for two years, Mahmood noted. Capital
requirements are also an issue in establishing a broader
banking presence in China. Since the Pakistani rupee to
USD rate has fluctuated over the past year, HBL wanted to
revalue its assets. This needed to be negotiated with the
Chinese, he added.



9. (U) HBL is planning to expand UCCB's banking network
beyond its current 69 branches in Xinjiang, arrange a
training program in Karachi for UCCB executives, and
establish cooperation with UCCB in international business
and settlement through HBL's 26 country, five continents
international network. Possibilities also exist for
cooperation and assistance in technology improvements,
business development, risk management and internal controls.



10. (U) Mahmood said HBL was established in 1941 and
privatized in 2004 with a 51 percent stake acquired by the
Aga Khan Fund for Economic Development. HBL has assets of
USD 9.1 billion, USD 2.5 billion of which are international
assets. HBL has 1,425 domestic branches, 45 international
branches, three subsidiaries - UK, Hong Kong and Australia,
representational offices in Iran and China and joint
ventures in Nepal, a 20 percent stake, and Nigeria, a 17
percent stake.



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Chinese Labor to Build Russian Homes


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11. (SBU) Dr. Viktor Koksharov, Minister for International
and Foreign Economic Relations of the Sverdlosk Region in
Russia commented to Econoff that for the first time a
delegation company is seeking Chinese labor for Russian
construction projects. Dr. Koksharov said Chinese laborers
are cheaper and more reliable than their Russian
counterparts. There were "problems" with Russian
construction workers that might be avoided by importing
labor from China he added, though he did not elaborate.



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Platitudes Aside - Turkey Addresses Trade Frictions


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12. (SBU) In a departure from the other effusive speeches

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regarding greater economic integration under the guidance
of the Shanghai Cooperation Organization, Ender Oncu, Head
of Department for the Republic of Turkey Prime Ministry,
Undersecretariat for Foreign Trade, General Directorate of
Agreements addressed bilateral trade frictions with China.
Oncu stated that the Turkish trade deficit, especially over
the last five years, "seems to be disturbing." Fifteen
percent of Turkey's total trade deficit is attributed to
China. Oncu said Turkey's trade deficit with China reached
USD 4.0 billion and USD 6.3 billion in 2004 and 2005
respectively.



13. (SBU) Another "disturbing" trend, according to Oncu,
is Turkey's exports to China which are limited to a few
commodities (primarily raw materials), while imports from
China include a wide range of finished, higher value-added
products. The share of Turkish exports to China's total
import volume was only 0.08 percent in 2005. Oncu noted
that Turkey launched a "China Market Access Project" in
2005 and would organize a trade delegation to Shanghai and
Beijing September 18-22 to address the broader Turkey-China
trade relationship.



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Comment


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14. (SBU) Forum participants had many visions and plans to
expand regional cooperation, but the vast distances between
trading centers and undeveloped infrastructure pose
daunting challenges. End comment.

Randt