Journey to the West Heads South to the Guangxi

UNCLAS SECTION 01 OF 05 GUANGZHOU 005377

SIPDIS

SENSITIVE
SIPDIS

STATE ALSO PASS USTR
PACOM FOR FPA

E.O. 12958: N/A
TAGS: ECON ETRD EINV ECIN ELAB CH
SUBJECT: Journey to the West Heads South to the Guangxi
Border with Vietnam

Ref: A) Guangzhou 4831 and previous, B) Guangzhou 4352

C) 05 Guangzhou 22787, D) 05 Guangzhou 21369 (last two
notal)

(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. PLEASE
PROTECT ACCORDINGLY. NOT FOR RELEASE OUTSIDE U.S.
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1. (SBU) Summary: In Guangxi, the three port cities of
Pingxiang, Dongxing and Fangchenggang boast a relatively
healthy trade with neighboring Vietnam, though Dongxing's
and Fangchenggang's access to the sea demonstrate a clear
economic advantage over land-locked Pingxiang. Budding
signs of foreign investment and real estate development,
combined with the market potential of other ASEAN member
countries, offer some economic promise to the region
particularly in the urban areas with direct land and sea
links with Vietnam. End Summary.

Congzuo Overview
--------------

2. (U) After receiving the perspective of the Vietnamese
Consul General as part of the Consulate' "journey to the
west" (ref A),Congenoffs proceeded south by expressway to
Guangxi's border with Vietnam. The Consulate party met
first with Deputy Secretary General Qin Qun of Congzuo, the
prefecture supervising Pingxiang, who described the area's
economic potential, particularly in light of its proximity
to Vietnam and recent improvements to infrastructure. Qin
stated that the RMB 14.8 billion (approximately USD 1.8
billion) GDP in 2005 reflects a year-on-year 13% GDP growth
rate, a 12.8% increase in revenues, and a 45% increase in
foreign trade to USD 440 million.


3. (SBU) Qin attributed Congzuo's growth to three main
factors. First, he noted the strength of agricultural
products, stating that the Congzuo area produces among the
highest levels of sugar in Guangxi province, at over 1,000
pounds per capita or 15 million tons total. The area also
produces per annum USD 2 billion of manganese. Next, the
Deputy Secretary General touted the area's tourist sites
such as the Detian waterfall and Zhuang minority cultural
destinations. A native of Guilin, Qin also compared the
karst mountain scenery in Congzuo very favorably with the
famous scenery of his hometown. Finally, the Deputy
Secretary General cited the new Nanning-Pingxiang highway

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as an opportunity for economic growth. This new toll road
opened in December 2005 and reduced driving time by nearly
fifty percent, from over four hours to two and one half
hours. (The costly toll may be prohibitive for potential
users; in the round-trip drive from Nanning to Pingxiang,
Congenoffs noted the lack of traffic on both sides,
particularly the absence of large cargo trucks transferring
goods. The cost is RMB 180 (approximately USD 22) for a
two-axle vehicle to travel one-way from Nanning to Hanoi)

First Pacify; Now Befriend
--------------

4. (U) In a subsequent meeting, officials from Pingxiang's
Commerce Bureau explained that Guangxi has had trade
relations with Vietnam since 1992, and that last year more
than 100 export/import companies handled USD 340 million in
trade with Vietnam. In addition to fostering bilateral
trade relations with Vietnam, Pingxiang has begun
developing relations with other ASEAN member countries as
well. On January 1, 2005, Pingxiang dropped all tariffs on
agricultural products coming from other ASEAN countries,
and over the past year has seen big increase in trade. The
officials explained that the trade of agricultural products
remains the main economic focus. Guangxi's plans to
promote regional trade through the upgrade of product
exhibition centers. They cited Guangxi's plans to invest
RMB 1 billion (approximately USD 124 million) to develop a
China-ASEAN logistic park


5. (U) The Pinxiang officials stated that in 2005, Vietnam
and China announced the creation of two economic corridors
between Hanoi and Kunming, and Hanoi and Nanning, which
includes the border towns of Pingxiang and Dongxing. As a
result, Pingxiang expects an increase in its service sector

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as well as development of expanded rail services to Hanoi.
The creation of the economic corridor also coincided with
the recent opening of the Nanning-Pingxiang expressway.
When asked about the efficiency of the road network on the
Vietnamese side, local officials acknowledged that
Vietnamese roads are poorer than those on the Guangxi side.
They did, however, mention the Greater Mekong Sub region
(GMS),a grouping of six Mekong River Delta entities
including Guangxi, one of whose goals is to promote
economic growth of member entities in part through
developing infrastructure with an emphasis on
transportation.


6. (U) When asked about border crossings for cargo
vehicles, the Pinxiang Commerce officials stated that cargo
vehicles are required to go to designated border points to
offload goods to domestic trucks; the same rule applies on
the Vietnamese side. They said that the two countries are
moving towards the use of dual-country license plates to
bypass the offloading step. (Comment: It appears that the
adoption of cross-border license plates has not moved very
quickly to date, but may speed up through ASEAN-initiated
mechanisms.) They claimed that Guangxi offers the quickest
entry point for goods, as vehicles can cross and depart in
a single day. When asked about following sanitary and
phyto-sanitary guidelines, they replied that Pingxiang
follows international standards and has no problems
regarding plant and animal trade between Vietnam and China.
She confirmed that imported goods are inspected upon entry.


7. (U) Congenoffs visited Pingxiang's truck crossing point,
at the free zone area of Puzhai. Nearly six thousand
trucks per month cross Puzhai in both directions, and the
designated transfer point that Congenoffs visited processes
one to two hundred trucks per day. Immediately inside the
border, the government is building an overly large
administrative and commercial structure in anticipation of
greatly increased trade flows. Despite the relatively high
volume of trade in the region, however, the people seemed
poor and the town was dirty. Local officials did not show
us the red light district, which is buried in the back
alleys of Puzhai. Consulate officials visited the red
light district in June 2005, as part of a HIV/AIDs
reporting trip (ref C).


8. (U) Pingxiang's second crossing point at You Yi Guan
(or, Friendship Gate) handles some trucks but primarily is
intended for foot traffic. Congenoffs observed some
tourists and several people hand carrying goods across the
border, but the crossing was rather desultory in trade.
Local regulations allow individuals to carry across goods
worth up to RMB 3,000 (approximately USD 372) an unlimited
number of times each day. (Comment: This regulation does
not seem to have much impact at the You Yi Guan crossing
because not much trade was going on, even on a Friday
morning.) You Yi Guan was formerly called Zhen Nan Guan,
or "Pacify the South (meaning, Vietnam) Gate."

A Brisk Trade, All on Foot
--------------

9. (U) The following day, Congenoffs visited another
crossing point at Dongxing, adjacent to the Tonkin Gulf
(Beibu Wan). The town has seen significant amounts of
development in recent years, as exemplified by the
relatively well decorated new buildings lining both sides
of the road leading to the border crossing, as well as new
construction in the town. Dongxing appears much wealthier
and economically vibrant than the competing border zone of
Pingxiang, and a large number of brand name shops seem to
be doing a brisk business. Despite having fewer residents
than Pingxiang, Dongxing appears to have benefited more
from trade with Vietnam. Local officials emphasized, for
example, that no spare land is available for development in
urban Dongxing. They noted that four real estate
development companies and over thirty logistics companies
currently operate in town. Officials also pointed out the
current development of a "China product city" intended to
facilitate trade through the Dongxing area. At the edge of
town, we observed a new center for products from "Yiwu,"
obviously named for the famed market city near Shanghai, as

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well as a separate designated construction site for a
China-ASEAN building materials center.


10. (U) At the border crossing, an Inspections and
Quarantine official explained that a large number of visits
each day consists of small border traders who make multiple
trips carrying goods under the RMB 3,000 limit. This
activity appears in sharp contrast to the relative dearth
of foot traffic at the You Yi Guan crossing in Pingxiang.
Conversely, the Dongxing crossing averaged only one cargo
truck a day, a number eclipsed by the nearly two hundred
trucks entering at Puzhai. The Inspections official noted
a travel exception for "tourism" vehicles, which are
allowed to traverse 200 km from the border on both the
China and Vietnam sides, reaching as far as Nanning and Hai
Phong on either side, but not as far as Hanoi, which is 230
km from the border.

A New Kid on the Block: No Rival to Guangdong
--------------

11. (U) In contrast to the hustle and bustle of Dongxing,
Fangchenggang, which is the administrative center at the
prefecture level for Dongxing and its nearest port town,
appears to be a sleepy town with little economic activity
in sight. Fangchenggang's Vice Mayor Xi Yang indicated
that the main reason for backward development of the area
is due to the conflict with Vietnam in the 1970's and
1980's. Formal reopening of border areas did not begin
until 1992, and Fangchenggang was not reorganized as a town
until 1993, and so the city and port are quite young. The
town took over the port role formerly located in Dongxing
because authorities wanted to remove the port from the
range of Vietnamese artillery, which had pounded the area
as late as 1984. The Vice Mayor also mentioned that the
largely urban nature of the population is also due in large
part to the tensions between China and Vietnam. He noted
that Fangchenggang is the smallest prefecture in Guangxi
Province, and 500,000 of its 800,000 residents are urban
dwellers, an unusual statistic in an otherwise heavily
rural region.


12. (U) Despite the town's late start, Vice Mayor Xi was
upbeat about both the recent growth in the town's economy
and its potential for the future, projecting a goal of four
hundred percent growth in GDP over the next five years. He
stated that Fangchenggang expected to exceed goals outlined
in its eleventh five-year plan through further development
of the port cities, trade and industry, particularly by
attracting both domestic and foreign investment sources.
The Vice Mayor noted Fangchenggang's intent to bring in
foreign expertise to develop the state-owned port, as it
already has brought in a large Spanish port management
company and a large Hong Kong group, which, combined, will
spend several hundred million RMB. The advantage of
Fangchenggang (as with Dongxing) over Pingxiang is the
access to the sea.


13. (U) Fangchenggang is the closest seaport for products
from Yunnan, Sichuan, Guizhou and other western provinces,
and hopes to expand its role as the gateway for China's
west. Shipping lines leaving Fangchenggang go to such
diverse places as Shenzhen, Hong Kong, Singapore, San
Francisco and Pusan. However, Vice Mayor Xi was clear in
acknowledging that the port city's largest competitor for
export traffic is Zhanjiang in western Guangdong province.
Each year, Fangchenggang's port handles 45,000 containers
and 20 million tons of bulk cargo consisting of ores and
agricultural products, compared to rival Zhanjiang's
170,000 containers and 40 million tons in 2005. The Vice
Mayor also noted sadly that all of the fruit imported from
Thailand did not go through Fangchenggang, the nearest
port, but rather via Shenzhen, which has a long and
illustrious record of distribution of fruits and other
goods.

The Port Itself -- Hope Springs Eternal
--------------

14. (U) A visit to Fangchenggang port itself included a
perusal of a large American investment, Archer Daniels
Midland, which now owns one hundred percent of what was

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previously a joint enterprise with a Chinese state-owned
enterprise and a Singaporean company. The American company
has a large soybean crushing facility to produce food oil
at the Fangchenggang port. Another significant project in
the pipelines for the town is a proposed steel project
initiated by the Wuhan Iron and Steel and Liuzhou Iron and
Steel companies. These two companies plan to invest RMB 80
billion (approximately USD 9.9 billion) for the first phase
of the plant. (From our conversations with Liuzhou
officials earlier in the trip, steel products produced by
the plant will serve both the domestic and export markets.)
The project is awaiting final approval from the central
government, but the Guangxi authorities already are heavily
promoting the project (ref B). Vice Mayor Xi mentioned
that with the current oversupply of steel manufacturing
capacity in China, Beijing may shut down less efficient
production sites in other areas. He also noted that
Fangchenggang already sees major imports of coal and iron
ore, particularly iron ore from Australia. As
Fangchenggang's growth strategy rests on three peninsulas,
with the western-most peninsula focusing on tourism and the
middle peninsula on the city and port economy, the eastern-
most peninsula is the intended site for the Wuhan and
Liuzhou iron and steel companies steel project. The city
also will extend a rail spur from the port line over to the
steel plant once the project is approved.


15. (U) Fangchenggang's port area currently has 34 berths
with a ten thousand-ton capacity and the space to build one
hundred additional berths of the same capacity. The port
has a number of berths capable of handling vessels up to
twenty thousand tons, with five additional berths of the
same capacity and one fifty thousand ton crude oil dock
planned for the future. Local officials noted the town's
goal to expand the bulk cargo volume to sixty million tons
per year, and to specialize the various berths by product
category. Currently, there is no separation of products,
as we watched bauxite being unloaded immediately adjacent
to soybeans presumably for the Archer Daniel Midland
facility. Fangchenggang has three thousand port workers;
the number of workers has not changed in the past ten
years, even though cargo volume has increased fivefold to
twenty million tons in same period. In comparison, rival
port Zhanjiang has ten thousand workers for more than
triple the number of containers and double the level of
cargo (ref D). Furthermore, Fangchenggang's port officials
claimed that the actual volume difference between the two
is not as great as the numbers would suggest, because ten
million tons of the total amount is crude oil imports, and
another seven to eight million tons is consumed locally by
Zhanjiang.


16. (U) Though it shares the same customer base with
Guangdong's Zhanjiang port, Fangchenggang aims to surpass
its main rival as the major bulk port in southern China by
competing through a combination of improved service and
lower costs. Last year, Fangchenggang experienced a
twenty-five percent growth in total volume, while its
operating costs already are much lower than those of
Zhanjiang. In addition, as a bulk cargo port that handles
a large amount of iron ore, coal and other products, the
port is dirty but compares favorably in cleanliness and
organization to rival Zhanjiang's port. On the other hand,
Fangchenggang's port equipment is relatively old fashioned
and inefficient, using a series of cranes with scoops to
transfer bulk cargo to chute loaders or onto conveyor belt.
The port has only two vacuum systems for grain and two
container cranes at port side, but port officials said that
after the expansion of berths they hope to purchase more up
to date equipment. Finally, it appeared that many of the
loading and unloading techniques were inefficient, with
bags of fertilizer being hand-unloaded from containers
before being palletized. Inefficient practices, in
combination with the prevalence of old machinery, leave
much room for Fangchenggang's future modernization and
improvement.

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

17. (U) Despite having a number of different development

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promotion packages at their disposal, such as the Greater
Mekong Sub region package, the Greater West program and the
China-ASEAN corridor, Congzuo and Pingxiang seem to be
pinning its hopes for future growth mostly on Vietnam.
Though Congzuo and Pingxiang each has its own industrial
development areas boasting low land and labor costs aimed
primarily at ASEAN business, their emphasis on cross-border
trade in cheap agricultural products such as sugar raises
questions about the area's ability to achieve the predicted
high levels of GDP growth. At the same time, while
Dongxing and Fangchenggang appear to be thriving port
towns, they are still a long way from attaining their
vision of regional domination. Southern Guangxi cannot
overlook its eastern neighbor, Guangdong Province, whose
ports of entry are potent competitors with the resources
and long-standing records of distribution throughout the
country. And at least some of the growth of these border
cities is fueled by "spillover" investments by Guangdong
entrepreneurs looking to expand their operations.


18. (SBU) There is dark side to those Guangxi cities
bordering Vietnam, including the threats of HIV/AIDS (and
its origins in prostitution and narcotics use) and Avian
Influenza. These topics will be taken up in the next
message in the Consulate's series on its "journey to the
west."


19. (U) This message has been cleared by AmEmbassy Hanoi.

DONG