Journey to the West -- Beihai: Pearls,

UNCLAS SECTION 01 OF 04 GUANGZHOU 005870

SIPDIS

SENSITIVE
SIPDIS

USDOC FOR 4420/ITA/MAC/MCQUEEN
TREASURY FOR OASIA/INA-CRANE
STATE ALSO PASS USTR
STATE ALSO PASS FEDERAL RESERVE

E.O. 12958: N/A
TAGS: ECON ETRD EINV CH
SUBJECT: Journey to the West -- Beihai: Pearls,
Fireworks, Sand, and Hope But Not a Whole Lot More

REF: Guangzhou 5798 (and previous)

(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. PLEASE
PROTECT ACCORDINGLY. NOT FOR RELEASE OUTSIDE U.S.
GOVERNMENT CHANNELS. NOT FOR INTERNET PUBLICATION.


1. (SBU) Summary: Acknowledging that previous economic
development planning has not panned out as expected,
Guangxi's Beihai City officials see their economic future
in developing labor-intensive light manufacturing and
logistic industries based on outside investment --
particularly from over-heated neighboring Guangdong -- and
their infrastructure resources. They also want to better
use and protect their natural resources to attract more
tourists especially to the 24 kilometer "Silver Beach" --
the "best beach in China" but replete with the shells of
uncompleted hotels and housing units. The city is
competing, however, against ASEAN countries for export
market and overseas tourists. The City plans to develop a
big deep-water port project, which they hope will become
their economic growth engine but the port would also put
Beihai into direct competition with other higher-powered
coastal cities in South China. End Summary.

By the Sea, By the Beautiful Sea
--------------

2. (U) The last stop in Guangxi in Consulate Guangzhou's
"journey to the west" (reftel) was in beauteous Beihai
where the Municipal Government's Vice Mayor, Commerce
Bureau, Tourism Bureau, and a large local enterprise gave
us a pretty good view of the economic development prospects
for the city. Beihai has a population of 1.4 million
people. Officials described Beihai as a small city with a
weak industrial foundation and small GDP. The City used to
belong to Guangdong Province; in 1965 the Central
Government put Beihai under the jurisdiction of Guangxi
Zhuang Autonomous Region. The local dialect of Beihai is a
branch of Cantonese and retains strong cultural ties with
Guangdong Province. Most of the people in Beihai belong to
the Han Nationality, and minorities are few, estimated at
3,000 people. Beihai has rich ocean resources including
one of China's biggest fishing areas in the Gulf of Tonkin
(Beibu Wan),a large number of salt-water pearl farms, and
China's biggest mangrove forest.

Slow Growth - High Potential
--------------

3. (U) Official said the City's future economic growth
relies heavily on outside investment because most local
enterprises are small and slow to expand, and the
Government is not allowed to use its revenues to invest in
any enterprise. Beihai boasts -- somewhat dubiously --
that it is the only municipality in China that has a
complete infrastructure combination of highway, railway,
airport and deepwater port, a combination which should
make it highly competitive. The City Government has put
the hopes of its economic future into one basket by
developing a large port called "Tiecang" that city
officials hope can help attract more investment to develop
labor-intensive industries in Beihai.

Missing the Boat: Bubbles, Corruption, and Incompetence
-------------- --------------

4. (SBU) In early 1990s, significant inflows of outside
investment into the City's real estate industry created a
big bubble which exploded in 1995, scaring off investors
until today. We saw many unfinished office and apartment
buildings in the City and unfinished resort after resort
along Beihai's beautiful, 24 kilometer long, Silver Beach
during our visit. News reports indicated that Beihai has
missed landing several big industrial projects in recent
years, including a big petroleum refinery project on which
the local government spent three to four years negotiating
with China's oil giant Sinopec but on which the city failed
to get a green light from Beijing. Beihai's neighbor
Fangchenggang won the deal. There also have been news
reports of numerous complaints from local residents about
the corrupt and incompetent government officials that
failed to develop the local economy.

GUANGZHOU 00005870 002 OF 004



Trade Up but Pessimism about ASEAN
--------------

5. (U) In 2005, Beihai's total export volume was USD 130
million, and import volume reached USD 50 million. The
United States is Beihai's largest trading partner,
accounting for about 27% of the City's foreign trade volume.
In 2005, Beihai's export to the United States was USD 41.47
million, and the main products include fireworks,
aquaculture products, and textiles. Beihai's total import
from the United States was USD 9.96 million, mostly
machinery.


6. (U) Though Guangxi and its major industrial cities such
as Nanning and Liuzhou place great emphasis on the future
growth of trade with ASEAN countries, Beihai officials did
not look excited about their trade relations with their
Southeast Asian neighbors because of similar export product
structures. The ASEAN area is only Beihai's fourth largest
trading partner. Beihai basically exports pesticide,
fertilizer and leather to ASEAN countries, and imports raw
materials, such as coal. Its trade volume with ASEAN
countries jumped by 50% in 2005, but officials explained
that was because its trade volume in the past was so low.
Beihai and ASEAN, especially Vietnam, are basically
competitors exporting similar fruit and aquaculture
products.

Hoping to Get the Surplus Fat from Guangdong
--------------

7. (U) Beihai is interested in attracting labor-intensive
investment from its saturated neighbor of Guangdong or the
Yangtze River Delta. Beihai can provide incentives through
a favorable tax policy, cheap land, abundant supply of
power and labor to outside investors. As a city located in
China's Great Western Development Program, Beihai can
provide both domestic and foreign investors income tax
waiver treatment granted by the Central Government. It can
also use incentives as part of the Beibu Wan Development
Area. The cheapest land price in Beihai is as low as RMB
25,000 (USD 2,941) per mu (1 mu = 0.17 acre). The City
also has a number of hydroelectricity stations and the unit
price for industrial power consumption was only RMB 0.45
(USD 0.05) per kilowatt-hour compared with Guangdong's
price of over RMB 0.9 (USD 0.11). Officials expressed
their expectation that this combination of incentives would
be sufficient to attract new investment. Beihai has a
large number of people working as migrants in Guangdong and
officials hoped in the future the ideal choice for these
migrant people would be to return home to get jobs at newly
established enterprises.


8. (U) Beihai officials said in recent years the trend had
been growing for industrial enterprises to transfer from
Guangdong to Southern Guangxi. Officials said the
industrialization in Guangdong had developed to certain
level and faced shortages of water, power and other
resources. As a result, Beihai has managed to attract
several Shenzhen enterprises to build factories making
purses, cell phone screens and MP4 players. Though Beihai
has a long tradition of making fireworks, officials said
they were not receiving such enterprises transferring from
Guangdong, nor would they approve the opening of new
fireworks factory because they would like to move to higher
value manufacturing. During a visit to a large firework
factory named "Qiangsheng," whose products are mainly for
export to the United States and European countries, the
management also told us that due to Beihai's interest in
developing other industries, the company had recently taken
over a firework factory in Hubei Province, rather than
expanding in Beihai itsels, which would have made more
sense in terms of logistics and supply management but which
the Beihai government is reluctant to approve.

Comparative Disadvantages
--------------

9. (U) City officials disclosed Beihai's primary
disadvantages in attracting investment are insufficient
local shipping and the lack of an industrial infrastructure

GUANGZHOU 00005870 003 OF 004


to provide complementary sourcing for manufacturers.
Beihai has only two container vessels going to Hong Kong
each week and the trip takes over 30 hours compared with
highway travel time of seven hours. Some export-oriented
enterprises have to use the more costly highway to ship
their time-sensitive products to Hong Kong. As Beihai has
a poor industrial infrastructure, it is inconvenient for
enterprises to find local component suppliers.

Tourism Development
--------------

10. (U) Beihai has China's longest sightseeing beach,
Silver Beach, 24 kilometers long. Its other tourist
attractions include a UNESCO-rated mangrove forest, Weizhou
Island with diving and European-imperialist era buildings,
a big scenic lake, an 1920s-era street that the government
is renovating, and a robust supply of seafood and pearls.
The City has over 200 hotels with a total number of 27,000
hotel beds. Compared with Hainan Island, whose tourists
are more high-end and generally can afford air tickets for
their traveling, Beihai officials confessed that they
basically receive low-end domestic tourists who drive to
Beihai and seek the lowest-cost accommodations.


11. (U) In 2005, Beihai received 4.43 million domestic
visits (including visitors who traveled there on multiple
occasions),an 11 percent growth year-on-year. A large
number of the tourists are from neighboring Guangdong, and
more and more of them are on driving tours. The number of
foreign visitors was only 30,000, and only one third of
them were westerners with half of them coming for business
and not sightseeing. The remaining two-thirds of overseas
visitors were from Hong Kong, Macao and Taiwan.


12. (U) Beihai also faces competition from its ASEAN
neighbors who boast similar tourist resources. Each year,
about one million Chinese tourists take boats to travel to
lower-cost Vietnam via Beihai, while the number of
Vietnamese tourists visiting Beihai is very limited. Since
last July, ASEAN countries, particularly Vietnam and
Guangxi (for China),started discussing the development of
a "tourism circle" around Beibu Wan (Tonkin Gulf) to build
synergy for the tourist market in the area. City Tourism
Bureau officials hope that by 2010, Beihai revenues from
tourism will jump up from the current RMB two billion (USD
248 million) to RMB six billion (USD 745 million),and the
total number of annual visitors can grow to 10 million,
with 100,000 from overseas spending USD 30 million. The
officials are paying more attention to the international
market and have been actively seeking cooperation with
European tourist wholesalers and in developing more
backpacker accommodations.

Big Projects
--------------

13. (U) Besides attracting investment and developing
tourism, Beihai plans to initiate the developing of
logistics industry, especially a big project called
"Tiecang" Port, in the 11th Five-Year Planning Period.
Beihai officials hope the project can serve as the City's
economic growth engine. The City Government's main
investment promotion target is Singapore, which, according
to the officials, has close relations with Beihai and is
always the first stop for Beihai's overseas investment
promotion. Some Singaporean companies have done research
about investing into the project.


14. (SBU) Currently, Beihai has a port that mainly handles
bulk cargo and recorded a volume of seven million tons in

2005. Its biggest berth can accommodate 50,000-ton boats.
It was only in October 2005 that Beihai opened its first
container route, which is connected to Hong Kong, with two
trips each week. The port has an annual handling capacity
of 50 thousand containers, and handled 30 thousand twenty-
foot equivalent units (TEUs) in 2005. The City's bulk
cargo can be directly shipped around the world, but for
containers, Beihai is just a feeder port for Hong Kong,
Shenzhen, or Guangzhou. Surveys performed for the city
show that Beihai has the potential to build 200 berths for

GUANGZHOU 00005870 004 OF 004


vessels at the 10,000-ton level, and the maximum level
could be as high as 200,000-ton. If Beihai could realize
its ambitious dream, the ultimate capacity of its port
would be comparable to Shanghai's, city officials claimed.
Besides the port development project, two railways
connecting Beihai with Guangdong and Guangxi's Yulin City
will start construction this year. The Government also
plans to build a cross-ocean bridge to connect itself
directly with Guangdong, though this project seems to be
much less likely (not to mention grotesquely grandiose).
Beihai hopes all these infrastructure projects will help
develop the City's logistics industry and attract more
industries to Beihai.

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

15. (SBU) By putting their hopes primarily on developing
deepwater port, Beihai will inevitably run into competition
from their neighboring coastal cities with operating ports,
such as Fangchenggang in Guangxi, or Zhanjiang in
Guangdong. All these ports will compete for the same bulk
cargo resources from Southwest China. It is doubtful that
foreign investors would really put their money in Beihai
for port development in the face of such competition.
Similar resources and conditions, such as cheap labor and
land, and a favorable deepwater line, will cause other
coastal cities in Guangxi to adopt similar development
strategies that will put them into competition for similar
external resources, such as investment and cargo resources
-- particularly since the regional government in Nanning is
fairly passive in refereeing such competition, hence
leading to a lot of wasteful utilization of economic
planning resources for projects that will most likely not
pan out.


16. (SBU) Guangdong supplies most of Beihai's tourists and
probably much of its future enterprise capital and
managerial talent. But Silver Beach was bereft of any such
tourists in the late afternoon hours when the Consulate
party visited Silver Beach. Scores of pearl sellers
thronged around us, and we leveraged their hunger for sales
to get some nice bargains. Like these pearl hawkers,
Beihai writ large is not in a strong economic bargaining
position, and it too is likely to sell its prospects
relatively cheaply to more advantaged visitors from
Guangdong.


17. (U) The topic for our final city-specific message in
our "journey to the west" series is actually during our
drive homeward towards the east -- Maoming in Guangdong
province, where the economic prospects and the
professionalism of governmental officials even in this
rather obscure part of Guangdong far outshone those in
Guangxi.

DONG