GROWING TRADE BETWEEN CHILE AND CHINA

UNCLAS SANTIAGO 000774

SIPDIS

SENSITIVE
SIPDIS

COMMERCE FOR SARA MCDOWELL

E.O. 12958: N/A
TAGS: ECON EMIN ETRD EINV CI CH
SUBJECT: GROWING TRADE BETWEEN CHILE AND CHINA

REF: 05 SANTIAGO 01794


1. (U) Summary. Chile's economic ties with China are
increasing. In 2005, China became Chile's number two trading
partner, consuming over 12 percent of Chile's exports, and
the two countries signed a partial trade agreement. Chinese
companies are increasing their investment in Chile, with the
focus likely to be on Chile as a source of copper. Chinese
goods are beginning to appear on the Chilean market, as the
market share of Chinese vehicles imported to Chile jumped to
over 10 percent of the imported vehicle market in 2005. End
Summary.

Trade Paves the Way
--------------


2. (SBU) Ten years ago, China bought just 1.4 percent of
Chile's exports. Between 1994 and 2003, Chile's exports to
China grew by 1,299 percent. In 2005, China became Chile's
number two trading partner, consuming nearly 12.5 percent of
Chile's total exports. Despite the public perception that
China is buying only Chilean copper, copper comprised just 20
percent of what China bought from Chile in 2005. The other
main Chilean exports to China were fish and paper products.
In November 2005, Chile and China signed a partial trade
agreement that is likely to boost bilateral trade further.
Chile is the first Latin American country to sign a trade
agreement with China. Chilean trade officials are very proud
of this and openly express the conviction that Chile's future
is fundamentally tied to trade with Asia, with China seen as
the linchpin in Asia.

Huge Joint Venture in Copper
--------------


3. (SBU) In 2005, while copper comprised just under 20
percent of Chile's trade with China, that percentage did
represent a 34 percent increase in Chilean copper exports to
China over 2004. China's interest in Chile as a source of
copper is evident in the USD 2 billion joint venture signed
in February 2006 between MinMetals Corporation and Chile's
state-owned copper producer, Codelco. Codelco currently
accounts for 40 percent of Chile's copper production but has
ambitious plans for the future. Over the next fifteen years,
it hopes to almost double annual production and needs to
invest an estimated USD 1.7 billion to accomplish that goal.
The joint venture with China provides Codelco a guaranteed
market and new financing options.


4. (SBU) On February 22, the Executive Director of Chile's
state mining company Codelco, Juan Villarzu, and the
Undersecretary of Mining , Mario Cabezas, signed the final
papers to formalize the joint venture with China's MinMetals
Corporation. As the first part of the USD 2 billion sales,
finance and investment agreement, Codelco and MinMetals will
set up a joint venture with an initial Chinese investment of
USD 550 million. In exchange for this Chinese investment,
Codelco will guarantee MinMetals a total of 836,250 metric
tons of copper over the next 15 years. MinMetals can also
exercise an option in 2009 to purchase 25-29 percent of the
shares in Codelco's newly developed Gaby copper mine.


5. (SBU) To finalize the deal, Chilean and Chinese officials
resolved two key issues:

- The PRC Government authorized the China Development Bank
(CDB) to play a role in the joint venture. CDB will act as
the guarantor agent and loan provider in a CDB-designed
financing structure. CDB will provide USD 330 million of the
total USD 550 million for the first part of the joint venture.

- There had been some debate about the valuation of the joint
venture, given dramatic increases in worldwide copper prices.
Villarzu stated that for the purposes of the joint venture
copper was valued at USD 1.20 per pound, which reflected the
nominal price estimate from May 2005 - February 2006. Viewed
over the 15-year period of the deal, both sides agreed that
this price was above the long-term guaranteed market price
for copper. However, China appears to value access to a
long-term steady supply of copper over benefiting from
fluctuations in the market price.

Smaller Ventures -- A Mall and More Chinese Cars
-------------- ---


6. (SBU) February 2006 also saw the opening of Chile's First
"Chinese Mall" in downtown Santiago. The "Centro Commercial
China" comprises about 80 shops selling textiles, jewelry,
clothing and shoes. According to the Chinese merchants
manning the shops, they are all from the Chinese city of Wen
Zhou, in Zhejiang province south of Shanghai. The shop
owners told econoff the commercial center is reserved only
for Chinese products produced in Wen Zhou and is being
facilitated by a Chinese businessman, Ji Rubin, who has been
working in Chile for the past nine years. Many of the
merchants complained about the Chilean tax requirements.
They were under the impression that once the basic licensing
fees had been paid to the Chilean government there would no
need for further formal interaction with the government.


7. (U) The Chilean press has described the mall's opening as
the most visible impact of the November 2005 Chile-China
trade agreement. The catch to that description is that the
trade agreement has not been ratified by the Chilean Congress
and thus is not yet in effect. Total investment in the mall
is estimated at USD 20 million. While not a significant
amount, the Chinese and Chileans working at the "Chinese
Mall" clearly feel they have taken the first small step
toward making Chile the platform for China's business
presence in South America.


8. (U) While easily overlooked in the mass of imported
Japanese cars on Chile's roads, vehicle imports from China
jumped in 2005 by over 70 percent. For 2005, Chilean vehicle
imports from China totaled USD 187 million in total value.
Motorcycle imports from China doubled, industrial vehicles
imports rose 75 percent and Chile began importing
Chinese-made buses. The value of Chilean vehicle imports in
2005 totaled USD 1.71 billion, meaning Chinese vehicle
imports to Chile comprised just under 11 percent of that
total.

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


9. (SBU) Comment. While a large part of China's interest in
Chile is obviously copper, China likely also sees Chile for
what it is -- a politically stable country with an open
economy. As such, Chile can serve as a platform for trade
with the rest of Latin America. From Chile's perspective,
with only 20 percent of its annual copper production going to
China, it does not feel particularly beholden to China.
Chile sees China as the key to Asia, and it would like to use
the new trade agreement to sell more to its biggest market in
Asia than just copper. Given the rise in Chinese goods from
textiles to cars now entering Chile, it's also clear China
has diversification on its mind and intends to do more in
Chile than just buy copper.
KELLY