EGYPT: GROWING ECONOMIC RELATIONS WITH CHINA

C O N F I D E N T I A L SECTION 01 OF 03 CAIRO 002440

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/05/2017
TAGS: PREL PGOV ETRD EINV ECON CH EG
SUBJECT: EGYPT: GROWING ECONOMIC RELATIONS WITH CHINA

REF: CAIRO 539

Classified by DCM Stuart E. Jones for reasons 1.4 (b) and (d).


1. (C) Summary: Egyptian-Chinese relations have expanded over
the last several years, primarily in the economic realm.
Egypt is courting Chinese trade and investment but is wary
that China could undercut Egypt in low-cost, labor-intensive
sectors, complicating Egyptian efforts to combat persistent
unemployment. Egyptian contacts highlight the Chinese
interest in extractive industries and the increase in cheap,
Chinese-made goods, though quality of Chinese goods is still
a concern. GOE officials also look to China for alternative
lessons in economic development, particularly given
sensitivities to western pressure for comprehensive political
and economic reform. Meanwhile, China sees Egypt as an
important player to protect its economic, and increasingly
political, interests in Africa, and to a lesser extent in the
Middle East. GOE officials hint that expanded relations with
China could eventually offset deteriorating relations with
the U.S., though Egypt remains a strong U.S. partner on
economic reform and regional security. End summary.

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A "Mature" but not "Deep" Relationship
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2. (SBU) Egyptian government officials, academics, and
researchers consistently describe Egyptian-Chinese relations
as "mature" and "diverse" but not "deep." Egypt was the
first African or Arab country to recognize the People's
Republic of China in 1956, but relations so far have been
focused on economics. Egyptian President Hosni Mubarak has
visited China nine times since becoming Vice President in
1975, most recently in a November 2006 visit that saw the
signing of several economic cooperation agreements.

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More Chinese in Egypt
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3. (U) Both the Chinese Embassy in Cairo and the Egyptian
Ministry of Foreign Affairs estimate that about 55,000
Chinese tourists visited Egypt in 2006, a 30 percent increase
over the previous year. (Note: Chinese tourism represented
about 0.5 percent of Egypt's 9.8 million tourists in 2006,
compared to 3.3 percent from the U.S. End note.) Estimates
of the number of Chinese expatriates in Egypt vary, but
Chinese and Egyptian officials and local academics put the
number at between 6,000 and 12,000. (Note: There are about
37,000 U.S. citizen expatriates in Egypt. End note.)
Anecdotal information indicates that more Egyptians are going
to China as well, particularly for business purposes. Travel
is becoming easier; Egyptian national carrier EgyptAir
recently begun daily flights to China.

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Chinese Exports Lead Trade Increase
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4. (SBU) China's emergence into world markets is driving
increased trade, but Egypt is also actively diversifying its
traditionally western-oriented trade relations. Mohamed
Mansour Fahmy, Vice Minister for Foreign Relations at the
Ministry of Trade and Industry, told emboff that at the
current rate China will be Egypt's largest single trading
partner by 2010, with 2006 bilateral trade at $3.3 billion,
or about nine percent of Egypt's total trade. (Note: U.S. -
Egypt bilateral trade was $6.5 billion in 2006. End note.)
The rise is mostly due to Chinese exports, he said, raising
fears that Chinese products will push out indigenous Egyptian
ones. Tellingly, Minister of Trade and Industry Rachid
Mohamed Rachid announced on July 30 that Egypt signed an
anti-dumping MOU with China, and was setting up a process to
receive dumping complaints about Chinese products from the
Egyptian business community.


5. (SBU) Egypt is aiming to increase its exports to China
from $270 million in 2006 to $1 billion by 2010, Mansour
said. (Note: Egyptian exports to the U.S. were $2.4 billion
in 2006. End note.) To do so, Egypt is attempting to become
a source of higher-quality goods. For instance, as marble is
one of Egypt's largest exports to China, Egypt is moving to
exporting semi-finished, instead of raw, marble.

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Lingering Concerns Over Chinese Quality
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6. (SBU) Although Chinese products are increasing in Egypt -
even some Pharaonic trinkets sold to tourists are now
produced in China - there are concerns about their quality.
Some, including MFA Deputy Assistant Minister for East Asia

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Magdi Amer, say that while Chinese products have historically
been poorly made, now they are "not bad." However, earlier
this year, U.S. companies General Electric and Electromotive
Diesel beat out Chinese competition to each sell 40 new
locomotives to Egyptian National Railways, likely due in part
to those companies' strong reputations for safety - an issue
of serious political import for the GOE - in comparison to
their Chinese competitors (reftel).

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Investment Limited, Competing Over Low-Skilled Jobs
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7. (SBU) Chinese foreign direct investment (FDI) in Egypt is
currently a mere $300 million, and focused on information and
communications technology (ICT) and energy, according to
Amer. (Note: U.S. FDI in Egypt was $4.1 billion in 2005.
End note.) Egyptian investment in China is an even lower $50
million, he said, mostly in petrochemicals, textiles, and
electronics. Chinese ICT giants Huawei and ZTE both have
their regional headquarters in Cairo. On energy, Chinese
entrance into the upstream petroleum sector has been limited
partly due to a scarcity of available concessions; however,
the Chinese are seeking inroads into oil field and
engineering services.


8. (SBU) Egypt is courting more Chinese direct investment but
is proceeding cautiously to ensure that new projects create
Egyptian jobs in low-cost, labor-intensive sectors, in order
to dent Egypt's (unofficial) 20 percent employment rate.
Mansour said that Egyptian requests for more Chinese
investment in labor-intensive sectors such as textiles and
footwear are stalled over the Chinese government's condition
that 20 percent of the labor must be Chinese. The GOE hopes
that the lure of better access to western markets, through
Egyptian trade agreements such as the Qualified Industrial
Zones (QIZ) agreement with the U.S. and Israel, and free
trade agreements with E.U. countries, will convince the
Chinese to forgo their labor requirements, according to
Mansour.


9. (SBU) Amer said that Egypt is also courting Chinese banks,
in the hope that increasing financial cooperation will help
raise bilateral investment in both countries. The Egyptian
Bank Al Ahly recently began operations in China, he said, and
made a deal with "a Chinese bank" (nfi) to facilitate Chinese
customers' use of Bank Al Ahly ATMs in Egypt.

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"Fresh" Development Ideas
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10. (SBU) Egyptian contacts uniformly highlighted that since
China is still a developing country, it is, in Amer's words,
a source of "very relevant development experience" for Egypt.
Mustafa Kamel El Sayyid, Professor of Asian Studies at Cairo
University, told emboff that GOE officials see China as a
model for economic development that does not call for
democratic reform and increasing respect for human rights.
GOE officials consider this model a welcome alternative to
western pressure for comprehensive political and economic
reform, he said.

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Egypt Important to Chinese Interests in Africa
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11. (SBU) Egyptian contacts say that China needs Egypt to
help secure its interests in Africa. Most notable, MFA
Deputy Assistant Minister for Regional African Cooperation
Taher Farahat told emboff, is China's interest in maintaining
access to oil and minerals. China uses the Forum on
China-Africa Cooperation (FoCAC),which will next meet in
Cairo in 2009, to guarantee resource access, Farahat said,
though also to organize aid to Africa for infrastructure,
combating infectious diseases, and education. According to
Amer, as China has taken more criticism for its policy
towards Sudan over the crisis in Darfur, China seeks Egyptian
and other African support through FoCAC to develop and push
policy on UN Security Council issues, such authorizing a
peacekeeping force for Darfur. Amer echoed Chinese embassy
Political Counselor Chen Ming Jian, who told emboff that
China puts its bilateral relationship with Egypt at the
forefront of its Middle East policy. However, Amer opined
that Egypt's importance to China in the Middle East was
secondary to its importance in Africa, as China has access to
energy bilaterally with other Arab oil-producing states.

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Minimal Military Cooperation
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12. (SBU) Though Egyptian and Chinese contacts are reluctant

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to discuss military relations in detail, they claim that
cooperation is minimal. Amer said that there is cooperation,
but it is "not deep," as most of Egypt's military equipment
is western. There are signs of increasing
military-to-military contact, including high-level visits,
but concrete information on this issue is limited. The most
extensive example of cooperation cited was that of a Chinese
aircraft that Egypt uses for training purposes, "but even
that has a U.S. engine," according to Amer.

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Comment: Egypt Hedging for Poorer U.S. Relations
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13. (C) GOE officials have hinted that closer ties with China
- not to mention Russia, other central Asian countries, and
even some E.U. countries - might offset deteriorating
relations with the U.S. over pressure for political reform.
Indeed, GOE officials seem to look to China for economic
development lessons that leave the question of political
reform unanswered. Nevertheless, they still work closely
with western interlocutors on economic reform, and remain a
strong partner on regional issues such as Israel/Palestine,
Iraq, and Iran.
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