CHINA'S YUNNAN PROVINCE BUILDS OUT TO SOUTHEAST ASIA

C O N F I D E N T I A L SECTION 01 OF 05 CHENGDU 000124 SIPDIS SIPDIS STATE FOR EAP/CM AND EB NSC FOR CHRISTINA COLLINS E.O. 12958: DECL: 5/15/2017 TAGS: ECON ETRD PGOV SOCI CH SUBJECT: CHINA'S YUNNAN PROVINCE BUILDS OUT TO SOUTHEAST ASIA REF: A) CHENGDU 100 B) CHIANG MAI 50 CHENGDU 00000124 001.2 OF 005 CLASSIFIED BY: James Boughner, Consul General, AmCongen Chengdu, State. REASON: 1.4 (b),(d) ¶1. (C) Summary: Yunnan officials in southwest China see construction of new road, river, and rail links with neighboring ASEAN countries as the key to ending their mountainous and landlocked province's long history of isolation and stimulating economic growth. While provincial authorities disagree on which of a number of transportation corridors under development will offer Yunnan the greatest opportunities, there does not appear to be a shortage of funding for any of the new routes. With massive capital expenditure transforming the physical appearance of the province, however, opportunities to profit from corruption abound, and at least one high-ranking official is being hunted by police for "economic crimes." The Yunnan border towns of Hekou (Vietnam),Mohan (Laos),and the Mekong port of Jinghong (Thailand) have an "anything goes" kind of atmosphere that government authorities do not in practice seem intent on reining in. Still uncertain are whether cross-border trade volumes will grow sufficiently to justify the investment in transportation infrastructure, and which local interests will benefit the most from increased border traffic. End summary. ¶2. (SBU) Consul General and Congenoff traveled recently to Kunming and to Yunnan's southern borders with Vietnam and Laos, meeting with provincial and local government officials as well as businesspeople and ordinary residents. Visits to Muslim religious communities in southern Yunnan were reported ref A. Ref B reported on a trip by regional diplomatic representatives along some of the same routes. -------------- YUNNAN: WHICH WAY OUT? -------------- ¶3. (U) By all accounts, Yunnan lags far behind China's eastern provinces in terms of international trade and foreign direct investment. According to official figures on the province's website, Yunnan's total foreign trade in 2006 was USD 5.3 billion, including USD 3.5 billion in exports. The biggest single export commodities are nonferrous metals and chemical products (about 41 percent of the total),followed by tobacco and cigarettes and produce, including cut flowers. ¶4. (SBU) According to Yunnan Department of Commerce Deputy Director Li Jiashou, Yunnan's ASEAN neighbors are receiving the vast majority of the province's exports: USD 2.1 billion in 2006, up 41 percent from 2005, with the bulk going to Burma (USD 700 million),Hong Kong, and Vietnam. However, Li said that trade volumes could grow even faster if the province's transportation infrastructure could be improved, and he called transportation improvements the "key factor" in attracting more FDI. Li denied that a significant percentage of exports from Burma to Yunnan in fact originate in Thailand. (Note: According to the Thai Consulate General in Chengdu, many Thai traders go through Burma in order to qualify for preferential customs treatment from China, and most Burmese exports into Yunnan should really be credited as Thai. See paragraph 22 below as well. End Note). ¶5. (C) In response to a question from CG, Li indicated he is particularly optimistic about the potential use of Burma as a transit corridor for the import and export of goods from Yunnan. He stressed the close relations between Chinese and Burmese governments and that China is fully confident of the ability of Burmese security officials to protect road networks in northern areas of the country. Insisting that all areas transited by the highway were under the firm control of Burma's central government, Li opined that overall the cross-Burma route was a far superior way to reach southern ports than transiting Laos and Thailand. The movement of goods between Burma and Yunnan should prove far more "convenient" than between Yunnan and Thailand through Laos. -------------- ON THE OTHER HAND ~ CHENGDU 00000124 002.2 OF 005 -------------- ¶6. (C) During a separate meeting, however, Yunnan Department of Transportation Deputy Director Yang Yan appeared to guffaw when Congenoffs asked him whether it would make more sense for Yunnan to use Burma for an import/export corridor over Laos and Thailand. He freely acknowledged the existence of armed militias in northern Burma, noting that stretches of the road from China into Burma are "not good." Yan commented that it would likely be many years before a secure and reliable transportation network could be set up through Burma. ¶7. (SBU) Yan outlined Yunnan's overall transportation situation, placing special emphasis on the challenges of establishing provincial highways, which he termed "high (in elevation), difficult (to construct),dangerous, and beautiful" (gao, nan, xian, mei). He described four major road corridors intended to strengthen Yunnan's links with its southern neighbors: (1) the Kunming-Hanoi-Haiphong Highway, which he said was the shortest route to the sea, at 940 kms, with the Chinese portion to be completed by the end of 2007; (2) the Kunming-Bangkok Highway, straddling Yunnan, Laos, and Thailand in roughly equal lengths totaling 1818 kms (Yan said the Chinese portion would be finished by the end of the year); (3) the 1989 km-long Kunming-Ruilin-Rangoon highway (again, the Chinese section is expected to be finished by the end of the year, but construction of the Burmese portion is said to be proceeding slowly); and (4) the Kunming-Chittagong Highway, passing through Burma, India, and Bangladesh over a portion of the World War II-era Stilwell Road (Yan said this highway is in the preliminary planning stages only). ¶8. (C) Note: Although it did not come up as a subject of conversation, one of Yan's former superiors in the Yunnan Transportation Department, Vice General Director Hu Xing, disappeared in January 2007 after a warrant was issued for his arrest due to a "serious economic crime," and recent media reports indicate that he has been arrested in Singapore. Local contacts have noted to us that the large infrastructure investments subsidized by the central government in Yunnan's transportation and other sectors have been accompanied by significant levels of corruption, and a highly placed official of the Kunming Urban Planning and Land Administration Bureau has also been recently arrested on similar charges. End note. -------------- THE ROAD TO HEKOU -------------- ¶9. (SBU) Following these initial provincial-level briefings, CG and Congenoff drove the roads linking Kunming to the Vietnamese border city of Hekou (on the Red River) and to the Laotian border town of Mohan. Long stretches of highway were still under construction, forcing our vehicle to travel on winding and narrow stretches of secondary roads - which became distinctly more treacherous and badly maintained as they neared the border areas. ¶10. (SBU) Getting to Hekou required 12 hours of driving from Kunming through often quite mountainous terrain. For much of the last half of the trip, the road paralleled the meter-gauge railroad originally constructed by the French to link Haiphong with Kunming. The railroad is still in operation, although we saw few trains running, and locals told us there is no more passenger traffic between Kunming and Mengzi, about 400 kilometers away. That section of the track has already been widened to standard gauge, with the remainder of the track in Chinese territory also slated for widening within the next few years. ¶11. (C) Mengzi, the capital of Hong He ("Red River") Autonomous Prefecture, appeared to be a relatively prosperous town almost completely rebuilt and dotted with brand new, massive, and rather expensive looking government buildings -- some decorated to resemble 18th century French palaces - more suitable for a national seat of power. One local contact referred to the Mengzi government's building boom as a "scandal" and noted that at least one deputy mayor had been removed for corruption. Somewhat coincidentally, CG ran into the said deputy mayor (whom he had met on a previous visit to Yunnan) in the lobby of a Mengzi luxury hotel built on a lake near the downtown shopping district. The former deputy mayor currently works for Yunnan's CHENGDU 00000124 003.2 OF 005 Forestry Department in Kunming and noted to CG he was in Mengzi for "business." -------------- -------------- HEKOU: YUNNAN"S "LITTLE HONG KONG" -------------- -------------- ¶12. (SBU) Truck traffic on the highway from Mengzi to Hekou was very light in both directions. Several large trucks heading toward Vietnam carried large loads of steel products. Our driver (a Yunnan native) told us that the steel had been manufactured in central Yunnan, and was being exported to Vietnam for use in construction projects there. A few small trucks filled with produce were heading north. As we approached Hekou, the road narrowed and wound through thick forests. Closer to the border was a large and well-maintained graveyard filled with soldiers killed during the 1979 war with Vietnam. The driver commented Chinese troops had been "slaughtered" during the war by the Vietnamese, who were much more experienced in jungle warfare, and there were a number of even larger military graveyards in the region. ¶13. (SBU) Hekou itself proved to be a small (9000 residents) city perched on the border of the Red River. During the afternoon of our arrival, about 30 Chinese trucks waited to cross the border, most loaded with iron and steel products. We did not see any trucks coming from the Vietnamese side. ¶14. (SBU) Despite the apparent slowness of the cross-border trade, Hekou Bureau of Commerce Deputy Director Dong Gaoyun extolled her city's virtues, calling it "little Hong Kong." She claimed that cross-border trade had increased by an average rate of 36 percent per year since 1999. Even better were the prospects for further growth made possible by major infrastructure projects: the imminent completion of the highway to Kunming; the widening of the meter-gauge railroad; river bank stabilization; and, most importantly, the construction of a large new bridge over the Red River and border trade processing area about a mile upstream from the site of the present bridge. (Note: the new bridge did not appear particularly "large" to us nor would it have to be, as the Red River looks like it could be easily waded across at this relatively narrow crossing point. End note.) -------------- -------------- PROSTITUTION AND THE EAST IS RED -------------- -------------- ¶15. (C) Official pronouncements aside, one aspect of Hekou's economy was quite evident -- its sex industry. Prostitution, fueled apparently by lots of ready cash on the Chinese side of the border, along with the illegal immigration of many young Vietnamese women, was booming and conducted quite openly. While CG and Congenoff ate dinner at an outdoor restaurant in the central business area, a small truck drove by repeatedly advertising the services of "special district love slaves" (Te Qu Ai Nu) via loudspeaker and rather risqui posters (the same truck had driven by previously in broad daylight while Congeoffs were accompanied by local officials). Walking through a local handicraft and produce market just a short time later, a young woman who from her accent appeared to be Vietnamese leapt from a sofa inside a small store and grabbed Congenoff in an attempt to drag him into her place of business. In our hotel, we were awakened repeatedly by telephone calls from anonymous women. ¶16. (SBU) In an apparent throwback to the '79 border conflict, CG and Congenoff were awakened early the next morning by loudspeakers aimed from Hekou into Vietnam blaring "The East Is Red," followed shortly thereafter by patriotic music played from the Vietnamese side of the border. (Note: Relatively new-looking air raid drill instruction notices could be seen posted throughout the town. End note). At 8:30 am, Congenoffs watched the Chinese flag-raising ceremony, followed by the opening of the cross-border bridge to traffic. First, a single Chinese man holding the hand of a small boy walked by themselves towards Vietnam - we were told that the man was probably originally from Vietnam and was taking his son to school. Shortly afterwards, a crowd of about 300 Vietnamese farmers began running across the bridge toward China, bringing baskets of fresh produce for sale in local markets. The trucks on the CHENGDU 00000124 004.2 OF 005 Chinese side that had been waiting to cross the afternoon before had all disappeared, and no new ones had yet taken their place at the border inspection point. -------------- - MOHAN: "THE NEXT SHENZHEN" -------------- - ¶17. (SBU) The provincial Foreign Affairs Office (FAO) refused permission for CG and Congenoff to drive directly from Hekou to the China-Laos border town of Mohan (population approximately 700),a route that would have taken our vehicle along the roads directly paralleling the Vietnamese and Laotian borders. Instead, the route prescribed by the FAO required us to spend an extra day driving north to the main highway before cutting back down to follow the route of the Kunming-Bangkok highway (most of which was unfinished from Yuanjiang to the Laotian border). ¶18. (C) We saw little Chinese truck traffic headed south to Laos, even less than on the road to Hekou. However, many large trucks filled with produce (often mangosteens) passed us by headed north from the Laotian border. Local contacts told us that Laotian drivers and trucks were allowed to drive on Yunnan's highways as far north as Kunming, while Chinese drivers and trucks could drive into Laos as far as Vientiane (note: see paragraph 22 below concerning the use of falsified certificate of origin documents in cross-border agricultural trade. End note) ¶19. (SBU) The first part of that trip from Yuanjiang to Mohan was quite spectacular - 30 percent of the 147 kilometer stretch just south of Yuanjiang is said to be consist of bridges and tunnels. However, the last eight hours proved to be a bone-jarring ride over badly decayed secondary roads twisting through dense tall canopy jungle. In those areas where the route of the new highway was visible, construction activity appeared to be feverish, with large earthmoving vehicles and steamrollers working constantly. Mohan itself was a sleepy little (population 700) town with little evident (legitimate) commercial activity. A quick after-dinner stroll around the city's sleepy streets showed lots of new but often empty buildings. However, one prominent two-block area was devoted to the "entertainment" industry, and on the town's main drag, we saw a woman about 35 years of age shepherd a group of teenaged looking girls into a karaoke club, saying "come on, girls, you've got customers waiting." ¶20. (SBU) Daylight the next morning revealed a line of about 15 Chinese trucks waiting to cross into Laos, most filled with hardware and construction materials. In an office near the border crossing post, Congenoffs met with Mohan Border Port Deputy Director An Yongxiang. While admitting his town attracted far less attention from outsiders than did other some areas including Hekou, he still waxed rhapsodic about the town's prospects, calling it the "next Shenzhen." Why? According to An, the answer lies in the prospects for Chinese-Thai trade that will accompany implementation in the next few years of a China-ASEAN free trade zone, as well as the promised completion of the Yuxi-Mohan Railway (a part of the Trans-Asian Railroad). He admitted, however, that few provincial or central government delegations had visited Mohan recently and that the town's prospects had not yet appeared to attract much attention. -------------- THE PORT OF JINGHONG -------------- ¶21. (SBU) From Mohan, CG and Congenoff spent a rather long eight hours on the road driving to Jinghong, the capital of the Xishuangbanna Dai Autonomous Prefecture. Jinghong is also the first significant port inside China on the Mekong River, known in Chinese along that stretch as the Lancang River. Local officials told us the river is suitable for smaller oceangoing ships during high-water seasons, although rocky and shallow areas often made the journey difficult. A visit to Jinghong's port facilities indicated they were used mostly for passenger traffic and engineered to deal with large fluctuations in the river's water levels. We did not see any evidence of freight vessels coming into Jinghong or using the port facilities, perhaps due to the very low water levels during our visit. CHENGDU 00000124 005.2 OF 005 ¶22. (C) Introduced to us by the Thai Consul General resident in Chengdu, CG and Congenoff met with a local Dai minority (ethnic Thai) businessman based in Jinghong. The Dai trader is involved in a number of border-related agricultural and transportation businesses in both China and Thailand, and hinted at relationships with militia leaders in Burma. He confirmed to us that "around 80 percent" of agricultural goods exported from Thailand to China are shipped under falsified documents showing that they originate in Laos or Burma in order to take advantage of lower tariff rates applying to those countries. ¶23. (C) The trader also stressed that successful enterprises engaging in large volumes of cross-border trade in the region are regularly shaken down for bribes by officials and (in Burma) by armed militias, and merchants needed to be flexible and smart in order to prosper. According to the trader, the writ of China central or provincial-level government officials does not in practice go very far along Yunnan's borders Laughing, he cited his own transportation company as an example, and said that it is much easier to expedite cargo by giving gifts to local customs officials than to go through official bureaucratic processes. The trader made it quite clear that with a combination of the right connections and local expertise, it is possible to move any kind of cargo expeditiously within the region. ¶24. (SBU) During an obligatory banquet in our honor, Jinghong Foreign Affairs Office representatives stressed that tourism -- both internal and international -- is a major pillar of the local economy. They agreed that the city's location in China's "tropics" and proximity to the protected national areas of Xishuangbanna gives the place an atmosphere of exoticism. Many Chinese come to Xishuangbanna to see wild monkeys and elephants (Note: we understand in reality it is actually quite difficult to see such animals "in the wild." End note). While our FAO hosts talked, the restaurant put on a so-called "cultural show" consisting for the most part of young, scantily-clad women dancing and singing according to "Dai traditions." Between numbers they circulated through the restaurant to force drinks upon a giggling audience of mostly Han Chinese tourists. -------------- COMMENTS -------------- ¶25. (C) While there can be no doubt that modern high-speed roads and rail connection will greatly facilitate the flow of goods from Yunnan to its ASEAN neighbors, several important questions remain. Will China's poorer neighbors benefit from an even larger and cheaper flood of manufactured items from China? Will the new roads bring an upsurge in drugs and sexually-transmitted diseases? Will they bring more illegal immigration across those southern borders? And perhaps most important, who will be the ultimate beneficiaries of the new trade links? ¶26. (C) On the road from Mohan to Jinghong, CG and Congenoff stopped at a very poor Dai village located just by the side of the road. The place was filthy, and the villagers' livestock (pigs, water buffalo, and chickens) lived in the lower levels of the villager's huts. Pumps in the middle of the village belched out suspiciously brown water intended for domestic use. We asked the village residents what they thought of the new road. Would it bring them greater opportunities? Most villagers just shrugged and turned away, but one said directly, "This is a rich man's road. We're poor. How can it help us? BOUGHNER