ITALY'S TRADE AND INVESTMENT WITH CHINA

UNCLAS SECTION 01 OF 03 ROME 000140

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV ETRD CH IT
SUBJECT: ITALY'S TRADE AND INVESTMENT WITH CHINA

REF: 05 ROME 02547

SUMMARY
=======


1. (U) Trade and investment between Italy and China will
reach record levels in 2006, likely surpassing 2005's 18.7
billion euro in trade. The countries made a concerted effort
to increase bilateral trade and investment in 2006, including
the largest-ever Italian trade delegation to China and
concluding agreements to stimulate investment and joint
ventures. Bilateral trade and cooperation will likely
increase if a three-way agreement routing Chinese export to
Europe through the Suez canal and southern Italian ports is
finalized. End Summary.

ITALY-CHINA TRADE
=================


2. (U) Italian imports from China have doubled since 2000,
and Italian exports to China have also risen sharply. China
is Italy's fourth largest trading partner, providing 4.6
percent of imports.

Italy-China Trade Figures (billions of euro)
(Source: Italian Statistical Agency (ISTAT))

IMPORTS EXPORTS
2000 7.0 2.4
2001 7.5 3.3
2002 8.3 4.0
2003 9.6 3.9
2004 11.8 4.5
2005 14.1 4.6
2006* 13.3 4.1

*Provisional figures for January - September 2006


3. (U) Italian exports to China are comprised primarily of
metals, textiles, petroleum and related products, machinery
and equipment, scientific and process control instruments,
and road vehicles. Exports of plastics, inorganic chemicals,
and other chemical materials and products have increased
considerably in the past year.


4. (U) Almost all categories of Chinese exports to Italy
have increased from their 2005 levels. Manufactured goods,
such as leather, apparel, clothing accessories, footwear,
gold, photographic equipment, and miscellaneous manufactured
articles had especially large increases. Many of these goods
are counterfeit and labeled "Made in Italy." Many are also
indistinguishable from the originals. These pirated goods
are a cause of negative reactions among many Italians who
resent the growing Chinese presence.


PRODI DELEGATION VISITS CHINA
=============================


5. (U) Italian PM Romano Prodi led a delegation of
government officials and over 700 business leaders on a
six-day visit to China in September 2006 (reftel). This was
the first high-level delegation to visit China since 2004.
The delegation traveled to Nanjing, Guangzhou, Shanghai,
Tianjin, and ended in Beijing. Throughout his visit, Prodi
sought to conclude trade agreements through meetings with
Chinese officials. During Prodi's visit to the port city of
Tianjin, trade representatives signed agreements on seven
cooperation programs worth 192 million dollars. Prodi also
attended the China-Italy Small and Medium Enterprise fair,
where over 4,000 Chinese and 760 Italian companies displayed
their products and services. Roughly 90 percent of Italian
companies are SME's.

ITALY-CHINA-EGYPT SHIPPING AGREEMENT
====================================


6. (U) Italy, China, and Egypt are negotiating a three-way
agreement to route Chinese exports to Europe through the Suez
Canal and making southern Italy the main entry point for
Chinese exports to Europe. Italian PM Romano Prodi discussed
the issue in Cairo with Egyptian Trade and Industry Minister
Rachid Mohamed Rachid in December, and also with officials in
Beijing in November. When implemented, the agreement will

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help create jobs in the South, Italy's poorest region, and
will further increase Italian trade with China.

ITALIAN INVESTMENT IN CHINA
===========================


7. (U) Cooperation between Italian and Chinese companies
grew in 2006, especially among larger enterprises. As of
September 2006, there were 1,428 Italian companies operating
in China. The following are among the most notable
developments in 2006.

Heavy Industry
--------------


8. (U) In July 2006, Fiat subsidiary Iveco and Shanghai Auto
agreed on a 50/50 joint venture worth 300 million dollars to
produce heavy-duty trucks in Chongqing. At full production
capacity the joint venture will have an annual production
capacity of 40,000 heavy-duty trucks and 30,000 engines by

2008. Also in heavy industry, Italian firm Globeco entered
into a venture with a Chinese state-owned company to produce
150 pollution cleaning vessels in the Changsha Shipyard in
Hunan. The initial production is valued at 75 to 100 million
euro.

Financial Services
--------------


9. (U) PM Prodi and Chinese PM Wen Jibao agreed to the
creation of a 225 million euro private equity fund by Italian
Intesa San Paolo IMI, China Development Bank, and China Exim
Bank. The fund, Mandarin Capital Partners, will pursue
ventures between medium-sized Chinese and Italian companies
providing 25 million euro capitalization for each company.
Separately, Assicurazioni Generali established the Generali
China Life Insurance Company with capital worth 168 million
euro, and obtained permission in 2006 to begin operating in
the non-life insurance sector.

Textiles
--------------


10. (U) In the textiles sector, Italian Montefibre joined
with Jilin Qifeng Chemical Fiber in a 160 million dollar
joint venture to produce acrylic fiber.

Electronics
--------------


11. (U) Eurotech Group signed an agreement with the
government-owned Shaanxi Baocheng Aviation Instrument Co. to
produce two million euro of computers annually. The Sacmi
Group began operations at a new plant in Nanhai dedicated to
producing machines and spare parts for the ceramic industry.

Retail
--------------


12. (U) Versace has five outlets in China and has announced
plans to open nine additional stores at a cost of eight
million euro, while Benetton is preparing to open 200 stores
in China by 2008.

CHINESE INVESTMENT IN ITALY
===========================


13. (U) Chinese investment in Italy remains relatively
small. In 2005, Chinese investment in Italy totaled 102
million dollars, sixteen percent of the 640 million dollars
Italian businesses invested in China in that year. Higher
production costs and a complicated bureaucracy have deterred
Chinese investment. In 2006, the Anhui Jinghuai Automobile
Group opened a research and development center in Turin,
which employs Italian researchers dedicated to designing new
vehicles.


14. (U) In May of 2006, 30 Chinese entrepreneurs visited
Milan to explore investment opportunities in the textile,
fashion, auto components and financial sectors. Italian and
Chinese trade commissions signed a memorandum of
understanding in November to promote cooperation of SME's in
the two countries. The memo includes organizing seminars,
business delegations, exhibitions and expositions, and

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corporate training.

EU ANTI-DUMPING MEASURES
========================


15. (U) On October 4th, 2006, the EU approved controversial
measures to impose anti-dumping measures against shoes
imported from China. Italy lobbied aggressively for tariffs
of 16.5 percent which will now be levied on Chinese leather
shoe imports for two years. The EU claims European footwear
production has fallen by 30 percent causing a loss of 40,000
jobs in the sector. Chinese leather shoe exports to the EU
increased by 450 percent from 2004-2005, totaling 206 million
pairs.

COMMENT
=======


16. (U) Italian businesses attitudes towards China, and
Chinese competition, are slowly evolving. From the earlier
knee-jerk protectionism that manifested itself in the EU's
anti-dumping measures, Italian attitudes seem to be shifting
to an "if you can't beat them, join them" position. Italian
businesses, especially ones most susceptible to competition
from low-cost Chinese labor, are establishing a manufacturing
and retailing presence in China in an effort to take
advantage of low labor costs and sell luxury brand goods to
China's growing middle class. The transshipment agreement
between China, Egypt, and Italy is another case in which the
Italian government, recognizing that Chinese imports are here
to stay, is trying to ensure that Italy extracts whatever
benefit it can from the growing quantity of Chinese goods
exported to the EU. End comment.
SPOGLI