C O N F I D E N T I A L SECTION 01 OF 02 SHANGHAI 000380

SIPDIS

SIPDIS

DEPT FOR EAP/CM, INR/B AND INR/EAP
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, ALTBACH, READE
TREAS FOR OASIA - DOHNER/HAARSAGER/WINSHIP/CUSHMAN
TREAS FOR AMB. HOLMER, WRIGHT,TSMITH
USDOC FOR ITA/MAC - DAS KASOFF, MELCHER, MCQUEEN
NSC FOR WILDER AND TONG

E.O. 12958: DECL: 6/21/2052
TAGS: PGOV PINR EINV ECON CH
SUBJECT: CARLYLE, XUGONG, AND BUREAUCRATIC POLITICS

REF: A) 06 BEIJING 16050

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CLASSIFIED BY: Kenneth Jarrett, Consul General, U.S. Consulate,
Shanghai, Department of State.
REASON: 1.4 (b), (d)




1. (C) Summary: Central government officials promised a
resolution to Carlyle Group's effort to purchase a 45 percent
stake--down from its initial 85 percent bid--in Xugong Machine
Group by the end of July. The current hang-up was the result of
bureaucratic infighting between the Ministry of Commerce
(MOFCOM) and the powerful National Development and Reform
Commission (NDRC). While NDRC had no specific objections to the
deal, it had decided to flex its bureaucratic muscles vis a vis
MOFCOM in a bureaucratic fight over control over the investment
process. End summary.

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Carlyle-Xugong Deal: An End Finally in Sight
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2. (C) During a June 20 discussion with Pol/Econ Chief and
Poloff, Carlyle's Chief China representative Luo Yi (strictly
protect) said that the Chinese government had promised a
resolution of the approval process for Carlyle's bid to acquire
a 45 percent stake in Xugong Machine Group by the end of July.
He said that in January, Carlyle had revised its offer to
purchase an interest in Xugong from its original October 2005
bid of 85 percent, after running into pushback from bureaucratic
interests (Ref A).

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A Hostage to Infighting
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3. (C) Luo explained that MOFCOM had sent a report to the State
Council in early May recommending approval. The State Council
then sent out letters to other relevant ministries seeking their

input. The China Securities Regulatory Commission, the State
Asset Supervision Administration Commission, the Tax Bureau, the
State Administration of Industry and Commerce, and the State
Administration for Foreign Exchange all responded recommending
approval of the deal. However, NDRC, although it had no
specific objection to the deal itself, ordered negotiations put
on hold, citing objections over the investment review and
approval process. NDRC said it should be the entity responsible
for approving the deal rather than MOFCOM.


4. (C) Despite MOFCOM objections, NDRC forced Carlyle and
Xugong back to the negotiating table. Luo said that Carlyle was
tired of being punted around like a political football while the
ministries fought over who had control of the deal and the
investment approval process generally. However, he had been
informed by both NDRC and MOFCOM that pulling out now was not an
option and that a final decision would be made in July. To pull
out would make both ministries lose face and jeopardize
Carlyle's relationship with them. When pressed, however, Luo
admitted that even with all of the headaches, the deal would
still be "very profitable." He expressed hope that Treasury
Deputy Secretary Kimmitt's recent visit to Beijing might help
force a bit more transparency and movement in China's investment
approval process.

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The NDRC Juggernaut
--------------


5. (C) Luo said that this current struggle highlighted the
immense power that NDRC held, despite efforts by former Premier
Zhu Rongji to dissipate its clout. Even in cases where it had
no clear stake, such as the Xugong deal, NDRC would get involved
to remind other ministries that it was still the preeminent
economic organization in the State Council. Its top position
was highlighted by the fact that in such cases, the State
Council did nothing to intervene against NDRC's actions. Luo
believed that the difficulties Carlyle had experienced with
MOFCOM and NDRC had little to do with personal politics between
their ministers, and more to do with bureaucratic infighting.


6. (C) According to Luo, part of NDRC's clout resulted from the
close ties between NDRC Chairman Ma Kai and Premier Wen. They
had formed a relationship when Ma had worked for Wen in the

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State Council when Wen was Vice Premier. Luo assessed that Ma
was being groomed by Wen to backfill the Premiership when Wen
retired in 2012 (Note: Luo is friends with Ma's daughter and her
husband. End note.). Commenting on MOFCOM Minister Bo Xilai,
Luo said that he was widely disliked by his peers, primarily
because they disliked his father, Bo Yibo, a once-powerful and
now-deceased party elder. Luo assessed that despite his
unpopularity, Bo might still rise to the level of vice premier,
but had little hope of ever becoming Premier.
JARRETT