CHINA WELCOMES WESTERN INVESTMENT IN MONGOLIAN MINING BUT

UNCLAS SECTION 01 OF 02 ULAANBAATAR 000602 SIPDIS SENSITIVE SIPDIS STATE PASS USTR, USTDA, OPIC, AND EXIMBANK STATE FOR EAP/CM AND EB/IFD/OIA USAID FOR ANE FOR D. WINSTON E.O. 12958: N/A TAGS: EINV PREL ETRD EMIN ENRG MG SUBJECT: CHINA WELCOMES WESTERN INVESTMENT IN MONGOLIAN MINING BUT FEARS ANTI-FOREIGNER SENTIMENT Ref: ULAANBAATAR 00565 THIS CABLE IS SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION ¶1. (SBU) SUMMARY: Mr. Chen Shan, Economics professor at CASS, the Chinese Academy of Social Sciences, told visiting Ulaanbaatar Econ/Coml Chief that China welcomes western involvement in Mongolia's mining sector but says anti-foreign (read: anti-Chinese?) sentiment is forcing the Chinese to rethink their investment strategy there. He said the reputation of Chinese miners in Mongolia is unfair and believes that Mongolia is relying too heavily on its mining sector for economic growth. END SUMMARY ¶2. (SBU) UB Econ/Coml Chief and Beijing Econoff recently had the opportunity to speak with Mr. Chen Shan, an Associate Economics professor at Institute of Asia-Pacific Studies of the Chinese Academy of Social Sciences (CASS) to solicit his views on Chinese-Mongolian economic relations. Western Investment in Mongolian Mining Welcomed -------------- --- ¶3. (SBU) According to Chen, China viewed its northern neighbor as an important source of minerals-based commodities needed for China's economic expansion, and China's hunger for mineral-based imports from Mongolia was expected to increase over the long term, growing in tandem with the Chinese economy. The advent of western mining firms interest in developing Mongolia's major mineral deposits was viewed by China not as a threat but as an opportunity. China's goal was to enter into strategic consortiums with western companies to help develop mines, the products of which could then be sold onto China. Western firms, he said, would help bring more stability to the minerals sector in Mongolia, providing a stronger guarantee that these sources will be available for purchase by China over the long term. He also felt that China's collaboration with western firms could help improve the reputation of Chinese mining practices in Mongolia. But All Investment Threatened by Anti-Foreign Bias -------------- -------------- ¶4. (SBU) Nevertheless, Chen said, the Chinese were concerned about recent "anti-foreign sentiment" and policies in Mongolia that were endangering mining sector development. He cited last year's change to the minerals law as well as street demonstrations against foreign companies involved in mining. (Comment: While budding Mongolian populism and nationalism has fueled some negative feelings towards foreign firms, particularly in the mining sector, it is clear that Chen was also tacitly referring to the sometimes vitriolic anti-Chinese sentiment that has made it difficult for Chinese firms to operate in Mongolia. There is resentment against many Chinese mining firms for their environmentally damaging practices as well as their tendency to import strictly Chinese labor for projects in Mongolia. In one instance two years ago, a Chinese mining firm had its license revoked, they claim, without cause. Anti-Chinese sentiment has also been on the rise among the Mongolian populace (reftel). End Comment) Chinese Contemplate New Investment Strategy -------------- ¶5. (SBU) Given the current negative atmosphere, Chen said Chinese officials were now rethinking their investment strategy in Mongolia. After the visit of President Hu Jintao to Mongolia in June, 2003 (his first visit to a foreign country as Chinese new leader) and a reciprocal visit of Mongolian President Bagabandi to Beijing a year later, Chinese foreign direct investment (FDI) in Mongolia tripled within the space of a year. Today, 30% of FDI in Mongolia's mineral ULAANBAATA 00000602 002 OF 002 sector comes from China and 70% of China's entire investment portfolio in Mongolia is concentrated in mining. Now, China fears the high ratio of Chinese investments in mining is beginning to represent too great a risk. Chen said the Chinese government has been encouraging Chinese investors to diversify into light industries and processing in Mongolia. (Comment: Chinese investors pulled out of small and medium enterprises (SMEs) and processing a decade ago because it was unprofitable. It is hard to see why they would return now, especially with mineral commodity prices at record highs. End Comment) Reputation of Chinese Miners in Mongolia Unfair -------------- -- ¶6. (SBU) Chen addressed the lingering reputation of Chinese mining companies in Mongolia as environmental destructors. He admitted that rapid growth in the 1990s overwhelmed Chinese regulators who were unable to keep pace with the mushrooming number of domestic small scale mining operations. Chinese miners then carried their unchecked behavior into Mongolia where they operated freely due to Mongolia's limited enforcement capacities and weak environmental laws. Yet Chen argued that this reputation was no longer deserved as Chinese authorities had improved enforcement of environmental standards among small scale miners in China which, he believed, would naturally carry over to Chinese operated mines in Mongolia. Nevertheless, he laid part of the blame for reckless Chinese mining practices at the feet of Mongolian authorities, who he said were responsible for enforcing their own environmental laws. ¶7. (SBU) Finally, Chen opined that Mongolia relied too heavily on the minerals sector for its economic development, leaving itself vulnerable to fluctuations in the market. Recent policy changes, he warned, would negatively impact the sector and could even threaten Chinese investment there. ¶8. (SBU) Econ/Coml Chief wishes to thank the Beijing Econ staff for arranging this meeting, particularly Joanna Wang, Rachel Brunette Chen and Brian Klein. ¶9. (SBU) This cable was cleared by Amembassy Beijing. GOLDBECK