ETHIOPIA/CHINA: PRC COMPANIES FEEL FOREIGN

C O N F I D E N T I A L SECTION 01 OF 02 ADDIS ABABA 002541 SIPDIS STATE FOR INR/B E.O. 12958: DECL: 09/12/2018 TAGS: ECON PGOV PREL PINR EAID CH ET SUBJECT: ETHIOPIA/CHINA: PRC COMPANIES FEEL FOREIGN EXCHANGE PINCH Classified By: Ambassador Donald Yamamoto. Reasons 1.4 (b) and (d). Chinese Firms Feel the Forex Pinch -------------- ¶1. (C) During a working lunch, newly arrived People's Republic of China (PRC) Ambassador to Ethiopia Gu Xiaojie and DCM Zhang Yuebang said that Ethiopia's foreign exchange crunch (septel) was "trouble" for Chinese companies, which have been unable to procure easily materials and supplies from international vendors in Ethiopia. Many critical materials are now difficult to purchase in Ethiopia, Ambassador Gu noted, adding that "our managers are running around India, Pakistan and the Middle East to try to find cement." Chinese firms in Ethiopia have no access to credit locally. China-based firms subsidize their Ethiopia-based branches by procuring whatever materials possible in China and shipping them directly to their branches in Ethiopia. Ambassador Gu remarked that the Ethiopian Birr (ETB) is overvalued by as much as thirty percent in transactions involving the Chinese currency and the ETB. ¶2. (C) On September 10, the Ambassador hosted a working lunch for Gu and his staff. PRC DCM Zhang, Senior Colonel Jiao Xinchun (Defense Attache),Captain Ren Lichen, Political Officer Ma Xiaoxiao, Political Officer Wang Gang and Economic and Commercial Officer (Ms.) Liu Jie accompanied Ambassador Gu. DCM, DATT and embassy political and economic officers also participated. The lunch follows the tradition of U.S.-China working lunches the Ambassador hosted with previous PRC Ambassador Lin Lin, and Ambassador Gu appeared eager to continue the engagement, noting, "Ethiopia is very important for us and we are glad to compare notes, to find out what we are both doing here and to look for ways to coordinate." Ambassador Gu said China continues to be open to cooperation and coordination with the United States on Africa, noting that the China-Africa Sub-dialogue is an important mechanism for creating "win-win" opportunities for the United State, China and Africa. CPC and EPRDF Enjoy Close Working Relations -------------- ¶3. (C) DCM Zhang downplayed China's ability to influence Ethiopia's forex policies and both he and Ambassador Gu demurred when the Ambassador suggested that China should think about coordinating with other key international players to impress upon the Ethiopian government the need to reform and liberalize its banking sector. However, Ambassador Gu noted a Communist Party of China (CPC) delegation to the ruling Ethiopia People's Revolutionary Democratic Front (EPRDF) party congress in Ethiopia the week of September 15. The CPC and the EPRDF have a "close working relationship," according to Ambassador Gu. Profit Margins Remain Low in Ethiopia -------------- ¶4. (C) The PRC Embassy team is optimistic about economic opportunities in Ethiopia and Africa more generally. The more Africa develops, Gu observed, "the more opportunities for everyone." DCM Zhang listed three reasons Chinese firms are competitive in Ethiopia: (i) they have experience working in hardship conditions; (ii) their equipment costs are lower than those of many Western firms; and (iii) their bids are competitively priced. In general, DCM Zhang said, Chinese firms have very low profit margins in Ethiopia, due to Ethiopia's bureaucratic inefficiencies and market failures, and some firms are losing money. However, Zhang added, some firms begin to realize profits on their second or third contracts, once the costs of shipping their equipment and materials to Ethiopia have already been born (i.e., during their initial contracts). Bio Notes: Counselor Zhang Yuebang -------------- ¶5. (C) Counselor Zhang is from Hebei province and is the fifth of six children. He has four sisters and a brother. He has just purchased a new apartment in Beijing. He has been in Ethiopia for two years and does not know when he will ADDIS ABAB 00002541 002 OF 002 receive his next posting, although he noted that Chinese diplomatic tours in Africa are generally two to four years. He speaks English fluently. YAMAMOTO