DALIAN PORT GROUP EXPANDS REACH THROUGHOUT

C O N F I D E N T I A L SECTION 01 OF 02 SHENYANG 000136

SIPDIS

E.O. 12958: DECL: 03/30/2017
TAGS: CH ECON ETRD EWWT PGOV PREL
SUBJECT: DALIAN PORT GROUP EXPANDS REACH THROUGHOUT
NORTHEAST CHINA

REF: A. A) SHENYANG 2007-0056

B. B) SHENYANG 2007-0171

Classified By: CONSUL GENERAL STEPHEN WICKMAN Reasons 1.4 B and D


1. (U) Summary. The "Five Points One Line" development plan,
devised by former Liaoning Party Secretary and current
Executive Vice-Premier Li Keqiang, is virtually co-extensive
with the expansion of Dalian Port Group, which continues to
broaden its reach throughout Northeast China (Ref A). In
addition to controlling Dalian Harbor, Dalian Airport, and
the Dalian Sea Passenger Terminal, the Group is the largest
investor in the Changxing Island Development Area, as well as
the Suifenhe Land and River Ports along the Chinese-Russian
border. The Group has entered into a joint venture with
Denver-based ProLogis to establish a logistics service center
in Shenyang's Hunnan Development Zone. The logistics
operation will service primarily the Hunnan Development Zone
and the newly-established Aviation Industrial Zone. End
Summary.


2. (U) The Changxing Island Development Area is comprised of
five islands west of the Dalian Development zone. Named for
the largest island, the development covers 330 square
kilometers. Although construction began just over a year
ago, the development is already home to South Korea's STX
Shipbuilding Company and twenty-two small factories which
manufacture ship fittings and accessories. The vast majority
of the factories are wholly-owned South Korean enterprises.
Raw materials for all of these operations are brought in by
ship from other points in China.


3. (U) The ships are processed at the newly-opened Changxing
Harbor facility. The facility opened three bulk cargo berths
in April of this year and has handled 270,000 tons of cargo
to date. Construction continues on the bulk cargo facility,
which will eventually afford a dozen berths. The ambitious
development plans also includes a large deep-water petroleum
facility. The island has excellent offshore depths of 20 to
30 meters and the planned facility will be able to handle
even the largest tanker vessels.


4. (U) Unlike the petroleum facility at Dalian Harbor, which
serves primarily the strategic petroleum reserve facility,
Changxing Harbor will support a planned petrochemical
industrial complex. According to Wang Yi, General Manager of
Dalian Port Group,s Oil and Liquefied Chemicals Division,
the petrochemical complex, devised and operated by
PetroChina, will incorporate the full range of petroleum
processing, from refining to manugacturing high-end petroleum
products. Each stage of petroleum processing will be linked
to the subsequent stage by underground pipelines, eliminating
both the costs and the hazards of surface shipping.


5. (U) Dalian Port Group is also the major investor in the
large residential development on Changxing Island, providing
basic infrastructure and overall direction for the project,
primarily developers from Hong Kong and Shanghai. As with
the shipbuilding industrial zone the housing area targets a
prinarily South Korean market. All promotional billboards
and literature are printed in Chinese and Korean. The
housing covers a broad economic spectrum from low-end housing
for factory and shipyard workers, to high-end villas for
those seeking refuge from the hustle and bustle of Dalian.
Prices range from RMB 2000 to RMB 4000 per square meter.


6. (U) The island, which had a population of less than twenty
thousand at the start of development, expects to expand to a
total population of about five hundred thousand within the
next three years. At present, nearly all of the labor force
is bused in from Dalian and bused back at the end of the
workday. The trip, made on STX-chartered buses, takes one
and half hours in each direction. Company managers say that
once the housing is completed, they expect it to fill
rapidly. While it is unlikely that workers will buy housing,
company managers expect the housing to be bought up by
investors and then rented to the laborers.


7. (U) Development Area Business Development Director, Leon
Wu, said that in order to regularize the island's rapidly
growing population, workers from outside Dalian will be given
six-month temporary resident permits. At the end of the six
months, the workers will then be able to transfer their
residency to the development area and become permanent
residents. The island's original inhabitants were virtually
all farmers, and although few have since taken jobs in the
service sector, most have chosen to remain farmers. Slightly
less than ten thousand had to be relocated to facilitate the
development. They now live in new housing units in

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newly-built high rise structures in the rapidly developing
city center. Another ten thousand remain in older farm
housing on the north end of the island. Conversations with
several of the relocated persons indicated that they were
satisfied with the move and did not mind commuting to the
fields situated along the island's newly established public
bus service.


8. (U) Yet another aspect of Dalian Port Group's effort on
the island is the development of a wood-products value-added
processing center. The center will begin production of
plywood and chipboard for construction use, relying on raw
materials from lumber imported from Russia via Suifenhe, in
Heilongjiang Province. Dalian Port Group is also the largest
investor in the Suifenhe Port of Entry.


9. (C) While the publicly-traded Dalian Port Group continues
to expand its already huge network of logistics and real
estate operations, the government arm, Dalian Port Authority,
is beginning to resist what it sees as excessive levels of
privatization in Dalian Harbor, insisting that new entities
in the main harbor at Dayou Bay be at least partly government
owned. According to Luan Haitao, Director of Foreign
Investment for the Bonded Port Area, this insistence has
halted investment in the northern shore of Dayou Bay for the
time being. Dalian Port Group,s Hu Song said the Port Group
is in no hurry to move forward on that portion of the
development, since existing container capacity in the port is
now three times current demand following the recent
completion of the Number Two and Number Three container
facilities on the south shore.


10. (C) According to Luan, the north shore originally was
planned to be developed for bulk cargo, but due to the
problems with the Port Authority, Dalian Port Group shifted
its bulk cargo development emphasis to the nearby Port of
Yingkou. Dalian Port Group is also Yingkou's largest
investor and has made major investments in improving the bulk
cargo handling capacity of that harbor, moving it well past
100 million tons per year. The Group's management explained
that the Group has plenty of projects to keep it busy and
that development of the north shore can wait until the Port
Authority becomes more cooperative.


11. (U) As in all the other harbors on the Liaoning coast,
the Dalian Port Group is the driving force behind the rapid
modernization of Jinzhou as well. The strategy in Jinzhou is
to develop enhanced bulk cargo facilities dedicated primarily
to the shipment of coal mined in eastern Inner Mongolia to
China's southern regions. The port will also handle domestic
shipments of bulk goods imported into Inner Mongolia from
Russia, as well as shipments of grain and produce from
western Liaoning, Jilin, and eastern Inner Mongolia to
markets in southern China.


12. (U) Dalian Port Group is at present a major investor in
Jinzhou Harbor and Development Zone, and discussions are
underway for the Dalian Port Group to purchase Jinzhou Harbor
outright (Jinzhou is the only port that is fully listed on
the Shanghai and Hong Kong stock exchanges). While there are
plenty of opportunities for expansion within Liaoning at
present, the high level of international cooperation and
close relationship with Denver-based ProLogis and the Port of
Singapore indicate that Dalian Port Group is positioning
itself for expansion abroad.


13. (U) In addition to moving into real estate development,
The Dalian Port Group is broadening the nature of its
activities by entering the logistics servicing field in
Shenyang,s Hunnan Development Zone. A USD 50 million joint
venture with ProLogis will serve the new Aviation Industrial
Zone and will also focus heavily on serving FoxConn,s needs
as FoxConn,s new nano-copper and magnesium alloy plants come
on line (ref B). The Port Group,s goal is to become an
end-to-end supply chain manager for companies throughout
Northeast China.
SWICKMAN