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 SHENYANG 00000136 002 OF 002 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