FRANCE-CHINA TENSION OVER DALAI LAMA, AFRICA ASSISTANCE,

C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 001536 SIPDIS STATE FOR EAP/CM -- THOMAS, FLATT, THORNTON, SHEAR STATE FOR S/P -- CHOLLET, GREEN STATE FOR E -- YON STATE FOR D -- PARK STATE FOR EEB/OIA -- SCHOLZ, HICKS, TRACTON STATE PASS USTR FOR STRATFORD, WINTER, KALLMER, BAHAR NSC FOR LOI TREASURY FOR EUGENE HUANG, CHRIS WINSHIP, JASON PAU PARIS PASS OECD E.O. 12598: DECL: 06/07/29 TAGS: PREL ECON EFIN EAID EINV ETRD PHUM AU CH SUBJECT: FRANCE-CHINA TENSION OVER DALAI LAMA, AFRICA ASSISTANCE, INVESTMENT REF: (a) Beijing 288 (b) Beijing 955 (c) Beijing 1311 Classified by Economic Minister-Counselor Robert Luke. Reasons 1.4 (b) and (d). SUMMARY -------------- ¶1. (SBU) Economic Counselor Josselin Kalifa and Financial Counselor Pierre Mongrue from the French Embassy in Beijing told Econoffs June 5 that Sino-French relations are on the mend following several months during which China gave France the cold shoulder as punishment for President Sarkozy's December 2008 meeting with the Dalai Lama. They emphasized that France's "banishment" was carefully confined to the diplomatic realm, and that commercial contacts and contracts proceeded normally. They said that France has observed tension growing between China and Africa -- noting China lags well behind in its 2007 commitment of $2 billion in assistance to Africa -- and lamented that China's "no strings attached" aid undermines more responsible forms of development assistance. They added China has begun to see itself as a leading investor country. Chinese investment in France is limited to two high-profile deals and several smaller transactions. France and China updated their investment agreement this year. End Summary. Punishment for Dalai Lama Visit Appears to have Ended -------------- -------------- ¶2. (SBU) Kalifa observed that China's response to the Dalai Lama's visit was focused and well-coordinated. When relations between France and China were at a nadir, Chinese contacts were "very disciplined" in their refusal to talk to or assist French Embassy officials, he said. However, commercial exchanges continued as usual and French businesses did not report any exceptional problems. Mongrue added that he believes a debate had taken place within the Chinese leadership over how far to push the issue and that when popular criticism appeared to be going too far, China reined it in. ¶3. (C) Kalifa added that the Mayor of Paris planned to meet the Dalai Lama the weekend of June 6-7. National-level French officials have no plans to meet the Dalai Lama and have carefully explained to China that they cannot control the Mayor's activities. Nonetheless, Kalifa noted that fears exist in France that if Paris "shows the Dalai Lama too much love," there could be a Chinese backlash in which China might direct Beijing to shun France while similarly claiming lack of control. China-Africa Tension Brewing in Advance of Third Summit -------------- -------------- ¶4. (C) Kalifa said that France is skeptical of China's ability to take a leading role among developing nations in Doha and other forums. He pointed to the fact that many African countries are "angry" at China's "uneven trade practices." Mongrue mentioned that several African nations feel trade with China has largely been at Pe*r[Q\Xtheir expense. He added China's investment and aid to Africa had lagged well behind its pledge of $2 billion at the second Forum on China Africa Cooperation (FOCAC) in 2006 and speculated that China may announce a series of investments and aid in advance of the third round, which will take place in Egypt in November 2009. (See reftels.) Frustration Over Development Assistance -------------- ¶5. (SBU) Kalifa and Mongrue echoed U.S. interest in cooperating with China on overseas development programs, especially in Africa, but said France has found China to be an "unfair competitor" because it does not abide by Paris Club rules. Chinese aid undercuts efforts of other countries, like France, because it is either unconditional or BEIJING 00001536 002 OF 003 conditioned on access to natural resources. Kalifa said that Chinese aid along these lines weakens support within France for France's own international development assistance. For example, French people do not support debt forgiveness if China's response is to loan more money to poor countries. Mongrue noted that China's not being a member of the Organization for Economic Cooperation and Development's Development Affairs Committee has made assistance coordination difficult. ¶6. (SBU) The two added that the French Development Agency has limited programs in China that are focused on reducing greenhouse gas emissions. The agency has offered assistance through funding, expertise, and project management for clean energy and clean transport projects. Growing Chinese Investment Abroad But Protectionism at Home -------------- -------------- ¶7. (SBU) Kalifa remarked that "the Chinese really see themselves as big investors abroad." For example, on a recent EU purchase mission, China emphasized that "investment was at least as important as trade." He observed that this could make China more amenable to stronger bilateral investment treaties (BITs) as their own companies would stand to benefit. ¶8. (C) At the same time, he assessed that China's climate for foreign investors is "getting worse." In particular, he criticized domestic procurement in China's stimulus programs. He expressed exasperation at China's bald-faced ability to denounce protectionism abroad when China is a leading practitioner. While other countries remain open to Chinese investment based on the belief that the capital is beneficial for the recipient country, he assessed that at some point, developed countries could begin to limit Chinese investment in order to gain leverage in a push for reciprocity. He admitted that for now, foreign companies in China are happy because their profits are still "better here than anywhere else." China's Investments in France Growing "BIT-by-BIT" -------------- -------------- ¶9. (SBU) Kalifa said to date, there have only been a handful of Chinese investments in France. Large investments have had mixed results. Kalifa pointed to China National Bluestar, a subsidiary of national-level State-owned Enterprise China National Chemical Corporation, as an example of a successful investor. In 2006, Bluestar acquired leading France-based animal nutritional feed firm Adisseo for US$524 million, making it the second largest producer in the world of methionine, a feed additive. Also in 2006, Bluestar bought French firm Rhodia's organic silicone patents, manufacturing operations, and distribution channels for US$ 630 million. The Rhodia acquisition catapulted Bluestar to the third-largest organic silicone producer in the world. The company's President, Ren Jianxin, has stated in the press that Bluestar aims to take the number two slot by 2010. Organic silicone was a US$7 billion market in 2007. These two investments make Bluestar the largest Chinese investor in Europe. ¶10. (SBU) On the other hand, Kalifa said Chinese firm TCL's investment in electronics maker Thompson was widely regarded as a disappointment. Most Chinese investments in France are small, he added. Notable examples include investments in a firm that makes boat engines and in a company that makes wood products. Also, Huawei and ZTE had invested in mid-sized research and development facilities and large representative offices, he said. ¶11. (SBU) Future Chinese investments are likely to target foreign firms with successful China operations and high margins overseas, Kalifa said. He pointed to the example of a French firm that makes "enormous tunneling machines," does 60% of its business in China, and had attracted Chinese investors. ¶12. (SBU) Kalifa added that France seeks to attract Chinese investment through its Invest in France Agency, which has an office BEIJING 00001536 003 OF 003 in Shanghai staffed by 10-15 people. He added that in the past France had difficulty tracking French outbound investment because a large portion of French and other European investment goes through the Netherlands and Belgium. Recently, however, France has changed its reporting requirements for outbound investment, such that investors now have to report final destinations. Even so, data is incomplete because most French companies in China also reinvest their profits. Details of China-France BIT Negotiations -------------- ¶13. (C) Regarding investment treaties, Kalifa said France and China had renewed their "investment protection agreement" in 2007. He said that China's Ministry of Commerce negotiators, led by Treaty and Law Division Director Lu Tao, had been conservative throughout the negotiations. After two years without movement, the agreement came together suddenly in just two days. Kalifa suspected the cause was pressure for a deliverable in advance of a presidential visit. Kalifa called the updated agreement, modeled after the Germany-China BIT, "moderately successful." He said updates covered arbitration and definition of territory. He added China had taken issue with a French proposal for "cultural exceptions," which apparently had to go quite high up the chain for approval on the Chinese side. French Economic Dialogues with China -------------- ¶14. (SBU) Kalifa and Mongrue emphasized France has POSITIVE relationships with both MOFCOM and the National Development and Reform Commission (NDRC),which chairs an annual "Structuring Partnerships" dialogue with French Minister of Foreign Trade Christine Lagarde. Kalifa assessed that NDRC has greater leeway to make its own decisions than other Chinese agencies, which he said leads to more in-depth exchanges. He added that Lagarde visits China twice a year, which has allowed her to make personal contacts that facilitate constructive dialogue. France tries to focus on issues it can realistically achieve; for instance, there is a lot of room for improvement in health care, Kalifa said. ¶15. (SBU) Kalifa mentioned that commercial relations between France and China began with the longstanding Comite France-Chine, a forum of French business leaders who host "good industry dialogues" on key topics by inviting influential speakers. PICCUTA