NORTH AFRICAN DIPLOMATS ANGRY ABOUT "CHINA INC."

C O N F I D E N T I A L BEIJING 000913 STATE PASS USTR FOR STRATFORD TREASURY FOR OASIA E.O. 12958: DECL: 04/03/2034 TAGS: ETRD EINV EAID PREL CH AU SUBJECT: NORTH AFRICAN DIPLOMATS ANGRY ABOUT "CHINA INC." REF: A. BEIJING 721 (CORRECTED) ¶B. BEIJING 228 ¶C. BEIJING 527 Classified By: Econ Mincouns Robert S. Luke, reasons 1.4 (b,d) ¶1. (C) SUMMARY: North African diplomats based in Beijing told EconOff that China's relations with the region are under stress caused by explosive growth in China's exports to the region. China's trade with the five countries in the region grew by 590 percent from 2001 to 2007. North African countries compete with China in some sectors, and are unhappy that China is unwilling to intervene in order to rebalance trade with developing countries. END SUMMARY. China's Trade with North Africa in Perspective -------------- - ¶2. (U) China's total trade with North Africa is only one-half of one percent of its global trade. In 2007, the total trade with the five countries of northern Africa was around $14 billion, and China's exports accounted for 75 percent of the total. In terms of total bilateral trade, China's main partner in the region is Egypt, but China's biggest source of imports is Libya. Several North African countries can attribute a large part of their trade deficits to China: Egypt (20 percent); Tunisia (15 percent); Morocco (10 percent). China and Egypt -------------- ¶3. (SBU) Trade: Egypt is China's biggest trade partner in the region, and of all the North African missions in Beijing, only Egyptians project a positive image of trade relations with China. Egyptian economic officer Fadel Yacoub confirmed that bilateral trade volumes have grown by around 450 percent since 2001, with China's exports growing twice as fast as Egypt's. Bilateral trade with China, said Yacoub, will likely surpass U.S.-Egypt trade in 2010. However, in 2008, total trade rose to $5.3 billion, and Egypt exported only $400 million worth of goods to China (less than 10 percent of the total). ¶4. (C) Labor Competition: Egypt recognized China as a "market economy" in 2006, and Yacoub said that Egypt regards the trade imbalance as a structural problem caused by China's labor advantage, not just the foreign exchange regime. Since 2001 China has pledged to work toward "balanced and sustainable" trade with Egypt, but the imbalance has only grown. Yacoub confirmed there is political pressure to address this problem, but Egypt's primary policy approach is to attract investment and to strengthen its own export strategy. ¶5. (C) Investment: Yacoub said that Egypt is not interested in opening up mining to China, so it needs to think creatively. Egypt's "Suez Cooperation Zone" is a host to one of China's five planned trade zones that officials wish to establish as part of China's Forum on China-Africa Cooperation (FOCAC) commitments made by President Hu Jintao at the Beijing FOCAC meeting in 2006. Yacoub said that Egypt hopes to become China's gateway for trade in Africa. The zone hosts Chinese factories making motorcycles, textiles, glass and tractors. Egypt will host this autumn,s meeting of the FOCAC ministerial. China and Algeria -------------- ¶6. (C) Trade: Algeria is China's second largest trade partner in the region. Unlike its neighbors -- and due to a national trade surplus -- Algerian diplomats in Beijing are less alarmed about the trade deficit with China. In 2007, Algeria exported about $1.2 billion in goods to China, roughly half of the $2.7 billion Algeria purchased from China. In 2008, total trade was $4.5 billion, an increase of around 18 percent. In 2008, however, Chinese exports surged to $3.9 billion and Algerian exports decreased to $850 million. ¶7. (C) Services: Algeria's large public works program makes the country's service sector highly attractive to China's state-owned enterprises (SOEs). In fact, there are Chinese SOEs in Algeria with contracts that exceed the amount of annual bilateral trade. For example, China's CITIC Group and the China Railway Construction Corporation (a former Chinese army enterprise) won a $6.2 billion contract to build part of a new trans-national highway, which will be completed in ¶2010. Tens of thousands of Chinese workers are living in Algeria to labor on this and other projects. A Chinese company was even contracted to build Algeria's new foreign ministry headquarters (REF A). China and Libya -------------- ¶8. (U) Trade: Libya is China's third largest trade partner in North Africa, and it is the only country in North Africa that has a national trade surplus and also a bilateral surplus with China, due largely to Chinese demand for its oil. Total bilateral trade in 2007 was $2.4 billion, and Libya's surplus totaled $686 million. Figures for 2008 are not yet available. ¶9. (U) Investment: According to press reports, Libyan officials announced in March that they would preclude a proposed Chinese $400 million investment in a Libyan oil field owned in part by Canada's Verenex Energy Incorporated. To exercise its right to preempt the Chinese bid, Libya's National Oil Corporation will be required to match the bid placed by China National Petroleum Corporation (CNPC). China and Morocco -------------- ¶10. (C) Trade: Morocco's economic relationship with China is based primarily on trade. Official data from China's Ministry of Commerce (MOFCOM) indicates that from 2001-2007, China's exports to Morocco increased by 620 percent. In 2007, China's exports ($2.1 billion) accounted for more than 80 percent of the total trade value ($2.5 billion). Moroccan Deputy Chief of Mission in Beijing Mohamed Farahat is openly bitter about economic relations with China, and says China's trade advantage is "( simply not fair for a developing country that is unable to sell anything in China." Farahat scoffed at the Chinese central bank proposal for a new international reserve currency, stating "China will never play the role of a global leader if it treats its trade partners so poorly." ¶11. (C) Services: Morocco has a conservative labor and foreign contracting policy and has not awarded any major service contracts to Chinese companies. Farahat said that Morocco's hope is to mobilize its private sector to partner with foreign companies that wish to invest in Africa. Moroccan companies would act as consultants and intermediaries. He conceded there is little interest in this offer from foreign companies, and China does not seem to want any third-party involvement for its commerce in Africa. ¶12. (C) Investment: Farahat stated that although investment in Africa is always needed, Morocco is not directly benefitting from the China-Africa Development Fund (CADF). CADF, another Chinese deliverable from the 2006 FOCAC summit in Beijing, is a government sponsored entity with a $1 billion endowment from the state-owned China Development Bank (with more on the way) that supports Chinese companies investing in Africa by contributing equity capital (REF B). Farahat stated that China's November 2007 announcement regarding CADF reflected one-sided planning and involved no consultation with the region whatsoever. Farahat stated plainly that, destined for failure in Africa, "China comes with only money and machines." Similar to China's other trade partners, Morocco is struggling to find a way to make up for its bilateral trade deficit, and finds investment insufficient. The Moroccan DCM stated that in light of the existing trade deficit, Morocco is conflicted about whether it even wants Chinese investment. Farahat said he has been personally involved in shutting down Chinese factory proposals that would not benefit Morocco. China and Tunisia -------------- ¶13. (C) Trade: Tunisia is China's smallest trade partner in the region. Mohamed Hedi Soltani, the Commercial counselor at the Tunisian Embassy in Beijing openly expressed deep cynicism about China's trade policy, recent buying missions in Europe, and its development finance in Africa. Tunisian officials have repeatedly asked MOFCOM for assistance in managing the trade deficit, and they are unhappy that China is indifferent to the imbalance. Official Chinese figures indicate that in 2007, total trade volume was only $512 million, but Chinese exports accounted for around $485 million of the total (95 percent). The only bright spot preventing more severe deterioration in its trade position is Tunisia's exports of phosphates to China, which have increased in value, said Soltani. ¶14. (C) Aid and Investment: As recently as 2006, Tunisia was a top recipient of Chinese Export-Import Bank (EXIM) funds and project assistance. Since the inauguration of the CADF, designed to spur Chinese investment in Africa, Tunisia has seen a sharp reduction in both EXIM funded projects and investment from China. In this period, some foreign manufacturers -- such as Technitrol -- shut down plants in Tunisia and moved them to China. Soltani is doubtful that large aid projects like CADF would extend any benefit to Tunisia. Soltani explained that Tunisia has little to attract Chinese investment: no petroleum; few mineral resources; restrictions on foreign labor; and export quotas for foreign-invested firms. At the same time, he said, Tunisia does not want Chinese investment if it will only lead to higher sales of Chinese goods. Tunisia prefers to attract export-oriented firms, but Chinese companies usually come with a sizable staff, which Tunisian law prohibits. COMMENT -------------- ¶15. (C) China's economic relations with North Africa are strained by the rapid and imbalanced growth in trade over the last decade. The average value of bilateral trade for these countries grew from a mere $365 million in 2001 to $2.8 billion by the end of 2007. Most countries in the region have developed structural trade deficits, and trade with export-oriented China has only exaggerated the trend. While trade with China certainly offers benefits to consumers in North Africa, diplomats from these countries view the rate and shape of trade growth as destabilizing, and the trend may result in increased friction between China and North Africa. As reported in REFs B and C, Beijing is increasingly aware of negative perceptions its economic might engenders in many African countries. To date, its efforts (concrete and symbolic) to reverse this image have been focused on least-developed countries in sub-Saharan Africa. China could face more pressure at the FOCAC ministerial (scheduled for this fall in Cairo) to address the complaints these countries have over the imbalanced growth in economic relations. END COMMENT. WEINSTEIN