AMIR'S CHINA VISIT - BUILDING THE NEW SILK ROAD

UNCLAS SECTION 01 OF 02 KUWAIT 000478

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DEPT FOR NEA/ARP, EEB, EAP/CM

E.O. 12958: N/A
TAGS: ECON EFIN EINV EPET ETRD CH KU
SUBJECT: AMIR'S CHINA VISIT - BUILDING THE NEW SILK ROAD

REF: A. KUWAIT 452

B. KUWAIT 438


1. (U) This report contains business proprietary information.
Not for internet distribution.


2. (SBU) Summary: On May 12, Kuwait's Amir completed his
state visit to China. Kuwaiti investors and oil executives
are cautiously optimistic that his visit helped Kuwaiti
investment opportunities in China, including "unsticking" the
Kuwaiti-Chinese refinery joint venture and facilitating KIA's
efforts to increase its investments in China. Kuwait is
looking to significantly expand its oil exports to China and
its government investments in "the second or third" largest
economy in the world. End summary.


3. (SBU) Kuwaiti Amir Shaykh Sabah Al-Ahmad Al-Sabah wrapped
up what appears to have been a successful visit to Hong Kong
and mainland China on May 12. The Kuwaitis publicly played
up the visit as strengthening the economic and commercial
ties between Kuwait and China. The two parties signed 5
agreements during the visit. More importantly, from the
Kuwaiti perspective, however, the Amir's visit appears to
have "unstuck" the Kuwaiti - Chinese joint venture to build a
multi-billion dollar refinery in China and opened up more
investment opportunities for the Kuwait Investment Authority.
China-Kuwait bilateral trade is growing, reaching $6.78
billion last year, and Kuwait's stated goal is to expand its
oil sales to China from the current 130,000-140,000 barrels
per day to 500,000 barrels per-day by 2015. (Note: By way of
comparison, last year the U.S. imported an average of 210,000
barrels per day from Kuwait. End note.)

Oil Cooperation
--------------


4. (SBU) According to the Kuwaiti press, Kuwait's Minister of
Oil Sheikh Ahmad Abdullah Al-Sabah signed an agreed minute
related to oil and gas cooperation with the Chairman of
China's National Energy Administration. The Managing
Director of International Marketing for Kuwait Petroleum
Company Al-Houti told Econoff that this merely ratified an
earlier agreement that was essentially a broad statement of
intent to cooperate in the energy sector.


5. (SBU) More importantly, Shaykh Ahmad also signed an
agreement to construct a refinery and petrochemical complex
in China. This $9 billion joint venture is billed as the
largest Sino-foreign joint venture in China. The project,
scheduled to be operational by 2013, would include a
refinery, designed to process 240,000-300,000 barrels per day
of Kuwaiti crude, and a petrochemical processing component.
Shaykh Ahmed told the press that Sinopec will own a 50% stake
in the joint venture, Kuwait will own a 30% stake, Royal
Dutch Shell and Dow Chemical Company will each own 10% (see
also ref b).


6. (SBU) This project, originally entered into in 2005, was
officially held up by Chinese environmental concerns about
the refinery's impact on a densely populated area in
Guangdong Province. Post's contacts in the petrochemical
industry have told us that the refinery's location would be
changed to near the city of Zhangjiagian. According to one
industry executive, internal Chinese politics had probably
played a bigger role in the decision than pure environmental
concerns. The Guangdong region already has a large
petrochemical industry and the Chinese authorities reportedly
believed that economic development opportunities were needed
elsewhere. So far, observers are cautiously optimistic that
the program will move forward.

Kuwait Investment Authority
--------------


7. (SBU) KIA Managing Director Bader Al-Saad told the press
that the Chinese Prime Minister had pledged to the Amir that
KIA would be able to trade in the Yuan as a domestic trader,
which would "give a robust boost to our investments in
China," which had previously been restricted to the Hong Kong
Stock Exchange. A senior KIA official confirmed to Econcouns
that the story was accurate. He explained that Kuwait had
been working for over a year to become a qualified foreign
institutional investor in China, but that the Chinese were
"very bureaucratic." He expressed his hope that the Amir's
visit had indeed helped facilitate this process. Currently,
he explained, KIA cannot invest in the Yuan directly, but

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needs to work through a third party and invest in dollars,
increasing cost and currency risk. Given the size of China's
economy, he noted, KIA is "significantly underweight" in the
country and is interested in increasing its investments in
China. As an aside, he also noted that KIA remained
significantly overweight in the U.S. based on its share of
world GDP. He stressed that KIA was not planning to cut its
holdings in the U.S. but that as new funds came in, it wanted
to allocate more of them to underweight markets.

Kuwaiti Assistance to China Continues
--------------


8. (U) The Managing Director of The Kuwait Fund for Arab
Economic Development (Kuwait's development agency) signed a
loan agreement with China's Vice Finance Minister to provide
a KD 6.8 million ($23.26 million) loan agreement to help
finance the Lake Bosten River Basin Environment Protection
and Development Project in the Muslim-majority Xinjiang
region. The Kuwait Fund will cover about 24% of the cost of
the project in a 25-year loan. This will bring the total
number of Kuwait Fund loans to China to 33 since 1982, with a
total loan value of $831.6 million.

Other agreements
--------------


9. (U) The Kuwaitis and Chinese also signed a MOU on
infrastructure cooperation for highways and water channels, a
cooperation agreement on higher education, and a sports
cooperation agreement.

Comment
--------------


10. (SBU) This is the Amir's second visit to China, and his
first as Amir. He visited China in 2004 as Prime Minister.
Although Kuwait and China have had diplomatic ties since 1971
and the public statements included the obligatory statements
on political cooperation, this visit was clearly focused on
economic issues. Kuwaiti investors and businesspeople are
increasingly focusing on the growth potential in China -- and
the rest of Asia. For their part, the Chinese are likely to
want to strengthen their ties to an important energy
supplier. Should the refinery project succeed, it will
cement increasing Sino-Kuwaiti energy ties. Kuwaiti oil
executives have already complained that Kuwait's tender
system pressures them to "buy (lower cost) Chinese" products.
As Kuwait increasingly looks to China for its oil exports
and investment opportunities, other business connections are
likely to follow, which could present challenges to U.S.
businesses. End Comment.

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For more reporting from Embassy Kuwait, visit:
visit Kuwait's Classified Website at:

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