GMS:PROXIMITY AND POLITICS FOCUSES CHINESE

C O N F I D E N T I A L SECTION 01 OF 04 VIENTIANE 000238

SIPDIS

STATE PASS TO USTDA AND CUSTOMS AND BORDER PATROL
COMMERCE FOR HPPHO
TREASURY FOR SCHUN

E.O. 12958: DECL: 05/09/2019
TAGS: ECON EFIN EINV ETRD ELTN EWWT CH LA TH
SUBJECT: GMS:PROXIMITY AND POLITICS FOCUSES CHINESE
INVESTMENT ON NORTHERN LAOS

REF: A. CHIANG MAI 57 (GMS: POOR INFRASTRUCTURE)

B. VIENTIANE 112 (CHINA,S INVESTMENT IN NORTHERN
LAOS)

C. 07 VIENTIANE 228

VIENTIANE 00000238 001.2 OF 004


Classified By: Ambassador Ravic R. Huso for reasons 1.4 (b) and (d)


1. This is the second in a series of cables from Consulate
General Chiang Mai and Embassy Vientiane on the Greater
Mekong Subregion's (GMS) R3A highway (ref a). These cables
have been coordinated with Consulate General Chengdu. This
cable was co-drafted by econ officers at both Vientiane and
Chiang Mai.

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Summary and Comment
--------------


2. (C) Two Special Economic Zones (SEZ),what Laotians
disparagingly call "Chinese concessions," anchored by
casino-hotels and run by Chinese firms, bookend the Laos
portion of the GMS's recently opened R3A highway. These
modern Chinatowns appear to offer little in the way of
employment for the local population and are aimed at a
Chinese clientele. The concessions and Chinese-financed
rubber plantations compose the largest share of foreign
direct investment (FDI) in northern Laos. While geography
and demography are likely the main drivers of FDI in the
northern GMS, political compatibility with the Lao government
gives Chinese investors another useful edge in northern Laos.


3. (C) Comment: China's dominant role in FDI across
northern Laos is unsurprising, considering geography, the
size of the Chinese economy, and its demand for resources.
However, the lack of Chinese FDI in northern Thailand
suggests that politics as well as proximity play a role in
where the Chinese choose to invest. Moreover, many Lao and
Thai who live along the R3A profess a dislike of Chinese
investments, believing them of little local benefit.
Cultural affinity between Laos and Thailand, relatively
inexpensive Lao labor, and abundant Lao natural resources
make Laos a natural destination for Thai investment. The R3A
now offers Thai investors easier access to neighboring Bokeo
province in
Laos, and also to previously difficult to reach Luang Namtha
province, as well as to southern China's Yunnan province
(whose ethnically similar Dai region already hosts large Thai
investments). Although Chinese firms currently provide the
majority of FDI in Bokeo and Luang Namtha, provincial Lao
officials and the local population would welcome a more
balanced mix. End summary and comment.

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The New Chinatowns: Boten
--------------


4. (C) China is establishing its economic presence in the
upper Mekong region, primarily in Laos, along the R3A highway
of the GMS,s North-South Economic Corridor. Adjacent to
China's Yunnan province, Luang Namtha province in Laos
exemplifies China's expanding GMS investment presence. At
Boten, the Chinese-Lao border town where the R3A enters Laos
from China, the government of Yunnan province in the People's
Republic of China (PRC) has underwritten the establishment of
a seven square-kilometer
special economic zone (SEZ),which it describes as an
opportunity for foreign investors from any country to invest
and export duty-free from Laos (ref a and b). This is
commonly referred to by the Lao as a "Chinese concession."
Although Luang Namtha province hosts the SEZ, provincial
planning and investment department officials said that they
do not count the SEZ as part of their provincial investment
stock as it is a "special arrangement by the central Lao
government." Ref C discusses the
establishment of the concession in more detail. About 20
kilometers from the international border at Boten, where Laos
is constructing a new customs check-point, a GOL public works
official said that "We (Laotians) cannot do anything there.
We cannot even cut down the trees." The official said he did
not know the price China paid for the land, but reported that
two Lao villages were forced to relocate just outside the

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zone. According to Houmpheng Souralay, Director General in
the Department of Direct and Foreign Investment in the
Ministry of Planning and Investment, the concession agreement
runs for 30 years.


5. (C) A report on the GMS from the Royal Thai Government's
(RTG) consulate in Chengdu said that $29.4 million of the
SEZ's construction costs came from Chinese government
sources. The report praised the zone as "a space that will
help expand various foreign investments in Laos." The basis
for the Consulate's analysis is unclear -- the Boten SEZ is a
modern Chinatown, lacking non-Chinese firms and workers. The
anchor location is a dingy Chinese casino, whose patrons are
middle-class Chinese tourists and whose employees are
Yunnanese laborers. In the casino and at most of the
businesses that
surround it, Mandarin is the language of choice and the RMB
is the preferred currency. U.S. dollars may be used upon
negotiation, but merchants prefer RMB over Lao kip; by
company policy, the casino does not accept kip. There is no
indication that the zone welcomes any non-Chinese investment.


6. (C) The Customs Director in Luang Namtha stated that he
believes Chinese officials would like the zone to develop
into a garment warehouse and production center. This
objective makes sense, as Chinese firms currently export
garments to Thailand via northern Thai ports, often using
smuggling routes via Burma (septel). Yunnan provincial
officials also hope that agro-industry and commodity
processing will take place in the SEZ. The Lao customs
director was optimistic about the zone, saying that it "is
good for the Lao people." While some tax revenue is flowing
to the GOL, repeated visits to the zone indicate that almost
all employment in the zone is reserved, at least
unofficially, for Chinese laborers. DG Souralay told Embassy
Vientiane that the GOL and the Boten investor have agreed to
negotiate a new tax rate for the casino in 2009, to replace
the flat $700,000 paid to the GOL yearly. The surrounding
Chinese shops supposedly pay taxes according to Lao law,
although provincial authorities have previously indicated
they do not have access to the SEZ to check the companies,
books.

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The New Chinatowns: The Golden Triangle
--------------


7. (C) At the southern end of the R3A in Laos, about one
hour from the Thai-Lao border town of Huay Sai in Bokeo
province, the Chinese company Dokngiewkhan (aka Kingsromans
Group; www.kingsromans.com with Chinese web pages that appear
to have additional information) is investing in a similar SEZ
or "concession" in Ton Pheung district, building a casino and
a 689 room hotel. The zone is situated on the banks of the
Mekong River at the heart of the Golden Triangle, opposite
the Thai river port of Chiang Saen and a Wa-controlled area
of Burma. This zone is over twice the size of the Boten SEZ,
reportedly measuring 20 square-kilometers. While merchants
at the nearby market say that China,s lease on the land has
a term of 100 years, central government officials say the
concession agreement
runs 50 years, starting from its signing in 2007.


8. (C) An immediate similarity with the Boten SEZ is the
lack of Lao laborers at the site. During our visit, skilled
and semi-skilled workers -- such as engineers, welders, and
supervisors -- were all Chinese. Low-skilled construction
workers were either Chinese or Burmese. According to our
driver, who takes potential Chinese investors to the site
regularly, these low-skilled Chinese and Burmese workers are
illegal. One Chinese merchant estimated that about 2,000
Chinese are working at the
site. Signage, such as safety policies for workers, was
exclusively in Chinese. Similar to Boten, the central
building being constructed in Ton Pheung is a massive casino
resort. Several other buildings, apparently future hotels,
shopping centers, and warehouses, are also under
construction; unlike Boten, none of the planned businesses
are yet open. At the riverbank, Chinese workers are also
building a new customs and immigration checkpoint.
Presumably, the checkpoint will support boat transport

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between Laos and neighboring Thailand and Burma. Local
merchants expect that China will supply a new wave of
tourists. Thai immigration officials told us they are
starting to see increasing numbers of Chinese entering
Thailand via northern ports, purportedly intending to visit
relatives who live and work in Mae Sai, the northern border
town adjacent to Burma. They also reported that China is
planning to establish a consulate in Chiang Rai province to
handle the growing number of Chinese visitors. (NOTE: China
already has a Consulate General in nearby Chiang Mai. END
NOTE.)

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Chinese Contract Investment Along the R3A
--------------


9. (C) Connecting the two new "Chinatowns," the R3A highway
is surrounded by FDI, mostly Chinese and in the form of
contract rubber farming. According to the Luang Namtha
planning and investment department, rubber plantations cover
21,647 acres of land in the province, the vast majority
financed by Chinese investors. Of the twenty-one companies
presently investing in Luang Namtha rubber plantations, only
three are non-Chinese. The standard contract, referred to as
"Three Two," requires the investing company to provide
technical advice, seeds, and branding for the rubber, while
the Lao farmer provides land for the rubber trees and labor
to raise and tap the rubber. The deputy director of the
investment department praised the program for its opium crop
substitution and poverty reduction mission. When asked why
the GOL chose to support rubber as a crop substitute for
opium versus other
high-value crops with shorter harvest periods (it takes seven
years to grow rubber before it can be harvested),the deputy
director said that the investment in rubber was an order from
the central GOL and was based on negotiations between the PRC
and GOL. The deputy director also indicated he feared that
local Lao labor would not be sufficient to tap all the rubber
when it matures. A German
citizen, serving as advisor to the investment department,
expects that in the annual nine months of rubber harvesting,
beginning in 2011 or 2012, the population of Luang Namtha
(estimated at 145,00) will double from a flood of Chinese
labor.


10. (C) The main town on the R3A within Laos is the
provincial capital city of Luang Namtha. The city is host to
other forms of Chinese investment which are also indicators
of the predominance of the Chinese business presence in
northern Laos. The recently constructed Hong Chin hotel and
adjacent market are both Chinese investments, which locals
refer to as the "Chinese hotel" and "Chinese market."
Chinese language signage, the use of RMB for hotel
transactions, and a "Ni hao" greeting upon arrival suggest
that Chinese are the expected hotel guests. At the market,
most of the goods sold are Chinese produced and several of
the merchants were Yunnanese.

-------------- --------------
Thai Investment in Northern Laos: Wanted, But Still Minimal
-------------- --------------


11. (C) Most Laotians along the R3A with whom we spoke had
disapproving attitudes toward Chinese investors, considering
them untrustworthy and cunning in their business techniques.
The Lao seemed eager for more Thai investors in northern
Laos. Along the southernmost Thai-financed portion of the
R3A highway, a large Thai-owned coal mine serves as the
exemplary case of a "good foreign investor" in northern Laos.
The mine began in 1994 and has 300 employees. Unlike the
two SEZs at Boten and Ton Pheung, the workers are Lao. In
addition to providing work to locals, the mine company also
engages in community outreach, including the donation of a
new school, medical services, and new equipment for local Lao
government agencies. One Lao employee praised the company
for providing job opportunities for local people and raising
incomes.


12. (C) A Lao mine representative said that the mine and
some agricultural contract farming funded by CP, a Thai
agro-industry firm, are the predominant Thai investments in

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northern Laos. He also said that the investment market in
northern Laos is ripe for more Thai participation, especially
given the linguistic and cultural similarities between Laos
and Thailand, the local desire for Thai investment, and the
ease of developing strong trust relationships between
culturally similar business partners. He believes the reason
Chinese investors dominate northern Laos is that they begin
their investment
at the central government level, whereas Thai investors
explore opportunities on an individual basis and work
directly with local land owners and governments.

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Little Chinese Investment in Northern Thailand
-------------- -


13. (C) If geographic and political proximity facilitates
China,s investment into Laos, the cooler political
relationship between the PRC and RTG, and the lack of a
contiguous border, help explain low levels of Chinese
investment in northern Thailand. While China,s investment
dominates northern Laos, only nine Chinese investment
projects have been declared to the Board of Investment in
northern Thailand, which covers the eight northernmost
provinces. The value of these nine projects is only about
$4.6 million, which is concentrated in agriculture and light
industry. Thai immigration and customs officials claim
Chinese investment is likely larger, but that it is hidden as
domestic investment because male Chinese investors often
marry Thai women (many of whom are of ethnic Chinese origin)
and classify their investment under the wife's name.


14. (C) While China,s investment interest in northern
Thailand remains low, Thai investors see promise in the 44
million people located in China's Yunnan province. According
to the Thai MFA, at the end of 2007 140 Thai investment
projects were declared in Yunnan, with a total value of $77.4
million. The two most notable projects are the Xishuangbanna
Jing Hong Industrial Estate and agricultural investment by
the Thai agro-industry firm CP. The dominant ethnic group in
Xishuangbanna is the Dai,
ethnically and culturally similar to the Thai and Lao, a
factor that has facilitated Thai investment. According to
the Government Relations Director of the industrial estate,
other Thai companies are actively expressing interest in
investment projects in Yunnan, including frozen foods and
energy drink firms. The Director told us by phone that he
also sees investment opportunities in electronic parts
production, food processing, and rubber production for Thai
firms in Yunnan.
HUSO