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Cablegate: South China Outward Investment in 2006

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RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0622/01 1520058
ZNR UUUUU ZZH
R 010058Z JUN 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6101
INFO RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHOO/CHINA POSTS COLLECTIVE
RUEHGV/USMISSION GENEVA 0448
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 03 GUANGZHOU 000622

SIPDIS

SIPDIS

USPACOM FOR FPA
STATE FOR EAP/CM, EA/CIP, AND EB/CBA
STATE PASS USTR FOR STRATFORD, WINTER
USDOC FOR 4420/ITA/MAC/MCQUEEN

E.O. 12958: N/A
TAGS: BTIO ECON EINV ETRD CH
SUBJECT: SOUTH CHINA OUTWARD INVESTMENT IN 2006


1. (U) Summary: In 2006, Chinese overseas investment surged by 32
percent and reached USD 16 billion, according to China's Ministry of
Commerce. Last year Guangdong Province, which accounted for USD 600
million in total overseas investment, was first in the country
again. The number of Guangdong-based enterprises with investments
outside of mainland China increased to 1,600, while Guangzhou
Municipality registered 20 new enterprises with investments
overseas. Vietnam has recently emerged as a particularly desirable
- and lucrative - destination for South China firms. Established
companies here continue to look at, but are not necessarily
investing in older, more established companies in the U.S., even as
many U.S. states, among them California, Washington, Hawaii,
Virginia, and Illinois, send commercial delegations here. Guangzhou
Municipality has a reward system in place for local companies, with
outstanding overseas investment performance, to encourage their
continued investment. End Summary.

Guangdong and Guangzhou's Outward Investment
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2. (U) According to Fu Haikun, Director of the Foreign Economic
Cooperation Division of the Guangdong Province Department of Foreign
Trade and Economic Cooperation, Guangdong, by year end 2006, had
registered more than 1,600 enterprises with foreign investments.
The total overseas investment for the province this past year
equaled USD 600 million. The primary destinations for Guangdong's
outward investment were Hong Kong, Macau and developing countries in
Southeast Asia such as Vietnam and Cambodia. Among these
destinations, Hong Kong accounted for over 50 percent of the total.
Guangdong Province approved investment applications for 60
enterprises to invest in the USA, but only 20 enterprises actually
invested there. In recent years, Guangdong has seen an increase of
new overseas investment in manufacturing industry, but a decrease in
civil engineering projects. Among the 20 new enterprises approved
by Guangzhou Municipality that made outward investment in 2006, most
were small and medium enterprises (SMEs), with less than USD 15
million in export value per year. These enterprises included
private companies as well as State-Owned Enterprises (SOEs).

3. (U) Since 2005, multi-national companies based in Guangdong in
the manufacturing and telecommunications sectors have been
increasingly investing overseas. These companies include
telecommunications equipment makers Huawei and ZTE; electronics
manufacturers Gree, Midea, TCL; audio equipment maker Guangzhou
Guoguang Electric Company and Guangzhou Pearl River Piano Group
Ltd., which date back to 1951 and 1956, respectively.
Guangzhou-based outward investment favors Hong Kong, Macau, as well
as Australia, Brazil, India, and Vietnam, with Hong Kong and Macao
accounting for half. The outward investment mainly goes to the
development of sales networks and service agents, with the exception
of a plastic sealing tape plant set up in Sao Paolo, Brazil. As has
been the case for many years, Hong Kong - with its proximity and
cultural affinities - has been the first choice for Guangdong
outward investment. As a global center of information, logistics
and finance, Hong Kong enjoys a well developed capital market and
has an established set of laws and regulations. Director Fu stated
that a company originally from South China can best expand its
business by becoming listed in Hong Kong.

Guangdong Province Invests in Southeast Asia
- - - - - - - - - - - - - - - - - - - - -- -

4. (U) Due to its close proximity, its relatively stable political
and sound investment environment, Southeast Asia is also very
attractive to Guangdong enterprises. TCL (based in Huizhou) has
established a color TV plant in Vietnam; Midea (Shunde) is building
an industrial park tehre for the purpose of manufacturing small
electronic appliances; and Guangzhou Cigarette Plant is expanding in
Cambodia.

Vietnam: A Major Destination for South Chinese Investment
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5. (U) In light of its low labor costs, large potential market,
rapid growth (more than 8% annually in recent years), and the
relatively stable political environment, countries like Vietnam
offer companies in South China a suitable location for investment.
In Vietnam, the average labor cost is about USD 40 per month, lower
than China's USD 100. After WTO ascension, the Vietnamese
government added initiatives/incentives to attract Chinese

GUANGZHOU 00000622 002 OF 003


investment, which include establishing industrial parks and sending
trade missions to China to promote Vietnam. In November 2006,
Vietnam's commerce minister led a delegation to China and
participated in an event held in Guangzhou that attracted over 500
enterprises. In the first quarter of 2007, Guangzhou registered two
more enterprises that applied to build factories in Ho Chi Minh
City.

South China Eyes the Rest of the World
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6. (U) Eastern Europe and Africa are also new destinations for
Guangdong's outward investment. Huawei and ZTE have projects
underway in Africa, the Middle East, Russia and South America. Gree
Electric Appliance Inc. has built an air conditioner manufacturing
plant in Brazil.

A Lack of New Guangzhou Investment in the U.S.
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7. (U) According to Zhang Liping, Director of Foreign Economic
Cooperation Division of the Guangzhou Municipal Bureau of Foreign
Trade, Guangzhou enterprises have been investing in the U.S. as far
back as 1987. Enterprises based in Guangzhou have focused on Los
Angeles and New York service and R&D sectors. However since 2004,
no other companies with plans to invest in the U.S. have been
registered with Guangzhou Municipality. Zhang pointed to the
overall lack of contact with the U.S. business community and to
strict U.S. visa policies, which have had an impact on local
businessmen and official travel, even though more than 1,000
officials and businessmen visited the U.S. in October 2005 as part
of delegation to promote investment and trade. In 2005, two
delegations from Virginia and Illinois traveled to Guangzhou to
promote investment opportunities, but both visits were unsuccessful.
California, Hawaii, and Washington have all sent trade missions
headed by their respective governors or vice-governors.

Encouraging Outward Investment
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8. (U) Guangdong has generally encouraged enterprises to make
outward investment and become more involved with economic
globalization, according to Director Fu. By helping implement the
policies issued by the Central Government and by providing services,
the provincial government is building a platform for local
enterprises to share information and promote cooperation. On the
other hand, the Guangzhou Municipal government does play an active
role and acts as an information resource for local enterprises
contemplating outward investment. The Economic Cooperation Division
collects overseas commercial information, makes information
available on its official website, arranges overseas visits for
local businessmen to meet foreign counterparts, hosts investment
promotion programs for visiting foreign business delegations, and
distributes brochures on the overseas investment environment to
Chinese businesspersons. An investment delegation, spearheaded by
Guangzhou Municipality, which visited Australia in 2006, resulted
from an earlier visit led by Guangdong Party Secretary Zhang
Dejiang.

Rewarding Companies with Outstanding Outward Investment
- - - - - - - - - - - - - - - - - - - - - - - - - - - -

9. (U) Since making outward investment is the "decision" of
individual enterprises, the provincial and municipal governments do
not provide funding or subsidies to Chinese multinationals,
according to local officials. To recognize outstanding the foreign
investment performance by individual Chinese companies, the
municipal government conducts annual evaluations, and awards the
outstanding company a small amount of cash. Among those recognized
have been Guangzhou GuoGuang Electric Company, with customer service
offices set up in Europe and the U.S., and the Guangzhou Pearl River
Piano Group Ltd., a Chinese piano manufacturer with sales networks
in the U.S. that increased its market share there from 5 percent to
more than 10 percent in recent years.

Improving How Guangzhou Promotes Outward Investment
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10. (U) Guangdong provincial and municipal officials said they would
continue encouraging local enterprises to invest overseas and become

GUANGZHOU 00000622 003 OF 003


strong players in the world market. Director Zhang suggested that
the municipal government might streamline the approval procedures
for companies seeking to invest overseas, improve the information
services provided by the government to local enterprises, and
increase the support from Chinese financial institutions. However
he cautioned that these changes would only be possible with the
guidance and support from the central government.

GOLDBERG

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