Cablegate: Chinese Investment Strategies: Fair or Foul Play?

VZCZCXRO6355
RR RUEHCHI
DE RUEHBK #4880/01 2220323
ZNR UUUUU ZZH
R 100323Z AUG 06
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 0832
INFO RUEHCHI/AMCONSUL CHIANG MAI 2269

UNCLAS SECTION 01 OF 03 BANGKOK 004880

SIPDIS

SIPDIS

E.O. 12958, AS AMENDED: N/A
TAGS: EINV ECON TH
SUBJECT: CHINESE INVESTMENT STRATEGIES: FAIR OR FOUL PLAY?

1. Summary: In its efforts to manage globalization and competition,
Thailand has welcomed Chinese trade and investment. China in turn
has responded with well-connected companies utilizing government
incentives to invest. Both countries extend attractive policy
measures to encourage this trend. Chinese multinational companies
find attractive Thailand's mature domestic market, similarities in
culture and - until recently - stable political environment, which
local observers believe primes it as a major outlet to reduce
China's rapidly expanding trade surpluses and foreign exchange
reserves. However, while some in Thailand welcome China as just
another source of investment to raise overall market
competitiveness, others fear that Chinese companies may possess
unfair advantages from being closely aligned with the PRC
government. Spurred by Beijing's 'Go Abroad' policy, large Chinese
state-owned enterprises can count on their government-sanctioned
financial support. End summary.

2. In recent years Thailand has aggressively targeted China as a
trading partner and as a growing source of foreign investment,
although local Thai observers do not see any favoritism on the part
of the RTG. Mr. Charas Chitkittichamras, head of the China desk at
Thailand's Board of Investment, considered the increased attention
towards China a necessary and balanced response commensurate to
China's economic clout. Furthermore, Dr. Deunden Nikomborirak,
research director at the Thailand Development Research Institute,
viewed China only as one among many participants in Thailand. She
emphasized the benefits of greater competition among all foreign and
Thai companies towards increased efficiency and lower prices.

3. Both countries actively promote this development. For instance,
Thailand's Board of Investment (BoI) has created a special China
desk to facilitate mutual FDI. Moreover, rather than relying solely
upon agreements with Beijing, the BoI has targeted individually 11
southern Chinese provinces for direct cooperation in the private
sector. This initiative includes the establishment of a
Thailand-China Business Council in each of those selected provinces.
Concomitantly, China has restructured its Thailand embassy to
encourage Chinese investment. According to Ms. Hu Yan, a Chinese
businesswoman with close connections inside the Chinese embassy in
Bangkok, China's diplomatic corps only engaged in political or
consular activities until the 1990s. In the last 10 years, however,
the Chinese Ministry of Commerce has increased its presence in
Thailand. Aside from supplying some basic informational and legal
support, it created the Chinese-Thai Enterprises Association in 2002
as the official grouping of Chinese companies. Hu noted these
measures correspond to Beijing's overall engagement with ASEAN
countries, where Thailand is the largest destination for Chinese
investments. For example, she noted the 3rd China-ASEAN expo later
this October in the Chinese city Nanning, to which she claimed
responsibilities for handling Thai delegates' travel arrangements.

Chinese investors praise Thailand
---------------------------------

4. Chinese investors interviewed by Econoff unanimously agreed that
Thailand is particularly well-suited for Chinese companies. Along
with a more mature domestic market, they felt Thailand offers better
production sourcing and infrastructure than most other Southeast
Asian nations. Ms. Jian Jun of textile and chemical manufacturer
China Worldbest Group, a Shanghai-based SOE, also mentioned
Thailand's advantages as a base for greater access to export
markets. Finally, the large ethnic Chinese community often acts as
a springboard into the market. According to Mr. Milton Osbourne at
the Lowry Institute in Australia, at least 60 percent of Thai
parliamentary MPs have Chinese ancestry, with some estimates upwards
of 90 percent. "We like Thailand because the Thais are unbelievably
friendly and kind, probably because of their Buddhist beliefs,"
added Mr. Wang Yinfei, managing director of China State Construction
Engineering company.

5. Notwithstanding Thailand's current political uncertainties, all
the Chinese investors interviewed considered the country as
generally stable, with mostly consistent economic policies. No one
denied that the current conditions have caused short-term
difficulties to their business. For example, Chinese businesswoman
Hu revealed that the Chinese premier was originally scheduled to
arrive earlier in April this year to announce upwards of USD 5
billion dollars in loans to the Thai government, but canceled the
trip due to the political protests at the time. Chinese companies
would in turn receive much of these loans to invest in Thailand.
Not surprisingly, all said they would like to see a continuation of
caretaker PM Thaksin's government, but maintain confidence that any
administration would continue liberal trade and investment policies.

Chinese SOEs to China: Show me the money!
-----------------------------------------

6. These conditions have also made Thailand an ideal destination for
China's 'Go Abroad' (Zou Chuqu) investment strategy, which Chinese
businessmen say offers incentives for Chinese state-owned
enterprises (SOEs) to invest in other countries. Mr. Xu Genluo,

BANGKOK 00004880 002 OF 003

general manager at Hangzhou-based Holley Group, explained the five
priorities of this policy: 1) Relieve the pressures to revalue the
Chinese currency; 2) Avoid certain export restrictions on Chinese
products; 3) Reduce China's trade imbalance with other countries by
diverting manufacturing; 4) Gain global management and technological
skills; and 5) Diversify company investments.

7. The 'Go Abroad' policy thus coordinates significant Chinese
government involvement in financially supporting its outbound SOEs.
Xu stated that his own company derives significant direction and
financial support from the government, including a direct grant for
a $100 million dollar electric meter factory in Thailand. Xu did
not specify the source of the grant, only stating that they were
given to ten specially selected Chinese companies. Jian also spoke
of regular consultations and business ceremonies held within the
Chinese embassy compound. (Note: During interviews with Econoff,
Chinese businesspersons all either appeared to have just come from
or prepared to depart for meetings there. It is possible the
Chinese embassy either wanted to ensure adherence to certain talking
points or to discover the substance of the interviews. End note.)
In addition, Hu recollected that some of her friends in Chinese
banks were mandated by their government to approve a certain number
of loans for outbound investments each year. She asserted some of
those loans offered "virtually no interest" for borrowers, adding
that Chinese SOEs are also exempt from corporate taxes on their
overseas earnings.

Getting too much help from China?
---------------------------------

8. Further blurring the distinction between Chinese businesses and
government, Hu also emphasized that only Chinese SOEs are afforded
those policy incentives. In contrast, privately-owned Chinese
companies are generally prohibited from going abroad. Officially,
only SOEs are allowed into the 69-member Chinese-Thai Enterprise
Association. There are only two exceptions, including Hu's small
tourism and air shipping company. She said the Chinese Ministry of
Commerce only allowed her company to bypass those rules because of
her extensive personal relationships with the Chinese embassy in
Bangkok.

9. In addition to reducing its foreign reserves and trade
imbalances, Chinese investment policies can help its SOEs gain
advantages over its private competitors in Thailand. For example,
Charas of Thailand's BoI suspected that the Chinese government
financially underwrites low bids to gain access to the Thai market.
He considered this policy to be an extension of Chinese soft power
policies. Nonetheless, Charas did not consider these measures
financially large enough to significantly undermine genuine
competition, especially since most Chinese companies are still minor
players in Thailand.

10. However, Jian of China Worldbest Group, a Shanghai-based SOE,
portrayed a far more distant relationship between Chinese businesses
and government. Acting also as president of the Chinese-Thai
Enterprise Association, she asserted that Worldbest received no
money from the Chinese government, dismissing the notion as an
inefficient allocation of public funds. She reiterated Chinese
government statements that China has allowed the market to
completely determine a company's viability. For Jian, even the
concept of SOEs being 'state-owned' belies the reality that
companies are now publicly owned, with the government as only one
shareholder. She theorized the dominance of Chinese SOE investors
as a natural result of China's relatively nascent entrance into a
market economy, as larger companies with resources to invest
overseas tend to have SOE origins.

11. Jian also defends against the notion that China is too reckless
with its outbound FDI. For instance, she gave evidence of
market-driven investment decisions, noting their careful risk
assessment since 1998 before opening manufacturing facilities in
Thailand in 2001. She explained that Worldbest wanted to have
better access to the local market and export position, but also
stressed the high quality of Thai talent in assisting their research
and development.

12. Charas agreed with most of Jian's market-based rationale. He
noted that most of the Chinese companies have been profitable, apart
from some minor investors in products and retail services. Aside
from telecommunications, most of the larger investments and service
trade in construction have moved into Thailand cautiously. Those
Chinese companies that have failed suffered from a limited
understanding of Thai tastes, rather than self-inflicted wounds to
placate Beijing's foreign policy mandates. For instance, Charas
imparted one anecdote on ceramics from Jingdezhen, China's most
famous town for such wares. Chinese investors failed to realize
Thai buyer's appreciation for professional presentation and often
displayed otherwise quality wares amassed on the ground. This
alienated Thai clients seeking ceramics for both small- and
large-scale home improvement projects.

13. Comment: Thus far it appears Thai observers considered the
advantages of Chinese investment outweigh any potential fairness

BANGKOK 00004880 003 OF 003

issues. While they understand that Chinese companies have close
relationships with the PRC government, none of the interlocutors has
indicated that China has used its increasing investments for
political leverage. Even Chinese investors like Hu and Xu were
candid regarding their own business-government intimacy, appearing
not to find such support unfair. With China's GDP rising 10.3
percent and 11.3 percent in the first and second quarters of 2006,
expect China to increase its direct incentives to motivate its SOEs
to 'Go Abroad', especially as China is eager to avoid the various
economic pressures caused by its ascendant economy. End Comment.

Arvizu

© Scoop Media