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Cablegate: Over-Capacity Not a Concern in Zhanjiang and Beihai

VZCZCXRO6221
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0707/01 3620850
ZNR UUUUU ZZH
R 280850Z DEC 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1220
INFO RUEHBJ/AMEMBASSY BEIJING 0981
RUEHGH/AMCONSUL SHANGHAI 0332
RUEHSH/AMCONSUL SHENYANG 0342
RUEHCN/AMCONSUL CHENGDU 0333
RUEHHK/AMCONSUL HONG KONG 0396
RUEHKU/AMEMBASSY KUWAIT 0001
RUEHRH/AMEMBASSY RIYADH 0003
RUEHLO/AMEMBASSY LONDON 0009
RUEHOO/CHINA POSTS COLLECTIVE 0405
RHMFISS/DEPT OF ENERGY WASHINGTON DC 0048
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0221
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC 0128
RUEAIIA/CIA WASHDC 0375
RUEKJCS/DIA WASHDC 0371
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 03 GUANGZHOU 000707

SENSITIVE
SIPDIS

STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/LEE
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER
STATE PASS SAN FRANCISCO FRB FOR CURRAN
TREASURY FOR MOGHTADER

E.O. 12958: N/A
TAGS: ECON EINV EIND EWWT ENRG PGOV CH
SUBJECT: Over-Capacity Not a Concern in Zhanjiang and Beihai

REF: A) BEIJING 3349, B) GUANGZHOU 643

GUANGZHOU 00000707 001.2 OF 003


(U) This document is sensitive but unclassified. Please protect
accordingly. Not for release outside U.S. government channels. Not
for internet publication.

1. (SBU) Summary: Big plans for industrial expansion are underway in
Beihai and Zhanjiang near the southern end of China's coast, where
local officials recently described to the Consul General ambitious
plans to develop steel, petrochemical, ship building, export
processing and other manufacturing industries. Beihai (population
1.5 million) is building the Tieshan Port Industrial Zone with plans
for new deep water port facilities with 200 berths and 132 square
kilometers allotted to five industries. The zone is one of eight
new industrial parks that are part of the central government's Beibu
Gulf Economic Development Zone in southern Guangxi Zhuang Autonomous
region; ASEAN trade is a major focus. Neighboring Zhanjiang
(population 7+ million) in Guangdong Province is the site for a
planned 10 million ton per year steel mill and a Sinopec-Kuwait
joint-venture petrochemical facility that will have the capacity to
refine 15 million tons of oil. Despite recent concerns expressed by
business leaders, academics and officials elsewhere in China about
the threat of over-capacity in some of these same industries (ref
A), the mood in these third-tier cities seems to be full steam
ahead. Interlocutors expressed interest in U.S. participation in
trade and investment opportunities in steel mill and petro-chemical
systems and controls, port handling equipment and management, and
wastewater treatment, as well as clean energy and environmental
protection equipment. End summary.

Beihai Building a New Industrial Zone
-------------------------------------

2. (SBU) Beihai on Guangxi's Gulf of Tonkin coast is the site of a
major new industrial zone that's part of Guangxi's larger Beibu Gulf
Development Zone. When the CG visited the embryonic Tieshan Port
Industrial Zone on December 8 it consisted of little more than
several dozen square kilometers of bulldozed land, the beginnings of
some roads and a single operational pier. However, local officials
have ambitious plans. The government has set aside 400 square
kilometers for the zone, where it is developing a deep water port
with depths ranging from 10-22 meters. Beihai Vice Mayor Yang
Zhiyuan claimed that it was the only deep water port in China that
still has space for large-scale industrial development. Officials
plan to eventually build more than 200 berths that can accommodate
vessels ranging from 10,000 to 200,000 tons. The industrial zone
initially has 132 square kilometers allotted to five industries --
petrochemicals, logistics, pulp and paper products, ship building,
and export processing.

Major Projects: Oil Refinery and Paper Pulp Plant
--------------------------------------------- -----

3. (SBU) According to Feng Wei, the Deputy Director of the
Construction and Administrative Committee Office of the Beihai Beibu
Gulf Economic Zone, the centerpiece of the petrochemical zone will
be a Sinopec oil refinery with the capacity to produce eight million
tons of gasoline and 200,000 tons of polyphenyl ether (PPE) per
year. In addition, officials also plan for a liquefied natural gas
(LNG) wharf and storage facilities. (NOTE: Press reports mention
discussions with British Petroleum as a partner.) A joint-venture
including Finnish paper manufacturer Stora Enso is the main investor
in@eQL;ipbuilding
--------------------------------------------

4. (SBU) Feng explained that the logistics zone would be designed

GUANGZHOU 00000707 002.2 OF 003


for a capacity of more than 300 million tons of bulk and container
cargo. The export processing zone will comprise 10 square
kilometers with room for 1,000 labor-intensive export makers, he
said. The firms will be required to build facilities of at least
four stories to save space. Ship building was the only sector where
officials expressed caution about development plans because of
current surplus capacity in China.

Focus on and Preparing for ASEAN Trade
--------------------------------------

5. (SBU) The Tieshan zone is just one of eight new industrial parks
planned in the Beibu Gulf Development Zone, which includes four
municipalities in the Guangxi Zhuang Autonomous Region, namely
Beihai, Fanchenggang, Nanning and Qinzhou. The Guangxi government
plans to spend RMB one billion annually in support of the
development of the zones, according to Vice Mayor Yang. But Feng
noted that the Beihai local government and private investors will
fund most of the development costs. Mayor Lian Younong pointed out
to the CG that the State Council wants the area to serve as a
platform for China-ASEAN regional cooperation. However Vice Mayor
Yang commented that cooperation with ASEAN is still in its early
stages and investment from ASEAN countries in Beihai is still small.


Zhanjiang Pursues Major Steel and Chemical Plants
--------------------------------------------- ----

6. (SBU) Zhanjiang, the coastal Guangdong city across the peninsula
and provincial border from Beihai, also has big plans for industrial
development. Mayor Ruan Risheng explained to the CG that the
capacity of the planned Baosteel steel mill will be 10 million tons
per year. The Sinopec-Kuwait joint-venture petrochemical plant,
which was transferred to Zhanjiang from Nansha District in Guangzhou
due to environmental concerns of local residents, will have the
capacity to refine 15 million tons of oil and one million tons of
ethylene annually, according to Ruan. Zhong Hongli, the Deputy
Chief Engineer of Sinopec Zhanjiang Dongxing Petrochemical Co., told
the CG that the new refinery plan is still pending a local
environmental assessment.

7. (SBU) The Baosteel and Sinopec-Kuwait projects will be located on
Donghai Island, where new port facilities are also being
constructed. According to Zhangjiang Port Deputy Party Secretary
Yang Wen, construction is scheduled to last 30 years and the new
port will occupy five square kilometers. The port plans to build
one new 300,000-ton class oil terminal next year and another
300,000-ton class bulk cargo terminal shortly thereafter. The port
expects to increase annual throughput capacity by 100 million tons
over the next three to five years, according to Deputy Party
Secretary Yang.

8. (SBU) Yang also noted that the port and Zhanjiang's industrial
development in general will benefit from stimulus spending on the
construction of railways that currently transport about 70% of bulk
cargo to and from the port. He said that port officials have
detected signals from the recent Central Economic Work Conference
that have encouraged them to speed their investment in port
expansion.

Comment - Few Concerns of Overcapacity
--------------------------------------

9. (SBU) Comment: Massive industrial development plans in Beihai
and Zhanjiang suggest that overcapacity is of little concern in
China's third-tier cities. The two major development zones that
Congenoffs discussed with local officials focus on three of the six
industries highlighted in the recent European Union Chamber of
Commerce report on over-capacity -- steel, chemicals and refining
(ref A). Beihai officials acknowledge that they may need to be
cautious about moving forward with development of the ship-building

GUANGZHOU 00000707 003.2 OF 003


industry because of over-capacity, but, with an estimated 10 percent
of the global shipping fleet already idle (ref B), this may be an
understatement. Beihai is also forging ahead with its plans for
major expansion of the export processing industry despite the global
economic downturn's negative effects on China's markets overseas.
Academics, businessmen and officials in China's first-tier cities
may worry about the threat of industrial over-capacity, but it
appears those concerns have yet to filter down to places like
Zhanjiang and Beihai. End Comment.

10. (SBU) The CG's December 7-10 trip to Beihai and Zhanjiang also
included meetings with the Beihai Civil Volunteers Association
(septel), Guangxi COFCO Bio-Energy Company (septel), the Beihai
China Council for the Promotion of International Trade (CCPIT) and
members of the local business community, Beihai College of the
Beijing University of Aeronautics and Astronautics, Guangdong Ocean
University, the Zhanjiang CCPIT and business leaders, Guolian
Aquatic Products Company, and Cyclare Technologies Inc. In
addition, the CG spoke to students at Beihai College, met with the
press in Beihai and donated books to the Zhanjiang Municipal
Library.

GOLDBECK

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