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C O N F I D E N T I A L SECTION 01 OF 05 SHANGHAI 000170

SIPDIS

STATE FOR EAP/CM
USDOC FOR ITA DAS KASOFF, MELCHER, OCEA
TREASURY FOR OASIA - DOHNER, HAARSAGER, WINSHIP
NSC FOR LOI

E.O. 12958: DECL: 4/15/2034
TAGS: PREL ECON ETRD EFIN CH XM XL XR
SUBJECT: CHINA'S GROWING TRADE AND INVESTMENT TIES WITH LATIN
AMERICA: VIEWS FROM SHANGHAI

REF: A) BEIJING 518 (NOTAL); B) SHANGHAI 70 (NOTAL); C) 08 SHANGHAI 428 (NOTAL)

CLASSIFIED BY: Christopher Beede, Pol/Econ Section Chief, U.S.
Consulate, Shanghai, U.S. Department of State.
REASON: 1.4 (b), (d), (e)



¶1. (C) Summary: Shanghai scholars said China's interest in
Latin America remains primarily economic - securing natural
resources and diversifying export markets amid the global
economic downturn. China recognizes that it is facing an image
problem in Latin America and is taking steps to address negative
perceptions, said the scholars. China's strategy in Latin
America is clear: it wants to "control the supply of
commodities," said the Brazilian Consul General in Shanghai.
Chinese investors, encouraged by the Chinese Government, are
rushing to invest in Brazil's natural resources. The
Argentinean Consul General in Shanghai, however, expressed
frustration at the slow pace of Chinese investment in his
country. Brazilian and Argentinean firms in East China are
increasingly focused on manufacturing for the Chinese domestic
market. End summary.

¶2. (SBU) Poloff held separate discussions in March with leading
Shanghai scholars on China-Latin America relations and the
Consuls General of Brazil and Argentina in Shanghai. The
discussions focused on overall political relations and growth in
bilateral trade and investment, including investment to and from
East China.

Need to Diversify Trade Partners
---------------------------------
¶3. (C) China's primary interest in Latin America remains oil
and natural resources, said Shanghai scholars, but the global
economic crisis is also forcing China to diversify its export
markets. With exports to developed countries plummeting, China
is looking to Latin America, which China thinks is still in
relatively good shape, to pick up some of the slack, said Niu
Haibin, Deputy Director of the Center for Latin American Studies
at the Shanghai Institutes for International Studies (SIIS). Wu
Chunsi, Deputy Director of the Department of American Studies at
SIIS, said China sees the need to "pay more attention" to large
emerging countries like Brazil and Mexico amid the changing
global economic balance of power. For their part, Latin
American countries view growing relations with China as a
"gateway" to greater economic cooperation with other countries
in East Asia, said Wu.

¶4. (C) These Shanghai scholars believe overall relations
between China and Latin America are good but also recognize
areas where interests do not overlap. For example, though China
already has FTAs with Chile and Peru and began negotiating an
FTA with Costa Rica in January 2009, Zhang Jiazhe, Vice Director
of the Center for Developing Countries Studies at the Shanghai
Academy of Social Sciences (SASS), believes other FTAs,
especially with bigger countries in the region, are "unlikely"
in the near future because many Chinese exports compete directly
with exports from Latin America. Niu pointed to the "similar
industrial structure" and overlapping exports of China and
Mexico, adding that China should invest more in the Mexican oil
industry to counter Mexican concerns about China's growing trade
surplus with the country. Wu Chunsi said China is "realistic"
that it can cooperate with the region on many things like
climate change and energy but that they "do not have to agree on

SHANGHAI 00000170 002 OF 005


everything," for example, the issue of expanding the number of
permanent seats on the United Nations Security Council, a
subject in which Brazil and China do not see eye to eye.

China Facing Image Problem
---------------------------
¶5. (C) The bigger problem for China in Latin America right now,
said the scholars, is its image among the local population.
Zhang said competition from Chinese imports, like textiles and
shoes, is creating negative feelings towards China among
countries with large low-end manufacturing industries,
mentioning Mexico as an example. There is also a perception in
Latin America that Chinese investors are like "locusts,"
extracting minerals and natural resources and leaving very
little of lasting value behind, said the scholars. Chinese
companies, on the other hand, find it difficult to invest in
Latin America, according to Niu. Chinese companies complain
about strong labor unions and cultural conflicts in Latin
America, including a "different work ethic" between Latin
American workers and Chinese workers, said Niu. Chinese
companies thus prefer to import workers from China for projects
in Latin America, often at the cost of local resentment.

¶6. (C) The Chinese Government recognizes it faces a public
relations challenge in Latin America, said the scholars.
Chinese companies in Latin America, for example, are being
encouraged by the Chinese Government to hire more local
employees, according to Wu. Zhang noted that China became a
donor member of the Inter-American Development Bank (IADB) in
January 2009 and donated USD 350 million, which is "money that
many Latin American countries need." He thinks China's outreach
to the IADB, along with consecutive high level visits to the
region by Chinese President Hu Jintao in November 2008 and Vice
President Xi Jinping and Vice Premier Hui Liangyu in February
2009, highlight China's efforts to improve overall relations,
including its image, in Latin America. (Ref A).

The Brazilian View: China Focused on Securing Resources
--------------------------------------------- ----------
¶7. (C) Marcos Caramuru de Paiva, Consul General of the
Brazilian Consulate in Shanghai, thinks the primary purpose of
recent high-level visits by Chinese leaders was to "clear the
road" for more Chinese investment in the region. For example,
Vice President Xi visited Brazil to sign an agreement with
Petrobras, in which China agreed to lend USD 10 billion for
deep-sea exploration and extraction in return for Brazilian oil.
"China's strategy is very clear: it is doing everything
possible to control the supply of commodities," said de Paiva.
Although Brazil exports some high-tech products, such as small
commercial aircraft, to China, he sees a growing "imbalance" in
bilateral trade, with China shipping higher value-added
machinery to Brazil in exchange for Brazilian commodities. De
Paiva does not think this situation will change anytime soon,
stating "it is difficult to compete with Chinese manufacturers."
However, he does not think this is necessarily a bad thing, as
current bilateral trade creates a "win-win" situation with both
countries capitalizing on their areas of comparative advantage.

Easier for China to Invest in Africa
-------------------------------------------
¶8. (C) The Chinese Government is telling Chinese firms to
invest in Brazil's mining and agriculture sectors, even
providing 70 percent of the initial financing in some cases,
said de Paiva. He sees several problems with this. First,

SHANGHAI 00000170 003 OF 005


there is already significant investment by Brazilian firms in
the country's well-developed mining and agriculture sectors,
leaving less opportunity for Chinese investment. Second, the
global economic crisis and consequent drop in the price of
commodities has altered the calculation of investors. He
mentioned the case of Baosteel, China's largest steel maker
(headquartered in Shanghai), which was planning to invest with
the Brazilian mining giant Vale to produce 10 million tons of
steel in Brazil each year. (Note: For more on Baosteel, see Ref
¶B. End note.) The deal fell through when demand for steel
products plummeted amid the crisis.

¶9. (C) Another problem is that, according to de Paiva, Chinese
investors "do not understand," nor do they try to understand,
the local Brazilian market and regulations. Chinese firms
"should first hire consultants" to navigate them through
Brazil's tax codes, regulations, and bureaucracy, he said.
Instead, spurred by easy access to government financing, they
immediately jump into investments in sectors with which they
have no experience. For example, de Paiva mentioned a furniture
company in East China that recently went to Brazil to set up an
agricultural company exporting soybeans. The Chinese investor
did not understand the intricacies of the business - the
importance of location, intermediaries, traders, transportation,
and well-established competition - since he had never been in
the agriculture business before, and so the venture failed.
Chinese investors think Latin America and Africa are the same,
said de Paiva, but it is easier for them to do business in
Africa since Africa's institutions and regulatory environment
are less well-developed than Latin America's.

Brazilian Presence in East China
----------------------------------
¶10. (C) According to de Paiva, there are approximately
1000-2000 Brazilian nationals in East China. Most are working
in multinational or Brazilian firms, but there is also a small
number in the entertainment industry (e.g., dancers). He also
noted a large number of ethnic Chinese children born in Brazil,
holding Brazilian passports, and currently living in East China.
De Paiva said there was an initial wave of Brazilian investors
setting up machinery, shoe, and textile factories in East and
South China about 10 years ago, and although new Brazilian
investors are still coming to China, the number of firms has
remained relatively stable. There are currently two Brazilian
banks in Shanghai - Banco do Brasil and Banco Itau -
facilitating bilateral trade and investment, according to de
Paiva. Although he has not heard of major regulatory problems
facing Brazilian firms in Shanghai, he has seen cases of IPR
infringement, including a Brazilian shoe manufacturer which
recently opened shops in China, only to realize that a Chinese
firm had already registered the company's trademark locally.
More and more Brazilian firms, such as this shoe maker, are
coming to China to sell their products to Chinese consumers,
said de Paiva. "The days of manufacturing cheaply in China are
over," as Brazilian firms focus more on tapping China's domestic
market, he added.

The Argentinean View: Chinese Investors Taking Their Time
--------------------------------------------- -----------
¶11. (C) Eduardo R. Ablin, Consul General of the
Consulate-General of Argentina in Shanghai, said Argentina
exports USD 9 billion, or 10 percent of its total exports, to
China. Three-quarters of its exports are soy, vegetable oils,
and animal feed. The remaining one-quarter includes poultry

SHANGHAI 00000170 004 OF 005


(Ablin thanked KFC for getting the Chinese hooked on chicken
wings), wine, and non-agricultural products. Imports from China
are primarily heavy industrial equipment and textiles. Ablin
estimated there are 100,000 Chinese nationals and second
generation ethnic Chinese in Argentina, with many of them
working in local retail shops and restaurants. However, "real
investment" from China only started five years ago and is only
growing at a "modest pace," he said. Ablin knows of only one
large Chinese investment project in Argentina, involving a
subsidiary of Baosteel which had taken over a previously
state-owned iron ore mine. Other Chinese investments in
Argentina are in relatively new sectors, such as a Chinese
motorcycle factory in Buenos Aires. The Chinese have looked at
other projects, such as copper mining and the revamping of
Argentina's ageing subway system, but so far, there has been
"more talk than action," said Ablin. He thinks China sees
Argentina as a "sustainable, long-term supplier" of natural
resources, but has been slow to turn ideas into concrete
investment.

Argentinean Presence in East China
----------------------------------
¶12. (C) According to Ablin, there are only 300 Argentinean
nationals in East China, more than half of them working in
Argentinean and multinational companies, while one-third are
ethnic Chinese children born in Argentina but currently living
in East China with dual passports. He said there are only six
large Argentinean investors in East China, all of whom have
formed joint ventures (JV) with local Chinese companies. He
mentioned, for example, a JV in Anhui Province producing
agricultural pesticides, and another JV engaged in pharmacology
and antibiotics. Ablin said Ningbo, a large port city in
Zhejiang Province, is becoming an increasingly important center
for Argentina's soybean and other agricultural imports into
China. Ablin has not heard complaints from Argentinean firms
about regulatory and legal difficulties in East China. Ablin
said Argentinean firms in East China, like Brazilian firms, are
increasingly focused on manufacturing for the Chinese domestic
market.

Comment
-------
¶13. (C) De Paiva lamented how the Brazilian Consulate in
Shanghai has only two officers (including himself) and has not
been able to keep up with the rapid growth in bilateral trade
and investment, particularly given Shanghai's significance as a
trade and financial hub. "We are behind the curve," he said.
Ablin of the Argentina Consulate said they currently have three
officers in Shanghai and are hoping to add a fourth in the
second half of 2009. He also mentioned plans to open a small
Consulate in Guangzhou in the near future.

¶14. (C) Despite burgeoning trade between China and Latin
America in recent years, there has been a dearth of interest in
the subject among academics and university students in Shanghai.
Zhang Jiazhe of SASS said it is difficult to get university and
government funding for research on Latin America as opposed to
research on the United States or Japan, for example. However,
the situation may be gradually changing, as SASS has recently
started discussions with universities in Brazil, Argentina, and
Mexico to set up educational exchanges. According to Zhang, the
Shanghai Municipal Government is also backing plans to set up
Confucian Institutes (Chinese language and cultural training
centers) in collaboration with Shanghai's Fudan University and

SHANGHAI 00000170 005 OF 005


the Shanghai Foreign Language Institute in Peru, Argentina,
Venezuela, and Brazil. Even with these efforts, however,
academic interest among Shanghai scholars on Latin America is
lagging and has not been commensurate with the growth in
bilateral trade and investment.
CAMP