VZCZCXRO5422
RR RUEHGH RUEHLMC RUEHVC
DE RUEHUM #0602/01 2950605
ZNR UUUUU ZZH
R 220605Z OCT 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 1590
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RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0749
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC

UNCLAS SECTION 01 OF 02 ULAANBAATAR 000602 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR, USTDA, OPIC, AND EXIMBANK 
STATE FOR EAP/CM AND EB/IFD/OIA 
USAID FOR ANE FOR D. WINSTON 
 
E.O. 12958: N/A 
TAGS: EINV PREL ETRD EMIN ENRG MG
SUBJECT: CHINA WELCOMES WESTERN INVESTMENT IN MONGOLIAN MINING BUT 
FEARS ANTI-FOREIGNER SENTIMENT 
 
Ref: ULAANBAATAR 00565 
 
THIS CABLE IS SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET 
DISTRIBUTION 
 
¶1. (SBU) SUMMARY: Mr. Chen Shan, Economics professor at CASS, the 
Chinese Academy of Social Sciences, told visiting Ulaanbaatar 
Econ/Coml Chief that China welcomes western involvement in 
Mongolia's mining sector but says anti-foreign (read: anti-Chinese?) 
sentiment is forcing the Chinese to rethink their investment 
strategy there.  He said the reputation of Chinese miners in 
Mongolia is unfair and believes that Mongolia is relying too heavily 
on its mining sector for economic growth. END SUMMARY 
 
¶2. (SBU) UB Econ/Coml Chief and Beijing Econoff recently had the 
opportunity to speak with Mr. Chen Shan, an Associate Economics 
professor at Institute of Asia-Pacific Studies of the Chinese 
Academy of Social Sciences (CASS) to solicit his views on 
Chinese-Mongolian economic relations. 
 
Western Investment in Mongolian Mining Welcomed 
--------------------------------------------- --- 
 
¶3. (SBU) According to Chen, China viewed its northern neighbor as an 
important source of minerals-based commodities needed for China's 
economic expansion, and China's hunger for mineral-based imports 
from Mongolia was expected to increase over the long term, growing 
in tandem with the Chinese economy.  The advent of western mining 
firms interest in developing Mongolia's major mineral deposits was 
viewed by China not as a threat but as an opportunity.  China's goal 
was to enter into strategic consortiums with western companies to 
help develop mines, the products of which could then be sold onto 
China.  Western firms, he said, would help bring more stability to 
the minerals sector in Mongolia, providing a stronger guarantee that 
these sources will be available for purchase by China over the long 
term.  He also felt that China's collaboration with western firms 
could help improve the reputation of Chinese mining practices in 
Mongolia. 
 
But All Investment Threatened by Anti-Foreign Bias 
--------------------------------------------- ------ 
 
¶4. (SBU) Nevertheless, Chen said, the Chinese were concerned about 
recent "anti-foreign sentiment" and policies in Mongolia that were 
endangering mining sector development.  He cited last year's change 
to the minerals law as well as street demonstrations against foreign 
companies involved in mining. (Comment: While budding Mongolian 
populism and nationalism has fueled some negative feelings towards 
foreign firms, particularly in the mining sector, it is clear that 
Chen was also tacitly referring to the sometimes vitriolic 
anti-Chinese sentiment that has made it difficult for Chinese firms 
to operate in Mongolia.  There is resentment against many Chinese 
mining firms for their environmentally damaging practices as well as 
their tendency to import strictly Chinese labor for projects in 
Mongolia.  In one instance two years ago, a Chinese mining firm had 
its license revoked, they claim, without cause.  Anti-Chinese 
sentiment has also been on the rise among the Mongolian populace 
(reftel). End Comment) 
 
Chinese Contemplate New Investment Strategy 
-------------------------------------------- 
 
¶5. (SBU) Given the current negative atmosphere, Chen said Chinese 
officials were now rethinking their investment strategy in Mongolia. 
 After the visit of President Hu Jintao to Mongolia in June, 2003 
(his first visit to a foreign country as Chinese new leader) and a 
reciprocal visit of Mongolian President Bagabandi to Beijing a year 
later, Chinese foreign direct investment (FDI) in Mongolia tripled 
within the space of a year. Today, 30% of FDI in Mongolia's mineral 
 
ULAANBAATA 00000602  002 OF 002 
 
 
sector comes from China and 70% of China's entire investment 
portfolio in Mongolia is concentrated in mining.  Now, China fears 
the high ratio of Chinese investments in mining is beginning to 
represent too great a risk. Chen said the Chinese government has 
been encouraging Chinese investors to diversify into light 
industries and processing in Mongolia. (Comment: Chinese investors 
pulled out of small and medium enterprises (SMEs) and processing a 
decade ago because it was unprofitable.  It is hard to see why they 
would return now, especially with mineral commodity prices at record 
highs.  End Comment) 
 
Reputation of Chinese Miners in Mongolia Unfair 
--------------------------------------------- -- 
 
¶6. (SBU) Chen addressed the lingering reputation of Chinese mining 
companies in Mongolia as environmental destructors.  He admitted 
that rapid growth in the 1990s overwhelmed Chinese regulators who 
were unable to keep pace with the mushrooming number of domestic 
small scale mining operations.  Chinese miners then carried their 
unchecked behavior into Mongolia where they operated freely due to 
Mongolia's limited enforcement capacities and weak environmental 
laws.  Yet Chen argued that this reputation was no longer deserved 
as Chinese authorities had improved enforcement of environmental 
standards among small scale miners in China which, he believed, 
would naturally carry over to Chinese operated mines in Mongolia. 
Nevertheless, he laid part of the blame for reckless Chinese mining 
practices at the feet of Mongolian authorities, who he said were 
responsible for enforcing their own environmental laws. 
 
¶7. (SBU) Finally, Chen opined that Mongolia relied too heavily on 
the minerals sector for its economic development, leaving itself 
vulnerable to fluctuations in the market.  Recent policy changes, he 
warned, would negatively impact the sector and could even threaten 
Chinese investment there. 
 
¶8. (SBU) Econ/Coml Chief wishes to thank the Beijing Econ staff for 
arranging this meeting, particularly Joanna Wang, Rachel Brunette 
Chen and Brian Klein. 
 
¶9. (SBU) This cable was cleared by Amembassy Beijing. 
 
GOLDBECK