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DE RUEHKI #0426/01 1341554
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FM AMEMBASSY KINSHASA
TO RUEHC/SECSTATE WASHDC 7988
RUEHBJ/AMEMBASSY BEIJING 0076
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHXR/RWANDA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/HQ USEUCOM VAIHINGEN GE

UNCLAS SECTION 01 OF 05 KINSHASA 000426 
 
PASS TO OPIC (JIM WILLIAMS) 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV EAGR ECPS MARR PREL PGOV SENV
TRGY, XA, XE, CH, CG 
SUBJECT: PRC Engagement in the DRC 
 
REF: A. STATE 41697 
 ¶B. 06 KINSHASA 1731 
 ¶C. 07 KINSHASA 1133 
 ¶D. KINSHASA 406 
 
¶1. (SBU) Summary:  The story of Chinese (PRC) involvement in the 
Democratic Republic of Congo (DRC), dating to the 1970's when the 
DRC was barely into its second decade as an independent nation, is 
long and complex.  Since the early 2000's, China has ramped up its 
presence and exchanges with the DRC, mostly on the basis of trade in 
the Congo's natural resource sector.  What was earlier an informal, 
somewhat disorganized collection of Chinese businesses, most 
operating in the Katanga Province of southern DRC, has begun to be 
formalized over the past year, beginning with a large, multi-billion 
dollar agreement between three large Chinese parastatals and the 
GDRC, signed in September 2007.  In early 2008 some of the 
agreement's details were made public and it was confirmed that this 
is an exchange of millions of tons of copper and cobalt for 
infrastructure projects, to be carried out by Chinese firms.  Many 
other Chinese investments and projects are being considered or are 
already in the works, including road building, hydroelectric 
installations, a deepwater port, and huge bio-diesel plantations. 
There are obvious benefits and drawbacks to all of these activities, 
but it is difficult at this time, due mainly to the lack of 
transparency surrounding these potential deals, to determine whether 
the results for the DRC will be net positive or negative.  There is 
little or no coordination/cooperation between the U.S. and China 
missions in the DRC, and future bilateral actions will need to be 
examined on a case-by-case, sector-by-sector basis.  End summary. 
 
 
The DRC: A History of Chinese Involvement 
----------------------------------------- 
 
¶2. (SBU) This is a response to STATE 41697 (ref A).  Chinese 
involvement in the DRC dates to the Mobutu era (1965-97), when 
large, highly visible projects were the rule.  The Stade des Martyrs 
(Martyrs Stadium) project (which is now in such disrepair that FIFA 
refused to schedule soccer games there unless the DRC made repairs 
to the tune of USD three million by end April 2008; this was not 
achieved), the Palais du Peuple (the Parliament Building) and other 
infrastructural projects including hospitals were all completed 
during the 1970's, 1980's, and early 1990's.  Following the economic 
collapse of the early 1990's and the subsequent conflicts that have 
wracked the Congo, Chinese presence was less visible and funding 
seemed to dry up.  All this has changed now that the DRC is emerging 
from over a decade of war and worldwide demand for commodities, 
especially metals including copper and cobalt, has skyrocketed along 
with the prices for those metals.  The DRC and China signed a 
declaration establishing a "strategic partnership" during the 
Beijing Summit Forum on China-Africa Cooperation in November 2006. 
Even before this signing, the state-owned China National Overseas 
Engineering Company (COVEC) loaned the DRC copper and cobalt mining 
parastatal, GECAMINES, USD 60 million to reopen a copper mine in 
Katanga Province.  At about the same time, the Chinese government 
loaned the GDRC USD 32 million to fund a mobile phone network in 
support of the Congo China Telecom company, a cellular service 
provider (ref B). 
 
China/DRC Trade: Growing by Leaps and Bounds 
-------------------------------------------- 
 
¶3. (SBU) DRC exports to China doubled between 2003 and 2004, while 
Congolese imports from China increased by more than 50 percent in 
each of the three years following the establishment of a 
transitional government in 2003.  2007 saw sustained levels of 
exports, mostly mineral ores, that attained nearly USD three billion 
for the year.  Imports from China nearly doubled between 2006 and 
2007 to over USD four billion, meaning that a country with a budget 
of barely more than USD two billion had a nearly USD one billion 
trade surplus with China.  Preliminary figures for 2008 show no 
decline in this trend, with January figures indicating a nearly 50 
percent increase in exports to China and a nearly 100 percent 
increase in imports from China over the same month in 2007.  At this 
rate, the DRC may post a USD three billion trade surplus with China 
alone, rivaling the level of the national budget for the year.  As 
in the days of King Leopold (1876 - 1909), much of the Congo's 
natural resource wealth is leaving the country, while the population 
still has relatively little purchasing power to buy the products, 
even cheap ones, that it needs or wants. 
 
Initially Small, Scattered Mining Operations 
 
KINSHASA 00000426  002 OF 005 
 
 
-------------------------------------------- 
 
¶4. (SBU) Much of the Chinese business in the DRC was, until 
recently, of an informal and ad-hoc nature.  In the copper belt area 
of the DRC's Katanga Province, small Chinese-owned operations bought 
copper and cobalt ore that had been scraped together virtually by 
hand and concentrated to the extent possible before being shipped in 
"big bags," flexible sacks with a handle capable of holding around 
one ton each and transported on trucks carrying 20 of them at a time 
to ports in Dar es Salaam or Durban for onward shipment to China. 
China, although it has significant reserves of cobalt itself, became 
the world's leading producer of cobalt metal, much of it sourced 
from Katangan mines that were being picked over by thousands of 
Congolese artisanal miners, some of them underage and all of them 
poorly equipped, working in dangerous conditions and earning a 
pittance.  (Note: The DRC is estimated to have about a third of the 
world's known cobalt reserves.  End note.) 
 
Katumbi Lowers the Boom 
----------------------- 
 
¶5. (SBU) Much of this trade came to an abrupt halt in early 2007 
following the elections of late 2006, when the new governor of 
Katanga Province, Moise Katumbi, decreed that all exports of raw, 
concentrated but unprocessed ores were prohibited.  This edict put a 
temporary halt to most of the illegal, and even some of the legal, 
exports of copper and cobalt ore that had been occurring unchecked 
since the early 2000s.  Total Chinese exports from the DRC dropped 
by more than a quarter during the first half of 2007, and did not 
begin to recover their previous level until midway through the year. 
 
 
China Steps up with Larger Projects, More Money 
--------------------------------------------- -- 
 
¶6. (SBU) Coincidentally, official Chinese investment in the DRC, 
with an eye toward regaining the metal ore exports needed to support 
the booming Chinese economy, began in earnest in mid-2007.  In 
August 2007, a delegation of Chinese businesses, including the ExIm 
Bank of China, the China Railway Engineering Corporation (CREC), and 
SINOHYDRO signed an agreement ("protocole d'accord") with the 
Congolese Minister of Infrastructure, Public Works and 
Reconstruction, Pierre Lumbi.  The agreement makes reference to 
cooperation agreements dating to 2001, during a period when the DRC 
was perhaps at its lowest ebb.  The agreement is seven pages long 
and includes two annexes that lay out the modalities of payment for 
infrastructural projects to be completed by Chinese companies, 
basically a swap of over eight million tons of copper, over 200,000 
tons of cobalt, and 372.3 tons of gold (source "to be found") worth 
USD 3 billion for a package of railway, roads and buildings 
(hospitals, health centers, universities and houses) estimated to 
cost over USD six billion dollars. 
 
Details of the Agreement 
------------------------ 
 
¶7. (SBU) A joint venture company, 32 percent Congolese and 68 
percent Chinese, would be financed by the output of the mining 
concessions specified in the agreement, most of them, except for the 
gold mines, located in Katanga Province.  The agreement gives the 
joint venture company all standard investment advantages set by the 
DRC investment and mining codes, as well as a nearly complete 
exoneration of taxes, duties and customs on all imports and exports. 
 The company is free to name its suppliers and to hire whomever they 
choose "both inside and outside the country."  All DRC dividends 
from the company are to be used to pay back the initial costs, 
unless they are paid off "in-kind," (i.e. by more natural 
resources.)  The term of the agreement is 30 years.  The agreement 
was signed on September 17, 2007 (ref C), and included an additional 
USD two billion for additional China-DRC joint ventures in the 
mining sector.  A virtually identical deal was signed in October 
with the China Development Bank. 
 
¶8. (SBU) Paul Fortin, the expatriate head of DRC state copper and 
cobalt mining parastatal, GECAMINES, spent over a month in China at 
the end of 2007 negotiating some of the fine print.  In January, it 
was announced that a deal had been signed and that the joint venture 
company, SICOMINES, would be backed by rights to two mining 
concessions with estimated reserves of 10 million tons of copper and 
2 million tons of cobalt.  At current market prices, these reserves 
are worth approximately USD 83 billion and USD 435 billion, 
respectively.  One estimate is that ultimately the Chinese will earn 
 
KINSHASA 00000426  003 OF 005 
 
 
a profit of over USD 40 billion after the initial investment is paid 
back.  As of April 2008, there is little to show from this agreement 
as details continue to be ironed out.  An announcement in mid-April 
stated that USD 700 million would be released this year to fund some 
of the infrastructural projects listed in the agreement.  One is the 
construction, or re-construction since the road already exists, of 
the 60 miles of highway between Lubumbashi, the capital city of 
Katanga Province, and Kasumbalesa, the major land border crossing 
between the DRC and Zambia.  This is not only the largest 
import/export crossing point in the DRC after the Matadi Port, which 
supplies the megalopolis of Kinshasa; it is also the point through 
which the vast bulk of the copper and cobalt due to be produced 
eventually will have to pass. 
 
And That's Not All... 
--------------------- 
 
¶9. (SBU) There are other Chinese investments and projects in the 
works and being proposed.  The China National Machinery, Equipment 
and Export Corporation (CEMEC) has already agreed to a USD 75 
million loan for chrome and nickel mine in the Kasai provinces of 
central DRC, not far from the provincial capitals of Kananga and 
Mbuji Mayi (ref B).  Kasai Occidental and its neighbor to the east, 
Kasai Oriental, site of the state diamond mining parastatal, MIBA, 
are isolated and underserved partly due to the decrepit condition of 
the rail line that passes through them from the Congo River north 
and west of the Kasais, down to the copper belt south and east of 
them.  What was once daily service bringing goods both down from 
Kinshasa and up from Lubumbashi is now a maybe once-a-week train 
that makes irregular deliveries of basic good such as fuel and corn 
meal that can cost twice as much as in the rest of the country, when 
available.  Despite the fact that the highly touted Inga-Shaba line, 
which delivers power from the Inga hydroelectric installations of 
Bas Congo to the mines of Katanga Province and points south (Zambia, 
Zimbabwe and South Africa), the Kasais are virtually without power 
other than local generators since the transmission line was never 
branched for them.  (See ref D for more information on the Inga 
hydroelectricity project). 
 
¶10. (SBU) China has expressed interest in possibly expanding Inga 
and working with the MIBA diamond mines.  It has even floated the 
possibility of creating a deepwater port at Banana, the DRC's 
Atlantic Ocean port that currently cannot handle the large, 
ocean-going cargo ships that dock at Pointe Noire, a few hundred 
miles up the coast in the Republic of the Congo.  During the January 
2008 visit of Chinese Foreign Minister Yang to the DRC, Yang 
announced a preferential loan agreement worth USD 33.6 million, 
financed by the ExIm Bank of China, to create a fiber optic trunk in 
the DRC, built by the China International Telecommunication 
Construction Corporation. 
 
Fuel for China: Bio-Diesel, Oil, and Uranium? 
--------------------------------------------- 
 
¶11. (SBU) It has been widely reported, though unsubstantiated, that 
a Chinese company, ZTE International, is considering investing USD 
one billion in order to create a three million hectares (11,500 
square miles, an area the size of a square with 100 mile-long sides) 
of oil palm plantations in the Equateur, Bandundu, Orientale and 
Kasai Occidental provinces to produce bio-diesel. (Note: The DRC has 
millions of hectares of existing oil palm plantations dating back to 
pre-independence days, but many of them are no longer producing due 
to age and lack of maintenance.  End note.)  China has shown little 
interest in DRC petroleum since its production (25,000 barrels/day) 
pales in comparison (well less than 10 percent) with that of 
Nigeria, Angola, Sudan, Equatorial Guinea, Gabon and the Republic of 
the Congo, but this could increase as more western companies begin 
onshore exploration here.  Finally, it is well-known that China is 
interested in uranium for its nuclear plants and that someday the 
DRC may open up its uranium mines again.  (Note: Uranium mining in 
the DRC is currently prohibited by a President Kabila decree, 
occasioned by earlier security concerns and lack of effective border 
control.  End note.) 
 
The "Pros" of Chinese Engagement 
-------------------------------- 
 
¶12. (SBU) Official, above-board Chinese investment and activity in 
the DRC directly addresses the country's most urgent needs, as 
expressed by President Kabila in his 2006 inaugural address, better 
known as the "Cinq Chantiers" (five pillars of reconstruction) 
speech: infrastructure; employment creation; housing, water and 
 
KINSHASA 00000426  004 OF 005 
 
 
electricity; health; and education.  While the details are still 
fuzzy in some cases, and the numbers may be off a bit, we do know 
that some 2000 miles of railway linking Katanga and Bas Congo 
provinces, 2000 miles of roadway linking Orientale and Katanga 
provinces, 31 hospitals, 145 health centers, two large universities 
and 5,000 government housing units are pledged.  A Chinese company 
is already working on the Matadi to Kinshasa road, ironically under 
a World Bank funded program.  Another Chinese company is next door 
to the DRC already, rehabilitating the Benguela, Angola to Dilolo, 
DRC rail line that will open up an alternate route westward to the 
Atlantic Ocean for Congolese mining exports. 
 
¶13. (SBU) In each of the China-DRC joint ventures revealed during 
the past year, much of the attention is paid to the infrastructure 
and job creation necessitated by the project rather than the actual 
outputs (e.g. chrome and nickel in the Kasais.)  Reliable water and 
electricity for processing plants, adequate roads to handle incoming 
equipment/materials and outgoing production, and upgraded health, 
education and housing for workers and their families are all right 
out of the "cinq chantiers" playbook.  (Note: this type of 
cradle-to-grave coverage of employees, especially in the Katanga 
Province copperbelt, was the norm for tens of thousands of employees 
of Congolese companies such as GECAMINES.  End note.) 
 
The "Cons" of Chinese Engagement 
-------------------------------- 
 
¶14. (SBU) Based upon past experience and from observing current 
Chinese business practices in neighboring countries (Angola and 
Zambia in particular), the DRC is likely aware of the obvious 
negatives: less local job creation and procurement than expected, 
less cost-savings than promised, and poorer quality (and 
dependability) of the infrastructure left behind.  The DRC may 
perhaps be unaware of, or not care about, other more subtle 
drawbacks.  These include the opening up of areas through road 
building that may increase illegal logging, exacerbate destruction 
of rainforest habitat, and provide opportunities for unscrupulous 
bushmeat hunters.  Certainly the idea of creating entirely new 
plantations by first cutting down existing forest cover should give 
the GDRC authorities pause.  Surprisingly, GDRC authorities appear 
to have overlooked the fact that they were in the midst of a 
controversial mining contract review of over 60 joint venture deals 
dating back to the late 90s when they signed the September agreement 
with the Chinese.  It was the DRC's inability to know for sure what 
they were giving away in those contracts, and then finding out that 
they had made bad deals, that necessitated the review.  This time, 
perhaps, the participation of GECAMINES CEO Paul Fortin has assuaged 
those fears. 
 
Formal IMF Program Imperiled by Chinese Loans 
--------------------------------------------- 
 
¶15. (SBU) The IMF has been told by GDRC authorities that the DRC 
2008 budget of USD 3.4 billion includes a USD 250 million "signing 
bonus" of unearmarked Chinese funding that will be paid to the GDRC 
sometime in the second half of 2008.  IMF officials, unconvinced of 
the supposed "concessional" nature of some of these billions of 
dollars of Chinese loans, are asking that the terms of the loans be 
made known, and renegotiated if necessary, in order to requalify the 
DRC for a new Poverty Reduction and Growth Facility program (PRGF). 
Without this new PRGF, the DRC will not be able to achieve the debt 
forgiveness, estimated at over USD 10 billion, that it so 
desperately needs from the Paris Club through the Heavily Indebted 
Poor Country (HIPC) initiative.  If the DRC can address IMF 
concerns, get the quarter million dollars from the Chinese, 
renegotiate a PRGF and achieve HIPC completion point before end 
2008, it will have avoided, perhaps, the biggest potential negative 
of this latest Chinese engagement in the DRC. 
 
¶16. (SBU) Comment. Other than the IMF issue regarding the 
concessionality of the Chinese loans, it is difficult to predict 
whether the DRC stands to ultimately win or lose from its dealings 
with China.  If much-needed infrastructure projects begin soon and 
provide some local employment and contracts for Congolese suppliers, 
nobody would claim that this was a bad thing.  President Kabila has 
been in office for nearly a year and a half, with not much to show 
in the way of progress on his "cinq chantiers."  As with the two 
Inga hydroelectric plants and plans for an Inga III and possibly a 
"Grand Inga" project, the costs of just rehabilitating existing 
infrastructure in the DRC, no less building new, are staggering and 
beyond the means of any one bilateral or multilateral donor. At 
present, there is virtually no contact between the U.S. and China 
 
KINSHASA 00000426  005 OF 005 
 
 
missions in the DRC, although China has apparently decided to at 
least attend some of the donors' group meetings held in Kinshasa. 
Any bilateral cooperation or coordination with the Chinese in the 
DRC would best be done on either a case-by-case or a 
sector-by-sector basis.  End comment. 
 
 
Garvelink