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