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C O N F I D E N T I A L QUITO 000037 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: DECL: 2035/01/26 
TAGS: ECON EFIN SENV ENRG EC CH
SUBJECT: China cautiously seeks to expand commercial interests in 
Ecuador 
 
REF: 09 QUITO 1059; QUITO 5; 09 QUITO 934 ...



id: 245644
date: 1/26/2010 22:21
refid: 10QUITO37
origin: Embassy Quito
classification: CONFIDENTIAL
destination: 09QUITO1059|09QUITO934|10QUITO5
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C O N F I D E N T I A L QUITO 000037 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: DECL: 2035/01/26 
TAGS: ECON EFIN SENV ENRG EC CH
SUBJECT: China cautiously seeks to expand commercial interests in 
Ecuador 
 
REF: 09 QUITO 1059; QUITO 5; 09 QUITO 934 
 
CLASSIFIED BY: Heather M Hodges, Ambassador, Department of State, 
EXEC; REASON: 1.4(B), (D) 
 
Summary 
 
------------ 
 
¶1. (C) China's Ambassador to Ecuador, Cai Runguo,  told Ambassador 
January 15 that the PRC is moving forward with negotiations with 
the GoE on financing various commercial projects, but that 
Ecuadorian President Correa's criticisms of China's tough 
negotiating position had caused some concern in Beijing.  It 
appears the GPRC-GoE negotiations over the $1.7 billion Coca Codo 
hydro project are progressing, although it is still unclear whether 
Correa will accept China's standard commercial loan conditions 
(particularly access to international arbitration).  Cai noted he 
was confused by the GoE's efforts to strengthen ties with Iran, 
asked whether Correa's frequent criticism of the U.S. was 
ideological, and mentioned that China is maintaining good and 
economically beneficial relations with Venezuela.  Clear from Cai's 
remarks and those of other Chinese officials, China believes it has 
significant economic interests in Ecuador, but is moving cautiously 
in talks with a GoE government that it does not seem to fully 
trust.  End Summary. 
 
 
 
Correa's Comments Disconcerting 
 
--------------------------------------------- 
 
¶2. (C) Chinese Ambassador Cai Runguo called on the Ambassador in 
her office on January 15, at Ambassador Cai's request.  Ambassador 
Cai was accompanied by his political officer, Tiefei Xu.  Embassy 
DCM also sat in.  Ambassador Cai expressed interest in a range of 
U.S.-Ecuadorian bilateral issues, as well as Obama administration 
policy towards Latin America, but was open to discussing Chinese 
issues in Ecuador and Venezuela. 
 
 
 
¶3. (C) Ambassador Cai indicated that China was disconcerted by 
Correa's verbal attack in December 2009 over China's negotiating 
position for loans to Ecuador, in which Correa alleged that even 
the IMF had not treated Ecuador as poorly as did China (Ref A). 
According to local press reports, Ecuadorian Finance Minister 
Viteri traveled to China in mid-January 2010 to negotiate various 
credits with the PRC government.  Cai confirmed that 
Chinese-Ecuadorian loan/investment agreements were proceeding, but 
argued that China was "substantially" maintaining insistence on the 
guarantees that Correa found objectionable and had complained about 
publicly during his December remarks.  Later in the conversation 
Cai also expressed China's unhappiness with Ecuador's continued 
maintenance of safeguard tariffs, and concern over when they would 
be lowered. 
 
 
 
¶4. (C) The focus at the moment is a 1.7 billion dollar loan from 
China's export-import bank to construct the Coca-Codo Sinclair 
hydroelectric project.  If terms can be agreed on that loan, Cai 
said there is another one billion dollar loan from China's 
development bank, for projects yet to be defined.  As part of the 
arrangement, the GoE has designated the Chinese firm Sinohydro as 
the chief contractor on the Coca-Codo project.  China's agreements 
stipulate bilateral negotiations first in the event of disputes, 
but then provide recourse to international arbitration. China is 
"still negotiating" this clause with Ecuador.  (Ecuador's new 
constitution bars the GoE from entering into contracts that include 
international arbitration, and the GoE has publicly announced its 
intention to terminate most of its Bilateral Investment Treaties, 
including with the U.S., mainly because they allow dispute 
settlement via international arbitration mechanisms.) 
 
 
¶5. (C) Ambassador Cai said that Correa does not seem to understand 
that China is negotiating "commercial deals" with Ecuador, similar 
to deals with other countries, and that China would not want to set 
a concessionary precedent for other countries.  In general, Cai 
said Correa wants Chinese investment in Ecuador, in petroleum, 
mining, telecommunications and infrastructure. China is "studying 
the investment situation."  Ecuadorian Press quoted Finance 
Minister Viteri on January 13, from China, stating that the GoE had 
signed a memorandum of understanding on a loan from China's 
Export-Import Bank to finance Coca-Codo.  Although she acknowledged 
that talks were still ongoing, GoE sources commented that the MOU 
represented the end of the difficult phase of the talks. 
 
 
 
Interest in Exploiting Yasuni ITT oil reserves 
 
--------------------------------------------- ------------- 
 
¶6. (C) Prompted by the Ambassador's query, Cai stated that "all" 
petroleum companies were interested in developing the Yasuni-ITT 
petroleum field if conservation initiatives fell through.  (See 
Refs B and C for background on Yasuni ITT and the recent political 
crisis it caused in Ecuador, including the resignation of Foreign 
Minister Falconi.)  Cai mentioned that Russia was interested in 
Block 31 in Ecuador, which is in the Yasuni National Park and next 
to the ITT block.  (PetroBras previously held the Block 31 
concession but returned it to the GoE.)  According to local press 
reports, PetroEcuador consulted with foreign oil companies, 
including Chinese oil company SINOPEC, on the possible exploitation 
of Yasuni ITT as recently as 2008. 
 
 
 
¶7. (C) The Ecuadorian government had also solicited Chinese 
involvement in building the Refinery of the Pacific, a joint 
initiative of Venezuelan President Chavez and Correa.  However, 
Ambassador Cai pointed out that if Chavez goes from power, would a 
subsequent government continue with crude deliveries?  If 
Yasuni-ITT were developed, Cai seemed to believe that could change 
the calculus for the Pacific Refinery.  (Ecuadorian press report 
that the South Korean company SK Group is slated to build the $12.5 
billion refinery, and that Deutsche Bank and China's Export-Import 
Bank are considering providing up to $5 billion in financing 
between them.) 
 
 
 
Skepticism over GoE Interest in Developing Manta as Aviation Hub 
 
--------------------------------------------- ---------------------- 
--------------------- 
 
¶8. (C) Ambassador Cai said that Correa had twice asked China to 
look at investing in Manta (site of the former-U.S. Forward 
Operating Location) as a transportation node, but Cai said that 
Chinese companies were neither interested nor experienced in such 
an overseas project.  Cai evinced skepticism over Correa's concept 
of a Manta-to-Manaus transportation link.  When Cai suggested 
Russia might be interested in Manta after Correa's Russia trip, the 
Ambassador noted that Russian ambassador Yan Burliay had told her 
that Russia's interest in Manta at this point was merely as an 
aviation stop for airplanes picking up flowers at Latacunga in the 
mountains, then proceeding to Manta on the coast to load shrimp and 
bananas. 
 
 
 
Ecuador's Relationship with Iran and the U.S.; China's Growing 
Relationship with Venezuela 
 
--------------------------------------------- ---------------------- 
--------------------------------------------- --------- 
 
¶9. (C) Ambassador Cai asked what the U.S. thought of Ecuadorian 
 
 
relations with Iran; what was the benefit to Ecuador?  He said he 
had asked this of the Ecuadorian Foreign Ministry, which replied 
that "various economic projects" were the benefit.  The Ambassador 
noted our principal concern was Ecuador's budding relationship with 
an Iranian Bank that had been designated by the USG for 
facilitating proliferation of WMD. 
 
 
 
¶10. (C) Ambassador Cai said that China's relations with Venezuela 
were good, citing a joint development fund with two-thirds Chinese 
capital.  The fund originally was for $8 billion, but after Chavez 
requested a doubling, was raised to $12 billion.  Credits from the 
fund are guaranteed by petroleum. 
 
 
 
¶11. (C) Cai asked whether Correa's frequent criticism of the U.S. 
stemmed from ideology, and the Ambassador answered, yes. 
Ambassador Cai nodded and said, "but he is different from Chavez." 
He opined that Correa has substantial support in Ecuador but 
appears to be losing the middle class. 
 
 
 
China's Rapidly Increasing Commercial and Investment Ties with 
Ecuador 
 
--------------------------------------------- ---------------------- 
------------------------------ 
 
¶12. (C) China has already shown itself willing to make large deals 
in Ecuador (as it also appears to be doing in other oil-producing 
states in the region, particularly Venezuela).  In July 2009, the 
two countries announced a four-year oil sales deal, under which 
China providing a $1 billion advance payment.  The terms of the 
deal reportedly favored China.  Ecuadorian press reported that 
during the November 2009 visit of Jia Qinglin, Chairman of the 
Chinese People's Political Consultative conference (CPPCC) national 
Committee, the two countries announced the signing of three 
cooperation agreements, including an arrangement to buy Chinese 
military planes for Ecuador's Air Force.  This was on top of the 
January 2009 $60 million deal to purchase an air defense radar 
system from the China Electronics Technology Group Corporation. 
During his visit, Jia reportedly emphasized the benefits that China 
sees in enhancing economic cooperation between the two countries. 
He encouraged Chinese companies to increase commercial and 
investment ties with Ecuador, noting that Chinese investment in 
Ecuador had reached $2.2 billion and also that two-way trade in 
2008 was almost $2.5 billion, 50% above 2007 levels. 
 
 
 
Comment 
 
------------- 
 
¶13. (C) Faced with a $3-4 billion (or higher) fiscal deficit in 
2010, and with no ability to print money or issue debt, and no 
intention of returning to the IMF or World Bank, the GoE is 
desperate to find large-scale financing from non-traditional 
sources.  Its efforts to date with Russia and Iran have been a 
bust, but China has proven a more willing, if demanding, source of 
both financing and investment.  Successful conclusion of the Coca 
Codo talks would further increase the importance of China to 
Ecuador.  However, faced with the often counterproductive public 
comments of President Correa and a complex investment climate 
resulting from the new constitution and apparent GoE ambivalence 
about attracting foreign investment, the GPRC is moving cautiously 
and making sure to negotiate terms favorable to China. 
HODGES 

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