VZCZCXRO3796
PP RUEHCHI RUEHDT RUEHGH RUEHHM RUEHNH
DE RUEHCN #0044/01 0570557
ZNR UUUUU ZZH
P R 260557Z FEB 10
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC PRIORITY 3763
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHOO/CHINA POSTS COLLECTIVE
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHCN/AMCONSUL CHENGDU 4489

UNCLAS SECTION 01 OF 05 CHENGDU 000044 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP DASES DAVID SHEAR, SCOT MARCIEL 
 
E.O. 12958: N/A 
TAGS: ECON ECIN ETRD EINV ELTN CH VM LA BM TH
SUBJECT: CHINA-ASEAN FTA START-UP: IMPACT ON YUNNAN PROVINCE MODEST 
NOW BUT BIG LATER 
 
REF: A) 07 CHENGDU 124, B) 09 CHENGDU 069, C) 09 CHIANG MAI 057, D) 09 VIENTIANE 088 
 
CHENGDU 00000044  001.2 OF 005 
 
 
¶1. (U) This cable contains sensitive but unclassified 
information - not for distribution on the Internet. 
 
¶2. (SBU) Summary:  Although Yunnan's overall foreign trade 
numbers declined by about 16 percent in 2009 because of the 
global financial crisis, its trade with the 10 member-nations of 
ASEAN managed to grow by nearly 14 percent over 2008 -- in part 
due to improved road infrastructure linking Yunnan to Vietnam, 
and to Thailand via Laos.  Yunnan's trade with ASEAN has seen a 
consistent annual double digit increase since 2003, with the 
exception of 2008, which saw a seven percent contraction.  While 
Burma has been the province's biggest trading partner, 
Yunnan-Burma trade increased by only 3 percent in 2009, with 
Yunnan-Vietnam trade growth of 22.4 percent. 
 
¶3. (SBU) Yunnan officials downplayed, in the short term, the 
importance of the January 1, 2010 launch of China-ASEAN Free 
Trade Area (CAFTA) because much of Yunnan's trade is with Burma, 
Vietnam, and Laos, which will not become fully liberalized under 
CAFTA until 2015.  At the same time, they expressed confidence 
in CAFTA's long-term potential, and stressed further 
improvements in infrastructure -- particularly by China's 
southern neighbors -- as key to allowing Yunnan to develop as a 
transportation and logistics hub between southeast Asia and the 
rest of the PRC.  The limits of the physical infrastructure are 
further compounded by only limited implementation of an existing 
cross-border transportation agreement; at present, for example, 
most Chinese trucks must offload onto Vietnamese trucks in 
Hekou, and Chinese trucks are banned altogether in Thailand, 
necessitating offload-onload onto a Thai truck.  End Summary. 
 
¶4. (SBU) Consul General and PolEconoffs made a week-long road 
trip January 17-23 to Yunnan's provincial capital, Kunming, and 
to Hekou and Mohan, the main ports for Yunnan's trade with 
Vietnam and Laos respectively.  Our interlocutors in Kunming 
included the Yunnan Departments of Commerce and Transportation, 
the Yunnan Academy of Social Sciences (YASS).  Septel reports on 
border trade at Hekou and Mohan. 
 
Yunnan-ASEAN Trade and Investment Growing Steadily 
--------------------------------------------- ----- 
 
¶5. (SBU) Although Yunnan's overall foreign trade numbers 
declined by about 16 percent in 2009 because of the global 
financial crisis, its trade with ASEAN countries managed to grow 
by nearly 14 percent over 2008, a Department of Commerce 
official told CG.  This growth in Yunnan-ASEAN trade also went 
against the tide of overall China-ASEAN trade, which was down by 
two percent in 2009.  In fact, Yunnan's trade with ASEAN has 
seen a consistent annual double digit growth since 2003, with 
the exception of 2008, which saw a seven percent contraction. 
While both Commerce and YASS identified Burma as the province's 
biggest trading partner, Vietnam may be catching up. 
Yunnan-Vietnam trade grew by 22.4 percent in 2009, higher than 
overall Yunnan-ASEAN trade, and far higher than Yunnan-Burma 
trade, which increased by only 3 percent. 
 
¶6. (U) According to official statistics for 2009, the total 
value of Yunnan-ASEAN trade stood at about USD 3.15 billion, 
39.3 percent of the province's total international trade. 
Exports from Yunnan to ASEAN were USD 2.1 billion; imports were 
USD 1.05 billion.  Yunnan ran trade deficits only with Indonesia 
and Laos.  Yunnan's top exports to ASEAN were agricultural 
products, phosphorus chemicals, and electrical machinery; its 
top imports from ASEAN were minerals, electrical machinery and 
agricultural products.  Additional details on Yunnan-ASEAN trade 
are in appendix. 
 
Yunnan- ASEAN Investment Ties: A Two-Way Street 
--------------------------------------------- -- 
 
¶7. (U) Yunnan-ASEAN investment relations have also risen 
steadily, if modestly, according to Department of Commerce 
officials.  Several hundred companies in Yunnan are currently 
authorized to invest internationally, and an increasing number 
of companies are seeking to expand their international business 
operations because they face domestic overcapacity. 
 
¶8. (U) Most such investments are going to Laos, Burma, and 
Vietnam in the fields of mining (chiefly iron, lead and zinc), 
hydropower (i.e. dam building) and agriculture (produce and wood 
products).  According to Department of Commerce statistics, the 
total contracted Yunnan outward investment as of the end of 2009 
to the three countries was USD 419 million -- of which 230 
million went to Laos, 180 million to Burma, and only 9 million 
to Vietnam.  About half of these investments were made by 
 
CHENGDU 00000044  002.2 OF 005 
 
 
state-owned enterprises (SOEs) under the central government; the 
rest were by provincial SOEs or private companies. 
 
¶9. (SBU) By contrast, ASEAN investment in Yunnan stood at USD 
348 million as of the end of 2009, with nearly half of that (USD 
160 million) being from Singapore.  Department of Commerce 
officials expressed hope that Singaporean investments could help 
develop the province's service and logistics capacities. 
Thailand, with USD 70 million invested in the province, is the 
second largest source; Burma is third with USD 40 million 
invested. 
 
That Said, Yunnan Still Accounts For 
Less Than 2 Percent of China-ASEAN Trade 
---------------------------------------- 
 
¶10. (SBU) Despite growing links, Yunnan Province's trade with 
ASEAN countries remains a small proportion of China's overall 
trade with the region.  As a YASS researcher pointed out, 
although trade with ASEAN is significant for the province, it 
still accounts for less than two percent of all trade between 
China and ASEAN.  A Department of Commerce official confided 
that he expected that Yunnan's relative importance in 
China-ASEAN trade would not increase significantly in the near 
future. Instead, he predicted faster growth in overall 
China-ASEAN trade volumes as CAFTA comes on line. 
 
¶11. (SBU) Despite its geographic position, the potential for 
Yunnan to benefit from expanded trade under CAFTA remains 
limited in the near term for several reasons, noted both YASS 
and Department of Commerce officials.  The three nations with 
which Yunnan shares a border -- Myanmar, Vietnam and Laos -- are 
all new ASEAN members and thus will not be required to implement 
CAFTA's tariff-free rules until 2015.  Trade in most 
agricultural products -- primarily with Thailand and Vietnam -- 
has already been tariff-free since 2004.  This leaves only a 
small proportion of trade between Yunnan and ASEAN that is 
seeing an elimination of tariffs as a result of CAFTA going into 
effect.  Moreover, emphasized the Department of Commerce, 
expanding Yunnan's proportion of overall China-ASEAN trade will 
be difficult in the face of long-established commercial 
relationships structured around trade via the eastern ocean 
ports that bypass Yunnan altogether. 
 
¶12. (SBU) Comment: One notable exception in terms of transit 
trade may be Vietnam, because of the growing importance for 
Yunnan of the port of Haiphong.  Some Yunnan trade is already 
brought in through Haiphong; our interlocutors indicated that 
third-country trade to Yunnan (and perhaps other provinces in 
southwestern China such as Sichuan) via Vietnam may increase 
significantly in the future due to improvements in rail and road 
infrastructure between Hekou and Haiphong.  It is likely that 
some U.S. beef, for example, which is technically banned for 
sale in China, is already being imported illegally into China 
via this route.  End Comment. 
 
Transportation Infrastructure Challenges 
---------------------------------------- 
 
¶13. (SBU) Yunnan officials nonetheless emphasized the long-term 
potential of CAFTA.  While provincial officials have long 
identified development of transport links as the key to ending 
the province's relative isolation and stimulating economic 
growth, the province has faced considerable challenges on this 
front.  Officials at both the Transportation Department and YASS 
noted the province's mountainous terrain considerably increases 
the cost of road construction and has thus slowed development. 
For example, the new highways to Southeast Asia required the 
building of a large number of tunnels and bridges.  (Note: 
During many days of travel to border points with Vietnam and 
Laos, we noted dozens of fairly long tunnels, a large number of 
raised highways -- in part to reduce negative impacts on the 
environment -- and several elaborate bridges.  End Note.) 
 
Dramatic Progress on Major Roads Projects 
----------------------------------------- 
 
¶14. (SBU) Despite the cost and engineering challenges, progress 
on highways linking the provincial capital of Kunming to its 
main border ports and onto Southeast Asian capitals has been 
dramatic over the last few years.  According to the 
Transportation Department, virtually all of the Kunming-Bangkok 
Highway within Yunnan -- 668 kilometers from Kunming to Mohan -- 
is now high-grade expressway; the 400-kilometer stretch from 
Kunming to Hekou of the Kunming-Hanoi-Haiphong Highway is also 
now mostly high-grade expressway; and, of the nine highways 
connecting Yunnan to Burma, three now have significant portions 
 
CHENGDU 00000044  003.2 OF 005 
 
 
within Yunnan that are expressways. 
 
¶15. (SBU) During the last extended Consulate travel along these 
same roads in early 2007 (Ref A), the Chinese portions of the 
Kunming-Hanoi-Haiphong and Kunming-Bangkok highways were still 
under construction.  At that time, travel between Kunming and 
Hekou on the border with Vietnam took 12 hours, mostly on 
mountainous secondary roads.  In contrast, the same drive in 
January 2010 took approximately six hours, mostly on expressway. 
 Likewise, in 2007 travel between Yuanjiang and Mohan involved a 
ten-hour "bone-jarring ride over badly decayed secondary roads." 
 The more recent trip, on this now completed stretch of the 
Kunming-Bangkok Highway, took about four hours. 
 
Improved River Ports; Plans for More Rail Connections 
--------------------------------------------- -------- 
 
¶16. (SBU) While roads have clearly been given top priority, 
officials also noted emphasis on other trade and transportation 
infrastructure development.  Large new port facilities have been 
built at Hekou and Mohan (discussed septel).  A YASS official 
also noted plans to increase the capacity of Mekong River 
transport from the current 300 ton per ship limit to 500 tons. 
 
¶17. (SBU) Construction of a new railroad linking Kunming and 
Hanoi is well underway and was in evidence all along our route 
from Kunming to the border town of Hekou.  (Yunnan's first rail 
line, a French-built narrow gauge line to Hanoi and Haiphong, 
remains operational, but only for freight.)  YASS officials also 
confirmed that a line linking Dali and Bashan within Yunnan will 
commence soon, with the possibility of later extending into 
Burma. 
 
¶18. (SBU) However, discussions of linking Kunming with Singapore 
by connecting various national rail networks remain largely 
"theoretical," according to officials at the Department of 
Commerce, while YASS officials assessed its completion as 
unlikely within the next 7-8 years.  Plans to link Yunnan with 
its neighboring provinces within China via high speed rail are 
likely to come on line much sooner, according to YASS. 
 
Yunnan Officials: 
Biggest Trade Obstacles Still Lie Across the Border 
--------------------------------------------- ------ 
 
¶19. (SBU) Fast-paced infrastructure development in Yunnan is not 
always matched across the border, officials said.  Once it 
crosses into Laos (at Mohan) the Kunming-Bangkok Highway (Route 
R3A) is all second-grade road, Transportation Department 
officials noted.  (Refs C and D describe extensive problems 
along the Lao portion of R3A, including stretches observed to be 
collapsing within the last year.) 
 
¶20. (SBU) Transportation Department officials also emphasized 
the physical bottleneck at the Lao-Thai border where the road 
meets the Mekong and vehicles must currently cross via ferry. 
They reported that construction of the new bridge meant to link 
the two sections of the R3A -- a joint Chinese-Thai project -- 
is to start within this month and will be completed in 2012. 
(Note: This is one year later than the initial planned 
completion date for this project.  Some press reports on the 
bridge have identified it as the key obstacle to expanding trade 
along this route, and note a long history of delays in getting 
the project off the ground.  See for example: 
http://tinyurl.com/R3Abridge.  Yunnan transportation officials, 
however, did not discuss these delays or express any skepticism 
regarding the new timeframe.  End Note.) 
 
Poor Coordination Among Transportation Officials; 
Need Implementation of Cross-Border Transport Agreement 
--------------------------------------------- ---------- 
 
¶21. (SBU) The limits of the physical infrastructure are further 
compounded by continued poor coordination of transportation 
regimes in the region, noted Commerce officials.  For example, a 
large cargo truck travelling from China toward Thailand hits 
multiple checkpoints along the road in Laos, adding both time 
and expense to the trip.  Once it arrives at the Thai border, 
the goods on the truck must be transferred to a new truck to 
drive into Thailand, as Chinese trucks remain barred from entry. 
 At the Vietnamese border, only trucks bearing plates from the 
Chinese border town of Hekou can cross, necessitating reloading 
of most trucks on the Chinese side of the border.  Cargo trucks 
face similar obstacles to uninhibited and efficient transport in 
various forms throughout the region. 
 
¶22. (SBU) Officials at both the Commerce and Transportation 
 
CHENGDU 00000044  004.2 OF 005 
 
 
Departments cited the importance of the GMS Cross-Border 
Transport Agreement (CBTA) for facilitating smoother transport 
processes within CAFTA.  However, they noted that the CBTA, 
despite being agreed to by all GMS governments, is not yet being 
fully implemented, blaming foot dragging on the part of some 
signatories.  (A Transportation Department official described 
the Government of Thailand as the largest obstacle, but also 
mentioned Burma.) 
 
¶23. (SBU) Overall, officials assessed the successful integration 
of the various transport and border regimes to be a ways off. 
There have been "many promises and deadlines, but they can't be 
put into practice."  (Note: The CBTA was initiated in 1996 as 
part of the Asian Development Bank's technical assistance to the 
six countries of the GMS in order to identify and address 
non-physical and non-tariff barriers to cross border cargo 
transport along key routes.  All six countries have signed and 
ratified the agreement.  See 
adb.org/GMS/Cross-Border/default.asp for additional information. 
 End note.) 
 
Comment: Further Substantial Integration Coming, 
But Will Taken Take, Need Unified Transportation Regimes 
--------------------------------------------- ----------- 
 
¶24. (SBU) Comment:  Although providing the necessary foundation, 
neither the official launching of CAFTA on January 1, nor rapid 
road and rail development, will necessarily produce a quick, 
substantial upsurge in Yunnan's trade with its southern 
neighbors.  It will take time to redirect long-established trade 
patterns, and to overcome bureaucratic hurdles to unified, 
cross-border transportation regimes.  Nonetheless, the trade and 
investment relations of Yunnan are already undergoing profound 
changes that will continue to reshape landscapes and 
livelihoods, and bring an increased level of economic 
integration between China and its much poorer southern 
neighbors. 
 
APPENDIX: Official Yunnan-ASEAN trade statistics for 2009, 
compiled from information published by the Yunnan Department of 
Commerce and China-ASEAN Expo (see http://tinyurl.com/YunnanDOC 
and http://www.caexpo.org).  Amounts are in US Dollars. 
 
¶I. Yunnan's ASEAN Trade Partners: 
 
   COUNTRY: BURMA 
   Trade Value/% of Total Trade: 1.2 billion / 15.3% 
   Trade Balance: 323 million surplus 
   Trade Growth Rate: 3% 
   Main exports to: chemicals, machinery, household appliances, 
and building materials 
   Main imports from: rubber, minerals, jade, rice and wood 
products 
 
   COUNTRY: VIETNAM 
   Trade Value/% of Total Trade: 790 million / 9.9% 
   Trade Growth Rate: 22.4% 
   Trade Balance: 53 million surplus 
   Main exports to: phosphorous, cigarettes, fertilizer, 
building materials, textiles, electric appliances 
   Main imports from: minerals, agricultural products 
 
   COUNTRY: INDONESIA 
   Trade Value/% of Total Trade: 345 million / 4.3% 
   Trade Growth Rate: 53.9% 
   Trade Balance: 56 million deficit 
   Main exports to: cigarettes, phosphorus, machinery, textiles 
   Main imports from: nonferrous metals, fertilizer 
 
   COUNTRY: THAILAND 
   Trade Value/% of Total Trade: 236 million / 2.9% 
   Trade Growth Rate: declined by 6.2% 
   Trade Balance: 169 million surplus 
   Main exports to: agricultural products 
   Main imports from: agricultural products, aquatic/sea products 
 
   COUNTRY: MALAYSIA 
   Trade Value/% of Total Trade: 221 million / 2.8% 
   Trade Growth Rate: 92.2% 
   Trade Balance: 9.5 million surplus 
   Main exports to: cigarettes, metals, chemical raw materials 
   Main imports from: palm oil, forestry products 
 
   COUNTRY: LAOS 
   Trade Value/% of Total Trade: 155 million / 1.9% 
   Trade Growth Rate: 40.5% 
   Trade Balance: 6.3 million deficit 
 
CHENGDU 00000044  005.2 OF 005 
 
 
   Main exports to: machinery, textiles, chemicals 
   Main imports from: agricultural products, wood 
 
   COUNTRY: SINGAPORE 
   Trade Value/% of Total Trade: 115 million / 1.4% 
   Trade Growth Rate: declined by 31.4% 
   Trade Balance: 44 million surplus 
   Main exports to: cigarettes, lead, aluminum 
   Main imports from: chemical products, electrical machinery, 
precision instruments, telecommunication equipment 
 
   COUNTRY: PHILIPPINES 
   Trade Value/% of Total Trade: 59 million / 0.7% 
   Trade Growth Rate: 27% 
   Trade Balance: 28 million surplus 
 
   COUNTRY: CAMBODIA 
   Trade Value: 3.7 million 
   Trade Growth Rate: declined by 78.2% 
   Trade Balance: 2 million surplus 
 
   COUNTRY: BRUNEI 
   Trade Value: 0.25 million 
   Trade Growth Rate: 97.6% 
   Trade Balance: 0.25 million surplus 
 
II. Yunnan's Main Exports to ASEAN: 
 
   Category: Agricultural products 
   Trade Value/% of Total: 883 million / 23.6% 
   YOY Growth Rate: 25.5% 
 
   Category: Phosphorus chemicals 
   Trade Value/% of Total: 720 million / 19.2% 
   YOY Growth Rate: declined by 52.6% 
 
   Category: Electrical machinery 
   Trade Value/% of Total: 703 million / 18.8% 
   YOY Growth Rate: declined by 20.5% 
 
   Category: Cigarettes 
   Trade Value/% of Total: 280 million / 7.5% 
   YOY Growth Rate: 31.9% 
 
   Category: Nonferrous metals 
   Trade Value/% of Total: 281 million / 7.5% 
   YOY Growth Rate: declined by 28.9% 
 
   Category: Textiles 
   Trade Value/% of Total: 243 million / 6.5% 
   YOY Growth Rate: 40.3% 
 
   Category: Electric Power 
   Trade Value/% of Total: 186 million / 5% 
   YOY Growth Rate: 34% 
 
   Category: Other 
   Trade Value/% of Total: 734 million / 19.6% 
   YOY Growth Rate: declined by 9.6% 
 
III. Yunnan's Main Imports from ASEAN: 
 
   Category: Minerals 
   Trade Value/% of Total: 1.3 billion / 42.6% 
   YOY Growth Rate: declined by 35.8% 
 
   Category: Electric Machinery 
   Trade Value/% of Total: 701 million / 23.4% 
   YOY Growth Rate: 17.4% 
 
   Category: Agricultural Products 
   Trade Value/% of Total: 339 million / 11.3% 
   YOY Growth Rate: 34.4% 
 
   Category: Wood 
   Trade Value/% of Total: 151 million / 5.1% 
   YOY Growth Rate: 0.4% 
 
   Category: Non-metallic Raw Materials 
   Trade Value/% of Total: 131 million / 4.4% 
   YOY Growth Rate: declined by 87.5 
 
   Category: Other 
   Trade Value/% of Total: 396 million / 13.2% 
   YOY Growth Rate: 8.6% 
BROWN