US embassy cable - 05CARACAS1807

C O N F I D E N T I A L  CARACAS 001807 
 
SIPDIS 
 
 
NSC FOR TSHANNON AND CBARTON 
HQ USSOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: DECL: 03/30/2015 
TAGS: ECON, PREL, ENRG, ECPS, CH, VE 
SUBJECT: CHINA'S INCREASING COMMERCIAL TIES WITH VENEZUELA 
 
REF: CARACAS 773 
 
Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 D 
 
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SUMMARY 
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1. (U)  Venezuelan President Hugo Chavez has identified China 
as an alternative commercial partner to the "imperialistic" 
United States and has moved aggressively to cultivate 
Sino-Venezuelan relations.  Recent state visits between the 
two countries have yielded dozens of agreements; however, 
most have been at the "memorandum of understanding" and 
"letter of intent" level.  Chinese officials concede that, 
among Latin American countries, Venezuela's relative 
importance to China remains moderate, but the Chinese have 
demonstrated a desire to expand the bilateral commercial 
relationship.  Bilateral commerce has been increasing 
rapidly, though from a fairly modest base.  The Chinese 
continue to increase their investment in Venezuela, primarily 
in the energy sector through state-owned enterprises. 
Chinese companies are also active competitors to provide 
telecommunications equipment to Venezuelan companies and to 
Venezuela's new state-owed CVG Telecom and sellling oil field 
equipment to state petroleum enterprise PDVSA.  Venezuela 
would like to sell oil to China, diversifying its markets 
away from the U.S.  This however is easier said than done. 
China appears to view Venezuela in purely economic terms 
while politics seems to largely drive Chavez's approach to 
the relationship.  END SUMMARY 
 
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The Road is Paved With Good Intentions 
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2. (U) Visiting China in December 2004, Chavez complimented 
China for being a big country without being imperialistic 
while criticizing U.S. "imperialism" and referring to 
American capitalism as "the road to hell."  During this visit 
he also affirmed Venezuela's support for China's "one China" 
policy with respect to Taiwan.  During the visit by Chinese 
Vice President Zeng Quinghong to Venezuela in February 2005, 
the governments of Venezuela and China signed 19 bilateral 
agreements on issues including the opening of 7 new oil 
fields to Chinese companies, a grant for $12 million to 
Venezuela for unspecified commercial purposes, a $42 million 
preferential credit facility to finance Chinese projects, 
memoranda of understanding (MOU) covering the oil industry, 
aluminum smelting, and an MOU to jointly develop satellites. 
As has been seen in other state visits that culminate with a 
lengthy signing ceremony, few if any binding contracts were 
signed. 
 
3. (U) In April 2005, an additional series of letters of 
intent were signed with Chinese enterprise Lang Chao for a 
possible joint venture to produce software and computers; 
with Haier, China's largest home appliance manufacturer, for 
a potential factory in Venezuela, and Shandong Foton Heavy 
Industries for the possible local production of farming and 
construction equipment. 
 
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China-Venezuela Trade Small, But On The Rise 
-------------------------------------------- 
 
4. (C) According to Wan Jian, Commercial Counselor of the 
Chinese Embassy in Venezuela, China is working to increase 
the level of both trade with and investment in the country. 
Jian told econoff that the level of trade with Venezuela -- 
approximately $1.3 billion in 2004 -- ranks as only the 
seventh largest in Latin America behind Brazil, Argentina, 
Chile, Mexico, Peru and Panama. (Note: In comparison, Chinese 
trade with Venezuela is less than ten percent of that with 
Brazil and accounted for about one-tenth of one-percent of 
China's global trade in 2004. End Note.)  On the investment 
side, according to Jian, Venezuela accounts for between 60-70 
percent of China's regional investment and is concentrated 
primarily in the energy sector.  China's energy investments 
have been made primarily through the China National Petroleum 
Company (CNPC) and a joint-venture with state-owned Bitumenes 
del Orinoco (BITOR) (see par. 11). 
 
5. (C) Jian said that he expected the level of 
 
China-Venezuelan trade to continue to accelerate, pointing to 
the near doubling of trade from 2003-2004.  When asked what 
he felt about business conditions in Venezuela, he complained 
about the exchange control system and the inefficiencies and 
delays caused by Venezuela's foreign exchange control 
authority, CADIVI, in repatriating capital.  He also pointed 
out that Chinese exporters were experiencing significant 
delays in payment.  This, he said, was because payments could 
not be released until goods had been inspected in Venezuela 
rather than being paid F.O.B. in the Chinese port of origin. 
Jian also confirmed Chinese interest and involvement in 
supplying equipment in both the telecommunications and 
agricultural equipment sectors. 
 
6. (C) Mimy Mock De Fung, President of the Chinese-Venezuelan 
Chamber of Commerce (CAVENCHI), told econoff that Chinese 
companies were increasingly looking at Venezuela as a source 
of raw materials and a market for Chinese finished goods. 
She commented however, that Chinese investment and trade 
decisions were made "on the basis of business calculations," 
and not for ideological reasons as appeared to be the case 
from the Venezuelan side.  She pointed out that the vast 
majority of Chinese investment -- about two-thirds -- had 
been made by the Chinese state enterprises.  She expected, 
however that the level of private investment would be 
increasing as a result of the trend towards closer 
Chinese-Venezuelan relations. (Note: During the visit, 
econoff observed construction underway as CAVENCHI was 
substantially expanding the size of its office. End Note.) 
 
--------------------------------------------- -- 
Strong Competitors in Public Tenders 
--------------------------------------------- -- 
 
7. (C) In a meeting with emboffs, Lucent Technologies 
Venezuela General Manager Raul Socorro said he believed U.S. 
companies were being unfairly disadvantaged in GOV 
procurement, and cited favoritism shown by the new state 
telecommunications enterprise, CVG Telecom, as an example 
(see par. 9).  He also complained that Chinese firms were 
often able to include preferential financing -- supported by 
the GOC -- in order to win bids. While he felt that Lucent 
could still compete in Venezuela, based on superior 
technology and service, Socorro said that Lucent's profit 
margins and market share were being quickly eroded. (Note: In 
a public forum attended a member of Embassy's commercial 
section, Alvin Lezama, Director General of Conatel, 
Venezuela's national communications commission, told the 
Venezuelan companies in attendance that to be successful, 
bidders on government telecommunications projects should have 
non-US partners, preferably Chinese, Indian, or French. End 
Note.) 
 
8. (C) Cisco Systems Country Manager Juan Carlos Lopez was 
more upbeat about the prospects for his country in the face 
of Chinese competition.  Lopez agreed that the Chinese were 
fiercely competitive in the Venezuelan telecommunications 
market, were often able to offer excellent terms (including 
financing) and were favorably viewed by the GOV.  However, he 
denied that Cisco was being specifically discriminated 
against as a U.S. company and speculated that Cisco's 
business model of working through local resellers mitigates 
the political pressure.  Lopez also identified major 
corruption in the procurement process as a hindrance to doing 
business and implied that Chinese companies might be behaving 
in ways forbidden to U.S. companies by the Foreign Corrupt 
Practices Act. 
 
9. (C) Frustrating the efforts of economic observers and 
would-be bidders is the fact that government tenders in 
Venezuela have become more and more opaque.  Recently, CVG 
Telecom, a newly formed telecommunications company owned by 
the state-owned industrial giant, Corporacion Venezolana de 
Guayana (CVG), was reported to be contracting for $150-200 
million worth of telecommunications equipment and service. 
CVG Telecom plans to use CVG's existing fiber-optic 
capabilities and rights of way along with new investments in 
mobile telephony to compete eventually  with Venezuela's 
privately owned telecommunications providers.  Venezuelan 
representatives of Lucent, which had been pursuing the 
contract, were told by CVG contacts that the Chinese firm 
Huawei Technologies had been selected for the contract. 
Following the ouster of CVG Telecom's President, Hipolido 
Izquierdo, Emboffs met with the company's new president, 
 
Julio Duran, who informed them that the contract was still 
open and was unaware that Lucent was interested in the 
tender. It remains unclear how and when the contract will 
ultimately be awarded. 
 
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Petroleum Relations 
------------------- 
 
10. (U) China, the second largest oil consumer in the world, 
has had a presence in the Venezuelan oil business since the 
late 1990's when the Chinese National Petroleum Company won 
two Operating Service Agreement contracts for the Caracoles 
and Intercampo Norte fields.  The deals opening seven new oil 
fields to Chinese drillers announced in February are in 
addition to an operating agreement for 15 fields in eastern 
Venezuela that was announced during President Chavez's visit 
to China in late 2004.  (Note:  There is a rumor in the 
energy sector in Caracas that, in the flurry of agreements 
the GOV signed with countries such as China and India in 2004 
and early 2005, the GOV actually signed agreements with two 
or more countries that cover substantially the same fields. 
End Note.)  According to published reports, Chinese companies 
have agreed to invest $350 million in oil fields in Venezuela 
and $60 million in a natural gas venture. 
 
11. (C) The China National Petroleum Corportion and 
Petrochina Fuel also formed a joint venture with Petroleos de 
Venezuela's BITOR affiliate in 2001 for the manufacture of 
Orimulsion, Venezuela's patented heavy oil/water blend 
developed to replace coal in power plants.  Since the 
December 2002-February 2003 national strike, there has been 
an active debate in Venezuela on the value of Orimulsion, 
with the current Vice Minister of Energy Bernard Mommer 
arguing forcefully that the return on the heavy oil used in 
Orimulsion would be greater if it were blended with lighter 
oil and sold as crude.  PDVSA has in fact announced that 
Orimulsion contracts with other nations such as Canada and 
Italy will not be renewed upon contract expiration.  Despite 
this, the "Sinovensa" joint venture has moved ahead and has 
started construction of a 7.25 million metric ton per annum 
orimulsion manufacturing facility at the Jose Industrial 
complex near Puerto La Cruz. 
 
12. (C) A U.S. company executive told econoffs visiting 
eastern Venezuela June 7-8 that PDVSA is taking extraordinary 
measures to support the continued export of Orimulsion to 
China despite its overall desire to withdraw from the 
business (leaving customers in Italy and Canada without a 
source of supply for power plants specificaly tooled up to 
take the fuel).  According to this manager, PDVSA employees 
have informed members of his staff that as much as 20-25,000 
barrels per day of PDVSA's own oil production is being lost 
because of the emphasis senior PDVSA management have put on 
carrying the orimulsion for China through a pipeline that is 
not big enough to carry both the Orimulsion and the 
production from all the fields in the area.  The U.S. company 
manager expressed his increasing concern that his oil will be 
squeezed out of the PDVSA pipeline.  (Comment:  PDVSA seems 
to be making a big effort to supply the Chinese despite 
persistent reports in the energy sector in eastern Venezuela 
that the Chinese are actually running the cheap Orimulsion 
through a refinery and using the heavy oil for asphalt.  End 
comment.) 
 
13. (C) In their recent trip to eastern Venezuela, econoffs 
also met with a representative of a U.S. drilling company who 
stated that his firm has decided to leave Venezuela in the 
face of the competition from Chinese drilling companies. 
According to this executive, the presence of Chinese drilling 
companies is expanding rapidly, particularly in eastern 
Venezuela.  The Chinese, he said, are under-bidding other 
companies on PDVSA contracts with "rigs made of metal 
scraps."  The services they provide, he said, do not match 
those of other international service companies. 
 
14. (C) Shipments of Venezuelan crude to China (as opposed to 
sales of Orimulsion and products such as fuel oil) reportedly 
began within the last year with periodic shipments of Boscan 
crude from western Venezuela.  Public discussion of the idea 
of a pipeline through Colombia or Panama to carry Venezuelan 
crude to a Pacific port for shipment to China has also 
increased in the past year.  The GOV has repeatedly claimed 
that crude shipments to China would come from increases in 
 
production rather than any reallocation of current supply 
commitments.  This claim, however, runs contrary to reports 
that GOV is actively working through oil traders to divert 
shipments to non-US buyers in addition to systematically 
replacing supply contracts with US firms with contracts with 
firms from India and China as they expire.  These moves are 
being pursued despite the substantial per barrel discount 
that Venezuela reportedly has to offer in order to offset 
increased transportation costs to ship oil to China rather 
than the U.S. (see reftel). 
 
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Military Relations - No Big Sales Yet 
------------------------------------- 
 
15. (C) Despite talk of closer military ties between China 
and Venezuela, there appears to be little evidence of 
progress in that direction.  For the first time, the entire 
graduating class of Venezuela's war college, some 70 
officers, were invited to a two-week orientation in China. 
In addition, there have been unconfirmed rumors that the 
Venezuelans have been pursuing the purchase of military 
radars from China, and the two countries have been discussing 
a Venezuelan purchase of a communications satellite, though 
it is not known if it would be for civilian or military 
purposes. 
 
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Comment 
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16. (C)  As part of his campaign to create a "multi-polar 
world" to diminish U.S. power, Venezuelan President Hugo 
Chavez has been working to draw Venezuela closer to countries 
such as Brazil, Russia, China, and Iran which he sees as 
antipathetic to or in competition with U.S. interests.  The 
level of bilateral trade and investment is low, but it does 
provide China with a destination for Chinese investment and a 
source of raw materials including oil and industrial metals, 
possibily at preferential prices.  President Chavez for his 
part gets to claim another "ally" in his fight against the 
neo-liberal imperialism of the U.S. and can pursue his 
economically questionable policy of oil sales diversion away 
from the U.S.  What distinguishes the China relationship from 
other Venezuelan bilateral relationships somewhat is the 
ideological rhetoric gushing from Caracas.  President Chavez 
has gone out of his way to declare himself a Maoist, a 21st 
century socialist and has gone as far as to publicly claim 
that Venezuelan national hero Simon Bolivar and Mao Tse Tung 
would almost certainly have been friends, and that Bolivar 
would no doubt have been a socialist had he lived a few 
decades longer.  From our perspective, the Venezuelans appear 
to be the primary boosters of the relationship, and sources 
tell us that the Chinese are happy to come along for the ride 
as long as the relationship makeQeconomic sense.  For the 
time being, the relationship works -- primed both by 
convenience and a healthy dose of Venezuelan concessions. 
Brownfield 
 
 
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      2005CARACA01807 - CONFIDENTIAL