US embassy cable - 05NAIROBI3600

UNCLAS SECTION 01 OF 06 NAIROBI 003600 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EAID, EAIR, ECIN, ECON, EFIN, ELAB, EINV, ETRD, PREL, CH, KE 
SUBJECT: KENYA'S PRESIDENT GOES TO CHINA - AND WHAT IT MEANS 
 
REF: A. STATE 153199 
     B. NAIROBI 3072 
 
Sensitive-but-unclassified.  Not for release outside USG 
channels. 
 
1.  (SBU) Summary:  Kenyan President Mwai Kibaki's August 
state visit to China was clearly aimed at further developing 
a bilateral economic relationship which, while small, is 
growing rapidly.  Trade and tourism are especially robust. 
Investment by Chinese firms in Kenya has yielded 
less-spectacular results, partly because it doesn't make much 
economic sense for Chinese manufacturers to produce in Kenya 
what they can more cheaply export from home.  In part as a 
result, bilateral trade relations are heavily skewed in 
China's favor, and there is a great deal of fear and concern 
in Kenya about China's competitiveness, especially in Kenya's 
once-fledgling garment sector.  While much of the bilateral 
China-Kenya economic relationship is private sector-driven, 
the Chinese government also greases the skids by providing 
grants and concessional loans tied to the use of Chinese 
firms, often for the completion of large infrastructure 
projects in roads, power, and telecommunications.   Kenya 
does not offer a significant source of natural resources to 
China, but a Chinese firm is reportedly heavily involved in a 
new project to mine titanium in Kenya -- and China is 
interested in seeing South Sudan oil piped to the Kenyan 
coast.  While some may see the Kibaki visit as part of an 
effort to curry favor with Beijing at the West's expense, we 
see it in more prosaic terms: a poor country in Africa 
recognizing the need to build ties to a rising economic 
powerhouse in Asia.  End summary. 
 
2.  (U) Kenyan President Mwai Kibaki made a state visit to 
China (Shanghai, Shenzhen, and Beijing) August 16-21 in what 
one local columnist dubbed "probably the most important 
foreign visit of the Kibaki presidency...More important, 
even, than the 2003 visit to the United States."  Joining 
Kibaki were six ministers (Foreign Affairs, Finance, 
Information and Communication, Tourism, Land, and Local 
Government) and a delegation of lesser officials and 
state-owned enterprise executives.  Deliverables from the 
visit, which Post will continue in the weeks ahead to try to 
learn more about and confirm, include the following: 
 
-- Bilateral framework agreement under which the Chinese 
government will provide KSh 600 million ($8 million) in 
grants to supplement an earlier grant of $6.7 million for 
road rehabilitation in Nairobi.  The agreement also provides 
for a concessional loan of KSh 2 billion ($26 million) for 
improvements in Kenya's electricity distribution system. 
 
-- Bilateral air services agreement that will grant Kenya 
Airways landing rights in Guangzhou beginning in October, and 
thereafter to other Chinese cities. 
 
-- Bilateral agreement on cooperation in radio broadcasting 
between the Ministry of Information and Tourism and China's 
State Administration of Radio, Film and Television. 
 
-- The official launch of the Kenya Tourism Board's 
MagicalKenya website for the Chinese market. 
 
-------------------------------------- 
Trade: Growing Quickly From a Low Base 
-------------------------------------- 
 
3.  (U) The Kibaki visit to China appears clearly aimed at 
giving added impetus to an economic relationship that has 
been growing rapidly in the past two years, albeit from a low 
base.  Looking first at trade, media reports and the PRC's 
Nairobi-based Econ/Commercial Counselor cite a 40% growth in 
bilateral trade - perhaps based on Chinese statistics. 
However, GOK statistics show that total bilateral 
Kenya-Mainland China trade was up just over 60% in 2004 to 
KSh 13.7 billion ($183 million), after growing by nearly a 
third in 2003.  Either way, this trade is skewed 
overwhelmingly in China's favor: According to Kenyan figures, 
Kenya exported only $12 million to the PRC in 2004 against 
imports of $170.5 million.  For Kenya, however, this trade 
still amounts to only a small proportion of its total trade 
with the rest of the world: 2.4% in 2004, but this is up from 
1.8% in 2004 and 1.5% in 2003.  By comparison, total trade 
with the EU accounted for nearly a quarter of Kenya's 
worldwide total in 2004; trade with fellow COMESA countries 
accounted for 15.4%.  The U.S. accounted for around 4% of 
Kenya's total trade in 2004, down from 5.1% and 5.7% in 2003 
and 2002 respectively. 
 
4.  (U) Hard data on the composition of trade is hard to come 
by, but according to China's Econ/Commercial Counselor, most 
Chinese exports are "light industrial" consumer goods.  A 
dated Chinese government website lists household appliances, 
industrial and agricultural tools, textiles, building 
materials, and drugs as the primary Chinese exports to Kenya. 
 Kenya in turn exports tea, coffee and leather goods to 
China. 
 
5.  (U) For Kenya, an emerging services export to China is 
tourism.  In fact, one of the immediate aims of the Kibaki 
visit was to promote Chinese tourism in Kenya, both as a 
means to boost tourist export revenues, and to diversify 
Kenya's tourist industry away from dependence on Europe (the 
UK, Germany, and Italy provided over 40% of Kenya's arrivals 
in 2004) and the United States.  The Chinese government's 
decision last year to include Kenya on its list of approved 
tourist destinations led in part to the nearly 85% increase 
in arrivals from China in 2004.  By comparison, arrivals from 
the UK were up 36% and from the U.S., 41%.  That said, China 
still ranks only 18th on the list of top tourist origin 
countries for Kenya, accounting for just 1.5% of all visitors 
to Kenya in 2004.  In comparison, the UK, at nearly 20%, was 
first; the U.S. was third with 9.4% - by far the best showing 
among non-European countries.   Chinese tourism in Kenya is 
widely expected to continue to expand at a rapid pace in 2005 
and beyond, thanks to better air connections in the wake of 
the air services agreement, better tourism marketing by Kenya 
in the Far East, and greater prosperity in China generally. 
 
--------------------------------------------- ------------- 
Foreign Direct Investment: Chinese Find It Easier to Trade 
--------------------------------------------- ------------- 
 
6.  (SBU) Kibaki's visit was aimed as much at luring Chinese 
businesses to Kenya as promoting Kenyan exports to the Middle 
Kingdom.  Without offering details, China's Econ/Commercial 
Counselor believes total Chinese foreign direct investment 
(FDI) in Kenya exceeds $100 million. This is higher than, but 
on the same order of magnitude as the $72 million in Chinese 
FDI officially registered at the Kenya Investment Promotion 
Center.  The latter is spread across 109 Chinese companies 
which have since 1990 provided 9,500 jobs.  These enterprises 
represent a fairly broad cross-section of sectors, including 
the importation and processing of food products, the export 
of coffee, travel and tourism, restaurants and other 
wholesale and retail food establishments, engineering, 
telecommunications, and, obviously, general importing and 
distribution. 
 
7.  (U) Definitive up-to-date data on total FDI in Kenya are 
hard to come by, but it is likely that total Chinese FDI 
accounts for only a small fraction of Kenya's total stock of 
FDI, and recent FDI flows from the PRC have not been growing 
at nearly the same pace as trade.  Of total Chinese FDI 
registered by the Kenya Investment Promotion Center, more 
than half ($37.4 million) was invested in the five-year 
period between 1995 and 1999.  The longer period from 2000 up 
to the present has seen less -- an additional $30 million -- 
and flows in 2004 were actually more than a third lower than 
in 2003.  Chinese FDI in 2005 is likely to be lower still 
based on the current trend. 
 
8.   (SBU) Most observers chalk up the relatively slow pace 
of Chinese investment in Kenya to the fact that much of the 
investment is in small businesses which are not capital 
intensive, including in particular import and distribution 
firms.  It apparently doesn't pay for Chinese firms to invest 
in large, capital and/or labor intensive manufacturing 
businesses in Kenya, given the economy's high costs and the 
relatively small size of the market.  Rather, it is far 
easier and more cost effective in most sectors for China to 
simply export consumer and heavy manufactured goods.  That 
said, a Chinese firm, AUCMA, recently established a TV and 
home appliance assembly plant near Nairobi, and in June 2005, 
Chinese firm North China Grid announced its intention to 
invest in a $3 million venture in Kenya that will manufacture 
concrete poles for power lines.  It was reported by the media 
as "the biggest single investment by a Chinese company in 
Kenya." 
--------------------------------------- 
Grants and Assistance: Strings Attached 
--------------------------------------- 
 
9.  (SBU) It is apparent that while much of the expansion in 
the Kenya-PRC economic relationship is nominally driven by 
private sector actors, this drive is in turn pushed along by 
the kind of assistance and concessional financing flows that 
formed the centerpiece of the August 16-21 state visit to the 
PRC.  While hard and fast numbers are difficult to come by, 
Kenya's total current debt stock to Chinese sources was 
around $30 million at the end of 2004, according to Kenya's 
Ministry of Finance.  This money, while constituting only a 
small fraction of Kenya's total external debt of around $5.6 
billion, gives Chinese firms an outright lock in winning key 
road construction and other infrastructure-related contracts. 
 The Chinese Econ/Commercial Counselor confirmed to Econ 
Counselor that all Chinese grants and concessional credits 
are channeled through China's Ministry of Commerce, and that 
all are conditional on the use of Chinese firms in carrying 
out the projects.  For large infrastructure projects, he 
said, Chinese firms typically subcontract to local companies, 
and have long since abandoned the use of Chinese laborers for 
such projects because of cost considerations. 
 
---------------------------------------- 
The Big Three: Roads, Power, and Telecom 
---------------------------------------- 
 
10.  (SBU) When looking at trade, aid, and investment 
holistically in the context of the overall bilateral economic 
relationship, China appears to have comparative advantages in 
areas which also happen to correspond to one of Kenya's 
greatest needs: namely infrastructure, and in particular, 
roads, power, and telecommunications.  The PRC has help fund 
several road projects over the past several years, and it is 
no coincidence that the recent $14.7 million in PRC grants 
announced during the Kibaki visit to China are earmarked for 
roads in Nairobi, doubtless using Chinese engineering and 
construction firms.  The $24 million concessional loan 
extended by Beijing during Kibaki's visit in turn is 
earmarked for upgrades in the power grid.  The loan dovetails 
with private sector activities: North China Grid's local rep 
has been quoted in the international press as saying that his 
company's manufacture of concrete poles for power lines is 
just the beginning, and that the company has big plans to 
also supply power stations, substations, and power lines, 
alongside of which it hopes to lay fiber optic lines by 
winning government tenders. 
 
11.  (U) In the telecom arena, Kibaki is reported to have 
signed an agreement during his visit with Huawei Technologies 
of Shenzhen under which Huawei will supply a wireless 
communications system linking all district government offices 
across Kenya.  Costs and financing details are unknown at 
this time.  Kibaki also reportedly noted during his visit to 
Shenzhen that the GOK is negotiating with China's Eximbank 
for a KSh 1.8 billion ($24 million) soft loan to finance the 
upgrading of Kenya's rural phone network.   Huawei has 
already supplied equipment and technical assistance to 
Kenya's monopoly fixed line provider, Telkom Kenya, as has 
Huawei's domestic Chinese rival, ZTE Corporation.  In recent 
visits to meet with Telkom Kenya management, Econ Counselor 
has twice bumped into ZTE's local rep, a Shanghai native. 
 
--------------------------------------------- ---- 
Natural Resources: Scooping Up Titanium? Oil Too? 
--------------------------------------------- ---- 
 
12.  (SBU) Much is made in the Western press of China's 
relentless pursuit of Africa's natural resources.  Beyond its 
natural beauty and wildlife resources and the recent 
revelation that an Australian company will be drilling 
exploratory wells off the Kenyan coast, Kenya lacks 
significant natural resource deposits.  But where there are 
any possibilities, Chinese interests are present.  Earlier in 
2005, Canadian mining giant Tiomin Resources was granted a 
license to strip mine for titanium in Kenya's Kwale District 
under terms which were not disclosed.  The deal, which took 
eight years to negotiate, has been described in the press as 
one of the largest single foreign investments in Kenya.  In 
the midst of Kibaki's visit to China, representatives from 
China's Jianchuan Group visited Kenya.  Their visit, 
apparently hosted by Tiomin, included a visit to the office 
of Minister for the Environment and Natural Resources, where 
they were exhorted by the Minister to "take interest" in "the 
other minerals in this country".  Press coverage reported 
that Jianchuan had signed an MOU with Tiomin declaring the 
former's intent to buy the titanium mined in Kwale.  Again, 
terms and details are not transparent at this time, but 
China's Econ/Commercial Counselor told Econ Counselor in late 
August that Jianchuan is also prepared to make a "very large" 
investment in the Tiomin project if and when it is confirmed 
that the mine has commercially viable deposits. 
 
13.  (SBU) Private sector and government officials have also 
noted keen Chinese interest in development of oil pipelines 
from Southern Sudan (now that a peace agreement has been 
signed there) to the Kenyan Indian Ocean port of Mombasa. 
Chinese companies are said to be heavily involved in not only 
bids to build the necessary infrastructure but in buying the 
oil exported.  Kibaki, during his visit to China, was quoted 
in the press as calling for Chinese assistance and 
participation in precisely this area. 
 
------------------------------------ 
Corruption: Does China Help or Hurt? 
------------------------------------ 
 
14.  (SBU) The nature of corrupt business practices makes it 
difficult to say with any certainty that Chinese firms more 
readily pay bribes and engage in other corrupt activities as 
part of their normal business practices in Kenya.  The rumor 
mill places a Chinese firm at the heart of the July 2004 
last-minute cancellation of the award for a second landline 
phone license.  As the story goes, when it became clear that 
the consortium which included both Chinese interests and 
relatives of President Kibaki would not win the tender, it 
intervened with Minister of Communications Raphael Tuju (who 
joined Kibaki on his trip to China) to have the tender 
cancelled.  Tuju never sufficiently explained his actions, 
and probably exceeded his legal authority in intervening in 
the tender process.  In April 2004, Chinese firm ZPMC won a 
controversial tender to supply eight gantry cranes worth $20 
million to the port of Mombasa.  The tender had twice been 
postponed by Cabinet ministers believed to have interests in 
companies competing in the tender.   The good news, at least, 
is that ZPMC delivered the cranes as promised. 
 
15.  (SBU) Such allegations of corruption are difficult to 
prove, but without the equivalent of the Foreign Corrupt 
Practices Act, and in the context of pervasive corruption at 
all levels of Kenyan government and society, it seems 
inconceivable that Chinese firms don't contribute actively to 
the corruption problem in Kenya.  Whether they do so more 
readily than companies from other countries is a matter of 
debate.  On another level, however, the perception that 
Chinese firms and the Chinese government are willing to do 
business in Kenya without any strings attached is widespread, 
and this undermines in small ways efforts on the part of 
Western donors and domestic reformers to reduce corruption 
and improve governance.  Government spokesman Alfred Mutua 
summed up the attitude of some in the GOK when he commented 
to the press recently: "The Chinese do not peg their economic 
activity or aid to political conditions...You never hear the 
Chinese saying that they will not finish a project because 
the government has not done enough to tackle corruption.  If 
they are going to build a road, then it will be built." 
 
------------------------------ 
China: Also a Scary Competitor 
------------------------------ 
 
16.   (SBU) Despite the generally positive media blitz 
surrounding the Kibaki visit to China, the growing economic 
relationship between the two countries is clearly a mixed 
blessing for Kenya, and many Kenyans know it.  First, there 
is recognition on the part of some that China's willingness 
to play ball without concern for governance and corruption 
issues is in fact a problem, not an advantage.  As one local 
columnist put it, China's "non-interference foreign policy 
does not encourage financial probity, political reform, and 
observance of human rights.  Its only condition is support 
for the 'One China' principle." 
 
17.  (SBU) Of greater concern to the average Kenyan, and to 
the GOK, however, is China's competitiveness and what it 
means for Kenya's own industries.  The bilateral trade 
deficit is symptomatic of this problem, and there is 
considerable acrimony within the Kenyan business community 
toward the growing presence of Chinese imports in Kenya, 
which many see as a direct threat to their viability, both in 
the domestic market and overseas.  Even with duty paid, many 
Chinese goods, including textiles, garments, batteries, and 
electrical components, beat comparable Kenyan products on 
price. 
 
18.  (SBU) Nowhere do Kenyan fears of being overrun by more 
efficient Chinese companies in an increasingly globalized 
economy crystallize more clearly than in the garment 
industry.  As noted ref B, Kenya's garment sector, which 
sprang to life over the past several years in large part due 
to preferences under the U.S. Africa Growth and Opportunity 
Act (AGOA), is now under threat from a combination of high 
costs at home, and greater Chinese competitiveness worldwide 
following the expiration of global apparel quotas under the 
Multi-Fiber Arrangement in January, 2005.  Kenya's apparel 
workers are both more expensive than their Chinese 
counterparts, while also being less productive.  As a result, 
as Chinese goods increasingly dominate markets in the U.S. 
and elsewhere, Kenya's hard-won AGOA gains are slipping away. 
  As detailed in ref B, at least seven textile companies and 
over 11,000 jobs have been lost in the sector just since the 
beginning of 2005. 
 
19.  (SBU) Some Kenyan business leaders are publicly 
questioning China,s global trade posture and its impact on 
Kenya,s export opportunities.  GOK officials echo these 
concerns, but to date, mostly in private.  At a June 2005 
meeting with members of the Common Market for Eastern and 
Southern Africa (COMESA), discussions centered primarily on 
figuring out ways of installing safeguard measures against 
China,s deluge of cheap exports to the continent.  Kenyan 
business interests as well as other COMESA members took aim 
at China for its alleged unfair trade practices.   While 
there is also much discussion about the local impact of 
"substandard and counterfeit" goods coming in from China, the 
fact remains that even legitimate imports undercut local 
products on price in many instances.  According to Elijah 
Manyara, Deputy Director for External Trade and the Ministry 
of Trade and Industry, Kenya has requested WTO anti-dumping 
consultations regarding Chinese exports of clothing and 
dry-cell batteries.  A previous anti-dumping notification on 
dry-cells has expired, but, according to Manyara, Kenya is 
closely watching the situation and "keeping its options 
open." 
 
------- 
Comment 
------- 
 
20.  (SBU) The Kibaki visit is seen by some observers as more 
than just an attempt to build a better economic relationship 
with a rising powerhouse in Asia.  Some, including doubtless 
certain of Kenya's political leaders, see it in more 
strategic terms - as part of a policy to diversify Kenya's 
interests and build ties to Asia,s tiger economies, to 
distance Kenya from a pestering, imperialistic West 
(including the United States), and to play the West and China 
off of each other for Kenya's gain.  We don't see Kenya's 
growing economic relationship in quite such Machiavellian 
terms, and do not believe we should take any such bait.  In 
some respects (e.g., China's efforts to improve Kenya's 
infrastructure), our interests and those of Kenya and China 
clearly intersect.   In other areas, they don't.  China's 
assistance, given without reference to corruption concerns, 
for example, make it incrementally harder for Western donors 
to maintain pressure on the Kenyan leadership for improved 
governance.  But at the end of the day, Kenya's economic and 
assistance ties to China, while growing rapidly, still remain 
peripheral compared to its much older, deeper, and broader 
ties to the region, to Europe, and to the U.S.   These latter 
ties are also strong and growing, and we find it perfectly 
natural, indeed unavoidable, for Kenya to simultaneously 
reach out to China for help given the PRC's rising political 
and economic stature in the world. 
BELLAMY