Cablegate: Green Investment in China's "Backyard Garden":

VZCZCXRO4728
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0703/01 3580350
ZNR UUUUU ZZH
R 240350Z DEC 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1212
INFO RUEHOO/CHINA POSTS COLLECTIVE 0399
RUEHBJ/AMEMBASSY BEIJING 0973
RUEHGH/AMCONSUL SHANGHAI 0326
RUEHCN/AMCONSUL CHENGDU 0327
RUEHSH/AMCONSUL SHENYANG 0336
RUEHHK/AMCONSUL HONG KONG 0390
RUEHIN/AIT TAIPEI 0291
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0215
RHMFISS/DEPT OF ENERGY WASHINGTON DC 0045
RUEAIIA/CIA WASHDC 0372
RUEKJCS/DIA WASHDC 0368

UNCLAS SECTION 01 OF 03 GUANGZHOU 000703

SENSITIVE
SIPDIS

State for EAP/CM, EB/ESC, OES/ENV, INR/EAP;
USTR for China Office
Beijing for FCS, ESTH and DOE

E.O. 12958: N/A
TAGS: ENRG SENV ETRD PREL EINV PGOV TW CH
SUBJECT: Green Investment in China's "Backyard Garden":
Consulate-AmCham Clean Energy Delegation to Hainan

REF: Guangzhou 587

GUANGZHOU 00000703 001.2 OF 003

1. (SBU) Summary: Seeking to capitalize on Hainan's stated
objectives of boosting clean energy research and development (R&D)
and strengthening protection of its natural environment (reftel),
Consul General Goldbeck and AmCham South China President Harley
Seyedin jointly led a delegation December 16-18 to explore green
investment opportunities in the island province. The delegation --
which included representatives from companies specializing in solar
power, electrical interconnect systems, legal services, tool-making,
transport of oversized cargo, and project investment, among others
-- participated in a business matching session attended by at least
thirty local green project representatives and carried out site
visits to a wind power plant, biogas farm, solar/wind hybrid street
lighting system and seed-to-fuel R&D center. Hainan's mid- to
long-term development plans, including proposals to make the island
an international tourism destination and establish the province as
China's first special zone for environmental protection, create
favorable conditions for investment and business cooperation.
However, the priority of potential local business partners appears
to be access to U.S. technologies and to a lesser degree joint
research and development. End Summary.

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DELEGATION TAKES ADVANTAGE OF PUSH FOR GREATER COOPERATION
---------------------------------- -----------------------

2. (SBU) During initial meetings with CG Goldbeck in September,
provincial government officials and researchers at local think tanks
and NGOs pushed for greater scientific and business cooperation with
U.S. companies and research institutions on clean energy and
environmental protection. Seizing the opportunity, CG Goldbeck
reached out to AmCham South China and proposed a joint delegation to
further explore green investment opportunities in Hainan.
Coordination of the delegation's visit to Hainan was facilitated by
the Hainan Renewable Energy Association and its Secretary General,
Fan Yimin (reftel).

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DEVELOPMENT PLANS MAY OPEN UP DOOR FOR GREEN INVESTMENT
----------------------------- -------------------------

3. (SBU) The Central Government is expected to approve a provincial
government proposal to transform Hainan into an international
tourism island very soon, according to Yin Zhongyi, Vice President
of the China Institute for Reform and Development (CIRD), a think
tank formed jointly by the Chinese central and Hainan provincial
governments. Realization of this objective, Yin argues, would
require Hainan to further develop its service sector and move away
from investment in heavy-polluting industries. In addition to
business opportunities related to clean energy, the implementation
of this proposal has the potential to create investment
opportunities for U.S. "green tourism" companies, according to Ye
Zhanghe, Deputy Director of the Hainan Development and Reform
Commission (DRC). (Note: While discussing the potential impacts of
the proposal, Yin mentioned as an aside that plans to build a
nuclear reactor in the middle of the island province would likely
come into conflict with tourism-related objectives, potentially
resulting in the decision to abandon the nuclear reactor
construction project. In contrast, local government officials
understood plans were proceeding. End Note.)

4. (SBU) Environmental protection is a "prerequisite" for
development of the tourism sector in Hainan, Yin told the CG. It
was this conviction that spurred CIRD to submit a proposal on the
provincial government's behalf in 2001 that Hainan be declared
China's first special zone for environmental protection. Although
this proposal has not yet been approved, Yin noted that it was very
well received at a meeting earlier this year with the Planning
Department of the National Development and Reform Commission (NDRC).
If and when the proposal is approved, Yin notes the challenge will
be translating the principles of environmental protection into
concrete actions that can be evaluated by measurable indicators.

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GUANGZHOU 00000703 002.2 OF 003

GDP GROWTH - THE WRONG METRIC FOR HAINAN
----------------------------------------

5. (SBU) However, Yin told the CG that so long as the provincial
government is evaluated using GDP metrics, it will be difficult for
officials to justify higher levels of investment in clean energy and
environmental protection. Despite Chinese Premier Wen Jiabao's
directive that the Hainan provincial government's first
responsibility is to preserve its natural environment, Yin believes
officials will be unwilling to make the investments necessary to
convert the province into China's "backyard garden" unless their
performance is measured by indicators other than GDP growth, e.g.
carbon intensity per unit of GDP production or clean energy as a
percentage of total energy.

6. (SBU) Yin advocated direct compensation from the Central
Government for the economic growth potential that would be
sacrificed by the shift to more expensive clean energies and
increased investments in environmental protection. He also
emphasized the need for pricing reforms that would ensure energy
prices reflect scarcity and environmental costs. Yin believes this
type of reform would be instrumental in creating economic incentives
for investment in clean energy.

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CLEAN ENERGY PROJECTS SEEK INVESTMENT BUT PREFER TECHNOLOGY
------------------------------------- ---------------------

7. (SBU) In September, Hainan Vice Governor Li Guoliang told the CG
that Hainan hopes to follow Hawaii's example and become a
demonstration site for clean energy technologies in China. The
province's commitment to clean energy development is substantiated
by a large number of ongoing clean energy R&D projects, which range
from wind and solar to biogas, geothermal, and seed-to-fuel. At
least 30 representatives from these and other projects attended the
business matching session on the first day of the U.S. delegation's
visit. This session was followed up by tours of four project sites:
1) a wind power plant with total installed capacity of 49.5
megawatts (MW); 2) a biogas project that converts pig manure into
biogas and fertilizer, providing electricity and heat for 146 homes
in Luoniushan Village; 3) a solar/wind hybrid street lighting system
that covers seven kilometers with 582 posts that generate 223
kilowatts (KW) of electricity; and 4) a jatropha curcas seed-to-fuel
R&D center focused on improving yields of jatropha seeds for use in
production of jet fuels.

8. (SBU) One theme that emerged from the business matching session
and site visits is that companies engaged in clean energy R&D in
Hainan are not just looking for project investment. Instead,
representatives from several projects, including the wind power and
seed-to-fuel projects mentioned above, are seeking research and
business cooperation that will result in the joint development
and/or sharing of technologies to improve project efficiency. In an
illustrative moment during the visit to the wind power plant, the
head of the company said in response to a GE representative's
expression of interest in working with the company: "I am not sure
GE is really interested in working together; I think GE's only
interest is selling turbines." The head of the company, which
already receives support under the Clean Development Mechanism, made
further comments that echoed the Chinese government's talking points
on the responsibility of developed countries to transfer clean
energy technology to developing countries.

9. (SBU) Comment: As Hainan seeks to further develop its tourism
sector and implement measures to strengthen protection of the
island's natural environment, business opportunities related to
clean energy and green tourism may become increasingly available.
While provincial leaders appear to be supportive of investment and
business cooperation, approval for large-scale investment in
specific clean energy R&D projects is not guaranteed. Potential
business partners in Hainan seem more interested in access to U.S.
technologies than any other form of cooperation, which may present
an obstacle to cooperation, especially given China's environment for
the protection of intellectual property. Reps from participating
AmCham firms said they appreciated making new contacts and that they

GUANGZHOU 00000703 003.2 OF 003

found a few interesting prospects, but they were skeptical about
opportunities to engage in larger, longer-term projects. End
Comment.

GOLDBECK

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