Background
Our Embassy in Peking reported on 4th December that Sir Y K Pao had been charged by Hu Yaobang (General Secretary of Central Committee of Chinese Communist Party) to have talks with HMG with the aim of seeking official support to enable Ningbo project to be financed at target interest rate of below 7% in US$. The special priority of the project to the Chinese Government and their hope that HMG would support with concessional finance was made clear to Lord Young during his recent visit to Peking by three Chinese ministers (Vice Minister for State Planning, Minister for Foreign Economic Relations and Trade and Minister for Metallurgy). The Minister for Metallurgy said that provision of soft finance would enable other problems (chiefly equity participation and loan guarantees) to be "easily" resolved. Lord Young's response was non-commital.
At meetings with Sir Y K Pao in October this year both the Prime Minister and SoS said that provision of aid for Ningbo on scale required by OECD commitments could not be accommodated within our aid budget.
The clearest indication that has now been given at high level by the Chinese Government as to the importance attached to Ningbo and their request for aid support, and indeed its commercial and industrial significance to UK companies, cannot be ignored. At a meeting with the Chairman of Davy McKee (Stockton) on 3rd December, Mr Clark and Lord Young said that some means of providing a measure of support to the project as an indication of HMG's commitment to it would be explored. Mr Clark subsequently asked that the feasibility of a £20-25 million soft-loan as part of a mixed currency package should be looked at. This strategem will require the special financing of a discrete part of the project (contract splitting) or a separate project, which could prove to be very difficult if not impossible. This has been confirmed by ECGD and ODA. There are also other difficulties and dangers eg that the Chinese will see this as the first steps in an upwardly negotiable aid offer. We are also seeking information on whether the German Government has been approached by German companies in the consortium with a request for aid support and their attitude. DTI now await clearer information from Davy on financing options and proposals as to aid supporting a discrete part of the project or a separate project.
To maintain Davy McKee's preferred position it is important that some response should be made to the Chinese Government through Sir Y K Pao. The form of words suggested in the line to take is the most that can be safely said at this atage.
Davy McKee are leading a consortium, including W German and possibly Austrian and Italian companies, in pursuit of this £3 billion project (UK content up to £1 billion). The project was introduced to the Prime Ministér by Sir Y K Pao. Ningbo is his birthplace.
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