RPT-Business first as China visit kicks off in France's silk city

Tue Mar 25, 2014 11:01am EDT

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By Andrew Callus

PARIS, March 25 (Reuters) - France will use a visit from China's President this week to seek tighter business links to the world's number-two economy in a bid to boost its own anaemic one, signing big-ticket industry deals and working to cut its trade and investment deficits.

Xi Jinping's three-day tour starts on Tuesday in the south eastern city of Lyon, where Chinese silk-making skills took root in the 15th Century. Technology transfer now flows firmly in the opposite direction, and business diplomacy around products ranging from cars to cooked meat is set to dominate the visit.

With the drubbing his Socialist party received in Sunday's municipal elections for failing to tackle record unemployment still fresh in the mind, French President Francois Hollande hosts Xi at a state dinner on Wednesday night.

Hours earlier, both men are to attend a signing ceremony at which Chinese carmaker Dongfeng is set to deepen ties with PSA Peugeot Citroen, buying a 14 percent stake in a mainstay of European automobile design and construction.

Peugeot and Dongfeng plan to extend an existing joint venture and Chinese production to enter new Southeast Asian markets and to co-develop new vehicles and technologies.

Talks on opening a second Airbus factory on its home soil continue as China prepares to sign a deal to buy at least 150 aircraft worth $20 billion - and possibly as many as 200 - from the Franco-German group.

The discussions may bear some fruit this week, according to a French diplomatic source. The aerospace industry accounts for 29 percent of French exports to China.

Nuclear co-operation may also be on the agenda after agreements last year including a letter of intent for French firms to build a used fuel treatment and recycling facility in China.

Officials are also considering whether to build more reactors at China General Nuclear's (CGN) Taishan site in the south of the country, where French utility EDF is its partner, building reactors designed by another French group, Areva.

SPECIAL RELATIONSHIP?

Xi's visit marks 50 years of diplomatic relations between the two countries. Recognition of the People's Republic of China by France in 1964 - in the face of anti-Communist hostility elsewhere in the west - forms part of France's claim to a special relationship.

Nevertheless, France trails far behind Germany on the trade front, accounting for just 1.2 percent of Chinese imports compared with 4.8 percent.

With his popularity at a record low, Hollande's efforts to harness France's patchy and slow economic recovery more tightly to China's powerful growth engine have a degree of urgency about them, and not just because of his troubles at home.

Signals China is not the global growth motor it has been in past years grew on Monday as purchasing managers index data showed its manufacturing sector contracted in the first quarter.

"Relations with China could get more complicated over the coming years with growth there slowing,"... said Jean-Pierre Raffarin, a former French prime minister, now chairman of the annual forum of the France-China Committee, who travelled with Hollande on his visit to China last year.

"We are in a position today to provide a Franco-Chinese offering at a world level."

In the shadow of the big-ticket deals, France also hopes to develop ties with the small and medium sized enterprise (SME) sector. Raffarin is planning to send 1,000 such French companies to China later this year.

Some 150 Chinese executives are travelling with Xi, who arrives in France from the Nuclear Security Summit in The Hague as part of a trip that also takes in European Union institutions in Brussels and a visit to Germany.

France has a wide trade and investment imbalance with China.

French foreign direct investment (FDI) in China totalled 16.7 billion euros ($23.0 billion) at the end of 2012 - just 1.83 percent of total FDI there but still dwarfing a 4.2 billion euro FDI stock of Chinese investment in France, which is just 0.9 percent of the total, according to Bank of France figures.

Dongfeng's Peugeot stake purchase alone is worth 800 million euros. "These investments are very welcome in France and should create employment here," said a finance ministry official.

France's trade deficit with China was around 26 billion euros in 2013, up from 11 billion in 2004.

In that decade, China's economy has grown at an average 10.5 percent annually, compared with just 1 percent a year in France, the world number-five economy.

MEAT AND DRINK

The deli meats, wines and spirits France is famous for are in strong demand in China, and one initiative tied to the visit is focused on building that connection. Food and agricultural products accounted for 11.6 percent of French exports in 2013.

The likes of traditional dry sausages and hams may be cleared this week for export to the world's biggest consumer of pork meat, agriculture ministry officials said.

Sales of raw French pork were cleared in 2005, but health regulations barring sales of French charcuterie have remained in place, even though Italian and Spanish producers have been exporting to China for some years.

Milk is another area of interest to China, whose wealthier consumers want quality, traceable supplies after a series of health scares. Two direct investment deals were signed last year, one between Synutra and France's largest dairy cooperative Sodiaal and the other between infant milk producer Biostime and dairy cooperative Isigny Sainte-Mere.

A third is under discussion, a source close to the matter told Reuters. French milk and whey exports to China rose 40 percent in 2013 compared to 2012, customs data shows.

A cloud on the trade horizon was lifted last week when China and the European Union reached a deal to end a dispute over European wine exports.

($1 = 0.7255 Euros) (Additional reporting by Yves Clarisse, Leigh Thomas, Sybille de La Hamaide and Jean-Baptiste Vey, editing by Dominique Vidalon, John Stonestreet)

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