CHINA SHOCKED AT E.O. 13382 DESIGNATIONS OF FOUR

S E C R E T BEIJING 012181


TREASURY FOR OFAC
STATE FOR ISN/CPI, EAP AND EAP/CM

E.O. 12958: DECL: 06/13/2016
TAGS: PARM PREL EFIN ETTC CH

SUBJECT: CHINA SHOCKED AT E.O. 13382 DESIGNATIONS OF FOUR
CHINESE ENTITIES

REF: SECSTATE 95206

Classified By: Deputy Chief of Mission David Sedney.
Reasons 1.4 (b) and (d).

SUMMARY
--------------


1. (S) The U.S. decision to designate four Chinese
companies under E.O. 13382 demonstrates that dialogue with
the United States is useless, a shocked and shaken MFA Arms
Control and Disarmament Director General Zhang Yan told DCM
in response to ref demarche points delivered on June 13.
News of the designations contradicts DG Zhang's
understanding that the United States would not take E.O.
action until the end of the year, which he believed was
confirmed in the recent June 7 bilateral nonproliferation
talks. These measures violate trust and undermine existing
U.S.-China cooperation on nonproliferation and export
controls. DG Zhang strongly urged the United States to
stop the designations. End Summary.


2. (S) On June 13, DCM met with MFA Arms Control and
Disarmament Director General Zhang Yan to deliver ref
demarche points. DCM said he understood that AA/S Record
had previewed with DG Zhang on the sidelines of the June 7
bilateral nonproliferation consultations in Washington the
likelihood that the United States would take this action.
The United States had hoped to receive additional
information on the four named entities during the course of
the bilateral discussions, but had not received anything
from the Chinese side that would prevent the U.S. from
proceeding now with the designations. The DCM said that
the designations would be announced the morning of June 13
in Washington and asked that the Chinese side make no
public response before then. A shocked and shaken DG Zhang
said he had no official response to the demarche points but
would report the information to his superiors at a high
level in the MFA.

E.O Designations Undermine Existing U.S.-PRC Cooperation
-------------- --------------


3. (S) Moving quickly to anger, DG Zhang said in his view
these actions are destructive, not constructive and will
undermine existing cooperation between the United States
and China on nonproliferation issues. The U.S. side has
not consulted with China in advance of these measures or
provided any explanation of its actions, DG Zhang claimed.
China has repeatedly asked the U.S. side to provide factual
information about the actions of the entities but has not
received information that meets any legal standard. The
designations are particularly shocking considering that
they come immediately after DG Zhang's June 7 bilateral
consultations with AA/S Record in Washington. This
demonstrates that dialogue with the United States is
"useless, even hopeless." DG Zhang said he cannot accept
the U.S. decision to designate the four Chinese companies
and implored the DCM to immediately request that the USG
stop the process of the designations and postpone the
announcement. If the United States is able to provide
facts against these entities, China will work to take
immediate action, DG Zhang said.

DG Zhang: No Designations Until The End Of 2006
-------------- --


4. (S) DG Zhang said his understanding from conversations
with AA/S Record during the June 7 bilateral consultations
is that China had until the end of the year before the
United States would designate. If the U.S. side proceeds
with the designations now it will represent a violation of
trust, DG Zhang said. Visibly upset, DG Zhang said "if
this is U.S. diplomacy China will find other countries to
engage with." DG Zhang was particularly angry that our
demarche did not reference any of the progress China had
shared at the June 7 talks. "If the United States was
serious about non-proliferation cooperation with China," he
said, "it would have recognized the major progress China is
making and would cooperate for more progress." DCM pointed
out that the United States had been very clear over the
course of the past 10 months that designations were imminent.

The June 7 U.S.-China Bilateral Talks
--------------


5. (C) DG Zhang said he had three purposes for attending
the June 7 bilateral talks in Washington: 1) to inform the
U.S. side of China's "new measures and new results" in the
areas of nonproliferation and export controls, 2) to
enhance U.S.-China cooperation on export controls,
particularly in the areas of personnel training and
seminars and 3) exchange information with the United States
on certain cases. China was expecting to hear additional
information from the U.S. side regarding Chinese companies,
but in spite of repeated requests for "new facts" or proof
that these entities have engaged in any recent
proliferation activities the Chinese side has yet to
receive additional information. In contrast, DG Zhang
said, the Chinese side has provided the United States with
new information of China's efforts to tighten enforcement
of export controls. Looking through his notes, DG Zhang
read from the list of Chinese actions he said he had
provided to the U.S. during the June 7 consultations.
Information provided by DG Zhang included the following:

--The Chinese Government stopped a 10 ton shipment of
sodium cyanide in 2004 destined for the DPRK. The goods
were confiscated and the company was fined RMB 50,000.
When the company failed to pay the fine, its assets were
seized. The case has been posted on a Chinese Government
website.

-- In 2005 a Chinese court sentenced one person to 9 years
imprisonment with a fine of RMB 100,000 and a second person
to 8 years with a fine of RMB 130,000 for attempting to
smuggle a 3-axle test bench that could be used for missile
tests to the DPRK. The equipment was confiscated.

--The Chinese Government stopped a Chinese company's
attempt to export Zirconium powder to Iran.

--In May 2006 The State Council approved new interim
administrative measures to control graphite exports.


Promulgation of the new measures is expected soon. The
interim measures will apply until permanent regulations can
be drafted.

--In January 2006, China implemented new measures to
regulate the export of dual-use goods and technology.

--China currently is revising its nuclear-related dual-use
technology export control regulations, especially the
controlled items lists, to bring them into compliance with
the NSG and Zanger lists.


6. (C) DG Zhang also said that China is doing more with
regard to the DPRK and Iran, but that revealing this
information could undermine China's future efforts to stop
proliferation activities involving these countries.

Zhang says Designations without Basis and Counterproductive
-------------- --------------


7. (C) Zhang was clearly upset, angry and personally
insulted by the designations. He said that the
designations would undermine the Foreign Ministry's ability
to work with Chinese companies, who already believed the
United States would punish Chinese companies with or
without evidence. Zhang returned repeatedly to the issue
of legally sufficient evidence, stating that the United
States had provided no legally sufficient evidence on any
of the four companies that they had on-going or in the
recent past had carried out illegal proliferation
activities. He lashed out at what he saw as bad faith by
the United States government and U.S. non-proliferation
officials as untrustworthy and as not being willing or able
to understand how to create cooperative relationships. DCM
urged Zhang to look at the entire process over the past 10
months and to continue our positive efforts to prevent
proliferation.

DG Zhang Strongly Urges USG To Stop Designations
-------------- ---


8. (S) At the conclusion of the meeting, DG Zhang again
reiterated China's willingness to act on "facts" the United
States might provide and again strongly urged the DCM to
stop the four E.O. designations scheduled for June 13. DCM
responded that he would communicate DG Zhang's message back
to Washington, but stressed that these actions were already
in motion and that it would most likely be impossible to
reverse them at this point.


9. (S) ACTION REQUEST: Zhang was unable to see a way
forward from the designations. He would like to know how
the designations once put in place can be removed. Please
provide talking points on what steps China or the
designated entities need to take to have the designation
lifted.
RANDT


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