(S) RESTRUCTURING CHINESE FOREIGN AID--NEXT STEPS

S E C R E T BEIJING 001238


TREASURY FOR OFFICE OF TRADE FINANCE TVARDEK
ULAANBAATAR PASS TO USAID WASKIN
BANGKOK PASS TO USAID RDM/A BEANS

E.O. 12958: DECL: 01/20/2016
TAGS: CH EAID ECON PREL
SUBJECT: (S) RESTRUCTURING CHINESE FOREIGN AID--NEXT STEPS

REF: 05 BEIJING 16254

Classified By: (S) CLASSIFIED BY MINISTER COUNSELOR FOR ECONOMIC AFFAIR
S ROBERT S. LUKE; REASON 1.5 (B) AND (D).


1. (S) Summary: A senior advisor on Chinese development
assistance told Econoff on December 20 that he has submitted
his recommendations to the Ministry of Commerce (MOFCOM) on
how China should restructure its foreign aid program. The
advisor stated that China's aid program should continue to
focus on the same geographic regions (Asia and Africa) and
have the same trade-promotion orientation, but that it also
should be a more transparent policy geared towards
cooperation with international agencies. He acknowledged a
significant amount of infighting over the future of China's
foreign aid program, and said one faction within the
bureaucracy is promoting a strategy that will continue to
emphasize natural resource acquisition, diplomatic support
vis-a-vis Taiwan, and promoting Chinese brand recognition.
The advisor said that China's transition to donor country
would be a gradual shift, not only because of these
philosophical differences within the Central Government but
also because China's economic assistance infrastructure
overseas remains weak. Illustrating China's transition from
recipient to donor, the World Food Program announced on
December 15 that it would no longer provide food aid to
China. End Summary.


2. (S) Dr. Zha Daojiong, Chair of the Department of
International Political Economy at the School of
International Studies at the People's University of China
(Renmin Daxue),told Econoff on December 20, 2005 that he has
submitted his final recommendations to MOFCOM on how China
should restructure its foreign aid program. Zha stated that
his report is the first study on external assistance
commissioned by the Central Government to an outside
consultant. Throughout the process, Zha claims to have
received high-level access to information and contacts at
MOFCOM and the MFA. Zha previously met with visiting USAID
officials in Beijing on September 19 to explain China's
transition from recipient nation to donor country (see
reftel). According to Zha, China currently is restructuring
its aid apparatus with a view towards playing a more
significant role in the international development community.

Future of Foreign Aid: 5 Recommendations and 4 Reforms
-------------- --------------


3. (S) Zha told Econoff that his report to MOFCOM made five
major recommendations and suggested four reforms on the
future of China's foreign aid program. The recommendations
are as follows:

--China's economic assistance should maintain the status quo
in terms of geographical distribution with most of China's
aid going to its Asian neighbors with Africa as the second
priority destination;

--Aid should continue to be tied to trade and investment
projects, specifically in Asia;

--Economic assistance in Asia also should take cross-border
economic problems into account, including drug trafficking,
trafficking in persons, etc., and aid should be leveraged to
help resolve these pressing issues;

--China should work through international agencies, including
the UN and World Bank to disperse aid and design programs; and

--China should cooperate closely with the G-7 and other
developed countries to design aid programs that meet the
standards of the Millennium Development Goals.


4. (S) The advisor stated that his suggested reforms are
intended to create a more transparent foreign aid apparatus.
The reforms are as follows:

--China should follow OECD guidelines for aid;

--China should publish an annual white paper on its foreign
aid program that would include statistics on the amounts of
aid as well as the location of projects;

--The Central Government should launch programs to educate
the public on why foreign aid is important; and

--China should reform its training and exchange programs to
facilitate more representatves from the developing world
having access to training in China or in their own countries.

Bureaucratic Dogfight: Confusion over China's Role
-------------- --------------


5. (S) Zha told Econoff that while his study was commissioned
by MOFCOM, he attempted to work with both MOFCOM and MFA, and
the friction between the two agencies is obvious. MFA is a
relatively open organization, Zha said, but MOFCOM controls
the money for aid programs, and the agency does not see the
need to be more transparent. (Comment: Clearly, however, the
fact that MOFCOM commissioned this study indicates there is
support for reform within that ministry as well. End
Comment.) Zha complained that a proposed conference on
international cooperation in development that he originally
had scheduled for September 2005 had been cancelled by MOFCOM
and was not likely to be rescheduled. MOFCOM's reluctance to
engage with foreigners on China's aid program, Zha said, is
largely because China's aid program is so small. He
estimated that Chinese donations amount to only 15 percent of
what China receives. (Note: Zha also spoke in reftel about
China's actual aid outflows not matching publicly stated
amounts due to perceived competition with Japan in developing
countries. End Note.)


6. (S) Zha hopes, however, that a Foreign Aid Policy
Workshop, recently held in Beijing and attended by members of
the National Committee on United States-China Relations, had
helped sensitize some recalcitrant government officials on
the importance of improving coordination with other donors.
China needs to cooperate with the G-7 on foreign aid, Zha
said, in order to both learn lessons and build confidence
with developed countries that China is a responsible
stakeholder.


7. (S) In the meantime, however, Zha told Econoff he is less
concerned about MOFCOM-MFA friction as he is about a faction
within the government that wants to continue to promote an
aid policy that emphasizes natural resource acquisition,
diplomatic support vis-a-vis Taiwan, and promoting Chinese
brand recognition. Zha said he was disappointed with the
outcome of a conference of China's Ambassadors on the margins
of the G-20 Summit in Beijing in October 2005. Although the
goal of the conference purportedly was to address new
strategies for China's foreign aid program, the primary focus
of the meeting, including the keynote speech by Premier Wen
Jiabao, instead centered on China's historical aid objectives
such as resources and Taiwan.


8. (S) Zha stated that he hopes, however, that the Central
Government's views on providing aid to developing countries
so that they will switch their diplomatic recognition from
Taiwan to the PRC are changing. He noted a recent example
when Honduras reportedly asked Beijing for a USD 40 billion
aid package spread over five years (USD 8 billion per year)
to switch its recognition to the PRC. According to Zha, the
MFA called an emergency meeting on the matter, and those
opposing providing the aid (including Zha) ultimately won the
debate. He referred to aid-for-recognition as "blackmail"
that China no longer should be willing to pay.

New Foreign Aid Program A Gradual Shift
--------------


9. (S) Due to philosophical differences and bureaucratic
infighting within the government, Zha theorized that China's
foreign aid policy would undergo a gradual transformation
rather than a dramatic change. He does not believe there
will be major new initiatives in 2006, but he does believe
there will be considerable pressure on China to transition
from recipient to donor before the 2008 Olympics in order to
prove Beijing is not a "free-loader."


10. (S) Any change will be a gradual one, Zha added, because
China's overseas aid infrastructure is not sufficient to
carry out new development projects in developing countries.
Zha said he believes China will continue to focus on
government-to-government aid, but he also hopes Beijing will
be more willing to cooperate with international agencies. He
said China has no plans to work through either Chinese or
international overseas NGOs, but MOFCOM will continue to
engage provincial governments to identify Chinese state-owned
and private sector contractors for projects overseas.
Working with these contractors, he said, gives the companies
international experience and also lessens the Central
Government's burden to implement projects.

World Food Program Departing China After 26 Years
-------------- --------------


11. (C) Even as the study on China's transition from
recipient to donor was submitted to MOFCOM, another aid
agency announced it is downsizing its program in Beijing. As
expected, the World Food Program (WFP) formally announced
during a December 15, 2005 visit by WFP Executive Director
James Morris that it would end its food aid program in China
after 26 years. Since 1979, WFP has provided China food aid
valued at more than USD 1 billion, feeding more than 30
million people in central and western China.


12. (C) Kate Milliken, WFP Program Officer told Econoff that
WFP's office in Beijing would remain open with a small staff
to accept donations, conduct emergency operations if
neessary, increase WFP's visibility, and negotiat stand-by
agreements to use China's emergencyresponse capacity to deal
with food crises. Aother important objective for WFP is to
encourage China to further increase its donor support to WFP,
which recently increased from USD 1.25 million to USD 1.75
million. Morris approached the Chinese about increasing its
donations to WFP during his visit to Beijing.

Transition Gradual But Appears to be Picking up Steam
-------------- --------------


13. (S) Comment: Although China's transition from aid
recipient to donor may be a gradual shift, it appears to be
picking up steam. It is significant that MOFCOM commissioned
a non-government entity to submit recommendations on how to
reform China's foreign aid program. Taken together with
reports on multilateral donors either closing down aid
programs in China, as in the case of WFP food aid, or
limiting their aid to technical assistance (World Bank, Asian
Development Bank),as well as bilateral donors pulling out,
the transition away from aid recipient is obvious.


14. (S) Equally obvious, however, is that China's future
strategy for outgoing economic assistance remains unclear.
Zha's recommendations focus on China becoming a responsible
stakeholder in the international donor community and working
to promote the Millennium Development Goals, as well as
increasing the transparency of its aid program. There are
others within the government, however, who will continue to
attempt to use China's aid apparatus to secure resources,
compete with Taiwan, and promote Chinese brands.
High-profile aid projects in places like Sudan and Cuba
continue to call into question whether recommendations to
cooperate with other donors and to become more transparent
will find a receptive audience among decision-makers at
MOFCOM and other government agencies. End Comment.


Randt