TREASURY U/S QUESTIONS VFM ZHANG YESUI ON PRC

S E C R E T SECTION 01 OF 02 BEIJING 007375 SIPDIS SIPDIS EAP/CM: PSECOR, JYAMAMOTO E.O. 12958: DECL: 12/06/2027 TAGS: CH IR PREL ETTC EFIN PARM SUBJECT: TREASURY U/S QUESTIONS VFM ZHANG YESUI ON PRC TRADE WITH IRAN Classified By: Ambassador Clark T. Randt, for reasons 1.4 (b/d) Summary -------------- ¶1. (S) Treasury Undersecretary Stuart Levey met with Vice Foreign Minister Zhang Yesui on November 13 to encourage the Chinese to do more in furtherance of international efforts to pressure Iran to give up its nuclear weapons program. U/S Levey outlined the threat posed to the integrity of the international banking system posed by Iran's poor internal financial controls, noting the recent statement by the Financial Action Task Force to that effect. He emphasized that many countries and global financial institutions have volunteered not to do business with Iran for fear of being lured into questionable transactions based on misrepresentation by Iranian entities. "Chinese banks are also at risk," he said, "even despite your government's efforts to prevent such interactions." VFM Zhang claimed he was "astonished" to hear that there are PRC companies involved in proliferation activities with Iran. Claiming UN Security Council Resolutions 1737 and 1747 are limiting the growth of PRC trade with Iran, however, VFM Zhang urged the United States to show more concern for "legitimate interests of PRC businesses" during discussions on a possible third UNSC resolution. End Summary. U/S Levey Describes Iranian Threat to Banking System -------------- -------------- ¶2. (S) Department of Treasury Undersecretary for Terrorism and Financial Intelligence Stuart Levey met with Vice Foreign Minister Zhang Yesui on November 13 to discuss the financial aspects of ongoing international efforts to pressure Iran to give up its nuclear weapons program. VFM Zhang said that China and the United States are carefully preparing for December's third Strategic Economic Dialogue and emphasized its importance to bilateral economic relations. U/S Levey agreed and reinforced the point by citing recent multilateral cooperation during the Financial Action Task Force's (FATF) October plenary, which resulted in FATF guidance on how to implement UN Security Council Resolutions (UNSCR) 1737 and the FATF statement describing the risk posed by Iran to the international financial system. U/S Levey described two manners in which Iran's poor internal financial controls threaten the international banking system: 1) Iranian institutions mislead foreign financial institutions into taking part in prohibited transactions by concealing information regarding the true purpose of the transactions and the partners involved; and 2) certain entities, for instance, Bank Melli, Bank Mellat, Bank Saderat, and the Islamic Revolutionary Guard Corps (IRGC),present specific proliferation or terrorism threats. U/S Levey left nonpapers describing some of these activities. ¶3. (S) VFM Zhang, assuring U/S Levey the MFA would carefully review all of this information, claimed he was "astonished" to hear of PRC companies' involvement in proliferation activities with Iran. "As a permanent member of the Security Council, we earnestly enforce all UNSCRs," he said. Asked if these activities occurred before or after the passage of UNSCRs 1737 and 1747, U/S Levey responded that they have occurred both before and after. Specifically, Dalian/LIMMT and China North Wanxing International Corporation conducted business with the UNSCR-designated entities Shahid Bakeri Industrial Group and the Iranian Defense Industries Organization, respectively, during the summer of 2007. VFM Zhang said China will fully investigate these claims and deal with any violations of PRC law or Security Council resolutions. U/S Levey emphasized that many countries and private financial institutions are volunteering not to do business with Iran because they understand the risk of being lured into questionable transactions based on misrepresentation. It is difficult for a bank to know its customer when dealing with Iran. "Chinese banks are also at risk," he said, "even despite your government's efforts to prevent such interactions." VFM Zhang Emphasizes PRC-Iran Trade Rate of Growth Slower in 07 -------------- -------------- ¶4. (S) Acknowledging U.S. concerns, VFM Zhang emphasized three aspects of the PRC's economic relationship with Iran. First, due to Security Council resolutions 1737 and 1747, the rate of growth of PRC trade with Iran was lower in the first BEIJING 00007375 002 OF 002 nine months of 2007 than during the same period in 2006. (Note: Overall China-Iran trade has continued to expand in 2006-07) Second, most exports to Iran, he claimed, are for civilian use and include products such as boilers, mining equipment, vehicles, audio-visual equipment and contracts for water, electricity and construction projects. "These are all related to the well-being and development of the country. None are related to weapons proliferation." he said. Third, citing Iran's leading role as a petroleum and natural gas exporter, VFM Zhang characterized the PRC's economic relationship with Iran as one of mutual benefit that "does not damage any other countries." He claimed most of the continued increase in trade between China and Iran is due to increasing oil and gas prices, not higher trade volume. U/S Levey asked if the PRC Government is still issuing export credit guarantees for trade with Iran, noting that this would be "inconsistent with our two countries' policies." VFM Zhang said that he is not an expert in export credits, but China would not do anything in violation of UNSCRs 1737 and ¶1747. ¶5. (S) Responding to VFM Zhang's assertion that most PRC trade with Iran is for civilian purposes, U/S Levey observed that such trade involves precisely the kind of transactions most susceptible to abuse by Iran. Noting U.S. companies have been prevented from trading with Iran since 1979, U/S Levey pointed out that many U.S. allies are opting out of certain transactions with Iran because such business is incompatible with the objectives of the Security Council resolutions. Companies that give up these contracts are concerned that China will "move in" on some of those business opportunities, blunting the intended effect and taking over markets. VFM Zhang denied this dynamic, claiming Iran is a small market for China, worth only 14 billion USD in 2006. U/S Levey clarified that while perhaps insignificant to China, this trade is very important to Iran, which counts China as its largest trade partner. Prospects for a New UNSCR -------------- ¶6. (S) VFM Zhang said that because the PRC shares common interests with other countries to prevent Iran from developing nuclear weapons, the PRC "will not use a veto, or rather don,t want a scenario where it is used" in the Security Council against a third resolution. The PRC supported the passage of the first two resolutions and has participated fully in discussions of a third, he said. The PRC does, however, have two problems with the current draft third UNSCR: 1) timing (Zhang said the United States "wants the resolution soon, but that IAEA and EU reports would need to be considered8) and 2) the resolution's possible damage to "normal and legitimate" trade. VFM Zhang insisted the current draft resolution would be "tantamount to an overall sanction," and is "not consistent with P5-plus-1 goals or PRC interests." Zhang averred that the PRC is a "free society," and many companies have "put a lot of pressure on the MFA" over the current draft of the third resolution, saying it does not show adequate concern for the "legitimate interests of PRC business." This cable was cleared by U/S Stuart Levey. RANDT