PRC/IRAN: CHINESE OBSERVERS SAY LITTLE ROOM LEFT

C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 001111

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/24/2033
TAGS: PREL PARM ENRG PTER MNUC IR CH
SUBJECT: PRC/IRAN: CHINESE OBSERVERS SAY LITTLE ROOM LEFT
FOR FURTHER SANCTIONS PRC CAN SUPPORT

Classified By: Political Minister Counselor Aubrey Carlson.
Reasons 1.4 (b/d).


1. (C) SUMMARY: Chinese foreign policy experts say there is
little room left for more sanctions against Iran that China
can support because current UN Security Council resolutions
come close to the PRC red line of jeopardizing China-Iran
energy cooperation. Domestically, China's leaders feel
increasing pressure from Chinese oil companies and other
economic actors to ensure China's energy supply is sufficient
to sustain economic development. The leadership sees energy
diplomacy as intimately connected to the Chinese Government's
ability in an increasingly uncertain economic environment to
maintain social stability, which represents a key pillar of
regime legitimacy. To maintain the crucial flow of energy,
more oil deals similar to the recently concluded
Yadavaran/Sinopec contract are likely to emerge, despite the
fact that the Yadavaran deal will be difficult to
"implement." China continues to believe that direct
negotiation with Iran is the only way to solve the nuclear
crisis and is seeking ways to establish such a dialogue. END
SUMMARY.


2. (C) PolOff discussed Iran-China relations and the
P5-plus-1 process with Li Guofu, Director of the Center for
Middle EastStudies at the MFA-affiliated China Institute fo
International Studies (CIIS) March 5, as well as Chinese
Academy for Social Sciences Middle East Studies Director
Zhang Xiaodong on March 11. PolOff also raised the topic in
a March 21 conversation with Xu Wei, Deputy Director of the
MFA West Asian and North African Affairs Department's Iran
and Turkey Division.

Nuclear Power OK, Nuclear Bomb Unacceptable
--------------


3. (C) Both academics reiterated the PRC official position
that an Iran with nuclear weapons is unacceptable to China,
but that Iran has a right to civilian nuclear power. Zhang
said UNSC Resolution 1803 demonstrates China's commitment to
this position. He underscored, however, that China is
concerned about all potential and actual proliferation of
nuclear weapons, including in Pakistan and India as well as
Iran. China's proximity to the latter countries amplifies
its concerns.

Iranian Energy Crucial China's Social Stability
-------------- --


4. (C) Li and Zhang stressed the importance of China's good
relations with Iran, particularly in the field of energy
cooperation. CIIS' Li argued that China's leaders see a
strong relationship between a sufficient energy supply and
social stability, which leaders regard as essential for the
regime's legitimacy. He said in the current environment of
higher inflation and an uncertain international economy,
Chinese leaders give much more weight to uninterrupted
economic development than to abstract foreign policy concerns
such as Iran's nuclear program. China fears other members of
the P5-plus-1 are willing to risk instability in world oil
markets, but China is not. Both academics stressed there is
almost no room for additional global oil production and the
world simply has no choice but to turn to Iran for oil.

Oil Lobby, Economic Voices Influential
--------------


5. (C) Li stressed that the MFA still has the primary voice
in guiding Chinese policy on Iran, but this primacy may not
last. The People's Liberation Army (PLA) plays an
increasingly important role and urges a more hard-line stance
against Western pressure, stressing China's national interest
in good relations with Iran. However, the most important
emerging force in Iran policy, Li argued, is an increasing
vocal chorus of small business groups, consumers, local and
provincial governments and economic advisors. While not an
organized lobby, Li said, the influence of this collection of
concerns is rapidly increasing.


6. (C) Forming a more formal "lobby," he added, are the
state-controlled oil companies, who seek protection for their
investments in Iran and space for future development.
Referring to the recently signed Sinopec deal, Li said he
expects "more Yadavarans" as Chinese oil companies seek to
meet domestic demand for energy and respond to pressure from
the government to ensure a steady oil supply. Li said that,
while there is debate within China about the best way forward
on Iran's nuclear program, there is no debate on the need to
oppose any action that would threaten China's energy
cooperation with Iran. MFA's Xu told PolOff that Sinopec is

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"not a normal company" due to its central role in China's
energy security, a "critical" priority for China. (Comment:
The state-run Chinese oil majors have significant
bureaucratic influence, in part because they possess a
breadth and depth of energy-related human resource talent not
found in the ministries. A recent reorganization of the
government failed to create an energy ministry, leaving
behind only a revamped energy commission and an NDRC-directed
bureau that may perpetuate the disjointed energy policy
structure already in place. In this environment, it is
relatively easy for the energy companies to maintain their
influence over the ministries.)

Yadavaran Deal Difficult to "Implement"
--------------


7. (C) Zhang said that the Chinese oil majors feel
increasingly vulnerable to international pressure on Iran,
which could give the companies an incentive to lock down new
deals quickly and create faits accompli. He said the
Sinopec/Yadavaran development deal has only passed the first
test, finalizing the contract. In the current environment,
he stressed, Sinopec is very concerned about international
pressure, the possibility of sanctions and the difficulties
of working with Iranian authorities. These factors will
present serious challenges to "implementing" the deal. He
declined to offer further information on specific obstacles.

UNSCR 1803 is Punishment and Hurts China, Too
--------------


8. (C) UN Ambassador Wang Guangya told the media shortly
after the passage of UNSCR 1803 that the measure is not meant
to punish Iran or the Iranian people, but to act as a
catalyst to restart direct negotiations over the Iranian
nuclear issue. Zhang said Wang's comments were aimed at
limiting the damage to China's relations with Iran and the
new resolution is "certainly a punishment of Iran." Zhang
said Western frustration over China's watering down of the
latest resolution is matched by Chinese concerns about the
real ramifications of the resolution. While UNSCR 1803 stops
short of impeding energy cooperation, Zhang said the
financial measures will complicate business for Chinese
companies active in Iran and lead to some scaling back of
Chinese business activities. Zhang said China was not
exempted from the Iranian public outburst after the passage
of UNSCR 1803 and that the resolution has made life more
difficult for Chinese officials dealing with Iran.

China Caught Off Guard by International Scrutiny?
-------------- --------------


9. (C) Comparing the Iranian nuclear issue to Darfur, Zhang
said Chinese policy-makers have been surprised by the extent
of international concern over China's role, particularly over
the last year. China's leaders have had to revise their
thinking on Iran as they became aware that the issue could
damage China's reputation during a sensitive year. Zhang
said that the Chinese leadership believes the international
community does not give China enough credit and
misunderstands China's position. Zhang said Chinese
policy-makers fear the U.S position focuses solely on the
short-term and the international community ignores China's
longer-term concerns over its growing energy needs.

Little Room Left for Future Sanctions
--------------


10. (C) Zhang said there is a growing consensus among
policy-makers in Beijing that the three UNSCRs (1737, 1747
and 1803) have done little to resolve the nuclear crisis, but
are beginning to cause headaches for Chinese businesses.
Each successive UNSCR has moved closer to impacting Chinese
core interests, and there is little room that Chinese
policy-makers can see for future expansion of formal
sanctions, he suggested. Zhang stressed that UNSCR 1803
successfully increased pressure on Iran while not
jeopardizing Chinese energy cooperation, but Chinese
policy-makers now believe the sanctions have reached the
Chinese red line and China will not countenance sanctions
that limit Iran's international energy cooperation.

Call for a New Way Forward: Incentives, Trust-Building
-------------- --------------


11. (C) Given China's opposition to further formal sanctions,
Zhang said China hopes the United States and China can seek a
"new way forward" after the third UNSCR. Chinese
policy-makers now believe direct talks between the United
States and Iran are the only solution. He added that China

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policy-makers hold out little hope for a diplomatic
breakthrough with presidential elections in both countries
within the next year. In the meantime, he said Beijing hopes
to push for a "strategic rethink," including the idea of an
incentive package for Iran, with an acknowledgement of Iran's
right to civilian nuclear energy. Zhang said Chinese
policy-makers have a growing sense of China's importance, but
some leaders still feel inexperienced and lack confidence in
dealing with the complexity of the Middle East. Both
academics said the Iranians need to build credibility and
China wants to help. They acknowledged the difficulty of
enhancing Iran's credibility, however, and did not offer
specific proposals. Li from CIIS said he advises Government
officials that sanctions should be adjusted based on Iranian
behavior to create positive incentives for increased
transparency.


12. (C) As for the official perspective, the MFA's Xu Wei
told PolOff that China continues to seek a middle ground that
acknowledges the concerns of the international community
regarding Iran's nuclear program and creates confidence that
Iran's nuclear program is peaceful. He reported that China
is actively working with the Iranian authorities to find ways
they could be brought back to negotiations on the nuclear
issue, but declined to offer specifics. However, he
reiterated the need for recognition of the right to nuclear
energy for Iran as a signatory of the Non-Proliferation
Treaty as well as a common understanding among the P5-plus-1
members about how to persuade Iran to return to negotiations.

Li: Iranians Sense they have the Upper Hand
--------------


13. (C) CIIS' Li Guofu said he advises officials in Beijing
that Iran will increase its nuclear development in the coming
months, because Iranian leaders perceive the West as
impotent. Because Iran desires to enhance its bargaining
position when direct negotiations eventually resume, it will
activate new centrifuges and continue missile development.
The Iranians will probably also signal to the next
administration that improved relations with Iran are
necessary for stability in Iraq and Afghanistan, Li said.


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