SCENESETTER FOR THE DEPUTY SECRETARY'S MAY 11-12

S E C R E T SECTION 01 OF 04 BEIJING 001728

SIPDIS

E.O. 12958: DECL: 05/06/2028
TAGS: PREL PGOV PHUM ABLD KIRF KOLY MASS PARM ECON
IR, SU, BM, KN, CH, TW
SUBJECT: SCENESETTER FOR THE DEPUTY SECRETARY'S MAY 11-12
VISIT TO BEIJING

Classified By: Ambassador Clark T. Randt, Jr.
Reasons 1.4 (b) and (d).

SUMMARY
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1. (C) China's leaders are preoccupied with managing the
domestic dimensions of and international fallout from the
Tibet crisis, determining how to deal with the new leadership
in Taiwan and ensuring that nothing mars a successful Olympic
Games. Despite seemingly strong domestic popular approval of
the Government's crackdown in Tibet, international criticism
in the run-up to the Olympics led to China's recent decision
to resume meeting with the Dalai Lama's representatives. The
Chinese people have full-blown Olympics Fever, but the
disruption of the Torch Run in several European cities,
protests in cities worldwide and hints that some leaders
might cancel participation in the Olympics Opening Ceremony
shattered any illusions the Government may have had about its
ability to stage-manage the Olympics. The Torch Run protests
abroad also led to a nationalistic public reaction that
China's leaders initially encouraged but now seek to rein in.
Taiwan is less likely to inflame nationalist emotion in the
near term, though China's leaders seem unsure how to manage
the opportunities presented by the newly elected government
in Taiwan. Under sustained Western diplomatic pressure on
Iran, Sudan, Burma and other issues, and under the Olympic
spotlight, China has grudgingly taken some positive moves,
but we can expect China to continue to block efforts to put
real teeth in sanctions that could affect China's economic
and energy interests.


2. (S) The Six-Party Talks remain a bright spot of
U.S.-Chinese cooperation. China continues to play a helpful
role, but could do more to press the DPRK to conclude a deal
swiftly. China has said it expects the Six-Party Talks to
form the basis of any future Northeast Asia Peace and
Security Mechanism (NEAPSM). Chinese experts in the past
have described the NEAPSM as a follow-on to the Six-Party
Talks. In the meantime, the Chinese remain interested in
hearing others' ideas for the NEAPSM. China has agreed to
host our Human Rights Dialogue (HRD) on May 26 but has only
scheduled half a day for the Dialogue and is indicating that
we should not expect any "results." The Chinese have also
refused A/S Kramer's request to visit Tibet. Accustomed to
consistent double-digit economic growth, China faces mounting
difficulties linked to skyrocketing energy prices and
problems in the economies of major trade partners. China is
largely unaffected by the global food crisis, though winter
storms and an outbreak of disease in pigs have contributed to
food price inflation in recent months. The China Mission
needs Chinese agreement on a new Conditions of Construction
Agreement (COCA II) in order to start work on the new
Guangzhou Consulate Complex. End Summary.

Tibet: Pragmatic Response to International Pressure
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3. (C) China's leaders appear encouraged by how the Tibet
crisis has played domestically, with support for the
Government reportedly at high levels. Credible reports of
heavy-handed repression in Tibetan areas continue, but the
Chinese Government response to the unrest largely avoided
large-scale deployment of the PLA and visible violence
against protestors. Moreover, the Chinese Government
appeared to successfully manage domestic public opinion, and
events in Tibet seem to have strengthened, not weakened,
regime legitimacy among most Han Chinese. The Government was
particularly successful in capitalizing on a few high-profile
reporting errors to paint Western media as biased against the
Chinese while at the same time closing Tibet tightly to
foreign reporters and diplomats. Any reports critical of the
response to the Tibet crisis are now cast by the Chinese
people as anti-China, to the point where foreign reporters
have received death threats from Chinese.


4. (C) However, Beijing did seem unprepared for the intensity
of the foreign reaction over violence in Tibet. With
international protests over Tibet refusing to die down,
especially in Japan where President Hu is planning a
high-profile visit beginning May 6, Beijing made the
pragmatic decision to accede to international demands that
China reopen contact with the Dalai Lama. Such contact,
which occurred May 3 in Shenzhen, bears little real cost for
Beijing (and has little real chance to improve the human
rights situation in Tibet) but it helps deflate Western
criticism. We continue to press China on the other elements
of a responsible Tibet policy: restraint toward Tibetans who
disagree with Government policies, humane treatment of
detainees, unfettered access to Tibet for diplomats and
journalists, and addressing the underlying concerns of

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Tibetans with regard to protecting their culture, religion
and way of life.

Olympics: China Rattled?
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5. (C) Pro-Tibet and other protestors' disruption of the
Olympic Torch Run in numerous cities abroad angered Beijing's
leaders, as did calls for Olympic boycotts. French President
Sarkozy's statement that unless Beijing addresses
international concerns over Tibet satisfactorily he might
skip the Opening Ceremony particularly miffed the Chinese.
Linkage of Tibet and the Olympics and the Torch Run
complications made it clear to Chinese leaders that the Games
may not be the smooth international celebration of China's
emergence as a global power that they intended. President
Bush's clear statement that he will attend the Olympics and
the lack of major incidents at the Torch Run in San Francisco
earned us goodwill and gratitude in Beijing and has given us
a degree of leverage.

Nationalism: Putting the Genie Back in the Bottle
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6. (C) Pro-Tibet protests at the Olympics Torch Run sparked
zealous Chinese nationalistic reactions inside and outside of
China. In China, the reactions took the form of protests
against foreign businesses and institutions and calls for
boycotts of foreign-owned businesses. Outside of China,
overseas Chinese groups staged counter-protests that got out
of hand in several cases. In one ugly example, at the Seoul
leg of the Olympic Torch Run, thousands of Chinese students
threw projectiles at a group of a few hundred protestors that
included children and elderly. After initially fanning the
flames, the Chinese Government has taken action in recent
days to rein in this nationalist fervor, limiting Internet
discussion of boycotts and protests and exhorting the Chinese
people to redirect their emotions into study and other
productive endeavors. China's leaders have seen examples in
the past of nationalist feeling in China mutating into
anti-regime sentiment.

Taiwan: Near-term Progress, Long-term Uncertainty
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7. (C) For now, Taiwan is less likely to provoke
nationalistic reactions in China. Now that Chen Shui-bian
has been soundly defeated, many observers expect quick
progress on some aspects of cross-Strait ties, with concrete
steps taken soon after President-elect Ma Ying-jeou's
inauguration. Cross-Strait contacts have already begun.
Taiwan Vice President-elect Vincent Siew and President Hu met
April 12 in Bo'ao and endorsed moving forward on cross-Strait
charter flights, opening Taiwan to Mainland Chinese tourism,
currency exchanges, and the resumption of official dialogue
by early July. Taiwan Straits Exchange Foundation (Taiwan's
designated Mainland negotiator) Chairman-designate P.K.
Chiang visited multiple cities in China in late April.
However, Beijing's leaders seem unsure what Ma Ying-jeou's
victory may mean in the longer term, and observers here worry
about the limited potential for real progress on larger
issues like Taiwan's identity and its international space.
Reflecting long-held positions, Beijing has cautioned us
against selling new arms to Taiwan, inviting Ma to the United
States or sending a high-level delegation to Ma's
inauguration. We have reminded Beijing of our one China
policy and Taiwan Relations Act obligations and urge China's
leaders to stay focused on the historic opportunity to
improve cross-Strait relations through peaceful dialogue and
to consider confidence-building measures such as withdrawing
missiles and aircraft currently deployed opposite Taiwan.

Pressuring China to be a Global Stakeholder
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8. (C) In the past, China has been quick to contrast its
non-interventionist "harmonious world" policy with U.S.
"unilateralism." It has blocked vigorous international
action on Burma, negotiated doggedly against tough sanctions
on Iran and consistently urged patience rather than action in
Sudan. More recently, concerted international pressure has
resulted in China taking steps, albeit reluctantly, in line
with U.S. goals on these issues. China brokered a deal that
led to the establishment of the hybrid force in Sudan,
eventually agreed to a third UNSC sanctions resolution on
Iran's nuclear activities, hosted a meeting of the P5-plus-1
on Iran in Shanghai and is now negotiating a second UNSC
President Statement on Burma. We note that in all of these
cases, China's cooperation has only come after considerable
resistance, and their "red lines" on most issues fall far
short of U.S. bottom lines. We are therefore pessimistic

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about China's willingness to agree to sanctions on energy
trade with Iran and Sudan or to meaningful curbs on China's
commercial activities in Burma.

Six-Party Talks: China Could Do More
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9. (S) The Six-Party process remains the best example of
U.S.-Chinese cooperation on an issue of joint concern.
China's hosting of the Six-Party Talks continues to pay
handsome dividends for China's prestige in the region and its
relations with the United States. Although China sees itself
largely as a mediator and chair of the talks, its clear
national interest in the denuclearization of the Korean
Peninsula has motivated Beijing to press North Korea to be
cooperative. However, Beijing can do more to urge Pyongyang
to conclude rapidly Phase II of the denuclearization process
and begin discusion of Phase III, to include verification of
Nrth Korea's declaration and other Six-Party Talks
priorities. China's "traditional friendly relations" with
North Korea, while strained following North Korea's 2006
nuclear test, continue to provide opportunities for Beijing
to convince Pyongyang that now is the time to conclude a
deal. There has been quite a bit of Beijing-Pyongyang
contact lately: Kim Jong-Il visited China's Embassy in
Pyongyang in March, and North Korea's Foreign Minister Pak Ui
Chun met senior Chinese officials in Beijing in April,
including Vice President Xi Jinping, State Councilor Dai
Bingguo and FM Yang Jiechi.

NEAPSM: Chinese Views Developing
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10. (S) China's vision of a future Northeast Asia Peace and
Security Mechanism (NEAPSM) continues to develop, although it
sees the Six-Party Talks as a potential base from which to
build a future security structure. Chinese officials have
said that the NEAPSM should be discussed within the Six-Party
Talks framework and that the founding members of this new
mechanism should be the current members of the Six-Party
Talks. The parties should be equals, acting in consensus and
consulting each another as partners of equal standing. China
believes agreement on the establishment of a NEAPSM could be
an outcome of a future Six-Party Ministerial meeting. Vice
Foreign Minister Wu Dawei told then-EAP PDAS Kathy Stephens
in July 2007 that North Korea will want to resolve the issue
of normalization of relations with the United States before
entertaining the NEAPSM idea seriously.


11. (S) While there is no agreement among Chinese experts on
what a future NEAPSM will look like, many see it as a natural
outgrowth of the Six-Party Talks that will start with the Six
Parties and may later expand to include interested countries,
such as Mongolia. The Chinese have an intrinsic preference
for "weak" regional architecture institutions that operate on
the basis of consensus and enshrine the principles of
inviolable sovereignty and non-interference in internal
affairs. Beijing has also made it clear that it will not
permit NEAPSM to touch upon the Taiwan issue. We expect the
Chinese to stick firmly to these principles in any discussion
of a future Northeast Asian regional grouping. The Chinese
have asked for our views on how NEAPSM would impact our
alliance arrangements and forward military deployments in
Northeast Asia.

Human Rights Dialogue
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12. (C) The U.S.-China Human Rights Dialogue has been
suspended since 2003. During the Secretary's February visit,
she and FM Yang announced that China and the United States
agreed to restart the Dialogue, and on May 5 an MFA official
agreed to May 26 and 27 as dates for the next HRD round and
related meetings. The news was not all good: China offered
a Director General-level interlocutor instead of the
Assistant Foreign Minister we requested and also rejected our
request to have A/S Kramer visit Tibet May 23-24. The MFA
official said the MFA is willing to explore "fallback"
alternatives to a trip to Tibet. A/S Kramer has said that,
if he cannot go to Tibet, he wants to travel to Xinjiang.

Economic Issues: Mounting Difficulties
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13. (SBU) The Chinese economy is facing many difficulties
after years of double-digit growth, including slowing
exports, inflation at an 11-year high, rising labor costs, a
widening urban-rural income gap, environmental challenges and
galloping energy consumption. Premier Wen Jiabao said
publicly that 2008 will be "a most difficult year" for the
economy due to "uncertainties in international

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circumstances." China's trade partners are facing high
energy prices and slowing economies, though China has little
direct exposure to the subprime crisis. At the same time,
Chinese officials, scholars and journalists are debating
whether China has become too open to foreign investment. To
deal with its challenges, China has in some cases reverted to
the blunt instruments of a state-directed economy, including
price controls on food and energy and measures to restrict
foreign investment in key sectors. The Strategic Economic
Dialogue (SED) is the key bilateral mechanism to address the
issues that will confront our economic relationship over the
coming decades; the next round will be in the United States
in mid-June. Recent SED deliverables include working toward
a ten-year plan on energy and environment cooperation and
advancing our bilateral investment treaty (BIT) discussions.
China continues to pose IPR protection challenges to U.S.
rights holders and was recently named a "priority watch list"
country (again) by USTR.

Food Crisis: Manageable in China
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14. (SBU) China is not a significant importer or exporter of
grains, and the country's recent food price/supply shocks are
largely domestic in origin. China is, however, the world's
top importer of oilseeds and edible oils (e.g., soybeans),
and thus affects those markets elsewhere. China's growing
imports of gas and oil contribute to rising fertilizer prices
globally and boost the economic attractiveness of biofuel
crops and production in other countries. Food inflation rose
21.0 percent in China in the first quarter of 2008, while
overall inflation was 8.0 percent. Major factors in food
inflation are the domestic pork supply and pig disease
problems, storms in January and February, and the costly
imports of edible oils. Higher food prices have hurt
low-income consumers who, in general, spend a higher
proportion of their income on food. There is no sign to date
that food inflation is leading to widespread or sustained
social instability.

COCA II: Need Chinese Agreement to Begin Construction
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15. (SBU) The lack of an applicable Conditions of
Construction Agreement (COCA) threatens the China Mission's
ambitiousbuilding program. The original COCA permitted te
reciprocal construction of new Embassy Compexes in Beijing
and Washington. We now requie a new agreement, COCA II, to
cover new cnsulate construction, refurbshment and major
repairs. We are ready to begin construction of our new
Guangzhou Consulate Complex, and the Chinese want to conduct
major consular facilities rehabilitation in New York and San
Francisco. A negotiating team from OBO will be in Beijing
toward the end of this month. Any significant delay will
threaten the China Mission's ambitious consular facilities
programs.
RANDT