CHINESE INROADS INTO TIMOR-LESTE: HIGH VISIBILITY, LOW COST,

C O N F I D E N T I A L SECTION 01 OF 06 DILI 000056

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SIPDIS

STATE FOR EAP/MTS, EAP/CM, AND INR/EAP - ZENZIE

E.O. 12958: DECL: 2/20/2018
TAGS: PREL PGOV EAID EMIN EINV SMIG CH TT
SUBJECT: CHINESE INROADS INTO TIMOR-LESTE: HIGH VISIBILITY, LOW COST,
FEW STRINGS ATTACHED

REF: A) 03 JAKARTA 13517, B) DILI 012

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CLASSIFIED BY: Henry M. Rector, Deputy Chief of Mission, U.S.
Embassy Dili, Department of State.
REASON: 1.4 (b),(d)



Summary

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1. (C) Summary: Vice Foreign Minister Wu Daiwe's January 29 -
31 visit to Timor-Leste highlights China's relatively
high-profile engagement here. Although Chinese diplomats in
Dili maintain that Timor-Leste is strategically unimportant to
Beijing, the PRC is nevertheless cultivating goodwill and
dispensing largess in a pattern consistent with its ongoing
regional charm offensive. Timor-Leste's inhospitable business
climate, however, remains unattractive to Chinese companies, and
new PRC investment is confined mostly to an influx of
small-scale retailers and entrepreneurs. More ambitious
ventures have not gotten past the exploratory phase. With
regard to defense cooperation, the PRC tends to offer training
and materiel without coordinating with other donors or
contributing to forms of institution-building that would enhance
Timor-Leste's long-term stability. Indeed, the Chinese offer to
sell a radar array has alarmed at least one very senior Timorese
official. This underscores a problem with China's approach to
Timor-Leste: the PRC distributes goodies with few strings
attached, but steers well clear of difficult yet necessary tasks
such as encouraging good governance, cultivating the rule of
law, and promoting security sector reform. Although
Timor-Leste's future depends on progress in these areas, China
seems either indifferent to them or content to leave them to
other foreign partners. End summary.

Wu Comes Calling

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2. (U) En route to the UN Convention Against Corruption in Bali,
Vice Foreign Minister Wu Daiwe visted Timor-Leste on January 29
- 31. He met with Prime Minister Xanana Gusmao, Deputy Prime
Minister Jose Luis Guterres, Speaker of Parliament Fernando
Lasama de Araujo, and former Prime Minister Mari Alkatiri.
Accepting a longstanding Timorese invitation, Wu was the
highest-ranking PRC official to visit Timor-Leste since the
nation's independence in 2002. Accompanying him were Deputy
Director General for Foreign Aid Yan Jia and Deputy Director
General for Asia Wan Fanfu.


3. (C) The highpoint of the visit was a "key handover" ceremony
to the imposing new Foreign Ministry building, funded and
constructed by China and set to open in March. Vicky Tchong,
the Timor-Leste Ministry of Foreign Affairs' new Secretary
General and until recently Embassy Counselor in Beijing, told us
that the GOTL and China had signed four notes during the visit.
The first committed USD 1.4 million (RNB 10 million) in new
Chinese aid funds to Timor-Leste. The second agreed in
principle to develop a list of Timorese products that could be
exported to China duty-free or at preferential tariffs. China
also agreed to provide furnishings for the new Foreign Ministry
(see para 8 below),and to send a Chinese survey team to start
work on promised facilities for the Armed Forces of Timor-Leste
(F-FDTL, see para 24). Ms Tchong noted that the China's approach
to aid is conducive to maximum PR value. Almost all projects,
she said, are funded out of a USD 42 million commitment the PRC
made in 2003. This operates like a bank account. The GOTL and
PRC consult on how to spend the fund, and every time a decision
is announced, it sounds in the media as if China is committing
new money. As a result, she said, there is sometimes fanfare
about agreements that have little or no immediate impact. Some
have no implementing mechanism, while others may not show
tangible results until much later. The new MOU on duty-free and
preferential exports from Timor-Leste to China is a case in
point. It will not come into effect until next year, and there

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is not yet any list of what products it will cover. Ms Tchong
said that it would probably include Timorese agricultural
products, but the country exports little else that is of
interest to the PRC.

Historical Baggage

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4. (U) Chinese outreach to Timor-Leste dates back hundreds of
years. A Chinese outpost in Timor to export sandalwood predated
Portugal's colonizers. Prior to the Indonesian invasion in
1975, the ethnic Chinese community in Timor numbered about
20,000, mostly with links to Taiwan, Hong Kong, Singapore, and
Macau. According to some accounts, marauding Indonesian troops
targeted the Chinese merchant community in Dili in the first
days of the invasion. The Suharto regime was at the time both
strongly anti-communist and anti-Chinese, and in the run-up to
the invasion, its intelligence service alleged that the PRC had
armed the pro-independence FRETILIN party. Ethnic Chinese
deserted Timor in droves during the Indonesian occupation,
emigrating to Australia, the Philippines and Taiwan. By the
time of independence in 2002, the ethnic Chinese community had
dwindled to its current level of an estimated 2,000 - 3,000.

Timor-Leste's Role In China's Regional Strategy

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5. (U) In 2005, the Chinese Embassy in Dili circulated a
lengthy white paper entitled "China's Peaceful Development
Road." The paper stated that China's "inevitable" rise would be
benign and peaceful for a variety of political, economic, and
cultural reasons. The paper argues that with respect to its
Asian neighbors, China's preference for peaceful, win-win
engagement dates back to the voyages of Admiral Zheng He in the
fifteenth century, and has been demonstrated more recently by
China's efforts to offset the regional effects of the 1997-98
economic crisis, its assistance to countries stricken by the
2004 tsunami, its cooperative response to SARS, and its
constructive participation in a variety of multilateral
political and economic structures.


6. (U) This is China's declared framework for its policy
towards Timor-Leste, which has three objectives, according to
PRC diplomats in Dili. The first is to promote goodwill and
stability in a small Asian neighbor country. Second, the PRC
dispenses its largess freely in order to preempt Timorese
overtures toward Taiwan. Finally, the PRC is concerned about
the welfare of the Chinese community in Timor-Leste,
particularly the burgeoning class of recently-arrived merchants
and entrepreneurs.

Constructing Goodwill

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7. (U) Chinese aid to Timor-Leste comes mostly in the form of
buildings and food, although there has been some human resource
training conducted in China. PRC DCM Xiong Lichun told us that
because of language barriers, China prefers simply to provide
material gifts rather than engage in capacity building in
Timor-Leste.


8. (U) China's highest-profile building projects are the new
Foreign Ministry, the Presidential Palace, and the new
headquarters of the Armed Forces of Timor-Leste (F-FDTL). The
new Foreign Ministry was built with mostly Chinese labor, and
will open in March. By far the GOTL's most imposing building,
it was designed to house 120 workers. However, a scramble is
now underway for space in the prestigious new structure, so it
will likely wind up accommodating many more. President Jose
Ramos-Horta has said that since he was the Foreign Minister who
signed the MOU for the project, he is entitled to an office
there until his Palace is ready.


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9. (C) Despite the prominence of the new Foreign Ministry and
the media attention it has attracted, PRC diplomats regard the
six million-dollar facility as a relatively small-scale project.
"This was rather inexpensive for us, even by our standards," in
the words of political officer Xu Xiao. Another Chinese
diplomat noted that if Chinese labor and materials had not been
used, its cost would have been at least doubled. As icing on
the cake, the PRC has recently agreed to supply USD 500,000
worth of furniture. According to PRC Defense Attache Senior
Colonel Wang Xinqiang, this was because the GOTL failed to
budget for any furniture on its own. Wang also added that the
Chinese installed complete phone, internet, and electrical
systems.


10. (U) The new Presidential Palace is scheduled to open in

2009. Another gift from China, this facility will cost USD five
million. The project has already hit a snag, however, since the
contractor, Shandong International, made the mistake of hiring
Timorese workers who were fired after they refused to work the
same long hours as their Chinese counterparts. This led to
scuffles between the dismissed workers and their former
employers at the site. President Ramos-Horta ordered the F-FDTL
to protect the site, and a Labor Ministry mediator is reportedly
seeking to resolve the dispute.




11. (U) At a prime spot on Dili's waterfront, a Chinese crew is
also making progress on the new PRC Embassy, which will open

2010. In Beijing, the PRC paid for the construction of
Timor-Leste's chancery and staff housing, according to the
Chinese DCM. He said this was done without benefit of any
written agreement in order to prevent word of the deal from
reaching other poorer countries that might make similar
requests. The site for Timor-Leste's Embassy was provided as
part of a land swap in exchange for the property of the new PRC
chancery in Dili.


12. (U) The PRC also plans to build a primary school at Liquica
at a cost of USD 500,000. The GOTL has identified a site, is
working to resolve the usual land disputes, and is preparing to
sign an MOU with the Chinese Embassy.


13. (U) Finally, in August 2007, the China Metallurgical
Construction Company, based in Jiangxi province, won a GOTL
contract to build a hospital at Suai. The Chinese DCM clarified
that this is a commercial undertaking, not an aid project


14. (C) These projects have whetted the GOTL's appetite for more
new buildings. The Chinese DCM told us that his government was
considering a request for construction of official housing for
members of Timor-Leste's National Parliament. PolOff Xu said
that the PRC had tried to interest the GOTL in other forms of
aid, such as a medical mission or more school buildings, but the
Timorese are clamoring for new government offices instead.

Food Aid And Capacity Building

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15. (U) Apart from its construction projects, China has also
sent well-publicized food aid in response to Timorese requests
during times of shortages. Since 2006, the PRC has given 8,000
metric tons of rice and 500 tons of cooking oil to the Ministry
of Social Solidarity, which implemented its distribution.
Although it was provided in several shipments on different
occasions, 8,000 metric tons of rice amounts to about a
one-month supply for Timor-Leste's population.


16. (U) Over the past several years, the PRC has hosted several
hundred Timorese for short courses in the areas of
administration, tourism, agriculture, and other vocational and
technical areas. Notably, some Timorese doctors and nurses have
received training in China. These are usually short courses in
areas such as malaria prevention, but a few Timorese students
are receiving a complete medical education in China, a program

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which takes six years including two years of Mandarin language
study. A PRC Embassy contact told us that it extends 4-5 full
scholarships annually for long-term higher education in China,
and that these were consciously aimed at "children of the elite."


17. (U) Since 2003, China has also provided doctors to work in
Dili's National Hospital. There are currently twelve Chinese
doctors on duty there, including radiologists, internists, and
cardiologists. Chinese diplomats say that the program will
continue indefinitely, and that new teams will be rotated in at
intervals.

Trade And Investment: China Still Probing

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18. (C) Ricardo Cardoso Nheu, himself an ethnic Chinese and the
director of Timor-Leste's Chamber of Commerce, told us that PRC
investment in Timor-Leste is still negligible, and that
Timor-Leste's ties to Indonesia, Singapore, and Malaysia are
better developed. While several PRC concerns had sent
exploratory missions to look at opportunities in Timor-Leste
over the past several years, none of them had led to significant
investment. In recent months, he said, Chinese companies had
looked into possibilities in the mining and fisheries sectors.
Chinese diplomats confirmed this to us.


19. (C) The most high-profile of these missions was PetroChina's
geological survey conducted at the GOTL's invitation in 2003-04.
However, PetroChina has opted not to develop the project
further, according to DCM Xiong. This was confirmed by Domingos
Maria, Director of Policy in the Ministry of Natural Resources.
He said that contrary to media accounts, this was a magnetic,
not a seismic, survey. PetroChina had, he said, simply
undertaken a three-month geological survey of Timor-Leste's
inland territory, updating a previous study from the early
1980's. The activity was not directly related to Timor-Leste's
offshore petroleum and LNG reserves. After the survey was
completed, there was never any follow-up, and its main outcome
was a pile of rocks still sitting in a GOTL storage facility,
Maria said.


20. (C) Similarly, there has been no follow-up to a
well-publicized September 2007 visit by a group of Chinese
businessmen, organized by the Timor-Leste Embassy in Beijing.
At the time, the mission was hyped as preparing the way for USD
100 million in investment in commercial banking, agriculture,
and property development. DCM Xiong said that the delegation
represented small-scale agri-business interests, and that the
promises were exaggerated either by journalists or by the
delegation itself.


21. (U) However, there have been significant inroads into Dili's
retail sector by Chinese businessmen who have arrived in the
last five years. These are small-scale merchants and
entrepreneurs from Fujian and Guangdong provinces who import and
sell electronics, furniture, appliances, hardware, and other
household items. According to the Chinese DCM, these businesses
are flourishing despite non-stop problems with shoplifting and
shakedowns by the locals. This community may now number about
1,000, he said.


22. (C) An unsavory form of Chinese entrepreneurship is also on
the rise, namely, prostitution and probably human trafficking.
Recent raids on bars on Dili (reftel B) turned up a number of
Chinese women, and Chinese nationals suspected of involvement in
trafficking have been detained on the border with Indonesia.
PRC PolOff Xu recalled that during the 2006 crisis, China sent
two charter aircraft to evacuate its nationals. Chinese
officials were surprised when in addition to the expected
construction workers and businessmen, a number of bar girls
presented themselves. Their presence in Timor-Leste had been
hitherto unknown to their Embassy. Xu added he had heard that
they had returned to Dili after the unrest subsided.

Defense And Security: A No-Frills Supplier

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23. (C) President Ramos-Horta, Vice Prime Minister Guterres, and
Secretary of State for Defense Julio Pinto have stated to us,

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repeatedly and explicitly, that Timor-Leste's strong preference
is to cooperate with its democratic partners - Australia,
Portugal, the U.S., and Japan - on defense and security matters.
Nevertheless, China has extended various forms of assistance
and training to the F-FDTL. Timorese officials have remarked to
us that an attractive feature of these no-frills offers is that
they come with only one conditionality - non-recognition of
Taiwan - whereas Western offers always seem to have strings
attached.


24. (U) So far, China's most important contributions to the
F-FDTL are, again, buildings. The PRC has a longstanding
agreement to build a new Ministry of Defense and headquarters
for the F-FDTL on the site of the ex-Indonesian army base at
Fatuhada. The estimated completion date for the project is
mid-2009, at a cost of approximately USD 2 million. The PRC has
also agreed to build housing for 100 Timorese soldiers and
civilians in Metinaro, east of Dili. This project is still in
the early stages. The GOTL has recently resolved land issues by
paying off local residents, and a Chinese engineering assessment
team will make its first visit to the site in March.


25. (C) The PRC has invited small numbers of F-FDTL personnel to
China for training in artillery operations and advanced-level
wireless operations. The courses are conducted in English,
however, which limits the number of Timorese soldiers who can
benefit from them. The PRC Defense Attache told DCM that while
China offered training billets to fourteen Timorese soldiers in
2007, the F-FDTL had only been able to accept four.


26. (C) The GOTL has also purchased from China some non-lethal
defense-related items including about USD 1.5 million dollars'
worth of uniforms, boots, and personal items. The choice of
China as a supplier for these items was mostly due to their low
cost. The GOTL is reportedly considering more substantial
Chinese purchases, however, including a small group of patrol
boats for ten million dollars. This offer is said to include
both training and spare parts.


27. (C) In December, Vice Prime Minister Jose Guterres told us
that Chinese defense firms had approached Timor-Leste with an
offer to install an array of radar facilities to monitor
shipping in the Wetar Strait. The only catch was that the
facilities were to be manned by Chinese technicians. The Vice
Prime Minister deliberately contacted the Ambassador following
the Chinese offer, noting his concerns that the radars could be
used for purposes other than those touted by the Chinese. They
could instead be used to extend China's radar based intelligence
perimeter deep into Southeast Asia. He explicitly asked that
the U.S. consider whether it saw the Chinese offer as a
strategic threat.

A Silent Partner In Donor Coordination

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28. (C) On the ground in Timor-Leste, China's behavior as a
member of the international donor community is ambivalent and
somewhat passive. China currently contributes 25 policemen to
the United Nations Police Mission (UNPOL),and regrettably does
not contribute to efforts to effectively coordinate development
assistance. It does, however, send a junior-level diplomat as a
silent observer at SRSG Atul Khare's periodic briefings. In
conversation with us, Ambassador Su Jian expressed mild
skepticism about the efficacy of the United Nations Integrated
Mission in Timor-Leste (UNMIT),and hinted that for China,
extending its mandate was of interest mainly as leverage in
connection with more important matters before the Security
Council. Clearly, China's preferred approach to Timor-Leste is
bilateral.


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Comment

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29. (C) As the above makes clear, Chinese aid to Timor-Leste
comes with almost no conditionalities. This underscores the
PRC's tendency to leave the heavy lifting in Timor-Leste to
other partners. Timor-Leste's institutions remain weak, the
capacity of its administrators is terribly low, and the
inclination of its political leadership to be unnecessarily
disputatious is strikingly strong. A question mark still looms
over subordination of the country's small military force to the
civilian authorities. The Timorese remain among the poorest
people in Asia. Accordingly, Timor-Leste's future may hold a
recurring cycle of crisis, collapse, and external intervention
unless foreign donors can work together in supporting the GOTL
in a long-term process of state-building. This will entail
sensitive, difficult, and controversial forms of cooperation,
and it is precisely this approach that China eschews. It is
difficult to escape the impression that China would be content
to curry favor with whoever happened to be in power in
Timor-Leste, regardless of how they obtained it or of the living
conditions of the Timorese people. We will continue to
encourage our Chinese colleagues to be constructive partners in
Timor-Leste's development, but anticipate their narrow,
self-serving attitude will be very difficult to overcome. End
Comment.
KLEMM