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08KOLONIA110 2008-07-29 05:44:00 CONFIDENTIAL Embassy Kolonia
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1. (SBU) China's Ambassador to the Federated States of
Micronesia (FSM) advised that her country has recently
diminished grant aid to the FSM. She claimed that Beijing was
less inclined to fund her own proposals for grants and projects.
Beijing believes there is little return on investment owing to
poor Micronesian performance. As relations with Taiwan have
begun to improve and to lessen the competitive edge in
Micronesia, Ambassador Liu Fei said China had begun to focus
instead on preferential loans that the Micronesians would need
to repay. Chinese commercial investments were also a high
priority, she said.

2. (C) Following a lunch at Ambassador Hughes' residence on
July 23, China's Ambassador Liu Fei stayed behind for two hours
to privately discuss Chinese aid activities in the FSM.
Regarding the FSM's new national petroleum corporation,
PetroCorp (reftel), Ambassador Liu said the FSM had turned to
China several months ago to request a maintenance services
agreement aimed at ensuring quality and safety standards at all
four FSM state oil facilities. In response, representatives of
a Chinese petroleum company came to inspect the storage tanks.
Liu Fei said the Chinese specialists were appalled at the
serious deterioration of the facilities, particularly in the
states of Chuuk and Yap. They concluded that the tanks were
beyond repair, and they declined to engage in further
discussions about maintenance.

3. (C) Instead, China extended a concession loan offer to
rebuild oil storage tanks throughout the FSM. Ambassador Liu
said she believed the offer remained on the table for
approximately USD 15 million. Ambassador Hughes asked whether
the Micronesians would really be expected to repay such loans.
Liu insisted that they had to repay and to put up collateral.
For this reason, she said, this particular loan remained in
abeyance. She doubted the Micronesians would be able to fulfill
conditions and to obtain approval of the FSM Congress. Hughes
observed that PetroCorp was advancing with almost no scrutiny
from the public or the FSM Congress. She believed board members
could make a deal secretly, perhaps offering land as collateral.
Ambassador Liu did not discard such speculation.

4. (C) In the FSM state of Kosrae, Liu said Governor Weilbacher
was indeed considering whether to offer property as collateral
to obtain a Chinese loan to establish a cold storage plant for
fish bait processing under the management of the Hong Kong based
Luen Thai Company. So far, FSM Vice President Alik Alik, whose
home state is Kosrae, had opposed the deal, she said. Luen Thai
promised the Governor that such a plant would employ some 200

5. (C) In the meantime, Liu confirmed that Luen Thai had beat
back South Korean competition and was close to concluding an
agreement with Kosrae state to open a dry dock facility at the
same port marina where the proposed cold storage facility would
be co-located. The dry dock operation, which would require no
capital investment from the Micronesians, would serve to repair
and maintain a fleet of some 70 fishing vessels that Luen Thai
runs in the FSM and RMI, Liu said. Together, these two projects
would give Luen Thai domination of the port. Kosrae's Attorney
General, who is a reliable Embassy contact, has alluded to
difficult negotiations driven by the Governor. She mentioned to
the Australian Ambassador that Luen Thai's chief negotiator is
an Amercan citizen named Richard Reddy, who supposedly has a
criminal record for embezzlement.

6. (SBU) Ambassador Liu confirmed that China has offered a
concession loan in the amount of USD 9 million for the purchase
of two Harbin Y-12 airplanes, which would enable the FSM to
start a new intra-island air company. Secretary of Research and
Development Peter Christian has visited the airplane factory in
Manchuria, and President Mori was also interested, she said.
China would next try to arrange a visit of President Mori to
Harbin. When Hughes questioned how the FSM would ever be able
to repay a loan for the purchase of the airplanes, Liu said she
did not know.

7. (SBU) Finally, Liu volunteered that in the absence of grant
aid, she had invested considerable effort to try to convince
Beijing to assign six Chinese doctors to work in Chuuk's state
hospital. This proposal was under consideration. Liu was
pleased to learn from Ambassador Hughes details of the visit of
the USNS hospital ship Mercy to Chuuk, along with refurbishment
of Chuuk's hospital by DOD engineers. Ambassador Liu was
enthusiastic and informative, suggesting that repairs to the

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hospital, in tandem with the service of Chinese doctors, could
complement our nations' joint efforts. She welcomed a
suggestion to meet regularly and to schedule aid discussions
that also included the ambassadors of Australia and Japan. As
dean of the small diplomatic corps in the FSM, Ambassador Liu
offered to host these meetings.