A TOUR D'HORIZON OF THE BILATERAL RELATIONSHIP FROM FUDAN'S

C O N F I D E N T I A L SECTION 01 OF 05 SHANGHAI 000195

SIPDIS

NSC FOR WILDER, TONG
SECDEF FOR ISA DAS SEDNEY

E.O. 12958: DECL: 6/2/2033
TAGS: PREL PGOV EFIN ENRG CH TW IR
SUBJECT: A TOUR D'HORIZON OF THE BILATERAL RELATIONSHIP FROM FUDAN'S
AMERICAN STUDIES CENTER DIRECTOR

CLASSIFIED BY: Simon Schuchat, Acting Consul General, U.S.
Consulate General, Shanghai, China, Department of State.
REASON: 1.4 (b),(d)




1. (C) Summary. During a May 24 meeting Fudan University
American Studies Center Director Shen Dingli told incoming
EAP/CM Director David Shear that the Sichuan earthquake, which
had revealed much weakness in the Chinese government, would be a
catalyst for positive change. He appraised the three remaining
U.S. Presidential candidates and confided that China would be
most comfortable with Senator McCain as President -- but that
China needed, and wanted, a good working relationship with the
U.S. no matter who becomes President. As tensions reduce across
the Taiwan Strait, the economic and financial aspects of the
bilateral relationship are increasingly central. China needs a
robust U.S. economy for its own economy to grow and its national
savings to retain their value. With the election of Ma
Ying-jeou, the mainland faces a more adept and effective leader
on Taiwan, in whose success China now has a stake. It will have
to give more "face" to the "Republic of China," he predicted.
It may be difficult for the U.S. to adapt to a rising China, but
China's overwhelming needs are for a positive relationship with
the United States. China will seek to cooperate with the U.S.,
whether on Iranian proliferation or global energy security,
because only through strategic cooperation with the U.S. can
China safeguard its own interests. End summary.


Earthquake as positive catalyst
--------------


2. (C) Shear began by expressing his condolences over the
devastating earthquake in Sichuan earlier this month. Shen
responded that the earthquake has been a positive catalyst for
further change in China. First, the media "disobeyed the
Party's orders," as journalists headed for the disaster zone to
report developments firsthand. According to Shen, this was the
first time for the media to disregard instructions from the
Propaganda Department on such a large scale. As a result of the
disaster, and the manner in which it was covered in China,
western media presentations of China went from highly critical
(because of the situation in Tibet) to highly favorable. It is
natural that China should evoke such sympathy, but it is also
important that China's leadership is perceived to have done a
good job, particularly in contrast with Burma.


Situation in Tibet
--------------


3. (C) Shen traveled to Tibet in late April, as one of the
first Chinese academics to visit after the disturbances in
March. It was his first visit to Tibet. According to Shen,
China's strategic interests are such that it will not relinquish
control over Tibet under any circumstances. Recalling the war
with Japan, when the invading forces could not reach Sichuan,
let alone Tibet, it was clear to Shen that China needed the
strategic depth which Tibet provided. He observed that the
Chinese government has accomplished many positive things for
Tibet, but nevertheless thousands of people participated in the
anti-Chinese demonstrations. The important questions are, why
do the Tibetans hate the Chinese so? And why is the Dalai Lama
more popular than the Chinese government? Finally, why was the
Chinese government so ineffectual in handling the
demonstrations? Was it because the local authorities were
overly cautious, or too bureaucratic? There was essentially no
government control from March 10 through 13. Shen noted that
some have argued that the government did not respond, even when
rioters attacked civilians and destroyed property, in order to
build a case for the subsequent crackdown. However, Shen was
not convinced by this argument.


Assessing the U.S. Presidential Candidates
--------------

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4. (C) China is concerned about the U.S. Presidential
election, Shen explained. He described difficulties he had when
invited to observe the 2004 election, when Chinese government
approval for his trip was first given and then withdrawn. Shen
attributed the about-face to the leadership's desire to see
President Bush reelected, and a concern that if there was too
much interest in China in President Bush's opponents, they might
be blamed for giving aid and comfort to his enemies. In a like
manner, the Chinese government cannot say that it would like to
see Senator McCain elected, but it does prefer McCain to the
other candidates. In fact, polls today suggest that McCain will
lose, but according to Shen, the Chinese government greatly
prefers a Republican to any Democrat.


5. (C) Shen confided that he did not look favorably on any of
the three remaining Presidential candidates. In his view,
Senator Obama is still too young and inexperienced, with only a
few years experience in the Senate. All he has done so far is
oppose the war in Iraq, but even that he has done largely as a
state legislator, not as a national-level legislator. Senator
Clinton would make a good President, in Shen's view; she is very
capable. Her fundamental weakness is arrogance and she has
therefore alienated many people. She has failed to apologize
for her vote authorizing the Iraq war, which Shen saw as a
failure of leadership. That is, her vote for the war was an
expedient decision, rather than a principled one, and thus she
did not demonstrate Presidential leadership.


6. (C) Among the three, Shen gave highest marks to Senator
McCain, who has demonstrated his commitment to the country. He
spoke honestly when he said America might be in Iraq for a
century, just as the U.S. has been in Japan for more than 60
years already. McCain understands that, even if the United
States mistakenly went into Iraq, it should not mistakenly
leave. So, in Shen's appraisal, Senator McCain is more
responsible, acknowledging the burden of staying and is honest
in recognizing that there cannot be a complete withdrawal.
According to Shen, if the situation in Iraq stabilizes, China
would certainly want the U.S. to remain. For strategic
reasons, the United States has a responsibility to clean up the
mess there, and an uncontrollable, but weak Iraq could well
attack the United States or even China. Furthermore, for
tactical reasons it is in China's interests for the United
States to remain in Iraq.


China wants to be a good partner to the next administration
-------------- --------------


7. (C) There is both rivalry and competition between the U.S.
and China. Although the situation has improved, Taiwan is still
an issue between us. Of course, China should not make any
mistakes, but if the U.S. is tied up with Iraq, there are more
opportunities for China to demonstrate that it is a good partner
and that the U.S.-China relationship should be further
strengthened. For the near term, China wants to be seen as a
helpful friend to the United States. In the longer term, the
PRC will of course continue to develop its own comprehensive
national strength, but even then, Shen believes that China's own
interests will increasingly coincide with U.S. interests.



8. (C) Shen stated that China would be eager to cooperate with
the next U.S. administration, whoever is President, particularly
in those areas where China already has a stake, so that
cooperation would advance China's existing interests; and in
areas where China is vulnerable. In both cases, for China to
address U.S. concerns would help China. China's highest
priorities are economic cooperation, and a stable relationship
with Taiwan. Internally, China is concerned with progress in
systemic reform, maintaining and bolstering regime legitimacy,
and proceeding with sustainable development. For all these
purposes it is highly desirable that the U.S. continue to be
China's partner. China needs capital, technology, and access to
the U.S. market, although with China's growing surpluses,
capital is a less pressing need. It is crucial for China that

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the U.S. have a robust economy, so that it can keep buying
Chinese exports, and so that the value of China's reserves do
not decline. China sees opportunities in U.S. vulnerability.
In Shen's assessment, whether the U.S. experiences a natural
decline, or a strategically manipulated decline, in either case
it will hurt China.



9. (C) China also needs a stable currency. Currently,
according to Shen, some Chinese experts argue that the RMB needs
a predictable, natural decline in value, while others argue that
further appreciation is necessary, either gradually or in a
one-time jump. This is important because increasingly the axis
of the U.S.-China relationship is less and less defined by the
Taiwan issue, and more and more by economic and financial
concerns. Thus, currency valuation is a leading factor in the
relationship. If a Democrat is elected President, Shen believed
that the currency would still be a leading issue. Therefore,
many in the PRC hope that Senator McCain will be elected: he
would also address economic and financial imbalances, but in a
gradual, respectful manner. This is another reason for China's
general preference for a Republican.


The SED is valuable for China
--------------



10. (C) China will continue to reform its economy, restructure
its industry, and keep itself open to the rest of the world.
China's growth provides many opportunities for other countries.
According to Shen, this will be a leading theme on the Chinese
side at the next Strategic Economic Dialogue (SED) in Washington
this June. No one can say whether the next U.S. administration
will continue the SED, but in fact it has helped to stabilize
the economic relationship. It has forced the Chinese government
to organize itself in order to respond to U.S. pressure, and
kept the need to consider U.S. views in the forefront of
economic policymakers' minds. The dialogue helps China
accomplish its own goals. With too little pressure, China does
too little, although it will ultimately respond if it is in its
own interests. The SED helps make China become more competitive
economically. The problem is that if there is perceived to be
too much pressure, the policymakers lose face, and the affected
industries push back. Shen said that the Chinese government is
getting weaker, and more vulnerable to internal pressure groups.
The internet also creates more pressure; the central Government
now needs to respond to a certain kind of public pressure.
Since the government is not elected, it needs to be more
responsive in order to preserve its legitimacy.


Weak Central Government and Earthquake Response
-------------- --------------


11. (C) Expanding on his view of the central Government as
weak, Shen explained that it was necessary for Premier Wen
Jiabao to travel to the earthquake affected region and
coordinate the reform efforts. Otherwise, there would have been
no coordination at all. The center is weak, and local
government could not respond, so relief efforts were up to the
military. However, the military was also incapable and
unwilling. Premier Wen had to compel them to act, admonishing
them that "the people raised you, you have to decide how to do
this." The earthquake revealed serious technical problems with
the PLA and its lack of preparedness. The military's capability
was in fact low, and it was overly concerned about its own
casualties. By day three of the disaster the PLA was finally
ready to act, but only because it was under enormous pressure.
The Chengdu Military Region was poorly prepared and lost
considerable face as a result; it had to bring in helicopters
from other military regions.

A new cross-strait environment and a smarter counterpart
-------------- --------------



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12. (C) Turning to the Taiwan issue, Shen said that this would
continue to be a long-term, core concern, but in the future the
relationship between Taiwan and the mainland would be more
competitive. The PRC needed to find a way to deal with the
Republic of China (ROC). He noted that during the earthquake,
China had accepted aid from Taiwan and that included tents which
had "ROC" printed on them. The PRC would have to find a way to
give the ROC more face. Chinese academics were "thrilled" that
Ma Ying-jeou had used the phrase "Chinese nation" (Zhonghua
minzu) in his inaugural address, and had emphasized that the ROC
was founded by Sun Yat-sen. Among the Taiwan-watching
community in China, there was a recognition of the need to
respond positively to Ma's speech, as well as an understanding
that now was not the time to emphasize reunification. Ma had
been very smart, focusing on the need to unite the people of
Taiwan; to calm the PRC; and have the U.S. perceive him as a
responsible leader. Shen thought this meant that there would be
arms sales from the U.S. to Taiwan in the near future.



13. (C) Ma's position of "no independence, no unification, no
use of force, and respect reality," was actually not so popular
in the mainland, particularly his call to "respect reality"
which could be taken as meaning "accept Taiwan's de facto
independence." Ma represented a new type of "responsible
Taiwanese." Ma Ying-jeou's logic is that the ROC could not
become democratic on the mainland, but could do so on Taiwan.
His interpretation of the "92 Consensus" is that the mainland is
part of the ROC, but in terms of its span of control, the ROC is
virtually equal to Taiwan. This re-raises the legitimacy issue,
since Ma won't seek to return to the mainland. Shen repeated
that Ma was very smart, having left all sorts of clues that
there are virtually two governments in one China, although he
will do nothing to change that to a legal reality. For eight
years he can sustain his "three noes," and won't betray those
who didn't vote for him. For Shen, this was the importance of
Lai Xiuyun's appointment as head of the Mainland Affairs Council
(MAC). She won't make policy -- that will remain in Ma's hands
-- but she will implement, and be a guarantor of the interests
of those who did not vote for Ma.



14. (C) Overall, Shen saw Ma as a much more adept adversary
than either Lee Teng-hui or Chen Shui-bian. Having observed how
the PRC had responded to Lee and Chen, he has presented the
mainland with a challenge: if you see me as an enemy, then I
will be an enemy. By engaging in mutual shaping, he is retaking
the initiative. The mainland needs to prevent Ma from becoming
an enemy, and will have to deal with him, by lowering its own
pace and refraining from alienating him. The mainland now has a
stake in Ma Ying-jeou's success and this will keep it inclined
to respond positively.


"Rising China" and the U.S. Response
--------------


15. (C) From a broad perspective, China's systemic cohesiveness
is growing. China's GDP is increasing and the gap with the
United States is narrowing. President Bush's focus has been
diverted away from China because of the war on terror, and has
had to cooperate with China. Thus, Shen observed, at the 16th
Party Congress in 2002 the Chinese Communist Party said that it
need to take advantage of this "strategic opportunity." But now
this pause is coming to an end. The U.S. will withdraw, at
least in part, from Iraq, and in fact the situation in Iraq may
be improving. This means that U.S. foreign policy will be
re-prioritized; thus, at the 17th Party Congress, the language
about the "strategic opportunity" was not repeated. In any
case, China is now better prepared and has more resources to
deal with other contingencies.



16. (C) However, the Chinese government has to work hard for
its legitimacy and continue to produce economic benefits in
order to stabilize the country. China will continue to need
foreign investment for at least another twenty years. The

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earthquake has demonstrated that the government doesn't have
enough funds to build safe schools. Shen observed that China's
constitution requires that four percent of all government
expenditure go to education, but "we can't even meet our own
poor standards." Shen believes that educated people will
increasingly challenge the system and force it to improve.
Thus, he repeated, the earthquake will be a positive catalyst
for change. This should lead to a China that has a better
government, and will be a better competitor for America. The
power alignment in the U.S.-China relationship will continue to
change; by 2025, China's nominal GDP should equal that of the
U.S., while per capita GDP will be about one-fifth of the U.S.
level. So, the question for the future is how will the U.S.
deal with a more confident and capable China, albeit not an
equal. The U.S. has no experience with a cooperative rival; the
U.S. relationship with the USSR was entirely confrontational.

Iran and energy
--------------


17. (C) Shen said that Iran is a worry, for China and the U.S.,
in different ways. It would be bad if Iran came between the
U.S. and the PRC. Shen has written two papers for the
Washington Quarterly on the Iran issue, and whether sanctions
can stop proliferation. He believes that Iran is testing
China's restraint, and that China will need to redefine its
interests in the issue. China would not have so much at stake
in a U.S.-Iran war, nor does it have as much influence with Iran
as it does with North Korea. However, China's overall interests
mean it must cooperate with the U.S. with regards to Iran.
Doing so enhances China's international respectability.
However, he acknowledged that this is an area where the U.S. is
vulnerable and a war might benefit China. In any case, there
are clear differences between China's position and that of
Russia. China has been supporting sanctions resolutions, even
though they are not strong enough. A related area for
cooperation, in Shen's view, is in U.S.-China dialogue on energy
security. This is increasingly important for China. If China
feels less strategic pressure, then it would work less with
Sudan, Venezuela, Burma, and other such states, and more with
Australia or Indonesia. China needs to feel assured that, as
long as it behaves responsibly, the U.S. will not block China's
access to resources. Overall, only through strategic
cooperation with the U.S. will China's situation improve.


18. (U) Mr. Shear has cleared this cable.
SCHUCHAT