Identifier
Created
Classification
Origin
09BEIJING1314
2009-05-15 09:04:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Beijing
Cable title:  

SCENESETTER FOR SENATOR KERRY'S VISIT TO CHINA

Tags:  OVIP PREL PGOV ECON PARM MARR CH 
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INFO RUEHOO/CHINA POSTS COLLECTIVE
UNCLAS BEIJING 001314 

SENSITIVE
SIPDIS

C O R R E C T E D COPY PARA 22

E.O. 12958: N/A
TAGS: OVIP PREL PGOV ECON PARM MARR CH

SUBJECT: SCENESETTER FOR SENATOR KERRY'S VISIT TO CHINA

(U) Sensitive but unclassified. Please handle accordingly.

UNCLAS BEIJING 001314

SENSITIVE
SIPDIS

C O R R E C T E D COPY PARA 22

E.O. 12958: N/A
TAGS: OVIP PREL PGOV ECON PARM MARR CH

SUBJECT: SCENESETTER FOR SENATOR KERRY'S VISIT TO CHINA

(U) Sensitive but unclassified. Please handle accordingly.


1. (SBU) Senator Kerry, the Chinese leaders place great importance
on personal relationships with foreign counterparts and on the
symbolism of high-level visits. They will want to use your visit to
demonstrate that China is deepening links with all parts of the U.S.
Government. They will welcome hearing your views about hotspots --
including Afghanistan, Pakistan, Iran, the Middle East and North
Korea. Your focus on climate change and energy security will be
particularly timely given the Obama Administration's emphasis on
those issues and our full awareness that any agreement to mitigate
the effects of climate change must involve significant Sino-U.S.
cooperation.

Playing a Constructive Role Internationally
--------------


2. (SBU) Since Inauguration Day, we have been laying out the Obama
Administration's priorities for work with China. The Chinese have
welcomed Secretary Clinton's assurances that we intend to intensify
consultations about key regions and transnational issues of mutual
concern. Your visit can help the Chinese leaders understand the
Senate's perspective on the importance of a verifiable
denuclearization agreement with North Korea, our common interest in
Iran and Pakistan, and how we need concrete actions on the part of
China to win the support of the American people for deeper bilateral
engagement.


3. (SBU) You can encourage China to work with the international
community to positively influence the behavior of the governments in
Sudan and Burma. As in Iran, Chinese investment aimed at locking
down energy supplies and other natural resources from these two
countries give it an economic stake in the status quo. In South
Asia, given China's historically strong ties to Pakistan and its
efforts to develop ties with India and Afghanistan, you can press
the Chinese to appropriately expand their role in realizing our
shared goals of political stability, economic development and the
elimination of terrorism.

Military-to-Military Relations

--------------


4. (SBU) Military-to-military relations lag behind most other
aspects of the bilateral relationship. Military exchanges were
suspended by the Chinese last October after DOD notified Congress of
pending arms sales to Taiwan. Although exchanges have resumed, they
will be limited until Defense Consultative Talks are held in late
June. You may wish to emphasize the importance of our two
militaries improving relations and point to a number of
opportunities for cooperation. The PLA Navy's recent deployment to
combat piracy off the Horn of Africa is but one opportunity for
closer cooperation. You may also want to stress that recent
harassment by Chinese Navy, Coast Guard and fishing vessels against
unarmed U.S. Naval vessels (i.e. USNS IMPECCABLE) conducting routine
surveillance operations in international waters undermine mutual
trust and risk unforeseen calamities that could negatively impact
our relationship.

Taiwan
--------------


5. (SBU) Your interlocutors will probably subject you to lengthy
discourses on Taiwan and offer warnings on the serious consequences
should the United States continue to sell arms to Taiwan. You may
choose to respond by emphasizing our obligations under the Taiwan
Relations Act to consider Taiwan's legitimate defense needs and that
we believe our sales of defense articles to Taiwan have been
conducive to cross-Strait peace and stability. We suggest you
welcome the improvements in cross-Strait ties pushed by PRC
President Hu and positively embraced by Taiwan President Ma
Ying-jeou since his inauguration in 2008. You can encourage Beijing
to maintain the positive momentum by accommodating Taiwan's
meaningful participation in international organizations such as
observership at the World Health Assembly (now a reality),by
reducing military deployments aimed at Taiwan, and continuing to
make progress on cross-Strait economic and cultural ties.

Domestic Stability
--------------


6. (SBU) No issue consumes the Chinese leadership's attention more
than maintaining domestic social stability -- all the more given the
global financial crisis. The fear that individual incidents of
unrest could coalesce into broader instability has been a
long-standing concern due to uneven development and growing income
inequality. President Hu Jintao's signature policies, "Scientific
Development" and "Harmonious Society," represent two somewhat
contradictory views on how to address these social ills.
"Scientific Development" generally represents the position that
China's market-driven reforms, with appropriate oversight by the
Party, can help China prepare for a whole host of demographic
problems about to appear -- problems ranging from a rapidly aging
population with no social safety net to wide-spread underemployment
among recent college graduates and migrant laborers. Hu's
"Harmonious Society" has come to represent a broader set of policies
that generally call on the public and government leaders to redress
unfairness and injustice in society by taking care of the rural
poor, the disadvantaged and others left in the wake of Chinese's
economic miracle. While senior leaders acknowledge these social
problems, no one is allowed to call into question the Chinese
Communist Party's one-party rule.

Response to the Financial Crisis
--------------


7. (SBU) China's financial system was relatively insulated from the
global financial unrest, and Beijing's response to the economic
crisis has, in general, been responsible and helpful. They have
continued to buy U.S. Treasury bills and agency (including Fannie
and Freddie) debt, and have worked with us in international fora
such as the G-20 Leader's meetings to achieve global financial
stability. We have urged China to provide additional resources to
the IMF, and noted our support for reforming that institution.


8. (SBU) Chinese exports and export-related investment were hard-hit
by the recent global economic downturn. Exports in the first four
months of this year are down around 20 percent over the same period
last year, and foreign investment is flat. What declining exports
have taken away, the Chinese government is trying to replace with
domestic spending. Beijing has announced a series of stimulus
plans, including massive infrastructure, social spending, and
monetary initiatives. These programs are bearing fruit, and
domestic government and SOE investment has expanded enough to return
China to growth.


9. (SBU) We have welcomed Beijing's strong actions to stimulate its
economy, but emphasized the importance of long-term sustainability.
Although we see green shoots in the United States and Europe, we
expect the U.S. savings rate to increase and American consumers may
no longer absorb China's excess production; China needs to start
re-orienting its economy towards domestic consumption. We point out
that, as we have seen in the United States, high growth of bank
lending and lack of transparency in China can be a cause for
concern. A more flexible exchange rate is one part of a policy mix
that can promote more harmonious balanced growth.

China's Concerns
--------------


10. (SBU) You will likely hear Chinese concerns that future
inflation in the United States could erode the value of their
dollar-denominated assets ("please protect China's U.S.
investments"). Some of their proposals to supplant the dollar with
an alternative international reserve currency appear derived from
these insecurities. You may wish to remind your interlocutors that
the majority of Treasuries are held by Americans (China holds only
about 7% of outstanding USG debt and 14% of publically held debt),
and make a strong statement indicating our intention to fight
inflation so that it does not erode our own citizens' assets -- such
a statement would help promote understanding of the situation.
Beijing interlocutors would also be interested in hearing the
Congressional position on future budget deficits and the future
restructuring of Fannie Mae and Freddie Mac.

Our Concerns
--------------


11. (SBU) The majority of US businesses operating here remain
profitable, especially those that are selling into the Chinese
domestic market. However, despite China's frequent calls to ban
"protectionism" and their claims that they have no "Buy Chinese"
policy in their stimulus package, U.S. businesses say that the
Chinese government puts severe restrictions on U.S. companies'
ability to compete successfully for stimulus-related contracts.
These biases have exacerbated pre-crisis favoritism for domestic
firms through use of unique national standards, requirements to
force firms into joint ventures with Chinese partners, slower
licensing for foreign firms, and the drafting of selective contract
specifications to favor domestic firms. It is valuable to emphasize
the reality of the "Buy American" requirements in the U.S. stimulus,
including their limited scope.

Labor Issues
--------------


12. (SBU) With the fallout from the global financial crisis, rising
unemployment is a serious concern. Migrant workers and recent
college graduates are particularly affected by the downturn, and
failures at export-oriented firms have led to protests in coastal
provinces. Inland provinces that are the traditional sources of
China's estimated 225 million migrant laborers are also being
impacted. Labor disputes have been on the increase for several
years, but the recent surge in formally filed cases may be due to
workers' awareness of the protections offered by the new Labor
Contract Law, which was enacted in January, 2008. The risk of
broader social disruption will depend on the extent of a global
downturn as well as the central and provincial governments' response
to it.

China: A Growing Energy Consumer
--------------


13. (SBU) In less than a generation, China has become an influential
player in international energy markets and it is currently the
world's fastest-growing energy consumer. Since reforms began in the
late 1970s, industrial and exchange rate policies have fueled
investments in resource-intensive industries, which currently
account for 55% of China's total energy consumption. Reflecting
China's emphasis on resource-intensive industries, China's energy
utilization rate grew faster than its GDP between 2002 and 2006. In
1990, China's energy use accounted for 8% of global primary energy
consumption. This grew to 17% by 2007 and it is expect to rise to
nearly 21% by 2030.

Energy Security a Top Priority
--------------


14. (SBU) Access to adequate energy supplies is an increasingly high
priority for China. Oil accounts for about 20% of China's current
energy mix. China became a net importer of oil in 1993 and it now
relies on imports to meet about 50% of its fossil fuel needs. It is
projected that China will need to import some 60% of its oil and at
least 30% of its natural gas by 2020. To strengthen the country's
energy security, China has adopted a "go-out" policy, which
encourages national oil, gas, and minerals companies to acquire
equity stakes in foreign extractive industries.


15. (SBU) As its reliance on imported oil and gas supplies grows,
China is making efforts to diversify its suppliers and supply
routes. Saudi Arabia, Angola, Iran, Oman, and Russia are China's
largest oil suppliers; China has also made deals in riskier
locations such as Sudan and Iraq to cope with growing demand.
Chinese state-owned oil companies' activities in Iran, Sudan, and
Burma present significant challenges to U.S. interests in these
countries. About 80% of China's oil imports currently pass through
the Strait of Malacca and some in Beijing worry that these routes
could be at risk should a crisis arise in the region. This has led
to a greater focus on pipeline construction projects, including
plans for an oil pipeline from Russia and oil and gas pipelines
through Burma that could allow some imports from the Middle East to
bypass part of the Strait of Malacca.

Coal Dominates the Energy Mix
--------------


16. (SBU) Coal remains China's primary source of energy, accounting
for 70% of its energy mix and fueling 80% of China's electricity
production. Dependence on coal has come at a high environmental,
economic, and public health cost. By most measurements, more than
half of the world's most polluted cities are in China. China's
sulfur dioxide, carbon dioxide, and mercury emissions are the
highest in the world. According to a recent study by the World
Health Organization, diseases caused by outdoor and indoor air
pollution in China kill 656,000 Chinese citizens every year. The
World Bank estimates that economic losses due to pollution total
between 3 and 7 percent of GDP annually.


17. (SBU) The Chinese government recognizes the need to reduce
dependence on coal and it is pursuing policies to diversify its
energy mix by increasing investments in wind, hydro, and solar
power. Nuclear and natural gas power will also account for a
greater proportion of energy production in the coming decades, but
under current projections, efforts to diversify China's energy mix
will not have a large enough impact to curb GHG growth.

Climate Change and China
--------------


18. (SBU) China surpassed the United States last year as the world's
largest annual emitter of greenhouse gases (GHGs). The United
States is seeking to establish a new level of cooperation on climate
change with China. During Secretary Clinton's February visit, China
agreed to establish a new partnership on energy/climate change and
also agreed that the U.S. and China should work together for the
success of the UNFCCC climate change meeting in Copenhagen. Because
China and the United States together represent 40% of world
emissions, no post-Kyoto climate change framework will be meaningful
without China. Although the U.S.-China Ten Year Framework (TYF) on
Energy and Environmental Cooperation established in June 2008 does
not specifically address climate change concerns, the Framework and
its action plans will support this new partnership.


19. (SBU) Secretary Clinton made a strong pitch to China during her
visit for the United States and China to forge a new partnership on
climate change with a goal of reaching a successful outcome in
Copenhagen in December 2009. China has agreed in principle to this
proposal, and on April 28, the National Development and Reform
Commission (NDRC) Vice Chairman Xie Zhenhua, China's top climate
official, submitted a draft MOU on climate change cooperation to
U.S. Special Envoy for Climate Change Todd Stern. The two met on
the margins of the Major Economies Forum (MEF),a meeting of the
world's 17 largest economies to discuss climate solutions for the
UNFCCC process. The Administration hopes to hold its first
Strategic and Economic Dialogue (S&ED) with China in July. Climate
Change is expected to be covered in the Strategic part of the
dialogue led by the Department of State. Another important
structure for longer term cooperation with China on climate change
issues is the U.S.-China Ten-Year Framework on Energy and
Environment Cooperation.

China's Current Position on Climate Change
--------------


20. (SBU) Although China is now the world's largest emitter of GHGs,
it has not directly acknowledged this fact. Instead, it points out
that historically and on a per capita basis, its emissions are only
a fraction of those of the developed countries. China is devoted to
the UNFCCC principle of "common but differentiated
responsibilities." To China, as a "developing country," this means
it is the responsibility of the developed countries to deal with
cumulative historical emissions and it is unfair to expect
developing countries to take on these same targets. China also
adheres to the UNFCCC principle that the developed countries have an
obligation to provide technology and financing to developing
countries to address their energy needs. Although China does not
have national emissions targets, it does have a target for reducing
energy intensity by 20% by 2010, and it has a goal of reaching a 16%
renewable energy share by 2020. Despite China's declared solidarity
with the developing countries, it is also acutely aware of its
vulnerability to the effects of climate change, including increasing
rates of glacial melt and desertification, rising sea levels, and
extreme weather events.

Opportunities for the U.S.

--------------

21. (SBU) China's stimulus package includes substantial investment
in energy-efficient transport and upgrades to improve the efficiency
of the electricity transmission network. This goal coincides with
U.S. interests in maintaining energy security and developing
opportunities for U.S. companies in the Chinese market. China's
efforts to reduce energy consumption per unit of GDP and increase
use of renewable energy sources, for example, contribute to global
energy security by reducing China's appetite for fossil fuels, which
in turn helps moderate global oil prices.


22. (SBU) U.S. firms are just beginning to tap into opportunities in
China to introduce energy efficiency, pollution control, and clean
coal technologies. China is a particularly attractive market
because of its significant efforts to adopt clean energy technology
even while its economy is becoming more industrialized. China will
invest USD 175 billion in environmental protection in the next five
years, according to the U.S. Commerce Department. U.S. companies
are very competitive in a range of clean energy technologies,
including renewable energy, power generation, gasification, energy
efficiency, nuclear, and others. Clean energy projects draw on the
rich resources of both U.S. and Chinese ingenuity and lead to jobs
in both countries. Westinghouse, for example, estimates that
several thousand U.S.-based jobs are retained every time China
orders another nuclear reactor from them.

Human Rights
--------------


23. (SBU) The Chinese like to define human rights broadly to include
factors affecting economic and social well-being, pointing out that
China's "reform and opening" policies of the past 30 years have
coincided with gradual improvements in the quality of life enjoyed
by hundreds of millions of Chinese. They further argue that our
focus on individual rights and liberties reflects "Western values."
We respond to this self-serving argument by noting that human rights
are universal values, as the Chinese themselves acknowledged when
they signed the Universal Declaration of Human Rights. Although
freedoms for Chinese citizens have expanded over the past three
decades (what some observers have called a bigger "cage"),the
overall human rights situation in China remains poor in many
respects. We continue to emphasize that the expansion of individual
freedoms, respect for the rule of law and the establishment of a
truly free and independent judiciary and press are in China's own
interests, and would enable the PRC to deal with social tensions and
achieve its goal of building a "harmonious society."


24. (SBU) We stand ready to help your staff gather information about
individual prisoners of concern. We are convinced that by raising
such cases in private meetings with Chinese leaders, you can help to
improve the plight of prisoners of conscience.

PICCUTA