SCENESETTER FOR SENATOR KERRY'S VISIT TO CHINA

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