SCENESETTER FOR DOE SECRETARY CHU VISIT TO CHINA

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SUBJECT: SCENESETTER FOR DOE SECRETARY CHU VISIT TO CHINA

(U) Sensitive but unclassified. Please handle accordingly.


1. (SBU) Secretary Chu, Chinese leaders are eagerly looking forward
to your visit to China and to engaging you on issues of energy,
climate change and science, among others, that will help determine
the quality of life of the Chinese and American people over the next
few decades. Your visit comes as Chinese leaders again are
confronted with issues of ethnicity and dissent in a far off place,
this time in Xinjiang and are wrestling, with some success, with the
impact of the global economic crisis on their economic development
plans. But it also comes at a time of some considerable pride, with
the commemoration of 30 years of diplomatic relations between our
two countries and upcoming 60th anniversary of the founding of the
PRC. China's leaders have been very clear that they want what they
are now calling a positive, cooperative and comprehensive
relationship with the United States. The question is always how
they see and deal with us on issues of disagreement - Tibet (this
year was the 50th anniversary of the Tibetan Uprising and the Dalai
Lama's flight to India),questions of history (this is the 20th
anniversary of the Tiananmen massacre),human rights and religious
freedom, among other matters. We have also provided information
below on issues that might be raised in your meetings such as Taiwan
and our military-to-military relationship (paragraphs 18-19).


2. (SBU) This year also marks the 30th anniversary of the
U.S.-China Agreement on Cooperation in Science and Technology. The
agreement--signed by President Carter and President Deng Xiaoping
just prior to the formal establishment of diplomatic relations--is
the longest standing accord between our two countries and has
facilitated an era of robust government-to-government S&T
collaboration. China's leaders, scientific and academic community
and its more creative thinkers about energy issues are ready to work
with you - as is this mission on enhancing how we move forward on
S&T and these issues of global significance.

Bilateral Relations
--------------

3. (SBU) The Chinese appreciated Secretary Clinton's including
China in her first visit abroad as Secretary of State, and were
particularly pleased that the new U.S. climate change envoy Todd
Stern accompanied her. They have invited the President to visit
Beijing later this year, looking forward to discussions with him and
other senior U.S. leaders to move forward key issues in our
bilateral strategic and economic dialogue. We are also
intensifying the seriousness with which we discuss hot-spot issues
such as North Korea, Iran, Afghanistan and Pakistan.


4. (SBU). China has hosted the Six-Party Talks aimed at creating a
denuclearized Korean Peninsula since the Talks' inception in 2003.
On April 5, North Korea launched a Taepodong-2 ICBM in violation of
UN Security Council Resolution (UNSCR) 1695. On May 25, North Korea
conducted its second test of a nuclear device in violation of UNSCR
1718 and other international agreements. On June 12, China and

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other members of the Security Council adopted UNSCR 1874 to condemn
the nuclear test and to call for North Korea not to conduct further
nuclear tests or ballistic missile launches, re-establish its
moratorium on missile launching, comply with UNSCR 1718, return to
the Non-Proliferation Treaty and IAEA safeguards, and abandon all
nuclear weapons, WMD and ballistic missile programs in a complete,
verifiable and irreversible manner. Since that time, the USG has
been in regular contact with senior Chinese officials to discuss the
effective implementation of UNSCR 1874.

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

5. (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 have worked with us in
international fora such as the G-20 Leader's meetings to achieve
global financial stability. China has provided $50 billion in
additional resources to the IMF and we have made clear our support
for reforming that institution.


6. (SBU) Chinese exports and export-related investment were
hard-hit by the global economic downturn. Exports in the first five
months of this year were down around 26 percent compared to the same
period last year, and foreign investment is flat. What declining
exports have taken away, the Chinese government is trying to replace
with state-driven 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 that most economists are expecting China to grow at least 7-8
percent this year. [NOTE: Media reports have made much of the fact
that electricity use is falling while official production rates rise
- this is in part due to statistical factors, and anecdotal evidence
supports the Chinese growth data. END NOTE.]


7. (SBU) We have welcomed Beijing's strong actions to stimulate its
economy, but continue to emphasize 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 toward 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.


8. (SBU) The majority of U.S. 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

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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.

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

9. (SBU) No issue is likely to occupy China's next generation of
leaders more than energy security. In less than a generation, China
has become an influential player in international energy markets and
is currently the world's fastest-growing energy consumer. 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. Access to adequate energy supplies is a 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 percent 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, sometimes
with deals that help prop up regimes that use the money to sustain
themselves in power. Saudi Arabia, Angola, Iran, Oman, and Russia
are China's largest oil suppliers; China has also made deals in
riskier locations such as Sudan, Burma and Iraq to cope with growing
demand.

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

10. (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.


11. (SBU) In an effort to address these issues China is working on
a range of domestic energy policies and incentives to reduce its
reliance on coal and address its most pressing pollution issues,
including subsidies for cars with small engines and solar energy
equipment, more energy efficient buildings, and the construction of
dozens of new nuclear reactors that will nearly double China's

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current nuclear power output by 2020. Although China has ambitious
renewable energy plans, connecting to the grid remains a major
obstacle. China hopes to address these challenges through
cooperation with the United States on smart grid technology.


12. (SBU) In a bid to scale up bilateral cooperation on clean
energy, senior Chinese leaders including Vice Premier LI Keqiang,
State Councilor LIU Yandong, and Minister WAN Gang of the Ministry
of Science and Technology (MOST) have all signaled their support for
the establishment of a U.S.-China clean energy research and
development center. Chinese leaders have also indicated that the
new center should include participation from large enterprises and
private industry such as U.S. and Chinese automakers, which are
working on electric car development.

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

13. (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 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.
The concept for addressing both issues through a single partnership
was also outlined in a non-paper submitted to the NDRC in early-June
and discussed at length with NDRC Vice Minister Xie, Vice Premier
Li, and State Councilor Liu. 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 TYF and its action plans are intended
to support this new partnership.


14. (SBU) Nevertheless, senior NDRC officials have recently
expressed concerns over the USG's expressed preference for
formalizing the link between climate change and clean energy. During
a June 30th meeting to walk through a draft agreement of the
U.S.-China Partnership on Clean Energy and Climate Change, MA Xin,
the NDRC's Director General of the Department of International
Cooperation said that given the time and effort that went into
negotiating the TYF, NDRC's strong preference is that it remain
intact and that existing action plans be allowed to yield results.
He also said that replacing, dismantling, or fragmenting the
existing TYF will likely require repeating the difficult
negotiations over text that occurred in 2008, and is unlikely to be
completed before the July S&ED. Ma also expressed concern that
combining climate change and clean energy in the same partnership
may be contentious on the Chinese side and that consensus on clean
energy collaboration may get derailed by more challenging
negotiations on the climate change portion of the agreement. Ma
clearly noted that his reactions were preliminary and not an

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official NDRC position and said NDRC needs some time to digest the
draft.

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

15. (SBU) Although China is now the world's largest emitter of
GHGs, it has not directly acknowledged this fact; nevertheless, some
Chinese ministers have privately conceded this fact in meetings with
U.S. officials. You can expect your interlocutors to point out that
historically and on a per capita basis, China's 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.
--------------

16. (SBU) China's 11th Five-year Plan calls for a 20% improvement
in energy efficiency between 2005 and 2010 (3.7 percent at an
annualized rate). This goal coincides with U.S. interests in
maintaining energy security and developing opportunities for U.S.
companies in the Chinese market. 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. 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
--------------

17. (SBU) 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

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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." Senior leaders will likely share with you their views on
the recent unrest in Tibet and Xinjiang. Violence in Tibet erupted
in March 2008, after police in Lhasa moved in to quell a peaceful
commemoration by Tibetan monks of a failed 1959 uprising against
Chinese rule. The unrest spread to Tibetan communities in
neighboring provinces. On July 5, 2009, bloody riots broke out in
China's far western province of Xinjiang between ethnic Muslim
Uighurs and Chinese Han in the capital city of Urumuqi, leaving more
than 150 persons dead. Members of minority groups in Tibet and
Xinjiang have complained for years about growing immigration by Han
Chinese into their areas and controls on religious practices.

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

18. (SBU) It is unlikely that yoQinterlocutors will subject you
to lengthy discourses on Taiwan or offer warnings on the serious
consequences should the United States continue to sell arms to
Taiwan. If they do, 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.

Military-to-Military Relations
--------------

19. (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, but resumed in late June with the
Defense Consultative Talks in Beijing led by Under Secretary of
Defense Policy Michele Flournoy. The PLA Navy's recent deployment to
combat piracy off the Horn of Africa is but one opportunity for
closer cooperation; however, 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 could undermine mutual trust and risk
unforeseen calamities that could damage our relationship.

GOLDBERG