CAAC DISCUSSES CAPE TOWN TREATY AND TECHNICAL COOPERATION

UNCLAS SECTION 01 OF 04 BEIJING 000394 C O R R E C T E D C O P Y//CHANGE DATE PARA 1/ SENSITIVE SIPDIS FAA NATIONAL HQ FOR DREIMOLD, JKLANG, RCICERO STATE EEB/TRA/AN FOR JBYERLY, KURS, VLIMAYE-DAVIS STATE L FOR HAROLD BURMAN STATE EAP/CM FOR SFLATT STATE EEB/TTP/MTAA FOR CHAYS STATE PASS USTR FOR FOR TSTRATFORD, KALVAREZ STATE PASS EXIM BANK FOR ROBERT MORRIN AND LOUIS EMERY DEPT OF COMMERCE FOR FOR NMELCHER, AHAAKENSEN, EALFORD DEPT OF TRANSPORTATION FOR PBLOCH, PGRETCH, KGLATZ, NPORTER, JTRAINI, PIRVINE, AND ABEST E.O. 12958: N/A TAGS: EAIR KTIA ETRD CH SUBJECT: CAAC DISCUSSES CAPE TOWN TREATY AND TECHNICAL COOPERATION AGREEMENT (CORRECTED COPY) REF: (A) Emails from/to EAP/CM SFLATT (June 2009) (B) Embassy Dipnote to MFA 2009/753 ¶1. (SBU) SUMMARY: Federal Aviation Administration (FAA) and Embassy officials met with the Civil Aviation Administration of China (CAAC) on February 1, 2010 to discuss China's implementation of the Cape Town Convention and the status of its Technical Cooperation Agreement with FAA. CAAC stated that China's requirement for a court order to deregister aircraft was "within its rights" under the Convention, and offered no timeline on how long the full deregistration process might take. CAAC officials appeared unconcerned that the requirement might defeat the Convention objective of reducing leasing costs for airlines and improving predictability for creditors. CAAC raised separate concerns that failure to update its Technical Cooperation Agreement with FAA threatened upcoming projects, including temporary duty assignments and cooperation on Air Traffic Flow Management (ATFM). Such projects will help CAAC create room for industry growth and also have the potential to support the interests of U.S. ATM system vendors, aircraft manufacturers, and airlines. END SUMMARY. ¶2. (SBU) On February 1, FAA Acting Deputy Assistant Administrator for International Aviation Jeffrey Klang met with CAAC Aircraft Airworthiness Certification Department (AACD) Director General Zhang Hongying. The chief topic of discussion for the U.S. was China's implementation of the Convention on International Interests in Mobile Equipment (the Cape Town Convention) and the accompanying Aircraft Protocol. As conveyed in an earlier diplomatic note (ref B),the United States raised concerns that China's requirement for a court order before deregistration of aircraft could lead to lengthy delays and defeat the risk reduction objectives of the treaty, thus failing to reduce the cost of credit in aircraft financing. FAA's Klang noted that lower risk and expansion of affordable financing would help Chinese airlines purchase newer, more technologically advanced, environmentally friendly and energy efficient aircraft. CAAC'S IMPLEMENTATION BASED ON NPC DECLARATION -------------- - ¶3. (SBU) AACD Deputy Director General Wang Jingling explained that the Cape Town Convention was ratified by the National People's Congress (NPC) and entered into force on June 1, 2009. CAAC subsequently designated its Aircraft Airworthiness Certification Department (AACD) as the entry point for registration of mobile assets, and on July 17, 2009, CAAC promulgated "Administrative Procedures for the Deregistration of Nationality of Civil Aircraft According to an Irrevocable Deregistration and Export Request Authorization (IDERA)" on July 17, 2009. (Note: CAAC shared their procedures with the U.S. delegation in document AP-45-AA-2009-02, which they confirmed was public. End note.) The procedures require creditor and debtor to sign an IDERA form in advance and file it with CAAC's AACD. If a debtor defaults on a contract, the creditor can petition AACD for deregistration, per the NPC declaration, with a document from the relevant Chinese court approving the creditor to deregister and export the aircraft from China. CAAC's AACD must refer to the court document before deregistering aircraft. Since entering into force, Wang continued, CAAC has responded to many requests for information on its procedures, but has not yet received any deregistration requests. CHINA'S IMPLEMENTATION IS "WITHIN ITS RIGHTS..." -------------- --- ¶4. (SBU) FAA's Klang inquired what the basis was for requiring a court order, and whether it was a statutory or regulatory requirement. He noted that China's ratification included Article XIII of the Aircraft Protocol, which requires that the registration authority "expeditiously cooperate" with the party requiring deregistration. Furthermore, the official commentary on the Convention expresses the view of the drafters that courts should not be involved in this process. Klang stated that the effectiveness of the treaty requires timely recovery of secured assets. DDG Wang explained that China's accession included a declaration under Article 54(2) that China cannot implement the remedy without a court judgment. Article XIII, Wang continued, did not explicitly state that court involvement is not necessary. Thus, Wang declared that China's implementation was "within its rights under the treaty." BEIJING 00000394 002 OF 004 ...YET UNCLEAR HOW LONG COURTS WILL TAKE -------------- ¶5. (SBU) FAA's Klang observed that China's declaration under Article 54(2) does allow for court permission, but that this reference does not apply to Article XIII of the Aircraft Protocol regarding expeditious deregistration. DDG Wang explained that CAAC's procedures are based on the declaration made by the NPC, and that CAAC may not unilaterally cancel the requirement for a court judgment. When asked how long a deregistration request would take to process, DDG Wang said that CAAC would implement its part of deregistration within five (5) working days. When asked how long the required court decision would take, however, Wang declined to speculate. ¶6. (SBU) Ms. Zhou Yinghui of CAAC's Policy, Law and Regulation Department (PLRD) clarified that CAAC's procedures require court order, not a formal court decision. This distinction, Zhou explained, meant that a full first and second trial would not be necessary, just a document outlining the results. This means the court can act more quickly, but when pressed, Zhou was not sure how long it would take for the court order to be rendered. Zhou explained that China's declaration to Article 53 of the treaty identified the Intermediate People's Courts where the headquarters of the relevant airline are located and which shall have jurisdiction in relevant disputes. IMPLEMENTATION IS "THE COST OF DOING BUSINESS" IN CHINA -------------- -------------- ¶7. (SBU) FAA's Klang thanked CAAC for their presentation, but expressed again USG concern that China's unique implementation requiring a court order could affect how aviation finance creditors react. If they are not confident of how measures will be implemented, this could influence their decision provide financing or leasing and whether to do so at lower leasing rates, which would affect Chinese carriers. CAAC's Director General Zhang Hongying of CAAC's Aircraft Airworthiness Certification Department (AACD) observed that the largest U.S. aircraft leasing companies, GE's Commercial Aviation Services (GECAS) and AIG's International Lease Finance Corp. (ILFC),both have long experience in China. He opined that these firms would use their deep experience to resolve issues before they ever resorted to court action. Zhang cited the 2009 dispute following the bankruptcy of China's East Star Airlines, in which he said GECAS was able to recover its aircraft. DG Zhang suggested that in the end, such creditors will need to balance the benefits of doing business in China with the costs. OTHER DETAILS UNCLEAR AND "WITHOUT PRECEDENT" -------------- ¶8. (SBU) In response to additional questions from the U.S. delegation, CAAC DDG Wang said that CAAC had no intention of requesting a review of China's Cape Town implementation. She noted that if issues later came to light which were beyond the CAAC's portfolio, CAAC could make proposals to the NPC. DDG Wang also explained that export of aircraft following deregistration was covered in a separate CAAC procedure, which was not altered as part of the Cape Town implementation. (Note: DG Zhang interrupted to give his personal opinion that export was a less critical issue, since the growth of China's aviation market meant there were ample opportunities to re-lease aircraft within China. End Note.) CAAC's fees for deregistration are public and set at RMB 100 (USD 15.00) through the Ministry of Finance (MOF). Wang also explained that the requirement for "other evidence as required" in the deregistration procedures were not yet specified, since CAAC had not established any precedent for deregistration. DDG Wang assured the U.S. delegation that CAAC would "use caution on these points." CHINA'S CAPE TOWN IMPLEMENTATION FAILS TO HIT THE MARK -------------- -------------- ¶9. (SBU) COMMENT. China's Cape Town Treaty implementation appears to have given little thought to the interests of creditors, which remain largely foreign interests. In spite of an official push for BEIJING 00000394 003 OF 004 Chinese banks to enter the aircraft finance and leasing markets, industry sources estimate 70 percent of aircraft leases are still through foreign firms, mainly from the United States. Given the dominance of the big three state-owned airlines, CAAC officials appear confident that most creditor issues will be resolved before a case goes to court. China's implementation appears to have given little consideration to lowering leasing costs for Chinese airlines, which a more expeditious process might have engendered. At present there is no history on this point, so they do not feel there is a problem. However, in the East Star Airlines case the courts did not fare well in resolving that issue in a timely manner. It seems China will not take appropriate action until they hear from their industry on this point, i.e., not until financing or leasing costs go up as a result of untimely court action. It was clear during our meeting that CAAC does not consider itself the right governmental body to address our concerns over Chinese court involvement in the deregistration process. END COMMENT. HURDLES REMAIN TO TECHNICAL COOPERATION AGREEMENT -------------- -------------- ¶10. (SBU) The CAAC delegation took the opportunity to review progress on proposed updates to the Technical Cooperation Agreement with FAA. DG Zhang Hongying began by thanking the FAA for recent progress made on changes to the agreement. However, DG Zhang noted two remaining issues. He observed that pre-payment issues were generally not a concern. If projects were included in a given department's budget, CAAC would be able to pay in advance. But if the project was not in the budget, CAAC would need to submit an application to its Finance Department, which would require time before approval is granted. Therefore, pre-payment of such projects would be very difficult. DG Zhang also asked FAA to consider the possibility of installment payments for large projects, such as the proposed Air Traffic Flow Management (ATFM) project. ¶11. (SBU) DG Zhang also requested greater flexibility on the immunity and liability provisions in the U.S. proposal. In this regard, DG Zhang explained that CAAC could sign the agreement, but it was very difficult to sign "on behalf of the People's Republic of China." DG Zhang confirmed that the CAAC has been given the power and authority to carry out aviation oversight for the PRC, but that such language would require consultation with the NPC, a lengthy process. CAAC might be able to explore a side letter arrangement, but would likely still need to consult with the NPC, the Ministry of Foreign Affairs (MFA),and with CAAC's parent ministry, the Ministry of Transport (MOT). Zhang expressed strong concern that negotiations on the agreement were already threatening to delay specific projects, such as cooperation on Air Traffic Flow Management (ATFM) systems, where CAAC was eager for FAA's support. Zhang noted that FAA had been an excellent partner in the past, and he hoped that the two sides could resolve remaining issues. DG Zhang suggested that both sides meet again by March to conclude our agreement. DELAYS IN TECHNICAL AGREEMENT MAY THREATEN COOPERATION ¶12. (SBU) COMMENT. CAAC is eager to begin new technical cooperation projects and to continue existing ones with FAA, but large gaps remain in what compromises they can make without time-consuming interagency review. Of particular concern is FAA cooperation which will lead to more efficient utilization of the limited air space allocated to civil aviation. Delays could also affect programs which require FAA personnel to travel to China, including the fifth year of the successful Executive Management Development Training (EMDT),jointly sponsored by the U.S. Trade Development Agency (USTDA),CAAC and U.S. industry. These projects are critical for CAAC to meet the double digit growth demands of its domestic industry. Such cooperation not only helps position U.S. industry for commercial opportunities on new systems, but could also ease the congestion issues at Chinese airports that have plagued U.S. airlines. END COMMENT. ¶13. (SBU) United States Representatives - Jeffrey Klang, Acting Deputy Assistant Administrator for International Aviation, FAA BEIJING 00000394 004.3 OF 004 - Patrick Power, FAA Attache, U.S. Embassy-Beijing - Daniel Kachur, Econ Officer, U.S. Embassy-Beijing ¶14. (SBU) Chinese Delegation: - Mr. Zhang Hongying, Dir. General, Aircraft Airworthiness Certification Dept. (AACD),CAAC - Ms. Wang Jingling, Deputy Dir. General, AACD, CAAC - Mr. Li Bo, Deputy Director, AACD, CAAC - Ms. Zhou Yinghui, Legal Affairs Division, Dept. of Policy, Law and Regulation, CAAC - Mr. Zhao Jinyu, Airworthiness Inspector, AACD, CAAC - Ms. Zhang Lei, Engineer, AACD, CAAC - Ms. Yang Jiru, Deputy Dir., Foreign Affairs, CAAC - Mr. Cai Guoxian, Deputy Dir., Foreign Affairs, CAAC HUNTSMAN