VZCZCXRO8208
RR RUEHKN
DE RUEHKN #0110/01 2110544
ZNY CCCCC ZZH
R 290544Z JUL 08
FM AMEMBASSY KOLONIA
TO RUEHC/SECSTATE WASHDC 2083
INFO RUEHBJ/AMEMBASSY BEIJING 0067
RHMFISS/CDR USPACOM HONOLULU HI
RUEHKN/AMEMBASSY KOLONIA 2430

C O N F I D E N T I A L SECTION 01 OF 02 KOLONIA 000110 
 
SIPDIS 
 
E.O. 12958: DECL:  7/29/2018 
TAGS: EAID CH FM PGOV
SUBJECT: CHINA SHIFTS FROM GRANTS TO LOANS IN THE FSM; OFFERS TO 
REBUILD OIL STORAGE TANKS 
 
REF: KOLONIA 103 
 
CLASSIFIED BY: Miriam K. Hughes, Ambassador, Amembassy Kolonia, 
State. 
REASON: 1.4 (b), (d) 
 
 
 
¶1. (SBU) China's Ambassador to the Federated States of 
Micronesia (FSM) advised that her country has recently 
diminished grant aid to the FSM.  She claimed that Beijing was 
less inclined to fund her own proposals for grants and projects. 
 Beijing believes there is little return on investment owing to 
poor Micronesian performance.  As relations with Taiwan have 
begun to improve and to lessen the competitive edge in 
Micronesia, Ambassador Liu Fei said China had begun to focus 
instead on preferential loans that the Micronesians would need 
to repay.  Chinese commercial investments were also a high 
priority, she said. 
 
¶2.  (C) Following a lunch at Ambassador Hughes' residence on 
July 23, China's Ambassador Liu Fei stayed behind for two hours 
to privately discuss Chinese aid activities in the FSM. 
Regarding the FSM's new national petroleum corporation, 
PetroCorp (reftel), Ambassador Liu said the FSM had turned to 
China several months ago to request a maintenance services 
agreement aimed at ensuring quality and safety standards at all 
four FSM state oil facilities.  In response, representatives of 
a Chinese petroleum company came to inspect the storage tanks. 
Liu Fei said the Chinese specialists were appalled at the 
serious deterioration of the facilities, particularly in the 
states of Chuuk and Yap.  They concluded that the tanks were 
beyond repair, and they declined to engage in further 
discussions about maintenance. 
 
¶3.  (C) Instead, China extended a concession loan offer to 
rebuild oil storage tanks throughout the FSM.  Ambassador Liu 
said she believed the offer remained on the table for 
approximately USD 15 million.  Ambassador Hughes asked whether 
the Micronesians would really be expected to repay such loans. 
Liu insisted that they had to repay and to put up collateral. 
For this reason, she said, this particular loan remained in 
abeyance.  She doubted the Micronesians would be able to fulfill 
conditions and to obtain approval of the FSM Congress.  Hughes 
observed that PetroCorp was advancing with almost no scrutiny 
from the public or the FSM Congress.  She believed board members 
could make a deal secretly, perhaps offering land as collateral. 
 Ambassador Liu did not discard such speculation. 
 
¶4.  (C) In the FSM state of Kosrae, Liu said Governor Weilbacher 
was indeed considering whether to offer property as collateral 
to obtain a Chinese loan to establish a cold storage plant for 
fish bait processing under the management of the Hong Kong based 
Luen Thai Company.  So far, FSM Vice President Alik Alik, whose 
home state is Kosrae, had opposed the deal, she said.  Luen Thai 
promised the Governor that such a plant would employ some 200 
Kosraeans. 
 
¶5.  (C) In the meantime, Liu confirmed that Luen Thai had beat 
back South Korean competition and was close to concluding an 
agreement with Kosrae state to open a dry dock facility at the 
same port marina where the proposed cold storage facility would 
be co-located.  The dry dock operation, which would require no 
capital investment from the Micronesians, would serve to repair 
and maintain a fleet of some 70 fishing vessels that Luen Thai 
runs in the FSM and RMI, Liu said.  Together, these two projects 
would give Luen Thai domination of the port.  Kosrae's Attorney 
General, who is a reliable Embassy contact, has alluded to 
difficult negotiations driven by the Governor.  She mentioned to 
the Australian Ambassador that Luen Thai's chief negotiator is 
an Amercan citizen named Richard Reddy, who supposedly has a 
criminal record for embezzlement. 
 
¶6.  (SBU) Ambassador Liu confirmed that China has offered a 
concession loan in the amount of USD 9 million for the purchase 
of two Harbin Y-12 airplanes, which would enable the FSM to 
start a new intra-island air company.  Secretary of Research and 
Development Peter Christian has visited the airplane factory in 
Manchuria, and President Mori was also interested, she said. 
China would next try to arrange a visit of President Mori to 
Harbin.  When Hughes questioned how the FSM would ever be able 
to repay a loan for the purchase of the airplanes, Liu said she 
did not know. 
 
¶7.  (SBU)  Finally, Liu volunteered that in the absence of grant 
aid, she had invested considerable effort to try to convince 
Beijing to assign six Chinese doctors to work in Chuuk's state 
hospital.  This proposal was under consideration.  Liu was 
pleased to learn from Ambassador Hughes details of the visit of 
the USNS hospital ship Mercy to Chuuk, along with refurbishment 
of Chuuk's hospital by DOD engineers.  Ambassador Liu was 
enthusiastic and informative, suggesting that repairs to the 
 
KOLONIA 00000110  002 OF 002 
 
 
hospital, in tandem with the service of Chinese doctors, could 
complement our nations' joint efforts.  She welcomed a 
suggestion to meet regularly and to schedule aid discussions 
that also included the ambassadors of Australia and Japan.  As 
dean of the small diplomatic corps in the FSM, Ambassador Liu 
offered to host these meetings. 
HUGHES