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PP RUEHCN RUEHGH
DE RUEHBJ #0394/01 0490821
ZNR UUUUU ZZH
P 180821Z FEB 10 ZDS
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 8134
RHMFIUU/FAA NATIONAL HQ WASHINGTON DC PRIORITY
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RULSDMK/DEPT OF TRANSPORTATION WASHDC PRIORITY
RUEAWJA/DEPT OF JUSTICE WASHDC PRIORITY

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