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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