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UNCLAS SECTION 01 OF 05 BEIJING 001924 
 
STATE FOR EAP/CM-HABJAN, EAP/CM, EAP/PD-STOLTZ 
STATE FOR OES DAS MIOTKE, OES/EGC, OES/ENV, AND OES/PCI 
STATE FOR S/SECC-STERN, S/P-GREEN, EEB, AND ECA 
STATE PASS TO CEQ SUTLEY 
USDOE FOR INTERNATIONAL 
USDOC FOR MAC AND MAS 
USDOC PASS USPTO FOR WU 
EPA FOR INTERNATIONAL/MKASMAN/GIANNINI-SPOHN 
NSC FOR LOI, SHRIER 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: OVIP PREL PGOV ECON PARM MARR SENV ENRG KGHG CH
 
SUBJECT: SCENESETTER FOR DOC SECRETARY LOCKE VISIT TO CHINA 
 
(U) Sensitive but unclassified.  Please handle accordingly. 
 
¶1. (SBU) Secretary Locke, I wanted to send you a note that addresses 
some of the issues you will raise from a China mission perspective. 
I know that your staff has prepared papers on these matters and hope 
we are not duplicating some of their observations. 
 
¶2. (SBU) Clearly, Chinese leaders are eagerly looking forward to 
your visit to China and to engaging you on issues of commerce and 
trade that will help determine the quality of life of the Chinese 
and American people over the next few decades.  Chinese leaders 
value the importance of building relationships and recognizing 
protocol niceties.  The Chinese appreciated Secretary Clinton's 
including China in her first visit abroad as Secretary of State, and 
will be similarly pleased by your visit. 
 
¶3. (SBU) 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 call 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 - such as Tibet, human rights and 
religious freedom. 
 
The State of our Trade and Investment Relationship 
--------------------------------------------- ----- 
 
¶4. (SBU) We are at an important turning point.  We have weathered a 
profound economic and financial crisis, though dangers remain to 
both sides of thinking solely in terms of national rather than 
international recovery.  Our message to the Chinese:  We need to 
work together to achieve sustainable, balanced global growth and 
development that appropriately addresses the U.S. 
quarter-of-a-trillion dollar annual bilateral trade deficit.  China 
is struggling with negotiating between asserting itself in ways that 
may not be helpful and retreating to a basically conservative 
impulse in which it acts cautiously and tentatively.  In the 
commercial realm, these conflicting forces are reflected as reform 
and opening up on one hand, and protectionism and state-led 
development on the other. 
 
Jobs, New Technologies, Buy China 
--------------------------------- 
 
¶5. (SBU) China can play a major role in the development of U.S. 
jobs, especially in the green job sector.  You and Secretary Chu 
together can stress the impact that new energy efficient 
technologies, many pioneered in the U.S., will have in reducing the 
 
BEIJING 00001924  002 OF 005 
 
 
impact of environmental degradation.  However, Chinese central 
government agencies continue to insist that products be of Chinese 
origin and that new technologies be either indigenously developed or 
transferred to local parties before they can be accepted in the 
Chinese market. These "Buy China" polices are extremely expensive to 
maintain and may in fact be impractical since foreign invested firms 
are so heavily integrated into the economy that it is no longer 
possible to exclude them. 
 
Financial Crisis: Cooperation and Concerns 
------------------------------------------ 
 
¶6. (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.  China has 
continued to buy U.S. Treasury bills, and worked with us in 
international fora such as the G-20 Leader's meetings to achieve 
global financial stability.  China has provided USD 50 billion in 
additional resources to the IMF and we have made clear our support 
for reforming that institution.   We have welcomed Beijing's strong 
actions to stimulate its economy, but continue to emphasize the 
importance of long-term sustainability.  The U.S. savings rate will 
almost certainly continue to increase, and American consumers may no 
longer absorb China's excess production.  China needs to re-orient 
its economy toward domestic consumption.  You can point out that, as 
we have seen in the United States, the high growth of bank lending 
and lack of transparency in China should be a cause for concern.  A 
more flexible exchange rate is one part of a policy mix that can 
promote more harmonious balanced growth. 
 
Value of Chinese Assets in America 
---------------------------------- 
 
¶7. (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 percent of outstanding USG debt and 14 percent 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. 
 
Chinese Domestic Economic Policy and Protectionism 
--------------------------------------------- ----- 
 
¶8. (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 was flat.  The Chinese government 
is trying to replace declining exports with state-driven domestic 
spending.  Beijing has announced a series of stimulus plans, 
 
BEIJING 00001924  003 OF 005 
 
 
including massive infrastructure, social spending, and monetary 
initiatives and most economists expect 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.] 
 
¶9. (SBU) The majority of U.S. businesses operating here remain 
profitable, especially those that are selling into the Chinese 
domestic market.  U.S. businesses tell us 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.  You should recognize the reality of the "Buy 
American" requirements in the U.S. stimulus when the Chinese state 
their concerns, but take note of just how limited they are in scope. 
You should also urge China to accelerate its progress on accession 
to the World Trade Organization's Government Procurement Agreement 
(GPA) governing government spending.   While many of China's trade 
measures and industrial policies are defensive in nature and focused 
on limiting domestic market share held by foreign firms, you should 
encourage China to open its domestic market to increased imports. 
 
 
Cross-Cutting Trade Issues 
-------------------------- 
 
¶10.  (SBU) A wide-range of cross-cutting trade and investment issues 
with China touch nearly every industry.  There is a need for greater 
transparency in the promulgation of regulations that affect trade 
and investment, including advance notice and opportunity for 
comment.  For nearly every major industry, China has national and 
sometimes sub-national industrial policies to promote 
self-sufficiency and favor domestic producers.  China's strong 
desire for national champion state-owned enterprises (SOEs) in key 
sectors further tilts the playing field toward local firms. Finally, 
overlapping and often conflicting policies of different ministries 
make full compliance impossible in certain industries. 
 
¶11. (SBU) Some basic cross-sectoral issues appear to conflict with 
China's own stated objectives of rebalancing its economy toward 
domestic consumption.  Customs procedures are often arcane and 
logistics infrastructure is underdeveloped. Preferential export tax 
policies, and their constant adjustment in favor of Chinese 
exporters, show that old export-led growth habits die hard.  The 
inconsistent and discriminatory application of China's new 
Anti-Monopoly Law (AML) and of merger and acquisition rules at times 
frustrate market consolidation, even where it may be beneficial. 
Uneven enforcement of intellectual property rights (IPR) and 
ineffective deterrent penalties for infringement not only hurt 
 
BEIJING 00001924  004 OF 005 
 
 
foreign firms, but discourage domestic innovation.  Finally, China 
must make more progress in the adoption of international standards 
and conformity assessment procedures in order to facilitate trade of 
foreign and domestic goods.  Major market access issues currently 
plague express delivery services, various insurance products and 
enterprise annuities, and telecom services.  We know that your staff 
has papers for you on cargo hubbing provisions, certification 
standards (amounting to barriers), new regulations on 
pharmaceuticals, intellectual property and a host of other issues, 
so I will refrain from going on at length about them. 
 
Energy Issues and the Search for New Sources 
-------------------------------------------- 
 
¶12. (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.  It is 
projected that China will need to import some 60 percent 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.  We have encouraged China's participation in the 
International Energy Agency (IEA) and the Extractive Industries 
Transparency Initiative (EITI) to promote transparent, responsible 
participation in international energy markets.  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 
-------------- 
 
¶13.  (SBU) China surpassed the United States last year as the 
world's largest annual emitter of greenhouse gases (GHGs), a fact it 
has not formally acknowledged.  China and the United States together 
represent 40 percent of world emissions; no post-Kyoto climate 
change framework will be meaningful without 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.  You can expect your interlocutors to point out that 
 
BEIJING 00001924  005 OF 005 
 
 
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 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 that the developed countries have an 
obligation to provide technology and financing to developing 
countries to address their energy needs.  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 United States 
----------------------------------- 
 
¶14. (SBU) 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. 
We have concerns that central government agencies insist that 
products be of Chinese origin and that new technologies be either 
indigenously developed or transferred to local parties before they 
can be accepted in the Chinese market. These "Buy China" polices are 
extremely expensive to maintain and may in fact be impractical since 
foreign invested firms are so heavily integrated into the economy 
that it is no longer possible to exclude them. 
 
¶15. (SBU) And finally a world on our bilateral political and 
strategic relationship.  It has certainly matured in the 30 years 
since normalization.  We have a wide variety of discussions and 
dialogues, and seek to expand our conversations on sensitive topics 
such as military engagement and development assistance in third 
countries. A few topics, however, are seen by the Chinese as "core 
interests" and we can brief you after your arrival on human rights, 
North Korea, Taiwan and military matters. 
 
¶16. (U) Please be assured that this mission will do everything we 
can to make your visit a successful one.  We look forward to seeing 
you out here shortly. 
 
GOLDBERG