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O 060945Z AUG 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5548
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHUL/AMEMBASSY SEOUL 1331

UNCLAS SECTION 01 OF 04 BEIJING 002249 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: OREP PREL PHUM PGOV ECON PARM MARR CH TW
SUBJECT: SCENESETTER FOR HFAC CHAIRMAN BERMAN'S VISIT TO 
CHINA 
 
REF: STATE 74770 
 
(U) Sensitive but unclassified.  Please handle accordingly. 
 
¶1. (SBU) Chairman Berman, your visit to China comes in a year 
filled with key anniversaries and events:  January 1 marked 
30 years of U.S.-China diplomatic relations; March saw the 
50th anniversary of the 1959 Tibetan uprising and the Dalai 
Lama's flight to India; June 4 marked the 20th anniversary of 
the Tiananmen Square massacre; July saw tragic ethnic 
violence in Xinjiang; our new State/Treasury-led Strategic 
and Economic Dialogue with China took place July 27-28; and 
October 1 will mark the 60th anniversary of the founding of 
the PRC.  The breadth of issues on which we engage China 
diplomatically has increased dramatically over the past 
thirty years to encompass a wide range of bilateral and 
multilateral issues.  We seek a mature relationship with 
China -- a relationship where our leaders can talk frankly 
about issues where we disagree, such as human rights, while 
also constructively engaging on vital issues of mutual 
concern like energy security, the environment, the global 
economic situation and regional security. 
 
Bilateral Relations 
------------------- 
 
¶2. (SBU) We are working to build a positive, cooperative and 
comprehensive relationship with China.  The Chinese 
appreciated that Secretary Clinton included China in her 
first visit abroad as Secretary of State.  President Obama 
had a successful first meeting with President Hu Jintao in 
London at the G-20, addressed senior U.S. and Chinese 
policymakers at the Strategic and Economic Dialogue in 
Washington, and has accepted Hu Jintao's invitation to visit 
China later this year.  The Chinese place great importance on 
our bilateral links and are pleased with our enhanced 
Strategic and Economic Dialogue.  We have serious and 
improving engagement with the Chinese on hot-spot issues. 
Despite the current freeze in the Six-Party Talks on the 
denuclearization of the Korean Peninsula, China's leadership 
of and participation in the Talks show that we can engage 
constructively on vexing issues.  We continue to push for 
increased PRC cooperation on Iran, Pakistan, Afghanistan and 
Sudan.  Your interlocutors would benefit from hearing your 
ideas on such issues and your suggestions on how 
inter-parliamentary exchanges can boost the overall 
relationship. 
 
The U.S.-China Strategic and Economic Dialogue 
--------------------------------------------- - 
 
¶3. (U) The July 28-29 Strategic and Economic Dialogue, led by 
Secretary Clinton and Secretary Geithner on the U.S. side and 
State Councilor Dai Bingguo and Vice Premier Wang Qishan on 
the Chinese side, reflected the development of a new 
framework for U.S.-China relations.  The Strategic and 
Economic Dialogue provided a venue for the U.S. and China to 
deepen cooperation in areas such as a lasting economic 
recovery; a clean, secure and prosperous energy future; 
stopping the spread of nuclear weapons and confronting 
transnational threats.  At the talks both the U.S. and China 
agreed to take measures to promote balanced and sustainable 
growth, improve financial regulation and supervision, fight 
protectionism, and cooperate on reforming international 
financial institutions.  The U.S. and China produced a 
Memorandum of Understanding that elevates climate change in 
the bilateral relationship and affirmed the importance of 
continuing efforts to achieve denuclearization of the Korean 
Peninsula.  The second round of the Strategic and Economic 
Dialogue will be held in Beijing next year. 
 
Response to the Financial Crisis 
-------------------------------- 
 
¶4. (SBU) China's financial system was relatively insulated 
from the global financial unrest, and Beijing's rapid 
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 Mae and Freddie 
Mac) debt and have worked with us in international fora, such 
as the G-20 Leaders' meetings, as well as bilaterally to 
promote global financial stability.  We have urged China to 
provide additional resources to the IMF and made clear our 
support for reforming that institution. 
 
¶5. (SBU) Chinese exports and export-related investment were 
hard-hit by the global economic downturn.  Exports in the 
first half of this year were down around 20 percent compared 
to 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 00002249  002 OF 004 
 
 
Beijing has announced a series of stimulus plans, including 
massive infrastructure, social spending, and monetary policy 
initiatives.  These programs are bearing fruit, and domestic 
government and SOE investment has expanded enough to return 
China to fairly robust GDP growth (7.1 percent in the first 
half of 2009).  Continued expansion through stimulus and 
government spending is an issue, interestingly, with which 
both the United States and China are dealing. 
 
¶6. (SBU) We have welcomed Beijing's strong actions to 
stimulate its economy but continue to emphasize the 
importance of long-term sustainability.  We see green shoots 
in the United States and Europe, but we expect the U.S. 
savings rate to increase and therefore American consumers may 
no longer absorb China's excess production.  China needs to 
start rebalancing its economy toward greater domestic 
consumption.  We point out that, as we have seen in the 
United States, high growth of bank lending and lack of 
transparency can be a cause for concern.  A more flexible 
exchange rate is one part of a policy mix that can promote 
more harmonious and balanced growth. 
 
¶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 seven percent of 
outstanding USG debt and fourteen percent of publicly held 
debt) and make a strong statement indicating our intention to 
fight inflation so that it does not erode our own citizens' 
assets.  Chinese interlocutors would be interested in hearing 
the Congressional position on future budget deficits and the 
future restructuring of Fannie Mae and Freddie Mac. 
 
Business-Related Concerns 
------------------------- 
 
¶8. (SBU) The majority of U.S. 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 Chinese 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.  Secretary of Commerce Locke made this point 
emphatically during his visit here in mid-July. 
 
¶9. (SBU) China's propensity to employ state power in business 
disputes involving state-owned enterprises is another area of 
concern for us.  The signature recent example of this was the 
arrest under state secrets laws of Australian and Chinese 
national staff of the Australian mining concern Rio Tinto, 
which was involved in complicated discussions, almost all of 
which to our knowledge was derived from the public record, 
with Chinese enterprises relating to ongoing iron ore sales 
and a possible merger/acquisition.  There have been other 
similar cases, including some involving American Citizens, 
but never at a level similar to that of Rio.  (In many 
respects this was a warning to large Chinese steel companies 
that the central government will not tolerate corrupt 
practices in the negotiation of iron ore contracts.)  We have 
made the case to the Chinese that using overly broad 
interpretations of the state secrets law to threaten and 
punish foreign business partners is inconsistent with 
international norms and damages China's reputation and 
attractiveness as an investment destination. 
 
Labor Issues 
------------ 
 
¶10. (SBU) With the fallout from the global economic crisis, 
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, including one in late July at 
a major steel works that resulted in the death of a plant 
foreman.  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 
 
BEIJING 00002249  003 OF 004 
 
 
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. 
 
China:  A Growing Energy Consumer 
--------------------------------- 
 
¶11. (SBU) 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.  In 
1990, China's energy use accounted for eight percent of 
global primary energy consumption.  This is expected to rise 
to nearly 21 percent by 2030.  China requires access to 
adequate energy supplies; oil accounts for about twenty 
percent of China's current energy mix.  China now relies on 
imports to meet about 50 percent of its fossil fuel needs. 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 that encourages investment by 
Chinese companies in foreign energy resources.  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. 
 
Coal Dominates the Energy Mix 
----------------------------- 
 
¶12. (SBU) Coal remains China's primary source of energy, 
accounting for 70 percent of its energy mix and fueling 80 
percent 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.  Secretary of Energy Chu spoke eloquently during 
his mid-July visit here on the importance of close 
collaboration on clean energy projects. 
 
Energy-Related Opportunities for the U.S. 
----------------------------------------- 
 
¶13. (SBU) China's audacious plans to improve energy 
efficiency coincide with U.S. interests in maintaining energy 
security and developing opportunities for U.S. companies in 
the Chinese market.  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.  U.S. companies, as Secretary Locke reminded his 
interlocutors during his July visit to China, 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 
------------ 
 
¶14. (SBU) The PRC government likes 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.  The Chinese further argue that our 
focus on individual rights and liberties reflects Western, 
not universal, values.  We respond to this by noting that 
human rights are indeed universal values, as the Chinese 
themselves acknowledged when they signed the Universal 
Declaration of Human Rights.  Although personal freedoms for 
Chinese citizens have expanded over the past three decades 
(providing what some observers have called "a bigger cage"), 
the overall human rights situation in China remains poor.  We 
continue to emphasize that the expansion of individual 
freedoms, respect for the rule of law and the establishment 
of a free and independent judiciary and press are in China's 
own interests, and would enable the PRC to better deal with 
 
BEIJING 00002249  004 OF 004 
 
 
social tensions and achieve its goal of building a 
"harmonious society."  Providing a legitimate democratic 
outlet for political criticism and expressions of social 
discontent might also help the Chinese reduce episodes of 
violence by disenfranchised elements of society. 
 
¶15. (SBU) House leaders from both political parties have 
helpfully faced the human rights situation in China head on. 
The late Representative Tom Lantos, a regular visitor to 
China, gracefully expressed respect for China's long history 
and rich culture while at the same time reminding Chinese 
leaders that China could not truly reach its full potential 
until it also reached international human rights norms. 
Representatives Chris Smith and Frank Wolf have repeatedly 
emphasized to the Chinese that religious freedom is a basic 
human need and that religious adherents make good citizens. 
Hill leaders have worked with U.S. experts and law schools to 
promote the rule of law in China. 
 
¶16. (SBU) July's unrest in Xinjiang (like last year's unrest 
in Tibet) made clear serious problems in PRC rule in its 
western provinces, as ethnic Uighur and Han Chinese battled 
one another in ways that might have caught the leadership off 
guard and will complicate ethnic and religious relations in 
China.  You will hear the Chinese assert that the July 5 
riots in Xinjiang were a coordinated act of terrorism.  They 
will claim that U.S.-based Uighur organizations and Uighur 
activist Rebiya Kadeer were leading actors in fomenting the 
violence.  We have no evidence to support their claims.  We 
have expressed condolences for the victims of the violence 
and urge the Chinese government to conduct the investigative 
and judicial response to the violence in a manner that is 
transparent and open and that respects the human rights of 
the detained.  Hundreds, and possibly thousands, of people 
have been detained in response to the riots, and we have 
urged that they receive fair treatment.  We also continue to 
urge the PRC authorities to seek ways to appropriately 
address the underlying causes of ethnic tensions. 
 
Taiwan 
------ 
 
¶17. (SBU) Your interlocutors may raise the Taiwan issue and 
criticize U.S. arms sales 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 
welcome the improvements in cross-Strait ties achieved by PRC 
President Hu and Taiwan President Ma Ying-jeou since the 
latter's May 2008 inauguration.  You can encourage Beijing to 
maintain the positive momentum by accommodating Taiwan's 
meaningful participation in international organizations, by 
reducing military deployments aimed at Taiwan, and by 
continuing to make progress on cross-Strait economic and 
cultural ties. 
GOLDBERG