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Cablegate: Caac Discusses Cape Town Treaty and Technical Cooperation

VZCZCXRO5422
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

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