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Cablegate: Treasury Secretary Pushes Capital Market Reform

VZCZCXRO7518
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #5565/01 2342245
ZNR UUUUU ZZH
O 222245Z AUG 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1192
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/NSC WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BEIJING 005565

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR EXEC - TSMITH, OASIA/ISA
STATE FOR EAP/CM
USDOC FOR 4420
NSC FOR MCCORMICK
STATE PASS USTR FOR STRATFORD
STATE PASS CEA
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON; SAN FRANCISCO
FRB FOR CURRAN/LUNG; NEW YORK FRB FOR DAGES/CLARK

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD CH
SUBJECT: TREASURY SECRETARY PUSHES CAPITAL MARKET REFORM
WITH CSRC CHAIRMAN SHANG FULIN

SUMMARY
-------
1. (SBU) Summary: In an August 1 meeting with Treasury
Secretary Paulson, China Securities Regulatory Commission

SIPDIS
(CSRC) Chairman Shang Fulin described steps CSRC has taken to
implement SED agreements, including licensing foreign stock
market rep offices, resuming licensing new securities firms,
increasing the quota for qualified foreign institutional
investors (QFII) and expanding the scope of business for
foreign joint venture securities companies. In particular,
lifting the moratorium on licensing of new securities firms
may occur as soon as September, three months earlier than
committed. Shang also said joint venture securities
companies could receive licenses to offer a full range of
services by the end of the year. Secretary Paulson
suggested China allow 100% foreign-owned securities companies
to compete in China and encouraged Shang to allow
wholly-owned affiliates of international credit ratings
agencies to rate RMB denominated bonds. Shang responded that
China needs to evaluate the progress of the current two pilot
JVs, Goldman Sachs-Gao Hua and UBS-Beijing Securities, before
adjusting equity caps. He welcomed the suggestion to allow
international ratings agencies to rate RMB debt, but noted
that domestic ratings agencies would resist. End Summary.

ENVIRONMENTAL FACTORS AFFECT STOCK MARKET LISTING DECISIONS
---------------------------------------
2. (SBU) Secretary Paulson described the Chinese conservation
efforts he observed during his visit to Qinghai Lake. Shang
noted that environmental performance is one of the indicators
CSRC considers in its review of applications for listing on
China's stock markets.

CSRC Report Card on SED II Deliverables
---------------------------------------
3. (SBU) Shang reported on progress in implementing SED
commitments to date:

a) NYSE and NASDAQ Rep Offices: applications received, expect
reiew and approval by October;

b) Moratorium on Licenses for Securities Companies: aim to
resume issuing in September, three months ahead of the SED
commitment;

c) Qualified Foreign Institutional Investor (QFII) Quota:
CSRC now coordinating with other agencies (mainly the State
Administration for Foreign Exchange, SAFE), but expects to
increase quota from USD 10 to 30 billion by the end of 2007
(Comment: SED commitment is to do so before SED III. Even
after the overall quota is increased, it will take time to
issue firm specific quotas. Embassy sources note that SAFE,
which is concerned about excessive capital inflows, is
delaying implementation. End comment);

d) Scope of Business for Foreign JV Securities Companies:
working to issue new regulations so JV,s could have a full
securities license (i.e. be able to undertake brokerage and
proprietary trading) by the end of 2007. (Comment: This is
more forward leaning than SED commitment to announce before
SED III that JV securities will be able to expand gradually
their scope of business).

Equity Caps
-----------
4. (SBU) Secretary Paulson said it is hard to find cases of
ownership caps on greenfield securities investments in major
developing economies like Mexico, India and Russia.
Secretary Paulson said that ownership caps should not be

SIPDIS
confused with market structure or development; the regulator
decides on new product approvals and the "rules of the game."
The best policy, he said, is to allow the world's best firms
to come in, compete and train local talent. He noted that
some domestic players may not welcome the competition, but
reminded Shang that those interests may not be in line with
national interests.

5. (SBU) Citing the Goldman Sachs-Gao Hua and UBS-Beijing
Securities joint venture (JV) deals, Shang said China needs

BEIJING 00005565 002 OF 002


to first review the results of these pilot JVs before
adjusting equity caps.

6. (SBU) Shang said China attaches great importance to
opening the securities sector, but this must be gradual and
conducive to stable economic development. Despite the
Chinese stock market's rise over the past two years, he
explained that many problems still exist. He believed
movements in China's stock market had little influence on
global financial markets.

Let International Ratings Agencies Rate RMB Debt
--------------------------------------------- ---
7. (SBU) Secretary Paulson praised CSRC's efforts to develop
its bond market. He suggested that China allow international
credit ratings agencies to rate China RMB denominated debt as
a way to promote the domestic bond market. (Comment:
Currently, only JVs in which foreign firms are limited to a
49 percent stake can rate RMB denominated bonds in China).
Shang welcomed the suggestion. He explained that bond
scandals in the early 90's resulted in strict regulations
that required that listed bonds have bank guarantees, which
eliminated the need for ratings. However, CSRC now has
authority over bond issuance and will adopt a market-oriented
approach. He said CSRC welcomes foreign credit ratings
agencies, but pointed out that domestic ratings agencies will
resist.

8. (U) Secretary Paulson's delegation cleared this cable.
Piccuta

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