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Cablegate: Sed Session Iii: Balanced Economic Development, December

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RR RUEHCN RUEHGH RUEHVC
DE RUEHBJ #7593/01 3550625
ZNR UUUUU ZZH
R 210625Z DEC 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 4179
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAEPA/HQ EPA WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEAUSA/DEPT OF HHS WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BEIJING 007593

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM SECOR/YAMAMOTO
STATE PASS USTR FOR STRATFORD/WINTER/MAIN/WINELAND

E.O. 12958: N/A
TAGS: ECON EFIN ETRD CH
SUBJECT: SED SESSION III: BALANCED ECONOMIC DEVELOPMENT, DECEMBER
12, 2007

REF: A. STATE 168294
B. BEIJING 7557
C. BEIJING 7579
D. BEIJING 7581

(U) THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED. PLEASE HANDLE
ACCORDINGLY. NOT FOR DISTRIBUTION OUTSIDE USG CHANNELS.

Summary
-------

1. (SBU) Summary. The third session of the U.S.-China Strategic
Economic Dialogue (SED) focused on Balanced Economic Development.
Both sides agreed on the need for further economic reforms, but
Chinese interlocutors insisted that reforms take place gradually to
avoid "overshooting." The Chinese side expressed concern that the
United States sub-prime mortgage crisis would adversely affect the
Chinese economy. Treasury Secretary Paulson underscored U.S.
efforts to address the sub-prime crisis and assured his counterparts
that the U.S. economy would continue to serve as an engine for
growth. End Summary.

Paulson Urges Quickening the Pace of Reform
-------------------------------------------

2. (SBU) During a discussion on Balanced Economic Growth on December
12, Treasury Secretary Henry Paulson attributed imbalances in both
the U.S. and Chinese economies to structural issues. He described
U.S. efforts to address U.S. domestic imbalances by resolving the
sub-prime mortgage crisis, addressing the entitlement process, and
increasing domestic savings rates. Paulson urged Chinese leaders to
quicken the pace of Chinese domestic reforms, noting that reforms
work best if executed during a time of economic strength rather than
in response to a crisis. Commerce Secretary Carlos Gutierrez echoed
Paulson's support for reforms, and encouraged Chinese leaders to
continue efforts to build a social safety net for its citizens and
strengthen innovation by further opening the market to foreign
competition.

PBOC: China Must Go Slow
------------------------
3. (SBU) People's Bank of China (PBOC) Governor Zhou Xiaochuan
agreed that China should move forward with economic reforms but at a
gradual pace. He warned that moving too quickly could lead to an
"overshooting" of corrections, tipping imbalances in the opposite
direction and generating new problems. Zhou cited a cultural
analogy to describe the differences between U.S. and Chinese
approaches to reform: "Chinese people use traditional Chinese
medicine to address the root causes of a disease, but it often takes
longer for the body to get well. The United States, on the other
hand, uses Western medicine to address only the symptoms of a
disease, but this does not necessarily resolve the underlying
illness." China's reform measures -- aimed at reducing income gaps
across the country and shifting the economy away from an
export-driven growth model -- similarly target the root causes of
China's economic imbalances, but will take a longer time to affect
the economy as a whole.
4. (SBU) Zhou said that domestic imbalances in both countries
complement one another, and stressed the importance of lowering
savings rates and increasing consumption in China, while increasing
savings and reducing consumption in the United States. He noted,
however, that it is difficult to reach a proper equilibrium, as a
high rate of consumption in the United States serves as an engine
for global economic growth. Zhou expressed concern about the impact
of the sub-prime mortgage crisis on China's economy. In Zhou's
view, excess liquidity resulting from the U.S. Federal Reserve's
lowering of interest rates in the wake of the sub-prime crisis could
contribute to excess liquidity in China and other countries. "China
already faces an excess liquidity problem," he said, "so we are
concerned that this will create ethical risks (moral hazard)."

MOF: Maintain a Stable Dollar
-----------------------------

5. (SBU) Minister of Finance Xie Xuren emphasized China's use of
fiscal policy to promote balanced economic growth. Xie stated that
China is strengthening the central government's transfer payments
system to promote growth in central and western regions. He
reported that China has also eliminated agricultural taxes and
subsidized agricultural production to narrow the wealth gap between
urban and rural areas. In support of "scientific development"

BEIJING 00007593 002 OF 002


policies aimed at protecting the environment and steering investment
toward high tech industries, China has also reduced and/or
eliminated VAT refunds on certain categories of exports whose
manufacture causes heavy pollution. Xie asserted that "developed
countries like the United States should shoulder more of the burden
for addressing global economic imbalances." He urged the United
States to maintain the U.S. dollar at a stable exchange rate,
increase technology exports, lower the budget deficit, and reduce
trade protectionism. Paulson replied that a large market-driven
economy like the United States will always have ups and downs, and
reminded Xie that the market determines the value of the U.S.
dollar.

CBRC on Financial Services
--------------------------

6. (SBU) China Banking Regulatory Commission (CBRC) Chairman Liu
Mingkang stated that CBRC will soon sign an Exchange of Letters
(EOL) with the U.S. Securities and Exchange Commission that would
facilitate Chinese fund managers to invest in U.S. stock markets.
Liu also encouraged U.S. banks to focus on rural banking, noting
that Citigroup and AIG have already expressed an interest in
investing in new types of financial institutions in rural areas. On
pension management, Liu said that "once the greenlight is lit"
foreign financial services firms will receive national treatment in
the enterprise annuity (pension management) business, but declined
to elaborate on a time frame. Liu welcomed the recent licensing of
China Merchants Bank's New York branch and encouraged the United
States to reduce the time it will take to approve licenses for
Industrial and Commercial Bank of China (ICBC) and China
Construction Bank (CCB). He also asked the United States to provide
national treatment to Chinese banks already operating in the United
States. Noting concern about the recent sub-prime crisis, Liu urged
the United States to prevent future crises through enhanced
bilateral financial information sharing mechanisms and strengthened
supervision of financial institutions. Liu stressed recent progress
on foreign bank cards, and noted that CBRC has already approved
issuance of several foreign bank cards. The card data processing and
storage however, must meet PBOC technical standards, he explained,
urging U.S. financial institutions to continue discussions with
PBOC.

CSRC on Opening the Securities Market
-------------------------------------

7. (SBU) China Securities Regulatory Commission (CSRC) Chairman
Shang Fulin stated that "China has faithfully followed up on
commitments to open the securities market." He cited recent
achievements, including the approval of NYSE and NASDAQ offices in
China and an extension of QFII quotas from USD 10 billion to USD 30
billion. He expressed concern about excess liquidity and weak
infrastructure in domestic capital markets, stressing that the stock
market has "accumulated risk." Shang stated that the CSRC will
further open the securities sector, "under the precondition of
ensuring financial stability."

8. (SBU) U.S. Trade Representative Schwab urged China to end
discriminatory treatment of foreign insurance firms opening branches
in China, noting that foreign firms can file only one branch
application at a time whereas Chinese firms can file multiple
applications. CIRC Chairman Wu Dingfu replied that premium income
for foreign insurance companies in China continues to rise, and that
foreign insurance firms' 48.7 percent growth rate is higher than
that of Chinese firms. "This proves we have been honoring our WTO
commitment," he claimed.

9. (SBU) Secretary Paulson closed the discussion, stating that the
United States and China have a shared responsibility to address
economic imbalances. He encouraged China to move forward quickly
with reforms and stressed that if regulation had preceded innovation
in the United States, it would have had a negative impact on the
development of the U.S. economy.

Randt

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