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Cablegate: Sed Session Vi: Advancing Bilateral Investment,

VZCZCXRO7518
RR RUEHCN RUEHGH RUEHVC
DE RUEHBJ #7595/01 3550936
ZNR UUUUU ZZH
R 210936Z DEC 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 4182
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 04 BEIJING 007595

SIPDIS

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: EINV ETRD ECON CH
SUBJECT: SED SESSION VI: ADVANCING BILATERAL INVESTMENT,
DECEMBER 13, 2007

REF: A. STATE 168294
B. BEIJING 7557
C. BEIJING 7579
D. BEIJING 7581
E. BEIJING 7593

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

Summary
-------

1. (SBU) Summary: During the December 13 investment
session of the third SED, both sides agreed that increased
Chinese investment in the United States would strengthen
bilateral ties. Chinese officials expressed frustration
over how the Committee on Foreign Investment in the United
States (CFIUS) evaluates the national security implications
of inward investment. United States officials complained
about the limitations China imposes on foreign investment
in some sectors and the vague criteria with which China
screens inward investment. Treasury Secretary Henry
Paulson said the United States welcomes investment from
abroad, including from countries that do not offer
reciprocal investment access, like China. The United
States and China agreed to establish a sustained senior-
level dialogue on investment policies, practices, and
climates and to intensify ongoing talks on a bilateral
investment agreement, noting the talks to date had proven
valuable in helping the two sides understand each others
investment regimes. End Summary.

Paulson: U.S. Open to Foreign Investment
----------------------------------------

2. (SBU) During the December 13 discussion on advancing
bilateral investment, Treasury Secretary Henry Paulson said
the United States was open to inward investment in all but
a few sectors. United States Trade Representative (USTR)
Susan Schwab noted the U.S. open investment policy had led
to a surge in foreign investment in the United States,
which had provided jobs that paid more than the national
average and contributed to exports. According to Schwab,
investment between the United States and China was less
than one would expect and smaller than cross border
investments between the United States and its other major
trading partners.

3. (SBU) Commerce Vice Minister Chen Deming agreed that
Chinese investment in the United States was small and
needed to grow. Chinese firms wanted to invest in the
United States, but progress had not been smooth. He said
China hoped to see the United States implement a plan to
attract investment, which could guarantee national
treatment, streamline the review of mergers and
acquisitions, and improve transparency.

4. (SBU) National Development and Reform Commission (NDRC)
Vice Chairman Zhang Xiaoqiang agreed that expanded
investment promoted and deepened bilateral cooperation.
But two-way investment remained modest. Chinese and U.S.
firms had a strong interest in expanding investment,
especially in chemicals, transport, electricity, energy,
environmental protection, and modern services. China,
Zhang said, was interested in more cooperation.

5. (SBU) Commerce Secretary Carlos Gutierrez noted that all
United States governors and mayors were looking to attract
inward investment. More Chinese investment in the United
States would go a long way in strengthening the bilateral
relationship. When the average American thought of China,
they thought of jobs going overseas, with no examples of
Chinese firms creating jobs in the United States.
Gutierrez urged China to consider the long-term benefits of
becoming a major investor in the United States.

China: CIFIUS Process Not Clear
-------------------------------

6. (SBU) Chen said China was concerned about how the

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Committee on Foreign Investment in the United States (CFIUS)
screens potential investments. Chen said the CFIUS process
did not offer a clear definition of Qnational security,
which has led to misgivings in the Chinese business
community about investment in the United States. In the
Joint Commission on Commerce and Trade (JCCT) session that
preceded the SED, the United States had expressed a
readiness to come up with a clearer definition, he said,
which China welcomed.

7. (SBU) Secretary Paulson said CFIUS screens foreign
investment for national security risks only, and there were
no exceptions limiting investment in so-called Qstrategic
industriesQ or to protect Qnational champions.Q Congress
passed the Foreign Investment and National Security Act of
2007 (FINSA) to clarify the CFIUS screening process and
increase transparency. Among the 150 or so transactions
CFIUS had screened during PaulsonQs tenure, almost all had
closed without controversy. USTR Schwab reiterated that
CFIUS reviews were narrow in scope, and the United States
maintained limited restrictions on foreign ownership in
only a few sectors.

U.S. Biased Against State Owned Enterprises?
--------------------------------------------

8. (SBU) PeopleQs Bank of China Governor Zhou Xiaochuan
noted that many Chinese firms that were formerly state-
owned had now been privatized and listed. The state often
remained a shareholder, but there were other investment
partners as well. Zhou said these companies had to
consider the interests of all their shareholders and could
not simply take directions from the state. He commented
tht apart from the China Investment Corporation, ll the
Chinese firms that were strong enough t make investments
overseas were private.

9 (SBU) In order to facilitate bilateral investment, Vice
Chairman Zhang proposed establishing an information sharing
system on major investments. The two countries could
designate agencies and departments to inform each other of
changes in laws and regulations and major investment areas
and give feedback to relevant enterprises and associations.
China also wanted to increase dialogue so that each side
could brief the other on their latest laws and regulations
and their implementation. China wanted the United States
to provide a clearer definition of Qnational security.
China was also trying to simplify approval procedures and
encouraged competent, reputable Chinese firms to cooperate
with foreign partners.

Bilateral Investment Treaty
---------------------------

10. (SBU) Vice Minister Chen said talks about the
possibility of negotiating a bilateral investment treaty
had been positive, and China planned to send a delegation
to the United States in January 2008 to continue these
discussions. But, Chen noted, there were obstacles to
overcome. China hopes the United States will not
discriminate against firms simply because they may be
state-owned. No matter who owns the firms that seek to
invest in the United States, they all would have to follow
U.S. laws. As Chinese firms had matured and as ChinaQs
foreign exchange reserves had grown, the United States
would become a key destination for ChinaQs outbound
investment.

11. (SBU) USTR Schwab said an agreement would provide
meaningful legal protections to investors from both
countries while also signaling a commitment to an open
global economy. However, there were key differences in
approaches to investment treaties, including ChinaQs
requirement for an affirmative approval for all new
investments compared to the United StatesQ pre-
establishment right to invest, subject to limited explicit
exceptions. The United States also prohibited measures
that discriminated against foreign investors, subject to
limited, explicit exceptions, whereas China exempted all
existing discriminatory measures. For next steps, the two
sides would broaden and intensify their discussions by

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focusing on national treatment and other obligations and
undertake frequent and intensive expert-level discussions
on fundamental investment protections.

China Committed to Opening Up and Reform
----------------------------------------

12. (SBU) Chen said China was committed to opening up and
reform, as Vice Premier Wi Yi had reaffirmed earlier in the
SED. A reversal, Chen said, would lead to a Qblind alley.
To improve the environment for foreign investment, China
had strengthened intellectual property rights (IPR)
protection, improved laws and regulations, and increased
transparency by unifying tax rates and publishing a new
investment catalogue. China allowed investment in all 22
categories of manufacturing and 100 service sectors that it
had committed to open in its WTO accession agreement.

13. (SBU) Chen commented that the United States was one of
the largest sources of foreign investment in China and U.S.
companies had benefited from expanded market access in
China. The China operations of U.S. firms employed 2.2
million people, boasted revenue of $120 billion in 2006,
and generated $10 billion in profits, or a 17 percent
return on investment, he noted. China also benefited from
the advanced technology, managerial expertise, and jobs
that U.S. investment delivered.

ChinaQs Investment Catalogue
----------------------------

14. (SBU) Before publishing the new investment catalogue,
China had solicited the views of foreign firms, according
to Chen. The catalogueQs guiding principle was to expand
foreign investment, and China welcomed further discussion
about the catalogue. China also passed an anti-monopoly
law that protects IPR and covers all enterprises, including
state-owned monopolies. China was aware the U.S. had
concerns about these issues, and was ready for in-depth
discussions in fields of interest.

15. (SBU) USTR Schwab said China had heightened uncertainty
among foreign investors by relying on the expansive and
vague concept of Qnational economic securityQ to screen
inward investment, noting the State-owned Assets
Supervision and Administration Commission of the State
Council (SASAC) had released a QGuiding OpinionQ in
December 2006 calling for greater state control in
Qimportant industries and key sectors.Q Moreover, the
Foreign Investment Catalogue had been issued without an
opportunity for public comment. Provisions of the August
2007 Anti-monopoly law also could be used to shield state-
owned firms from foreign competition and authorize
QcompetitionQ decisions that actually promoted macro-
economic goals.

16. (SBU) Despite these concerns, Schwab said the United
States and China had made progress discussing investment
issues in the SED. The United States was pleased that
China had agreed to its proposal to establish a bilateral
forum on investment policies, practices, and climates.

Sovereign Wealth Funds
----------------------

17. (SBU) Secretary Paulson noted there were philosophical
differences about sovereign wealth funds (SWF). Some
people thought that allowing SWFs to buy assets in
countries that had earlier privatized them would
essentially undo the privatization. This line of thinking
did not represent the United States governmentQs view. If
SWFs could agree on best practices, it would help members
of the Organization for Economic Cooperation and
Development (OECD) to agree on principles, which would help
ensure their markets remained open.

18. (SBU) Chinese Foreign Minister Yang Jiechi noted that
SWFs had existed for a number of years. The United States
needed a policy to deal with this; otherwise, the situation
would become more serious for the United States. Yang
noted that American firms appeared to feel no reservations

BEIJING 00007595 004 OF 004


partnering with Chinese state-owned firms when hey
invested in China. Why then was there supicion if the
same U.S. firms wanted topartner with a Chinese SOE in the
United States, he asked. Yang added that U.S. governors
all sought Chinese investment, and said China would like
the CFIUS examination to take into account the 50 states
ideas and needs, instead of considering Qunnecessary
elements.

19. (SBU) Secretary Paulson replied that the United States
had been open to investments from SWFs for a long time.
The United StatesQ biggest concern was that European
nations were not necessarily open to SWF investment. CFIUS
legislation maintained that the United States would remain
open to investment, even in the case of SWFs and SOEs.
Paulson noted that other countries sometimes said they
needed a review similar to CFIUS, but in reality sought to
screen investments in Qstrategic industries.

Conclusion
----------

20. (SBU) Secretary Paulson closed the discussion by noting
that the quality of views exchanged in the session showed
that there was no doubt about the importance of the high-
level dialogue on investment to which both sides had agreed.
The United States would like to see limits on investment
lifted and China was seeking more clarity on U.S.
regulations. Paulson said this was not the first time he
had heard China ask for a Qroadmap,Q to help avoid
misunderstandings.

Randt

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