Cablegate: Sed Ambassador Alan Holmer Previews Sed Iv During

DE RUEHBJ #2076/01 1500751
P 290751Z MAY 08




E.O. 12958: N/A
SUBJECT: SED Ambassador Alan Holmer Previews SED IV During
May 22-23 Visit to Beijing


1. (SBU) Summary: Treasury Special Envoy for China and the
Strategic Economic Dialogue (SED) Ambassador Alan Holmer
discussed plans for the fourth round of the SED with
Chinese officials during a May 22-23 visit to Beijing. In
his discussion with NPC Vice Minister Wu Xiaoling, Holmer
praised China's relief efforts following the May 12
earthquake in Sichuan Province, pressed for further
financial sector liberalization, and encouraged greater
exchange rate flexibility. General Administration of
Quality, Supervision, Inspection and Quarantine (AQSIQ)
Vice Minister Wei Chuanzhong sought Holmer's assistance in
moving forward with two draft MOUs with the Department of
Agriculture and the Department of Commerce. VM Wei also
indicated that AQSIQ's relationships with the Department of
Health and Human Services (HHS), the Consumer Product
Safety Commission and the Environmental Protection Agency
(EPA) have evolved over the past year and through signing
of agreements at SED III have been productive and helped
resolve problems. In a meeting with Ministry of Railways
(MOR) Chief Economist Yu Bangli, Holmer and Department of
Transportation Deputy Assistant Secretary for
Transportation Policy Joel Szabat encouraged MOR to
participate in the upcoming SED Transportation Dialogue.
Ambassador Holmer also held meetings with a large group of
American business representatives, leading Chinese
academics, and Chinese and foreign media. End Summary.

NPC VM Wu Xiaoling: Sichuan Earthquake and Inflation
--------------------------------------------- -------

2. (SBU) Treasury Special Envoy for China and the Strategic
Economic Dialogue (SED) Ambassador Alan Holmer met May 22
with Wu Xiaoling, Vice Chair of the Financial and Economic
Committee of the National People's Congress. Holmer
praised the Chinese government's timely response and
transparency following the devastating May 12 earthquake in
Sichuan Province. Wu noted the Chinese government has
became more mature in its response to crises, beginning
with SARS in 2003, and continuing this year with the
Chinese New Year snowstorms, and the Sichuan earthquake.
According to Wu, the Chinese government has learned that
transparency can improve public understanding of the
challenges the government faces during crises. She
contrasted the government's openness following the
earthquake, which led to positive international press
coverage, with the tight media restrictions following the
March protests in Tibet and the negative press stories that
ensued. [Note: Wu later in the meeting seemed to backtrack
on this point by noting the restrictions on foreign
journalists in Tibet were for the journalists' own safety.
End note]. In response to Holmer's question on the impact
of the Sichuan earthquake on China's economy, Wu noted that
while the disaster has had a large impact on the local
economy, Sichuan is not home to key industrial sectors so
the earthquake will have only a limited effect on the
Chinese economy as a whole.

3. (SBU) Wu said inflation remained the top economic
concern of the Chinese government and predicted the
continuation of China's tight monetary policy. Wu argued
that U.S. policies were exacerbating Chinese inflation.
First, an important factor for rising inflationary
pressures in China is the higher price of imported
commodities, such as oil. Since prices of oil and other
commodities are settled in U.S. dollars, a weaker dollar
tends to lead to higher commodity prices. Second, while
the Federal Reserve's loosening of monetary policy and
provision of large scale liquidity support is
understandable given U.S. circumstances, the increase in
global liquidity is flowing to other countries and
contributing to global inflationary pressures. Given this,
Wu said it is important for the U.S. government to take
actions to achieve a greater degree of exchange rate

BEIJING 00002076 002 OF 004

stability (she did not specify what policies). She
suggested the SED focus on the impact of U.S. monetary
policy on developing countries and how to increase
coordination among financial regulators

RMB Appreciation and IMF Report

4. (SBU) In response to Ambassador Holmer's inquiry on the
role of RMB appreciation in reducing domestic inflation, Wu
replied that RMB appreciation should help, however, there
was a risk of over-shooting, which, coming at a time of
weakening external demand, could harm excessively
exporters in the coastal areas, leading to large job losses.
Wu said the Chinese government remained focused on
reforming exchange rate policy, but it is unrealistic to
expect the RMB to continue its recent rapid appreciation.
Wu said Congress and the Administration should be patient
with the pace of RMB exchange rate reform. Holmer said the
SED provided a forum for the frank exchange of views on
sensitive topics such as exchange rates, and said he hoped
China would move rapidly toward a more flexible exchange
rate regime.

5. (SBU) Responding to FINATT's question on the Chinese
reaction to the expected decision by the IMF to describe
the RMB as "fundamentally misaligned," Wu complained the
IMF looks excessively at foreign reserve holdings to judge
whether a currency is misaligned. She said this approach
ignores the importance of holding USD as the world's key
reserve currency and may be based on faulty assumptions on
how much foreign reserve is necessary to deal with external

Energy and Environment Cooperation

6. (SBU) Wu praised the SED's ten-year framework to deal
with energy and environmental issues. She said it is
important for the United States to ratify the Kyoto
Protocol and provide strong leadership on a post-Kyoto
accord. She also stressed the United States' energy-
intensive lifestyle will need to change, and the U.S.
should do more to reduce energy consumption to allow for
the development of poorer countries. Wu said it was not
realistic for the United States to ask China to reduce its
greenhouse gas emissions while not committing to do the
same thing. Ambassador Holmer noted the Administration is
playing a leadership role in developing a post-Kyoto
framework and looks forward to continue to work closely
with China on this issue.

AQSIQ Vice Minister Wei Chuanzhong

7. (SBU) In his May 23 meeting with General Administration
of Quality Supervision, Inspection and Quarantine (AQSIQ)
Vice Minister Wei Chuanzhong, Ambassador Holmer expressed
condolences for the losses suffered during the Sichuan
earthquake and reiterated the United States' offer of
assistance. Vice Minister Wei thanked Holmer for his
expressions of concern and noted AQSIQ has already sent 29
rescue teams, or more than 600 people, to participate in
the relief effort.

Food and Product Safety

8. (SBU) Ambassador Holmer and Vice Minister Wei reviewed
the achievements of the previous rounds of the Strategic
Economic Dialogue. At SED III, AQSIQ signed three
agreements with U.S. agencies, including an MOU on food and
feed safety with the Department of Health and Human
Services (HHS), an MOU on trade in alcohol and tobacco with
Treasury's Alcohol and Tobacco Tax and Trade Bureau (TTB),
and an MOU on protection of human health and the
environment with the Environmental Protection Agency (EPA).

BEIJING 00002076 003 OF 004

Vice Minister Wei expressed his appreciation for previous
cooperation with the EPA, the Consumer Product Safety
Commission (CPSC) and HHS and said that these relationships
have strengthened cooperative solutions and prevented
problems. Ambassador Holmer agreed the two sides had made
good progress on these issues.

Looking Forward

9. (SBU) Vice Minister Wei raised the issue of three
safety-related documents that both sides have been working
on recently. The first is a Memorandum of Understanding
concerning standards and conformity assessment; the
document has been reviewed by AQSIQ and is currently under
final review at the Department of Commerce. The signing
deadline for this document was originally set for December
31, 2008, although AQSIQ would like to sign the document as
soon as possible. The second document is a "progress
report and work plan" related to the 2007 MOA between HHS
and AQSIQ on Food and Feed Safety, which Minister Li
Changjiang and HHS Secretary Leavitt would sign during SED
IV. This document has been reviewed by AQSIQ and returned
to the Food and Drug Administration (FDA) for consideration
and comment. The third agreement is a draft MOU with the
U.S. Department of Agriculture (USDA); Wei said AQSIQ is
still awaiting comments from the U.S. side and asked
Ambassador Holmer to urge USDA to respond quickly.
[Note: AQSIQ and USDA technical level officials have been
exchanging drafts and working toward agreement on several
difficult issues in an effort to craft a MOU that can be
signed at SED IV. End Note.]

Ministry of Railways

10. (SBU) During a May 23 meeting with Ministry of Railways
(MOR) Chief Economist Yu Bangli, SED Ambassador Holmer
expressed his deepest condolences for the loss of life and
devastation resulting from the earthquake in Sichuan
Province. He also invited MOR to join the SED IV
transportation forum, which is expected to focus on the
areas on infrastructure, innovative finance, congestion and
supply chain logistics. Yu said he personally agreed that
a transportation forum would be useful and indicated that
MOR would coordinate with the Ministry of Finance (MOF) and
Ministry of Transportation (MOT).

11. (SBU) Department of Transportation Deputy Assistant
Secretary for Transportation Policy Joel Szabat said the
forum would focus on transportation challenges that affect
trade and commerce between the United States and China.
Szabat stressed that incorporating rail was vital to the
Forum's success and noted that one of the biggest
challenges facing both countries was connecting roads and
railroads to ports and airports. Yu agreed that rail was
important to such a forum and said most Chinese travel via
rail. He remarked that 140 million Chinese traveled by
rail during the Chinese Lunar New Year this past February.
Yu also noted that there is a Medium and Long-Term Plan and
an 11th Five Year Plan for intermodal railway development.

12. (SBU) MOR Deputy Director General Zhang Jianping
said the Medium and Long-Term Plan covers 2003-2020 and was
approved by the State Council in early 2004. According to
Zhang, the plan initially called for China to have 100,000
kilometers of railway tracks by 2020. However, due to
rapid economic development, Zhang said the plan was
adjusted to establish a new goal of 120,000 kilometers of
railway tracks by 2020.

Public Diplomacy

13. (SBU) Ambassador Holmer conducted a breakfast briefing
for approximately 75 American business representatives at
an event co-hosted by AmCham, the U.S.-China Business

BEIJING 00002076 004 OF 004

Council, and the U.S. Information Technology Office. In
addition, Ambassador Holmer discussed U.S.-China economic
relations with Professor Wang Jisi and Professor Wang Yong
of Beijing University's Center for International and
Strategic Studies and held a roundtable with Beijing
University students.

14. (SBU) Ambassador Holmer participated in a webchat with and conducted interviews with China Radio
International (CRI), the 21st Century Business Herald (circ
480,000), and Dow Jones Newswire. The wire service article
appeared the same day, while 21st Century Business Herald
ran its article on May 23 noting the purpose of Ambassador
Holmer's visit and his comments on U.S. assistance to China
for the Sichuan earthquake. The webchat was available
online from Monday, May 26, the same day CRI aired the
radio interview. The press events allowed Ambassador
Holmer to underscore the "win-win" framework of the SED and
the importance of open markets to the global economy.

15. (U) Ambassdor Holmer's delegation cleared this cable.


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