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Cablegate: Sed Envoy Holmer Visits Shanghai and Ningbo

VZCZCXRO1718
RR RUEHCN RUEHVC
DE RUEHGH #0187/01 1441006
ZNR UUUUU ZZH
R 231006Z MAY 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 6867
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7421

UNCLAS SECTION 01 OF 05 SHANGHAI 000187

SENSITIVE
SIPDIS

TREASURY FOR AMB. HOLMER, WRIGHT, TSMITH, AND OASIA - DOHNER,
HAARSAGER, CUSHMAN
USDOC FOR ITA MAC DAS KASOFF, MELCHER, MCQUEEN
NSC FOR WILDER AND TONG

E.O. 12958: N/A
TAGS: ECON PGOV ETRD EFIN KIPR ENRG SENV EWWT CH
SUBJECT: SED ENVOY HOLMER VISITS SHANGHAI AND NINGBO


SHANGHAI 00000187 001.2 OF 005


1. (SBU) Summary. During a May 18-20 visit to Shanghai and
Ningbo, Special Envoy for China and the Strategic Economic
Dialogue (SED) Ambassador Alan Holmer, Managing Director for
China and the SED Dan Wright, and Deputy Assistant Secretary for
Transportation Policy Joel Szabat engaged U.S. business
representatives, Shanghai academics and the national media on
SED-related issues. Both academics and the U.S. business
community were vocal in their support for a continuation of the
SED dialogue in the next administration. The delegation also
met with China Customs officials and Yangshan Free Trade Zone
Administrative Committee representatives to discuss
implementation of SED-related Customs agreements, IPR protection
and other transportation and port-related issues. While
visiting Ningbo, the delegation toured a newly-established
wetlands area, discussed local trade issues with Ningbo Foreign
Affairs officials, and engaged an official from Yinzhou Bank, a
small, agriculture-focused bank, on its efforts to serve farmers
and SMEs. End summary.

AmCham Shanghai: Hopeful for Continuation of SED

--------------------------------------------- ---

2. (SBU) In a roundtable discussion with 18 members of the U.S.
business community, Ambassador Holmer briefed the group on U.S.
disaster relief assistance in Sichuan Province and discussed SED
progress and opportunities for progress. Business
representatives were positive about the results of the SED and
queried whether the SED would continue with the next
administration. AIG General Insurance Company China Limited
Assistant Vice President Eric Zheng attributed AIG's success in
obtaining a business license approval to the SED and said his
company had now established a wholly-owned foreign subsidiary in
Shanghai. AIG is now "testing" the waters further by applying
for three branch offices simultaneously. Javelin Investments
Chairman and CEO Kim Woodard urged the SED to push for greater
transparency on merger and acquisition rules for both sides. He
opined the borders between "national economic security" and
old-fashioned protectionism were increasingly blurring in China.


3. (SBU) Davis Wright and Tremaine Partner Ron Cai pointed out
that there is unequal treatment for trucking license approvals,
particularly in transporting HAZMATS and argued the issue should
be addressed in the SED. In response to Ambassador Holmer's
query regarding the impact of the RMB appreciation, Better Asian
Sources Chief Representative Daniel Krassenstein said the RMB
appreciation, inflation, and increased labor costs have driven
up the cost of export goods to the United States by as much as
20 percent, which U.S. consumers are not willing to accept. As
a result, some Chinese vendors have begun substituting materials
in products, which creates safety concerns in some cases. He
added that there is a great deal of confusion in China over
safety standards because there are different standards between
the United States and E.U. and even within the United States.
Krassenstein urged the United States to work more closely with
the E.U. to develop consistent and unified safety requirements
for Chinese goods. Tyson Foods China Director James Rice added
that the United States should be more actively engaged in
general with China in setting standards, rather than allow the
E.U. or Japan to gain the advantage.

IPR Is Still An Issue

---------------------

4. (SBU) Cai expressed that protection of intellectual property
rights (IPR) is a real concern for companies who have
environmentally-friendly technology that could assist China. As
a result companies are not exporting their newest and latest
energy efficient and environmentally-friendly technology to
China. Rouse and Co. International Senior Consultant Diana
Matthias said more rights holders are resorting to litigation to
protect their IPR since the courts in the major cities such as
Shanghai and Beijing are becoming more reliable. The problem is
finding a viable entity against which to litigate. Matthias
added that most counterfeits are not originating out of the
ports in Shanghai or Ningbo because these port are more thorough
in their screening. Most of the counterfeits are originating in
smaller ports with less vigorous checks, and Customs in larger
ports such as Shanghai does not recheck the goods. She also
offered that many Chinese pirated goods are being shipped via
Vietnam and Thailand.

SHANGHAI 00000187 002.2 OF 005

More Work Need on Environment and Energy

----------------------------------------

5. (SBU) Business representatives also asked if there have been
any tangible results on energy and environmental issues as a
result of the SED and whether the Olympics has moved these
issues into the Chinese mainstream thinking. Ambassador Holmer
replied that the Chinese are taking these issues with great
seriousness and that in addressing these issues in the SED we
are "pushing on an open door." Wright also enumerated the
10-year framework and five goals agreed to in the SED, which are
established to address these issues. Squire Sanders Counsel and
AmCham Environmental Committee Co-Chair Charles McElwee noted
there is a vacuum of Chinese standards on the environmental
side. In particular there are no standards on green products.
He also urged a liberalization of investment regulations in
these critical areas.

Brainstorm - An Opportunity for Public Outreach

--------------------------------------------- --

6. (SBU) During a two hour media event on "Brainstorm," a
popular, Shanghai talk show reminiscent of "Crossfire,"
Ambassador Holmer responded to remarks and questions from a
four-member panel of experts, a large studio audience and the
talk show host. The program, which will air on Channel Business
News Asia, a partner of CNBC, will reach no less than 100
million viewers not only in East China but also throughout East
Asia and in the United States. Ambassador Holmer began the
program by reiterating U.S. condolences with respect to the
three-day mourning period for the May 12 Sichuan earthquake. He
then discussed his role as the Special Envoy for China and the
SED, noting he was both an envoy to the Chinese Government as
well as to the Chinese people. He also emphasized the strategic
nature and long-term approach to resolving issues in the SED.
Panelists, the talk show host, and audience members raised a
wide-range of questions ranging from the state of the U.S.
economy to prospects for changes in U.S./China trade relations.

Shanghai Customs: Working on Implementing SED Agreements

--------------------------------------------- -----------

7. (SBU) The delegation also traveled to Shanghai's Yangshan
Deepwater Port and met with China Customs Director General for
Duty Collections Gao Rongkun (who traveled down from Beijing for
the event), Shanghai Customs Deputy Director General Chen
Xudong, and Director of Yangshan Port Customs Shao Xiaoping.
Gao outlined the role of China Customs and noted efforts in
cooperation with the United States such as efforts to stop
shipments of IP infringing goods and illegally-logged lumber,
sharing of trade statistics, and counter-terrorism efforts.
Shao briefed the delegation on Yangshan Port operations, noting
that the port is now in its third phase of development that will
be completed by the end of 2008. It is expected that Yangshan
will handle 15 million TEU by 2010 with a total of 26 deepwater
berths. Currently 60 percent of the containers arrive by truck,
with the remaining 40 percent arriving by water (only a tiny
fraction are international transshipments). Shao estimated
within a few years the three components will be roughly one
third of the total. Shao noted that Shanghai Customs does not
re-inspect containers that have been cleared by other Customs
offices throughout China; it only checks to ensure the seals
have not been tampered with. Yangshan is also making an effort
to induce foreign manufactures to move to the surrounding free
trade zone area as a means to increase usage of the port. In
2007, Shanghai Customs collected RMB 23.8 billion (about USD 3.4
billion), almost doubling over the RMB 12.6 billion (USD 1.8
billion) collected in 2006.

Achieving Results on IPR Efforts

--------------------------------

8. (SBU) Regarding IPR issues, Shao emphasized that Shanghai
Customs attaches great importance to the 2007 SED Custom-related
agreement with the United States. In 2007, Shanghai Customs
intercepted 29 cases of IP infringing goods, valued at RMB 16.62
million. As of May 1, 2008, Shanghai Customs has caught 23
cases of infringing goods, valued at RMB 4 million. Shao noted

SHANGHAI 00000187 003.2 OF 005


that these numbers are a great improvement from the first four
years (1994-1998) Shanghai Customs began monitoring for
IP-infringing goods during which only 26 cases were uncovered.
Shanghai Customs uses a system of targeting high risk goods and
exporters for special examination. Although some cases are
initiated by the rights holders, the vast majority are ex
officio. Customs regulations require that each IPR-related case
be reported to Customs headquarters. Chen added that Customs
maintains a "blacklist" of traders, many of whom are reported by
the United States. Customs intensely scrutinizes these traders
for infringing goods.

9. (SBU) Chen also said Customs has made significant progress
over the past year on six Customs-related projects initiated
under the SED; in particular he noted progress on the rules of
origin. Currently 56 percent of China's exported goods are
produced by foreign-invested companies, many of which are U.S.
enterprises. China Customs is undertaking thorough study and
research on the origin of goods so that both sides can make a
correct and clear judgment of bilateral trade. The United
States and China also need to set clear standards on the rules
of origin so as to set a clear example for other countries.
Chen also said that he was not clear which U.S. agency was
charged with coordinating SED-related issues with China Customs
and asked for assistance in clarifying this issue. Ambassador
Holmer assured Chen that the United States is fully committed to
ensuring it lives up to the Customs-related agreements made in
the third round of the SED and promised to get back to Chen
regarding the coordinator for the U.S. side.

Financial Academics: Exchange Rates, Inflation and More

--------------------------------------------- -----------

10. (SBU) In a roundtable meeting with Shanghai Institute of
International Studies Vice President Chen Dongxiao, Shanghai
Academy of Social Sciences Vice President Huang Renwei, Deputy
Director of the Institute of World Economy Xu Mingqi, and
Shanghai Stock Exchange Deputy Director James Liu, Ambassador
Holmer discussed current economic trends in China and SED
initiatives. Huang welcomed that SED energy and environment
initiatives are based on a 10-year plan and hopes the SED would
continue into the next administration. He also emphasized that
the Chinese Government is particularly concerned about "hot
money," and the Government is allowing fluctuations as a way to
discourage these flows. Chen agreed that the Chinese Government
is in a quandary about hot money and said that the United States
should make a joint statement with China as a way to discourage
speculative funds. In response to whether current financial
issues in the United States had dampened China's appetite for
financial liberalization, Chen replied it had not, but it had
changed China's desire for new financial instruments. Liu
opined that China needs a true futures market that allows
businesses to bet on the direction of the RMB/dollar exchange
rate. This would provide a more reliable indicator to the
Government on the direction of market forces. Liu also averred
that the pause in RMB appreciation of the RMB is a political
decision to help keep speculators off-balance.

11. (SBU) Chen also hoped the SED would be used to address the
dramatic depreciation of the U.S. dollar and noted the Chinese
Government is looking to the U.S. side for assurance that the
U.S. economy will not worsen. Regarding why the RMB had
remained steady over the past month, Chen said some believe it
is because of high Chinese inflation. He believes overall RMB
appreciation this year may be as much as 10 percent; however, it
will largely depend on whether the appreciation has a measurable
effect on cooling down the economy. If it does not, the Chinese
Government will not be enthusiastic about allowing the RMB to go
higher. Chen also opined that the U.S. election is factoring
into China's decision to pursue new initiatives or wait unit the
next administration. Regarding China's inflation, he believed
that China's price controls will only postpone higher inflation
until a later date. This will likely occur after the Olympics,
which may also be the start of an economic slowdown because of
changed investment expectations. Xu and Huang also expressed
concern that 2009 could be difficult year economically for
China, noting slowing growth in 2008 of Chinese corporate
profits, slowing exports and lower growth, added to which is the
effects of RMB appreciation and increased labor costs on
inefficient small and medium Chinese enterprises with already
slim profit margins. Xu wondered whether the RMB's exchange
rate will begin to depreciate against the dollar in 2009 in

SHANGHAI 00000187 004.2 OF 005


light of those adverse trends.

Ningbo Wetlands: A Testament to Sustainable Development

--------------------------------------------- -----------

12. (SBU) During a tour of the newly-established Ningbo-Cixi
Wetland Project, Ningbo Municipal Development and Reform
Commission Division Chief Li Zhibo explained the main reasons
behind the project: develop the wetlands as a habitat for
international migratory birds, help reduce land-based
contamination of coastal waters, promote wetland conservation
and research, and provide a center for conservation education.
The City of Cixi received a grant of USD 5 million from the
Global Environment Facility, through the World Bank, to finance
a wastewater treatment plant in Cixi and develop the 43.5 square
kilometer wetlands area at the base of the just opened Hangzhou
Bay Sea Bridge. The wetlands include a reclaimed mudflat area
created to provide a nesting site for migratory birds, an
inter-tidal marsh area, and a small offshore island. According
to Li, the Ningbo-Cixi Wetlands is the largest man-made wetland
project in China and one of the country's eight officially
designated wetland sites. Since its inception in 2005, the
project has had a great impact on the bird population; the
number of species has increased from 45 to 120. Li also said he
and other managers of the wetlands hope to link up with similar
projects in the Chesapeake Bay area to share ideas. He also
proudly pointed out that projects like this show that
sustainable development is "not just a slogan" in China.

Ningbo FAO Director: "We Want More High Tech Trade"

--------------------------------------------- -------

13. (SBU) Ningbo Foreign Affairs Office Director Kong Weiwei
briefed the delegation on Ningbo's economic growth and
aspirations for being a trading center for high-tech equipment
from the United States. Kong said that part of the bilateral
trade imbalance could be addressed by the United States giving
the "green light" to exports of technology and equipment that
would help China increase energy efficiency and reduce
pollution. He noted that currently Ningbo's own trade
statistics show a great imbalance with USD 18 billion of imports
and 36 billion in exports. Because Ningbo wants to be a center
for high-tech imports, it is pursing a sister city relationship
with Atlanta. Kong added that the agreement has not been
reached yet because of Atlanta's budget issues, which precluded
Atlanta officials from traveling to Ningbo. He noted that Wuhan
is also courting Atlanta for a sister city relationship, and he
hopes that both Chinese cities would be successful. Ambassador
Holmer emphasized that the United States is not restricting
environmental and energy-related equipment and technology -
rather, many U.S. companies are concerned about exporting due to
IP protection concerns and many of the Chinese tariffs on such
goods are prohibitively high.

Yinzhou Bank - A Model of Rural Finance

---------------------------------------

14. (SBU) In Ningbo, the delegation also met with Yinzhou
Agriculture Cooperation Bank President Zhou Jianbin to discuss
local economic conditions and rural finance. Zhou described his
bank as one of the first agriculture-focused banks in China
serving farmers and SMEs. Although small in size with total
deposits totaling around RMB 24.8 billion, the bank offers a
wide variety of services ranging from credit cards to
intermediary services. At the behest of the National
Development and Reform Commission, Yinzhou Bank has set up
branches in small villages and begun extending micro loans to
farmers. Zhou emphasized that Yinzhou Bank also attaches great
importance to corporate social responsibility, citing the bank's
RMB 20 million donation to an underprivileged children's fund.

15. (SBU) Regarding growth risks from high inflation, global
economic weakness, and RMB appreciation, Zhou maintained that
China's strong organic growth is still intact. He said the past
30 year's strong output growth was driven by the economic
development from coastal regions, such as Yangtze Delta Region,
Pearl River Delta Region and Bohai Delta Region. Economic
development in the middle and west part of China lagged coastal
regions. If the pace of economic development in these two
regions will pick up, 30 years of GDP growth shall be

SHANGHAI 00000187 005.2 OF 005


contributed from each, hence China still has 60 years of GDP
growth ahead, Zhou reasoned. Zhou believes the RMB appreciation
will gradually slow down and the RMB will even depreciate
against the U.S. dollar in the future. He said that Yinzhou
Bank had been marginally affected by the sub-prime credit crisis
in the United States and added that the global credit crunch was
felt most deeply by the China's four state-owned commercial
banks. Although there has been an overall tightening of
liquidity, Yinzhou Bank has actually been able to issue more
loans to enterprises as the larger banks contracted their loan
portfolios.

16. (SBU) Ambassador Holmer has cleared this cable.
JARRETT

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