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Cablegate: China/Cfius: Treasury Das Daly, Chinese Officials Discuss

VZCZCXRO1386
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #6070/01 2600643
ZNR UUUUU ZZH
P 170643Z SEP 07 ZDK
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 1890
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 02 BEIJING 006070

SIPDIS

SIPDIS
SENSITIVE

STATE FOR EAP/CM PSECOR AND EEB/OMA
TREASURY FOR OASIA DALY/DOHNER/HAARSAGER/CUSHMAN
USDOC FOR 4420/ITA/MAC/CEA/MCQUEEN
USTR FOR STRATFORD/WINTER/ALTBACH/MCCARTIN/KEMP

E.O. 12958: N/A
TAGS: ECON PGOV EINV ETRD EFIN CH
SUBJECT: CHINA/CFIUS: TREASURY DAS DALY, CHINESE OFFICIALS DISCUSS
MERGERS AND ACQUISITIONS ISSUES

BEIJING 00006070 001.2 OF 002


-------
SUMMARY
-------

1. (SBU) Treasury Department Deputy Assistant Secretary (DAS) Nova
Daly held discussions with Chinese Government officials and business
leaders relating to bilateral investment issues on September 10,
2007. During the meetings DAS Daly provided an introduction to the
new Committee for Financial Investment in the United States (CFIUS)
law while also emphasizing the need for bilateral cooperation to
guard against the rise of trade and investment protectionism. In
response to DAS Daly's remarks, National Development and Reform
Commission (NDRC) officials noted their desire for more direct
Chinese investment in the United States. The officials also
outlined China's emerging foreign direct investment (FDI)
procedures. Ministry of Commerce (MOFCOM) officials stated that
Chinese enterprises are poised to begin investment in the United
States, but need more information to enable them to do so. Chinese
national oil company and Chinese Investment Corporation (CIC)
officials echoed others' calls for more CFIUS details. CIC
officials also provided details surrounding the formation of their
organization. End Summary.

--------------------------------------------- ----
NDRC HYPES INVESTMENT ABROAD, EXPLAINS FDI REVIEW
--------------------------------------------- ----

2. (SBU) NDRC Department of Foreign Capital Utilization Deputy
General Li Guohui told DAS Daly that Beijing is encouraging Chinese
enterprises to invest in the United States. The enterprises are
interested in using the investment to gain greater access to United
States technology and managerial expertise. Li stated that Chinese
enterprises find it difficult to acquire technology in the United
States because of restrictive export laws. Beijing hopes that the
new CFIUS law will enable Chinese enterprises to become more active
in the United States market. Recent investments by China overseas,
including that in the United Kingdom's Barclay's Bank, have been met
by some negative reactions, said Li. Beijing believes critics
should not only recognize the benefits of foreign investment in
China, but Chinese investment abroad as well.

3. (SBU) Deputy General Li stated that China is open to investment
from every country. FDI is regulated by China's foreign investment
catalogue which is updated every two years. Li stated that each
sector of China's economy is characterized in the FDI catalogue as
either: encouraged, restricted, or closed. China's economy has
increasingly opened to foreign investment during the past twenty
five years. Beijing opened areas such as soft drink production to
FDI during the early stages of economic reform. (Comment: It is
interesting that Li chose this example, since carbonated soft drinks
are rather anomalously included in the restricted category in the
current version of the investment catalogue. End Comment.) More
recently, after its accession to the World Trade Organization (WTO),
China opened up the service sector to FDI. Li said that other
sectors, including the financial sector, will open more gradually.
These sectors will open as the legal framework necessary to protect
foreign investors is created, according to Li.

4. (SBU) Deputy General Li stated that in addition to the guidance
provided in the FDI catalogue, Beijing has established separate
committees for review of proposed FDI in the manufacturing and
financial sectors. The committees are so far operating on an ad hoc
basis, but China's State Council plans to issue instructions soon
formalizing the committees' structure. Li suggested that the State
Council will create a supervisory body under which the committees
will reside. The State Council in the future may also establish
review committees for other sectors if needed. Li said that the
manufacturing committee is comprised of MOFCOM, NDRC, and the
Ministry of Finance (MOF) with NDRC serving as the committee chair.
The financial committee is made up of the NDRC, People's Bank of
China (PBOC), MOF, and the China Security Regulatory Commission
(CSRC) with PBOC serving as the chair. The State-owned Assets
Supervision and Administration Commission (SASAC) also plays an
important role in the committees. Li noted that cases are referred
to the committees by MOFCOM after it does an initial review of the
proposed transaction, but indicated that the State Council has the
power to directly refer a case to a committee as well.

------------------------------------------
MOFCOM BETTERING BILATERAL INVESTMENT TIES
------------------------------------------

5. (SBU) MOFCOM Department of Foreign Economic Cooperation Director
General (DG) Wu Xilin stated that Chinese enterprises are now
positioned to begin investing abroad. They will do so in adherence

BEIJING 00006070 002.2 OF 002


to the laws and regulations of the countries in which they are doing
business. Wu noted that this is why Beijing hopes some ambiguities
in the new CFIUS law, such as the definition of critical
infrastructure, can be clarified. MOFCOM would like to provide as
much information as it can to China's enterprises as they go abroad.
MOFCOM also is strengthening its ties to the United States
Department of Commerce and other agencies to better facilitate
bilateral trade and investment. Wu stated that MOFCOM Assistant
Minister Chen Jian will lead a trade and investment delegation to
the United States in late September. The delegation plans to meet
with Commerce Department officials during a stop in Washington.
(Note: DG Wu stated that the delegation will depart China for Canada
on September 16. They will arrive in the United States after three
days of meetings in Canada. End Note.)

---------------------------------------
CNOOC SEEKS MORE CIFIUS PROCESS DETAILS
---------------------------------------

6. (SBU) China National Overseas Oil Company (CNOOC) Vice President
Zhu Mingcai told DAS Daly that is important for Chinese enterprises
to clearly understand the CIFIUS process before investing in the
United States. Beijing felt that there was political prejudice
against CNOOC during the company's aborted attempt to purchase
Unocal in 2005. Other CNOOC officials told DAS Daly that the CIFIUS
process appears to discriminate against state-owned companies like
CNOOC because it requires disclosure of transaction details before a
deal is finalized. The Treasury Department should publicize details
surrounding CIFIUS to enable Chinese enterprises to gain a better
understanding of the process, according to Zhu and other CNOOC
officials. (Note: CNOOC officials asked several questions during
the meeting relating to CIFIUS' jurisdiction over a particular
transaction type. Specifically, the officials sought determine
whether a state-owned company would be subjected to CIFIUS review if
attempting to purchase an United States-based holding company whose
assets were entirely located abroad. End Note.)

-----------------------------
SAFE CEO LAYS OUT CIC DETAILS
-----------------------------

7. (SBU) Xie Ping, CEO of Central SAFE Investments (Huijin) told DAS
Daly that CIC may provide financing for Chinese companies via
purchases of stock or bonds in foreign, but not domestic, markets (H
shares). An announcement on personnel for CIC will be made by the
end of September. Currently, there is a seven-member preparatory
working group that includes Lou Jiwei, Gao Xiqing, Zhang Hongli
(MOF), Xie Ping, Su Ning (PBOC) and Jessie Wang. Xie called reports
claiming that the management team had been selected premature, and
noted that personnel changes may still take place. Huijin will be
the primary source of staffing for CIC, but additional outside fund
managers and experts will be brought aboard. CIC has requested the
State Council allow CIC staff to earn market-determined salaries
augmented by performance incentives rather than civil services
salaries, according to Xie.

8. (SBU) Xie suggested that the Treasury Department engage in more
Chinese media outreach to explain the CFIUS program and new
investment law. Many private Chinese companies have the funds and
desire to invest in the United States, but are afraid that United
States security concerns will prevent them from doing so. Xie
mentioned that the Industrial and Commercial Bank of China (ICBC),
of which Huijin holds a controlling interest, was approached by an
American bank seeking funding, via a sale of equity, to counter
liquidity problems it faced in the sub-prime mortgage market. ICBC
turned down the offer due to their perception that political vitriol
would surround any Chinese purchase of a stake in an United States
financial institution, according to Xie.

---------
CLEARANCE
---------

9. (U) DAS Daly did not have an opportunity to clear this cable.

Randt

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