Cablegate: Treasurys Smith and Medeiros Meeting with Mof a/S Zhu

DE RUEHBJ #6889/01 3030635
P 300635Z OCT 07




E.O. 12958: n/a


1. (SBU) Summary: Treasury Deputy Chief of Staff Taiya Smith and
Strategic Economic Dialogue (SED) Political Advisor Evan Medeiros
discussed preparations for the third round of the SED with Ministry
of Finance Assistant Minister Zhu Guangyao October 10. Smith and
Zhu agreed that the SED should focus on long-term strategic issues,
identify areas of common interest, and provide guidance to other
bilateral fora, while also achieving tangible results in the
short-term. For the December SED meeting, the two sides agreed to
work on sustainable logging, financial services, food and product
safety, air pollution (SO2), transparency, investment, water
pollution, and clean fuels and autos. Smith and Zhu discussed the
possibility of the two countries cooperating on a long-term,
ten-year joint project on a strategic topic. Both agreed to talk
again after consulting with their respective sides. End Summary.

SED Principles

2. (SBU) In discussions October 10 with Ministry of Finance
Assistant Minister Zhu Guangyao, Treasury Deputy Chief of Staff
Taiya Smith and Strategic Economic Dialogue (SED) Political Advisor
Evan Medeiros discussed preparations for the third round of the SED
to be held December 12-13 in Beijing. Smith and Zhu agreed that the
SED should be guided by the following principals: a focus on
long-term strategic issues, working cooperatively on areas of common
interests, providing guidance to other bilateral dialogues, and
working to achieve tangible, short-term results.

3. (SBU) Smith emphasized that the SEDQs strategic focus would help
both countries deal with long-term challenges, such as global
climate change. Towards that end, Smith suggested that the two
sides consider launching a long-term, ten-year joint project on a
strategic topic. Both agreed to talk again after consulting with
their respective sides.

Sustainable Logging

4. (SBU) Smith noted that Deputy USTR Karan Bhatia had recently
discussed sustainable logging with MOFCOM Vice Minister Ma Xiuhong.
Smith emphasized the importance of ministries such as MOFCOM and
Customs strengthening cooperation with the State Forestry Agency
(SFA) which has been assigned the lead role in negotiations on a
bilateral agreement on sustainable logging. She urged the Finance
Ministry to help the different Chinese agencies to work together on
this important issue, which affects not only Chinese wood
manufacturers, but also affects global warming. U.S. negotiators
would soon present the SFA with a draft cooperation agreement and
hoped to finalize an agreement by the December SED. Zhu said he
would work to strengthen coordination on the Chinese side and asked
that Smith keep him abreast of developments.

Financial Services

5. (SBU) FinAtt David Loevinger said the United States hoped China
would continue to liberalize its financial services market.
Specifically, the United States wanted China to raise the equity
caps for foreign owned and joint venture financial service firms and
grant licenses allowing these firms to offer a full-range of
financial services. Zhu pressed Loevinger for a realistic target on
equity caps and said any progress on this issue must take into
account ChinaQs level of development. Loevinger said the United
States wanted to see ownership limits rise to 49 percent by the end
of the year and to 100 percent by the end of 2008. Zhu expressed
deep skepticism that these goals could be reached in such a short
time period, but said both sides should continue to exchange views
on the matter.

6. (SBU) On credit rating agencies, Loevinger observed that ChinaQs
SED II commitment appeared to be wavering. Chinese regulators had
recently informed MoodyQs joint venture that it was no longer
permitted to rate RMB-denominated bonds. This was a step backward
and contrary to ChinaQs SED II commitment on welcoming foreign
credit rating agencies.

7. (SBU) Zhu replied that the three major international credit
rating agencies--MoodyQs, Standard & PoorQs, and Fitch--had been
widely criticized by the international community over its ratings of
collateralized debt obligations. This led, Zhu asserted, to serious
problems for the firms and a loss of reputation. Zhu said China
would only open its market to foreign credit rating agencies after
they had addressed their serious weaknesses in corporate governance.

BEIJING 00006889 002 OF 003

He said the United States was free to raise this issue in SED III
but said he thought the issue was better addressed in the JEC.
Loevinger said the U.S. position was firm and considered recent
Chinese regulatory decisions as running contrary to ChinaQs SED

Food and Product Safety

8. (SBU) Regarding ongoing negotiations to conclude two bilateral
binding memoranda of agreement (MOA) on food and feed and drugs and
medical devices, Zhu said he had recently spoken to the head of the
State Food and Drug Agency (SFDA) who had complained that the United
States had changed its position after returning to Washington
following the first round of negotiations in Beijing.

9. (SBU) Smith replied that the U.S. had not changed its position
but was seeking greater clarity from the Chinese side regarding
regulatory supervision of active pharmaceutical ingredients (APIs).
It is unclear to the U.S. side whether SFDA has authority to
regulate exports of such goods. If SFDA is not the right agency to
oversee APIs, then the Chinese side should identify the appropriate
agency. She also urged the Chinese negotiators to provide written
comments on the revised draft text and to confirm when they will be
able to travel to Washington to continue negotiations. Zhu replied
that he would report back to Vice Premier Wu Yi on this matter and
would urge SFDA to strengthen communication with HHS/FDA.

10. (SBU) Smith also noted that there were several other agreements
related to food and product safety currently under discussions. She
said it would send a positive signal if all of these agreements
could be finalized and announced by the December SED.

SO2 Cap-and-Trade

11. (SBU) Smith noted that in his meeting with EPA Administrator
Johnson, NDRC Vice Chairman Xie Zhenhua was positive on the
prospects of launching a national cap-and-trade emissions trading
system for SO2. EPA is currently working on a joint abatement study
with ChinaQs SEPA and would have policy recommendations by the
December SED. Smith said it would be a strong demonstration of
U.S-China cooperation if China was prepared to announce an SO2
emissions trading system at SED III. Zhu said the two sides should
continue discussions on this issue.


12. (SBU) On transparency, Smith said preparations were going well
for two seminars on administrative rule-making and licensing, the
first to be held in Beijing at the end of October and the other in
late November in Washington. The United States was also looking for
China to implement its APEC transparency commitments and adopt a
national policy on public notice-and-comment period. Zhu recalled
that both sides struggled during the May SED to come up with a
common approach on this issue and urged both sides to prepare
carefully for the upcoming SED.


13. (SBU) Smith informed Zhu that Deputy USTR Bhatia had spoken to
MOFCOMQs Madame Ma about prospects for concluding a bilateral
investment treaty (BIT). U.S. officials planned to have further
discussions on this issue in Washington and would then discuss with
the Chinese side how best to move forward. Zhu said it would be
important to make progress on this issue and that both sides should
do more to improve trust and confidence in the investment
environment. He said that some examples of successful investments
on both sides would demonstrate the value of open investment
policies. Smith suggested that U.S. and Chinese scholars could
collaborate on case studies of both successful investments and those
that ran into difficulties, such as the CNOOC case.

Water Pollution

14. (SBU) Noting ChinaQs interest in cooperating on water issues,
Smith said the United States would look into strengthening the
existing agreement between EPA and the Ministry of Water Resources.

Autos/Low Sulfur Fuel

15. (SBU) Responding to ChinaQs interest in discussing clean fuels

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for automobiles, Smith said EPA had worked with Chinese officials on
low sulfur fuel issues for many years. Zhu said China welcomed
cooperation on this issue and said he hoped both sides could do more
work in this area for the December SED.

Environmental Tariffs

16. (SBU) Regarding lowering tariffs on environmental goods and
services, Zhu asked if the United States had any further ideas on
how to discuss this issue in a bilateral context. He suggested both
sides consider building on President HuQs proposal at APEC to
establish an Asia Pacific information network on environmental
tariffs. Smith said she would discuss with her colleagues in
Washington on how best to move forward.


17. (SBU) Zhu raised the issue of renewing the expired bilateral
satellite launch cooperation agreement, noting that JCCT discussions
on this topic had not made progress. Smith replied that this was a
sensitive issue and must be approached carefully.

Accounting Standards

18. (SBU) Zhu said Chinese companies found it burdensome to comply
with U.S. accounting standards when trying to list shares on U.S.
stock markets. He asked if U.S. regulators could accept Chinese
accounting statements which comply with international standards.
Smith noted that U.S. accounting standards are more rigorous than
international standards Q having been strengthened following the
passage of Sarbanes-Oxley legislation and that U.S. regulators
applied the same standard to all foreign firms. Loevinger suggested
that MOF Vice Minister Li Yong meet with SEC officials when he is in
Washington to attend World Bank meetings.

19. (U) Smith and Medeiros cleared this cable.


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