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Cablegate: China/Japan High-Level Economic Dialogue, Form Wins Over

VZCZCXRO5102
PP RUEHCN RUEHGH
DE RUEHBJ #7382/01 3400939
ZNR UUUUU ZZH
P 060939Z DEC 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 3867
INFO RUEHKO/AMEMBASSY TOKYO 1705
RUEHCN/AMCONSUL CHENGDU 8851
RUEHGZ/AMCONSUL GUANGZHOU 3687
RUEHHK/AMCONSUL HONG KONG 9871
RUEHGH/AMCONSUL SHANGHAI 8729
RUEHSH/AMCONSUL SHENYANG 8500
RUEHIN/AIT TAIPEI 6759
RUEHGV/USMISSION GENEVA 2049
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 BEIJING 007382

SIPDIS

SENSITIVE

SIPDIS

STATE PASS USTR STRATFORD, WINTER, ALTBACH
NSC FOR TONG
GENEVA PASS USTR

E.O. 12958: N/A
TAGS: ETRD WTRO ECON CH

SUBJECT: CHINA/JAPAN HIGH-LEVEL ECONOMIC DIALOGUE, FORM WINS OVER
SUBSTANCE

1. (SBU) Summary: Form prevailed over substance at the first ever
China-Japan High-Level Economic Dialogue (HLED) in Beijing December
1, 2007. The meeting was co-chaired by Chinese Vice Premier Zeng
Peiyan and Japanese Foreign Minister Masahiko Koumura. Topics
included macroeconomic policies, economic cooperation, environmental
protection, and plans for a second HLED in 2008. After the two-hour
meeting, ministers from both governments met with their
counterparts, and the parties signed agreements on mutual
cooperation in criminal investigations and on Japanese loans to
China, including a USD 420 million loan for environmental projects.
More contentious issues like China's push for recognition as a
market economy and renminbi (RMB) appreciation were apparently not
resolved.
"Frank" Discussions and Agreement for 2nd Dialogue
--------------------------------------------- -------

2. (SBU) According to Xinhua News, the talks were positive and both
sides agreed to a second high-level dialogue in 2008 to be held in
Tokyo. The joint communique mentioned "frank" discussions of issues
concerning macro-economic policies, trade and investment, climate
change, environmental protection and multilateral and regional
economic cooperation. The two sides reaffirmed mutually beneficial
bilateral economic ties and vowed to make a greater contribution to
the sustained development of the world economy. Our Japanese
Embassy counterparts informed us that President Hu will likely visit
Japan next year - the first visit by a Chinese president to Japan in
a decade. They also said that Prime Minister Fukuda has plans to
visit China soon, possibly as early as the end of December or in
early January 2008.

Zeng's Four Problems with Sino-Japan Economic Ties
--------------------------------------------- ----

3. (SBU) According to Chinese press reports Vice Premier Zeng
identified four major problems in Sino-Japanese economic ties: a
slowdown in the growth rate of bilateral trade, an unsatisfactory
business environment, obstacles in technical cooperation, and
fluctuating Japanese investment in China.
Zeng also brought up concerns over market economy status, trade
conditions, technology exports and a new emphasis on both
commodities and services trade. The Vice Premier urged both sides
to improve technological exchanges on energy-saving and
environmental protection and to work together to resolve global and
regional economic issues.
Some Progress on Environmental Cooperation
------------------------------------------
4. (U) Japanese Embassy officials told us that the two sides made
some progress on bilateral environmental protection cooperation,
including a Japanese loan to China of USD 420 million loan for
environmental protection projects. Both sides shared a common view
on participating in the development of an effective framework for
2013 and beyond under the United Nations Convention on Climate
Change, in which all major economies would agree to assume greater
responsibility for environmental protection. They also agreed to
enhance cooperation in recycling initiatives, improvement of water
quality in the Yangtze and other major waterways, prevention of
cross-border movement of waste, and sustainable forestry management.
On energy cooperation, both sides confirmed they would exchange
technology and information on biomass use, clean coal, and safe coal
mining practices. Japanese Embassy officials told us that
environment ministers from both countries signed a statement
agreeing to move forward on technology transfer and other
assistance, but the statement did not include many details or
concrete implementation plans.
5. (SBU) Japanese Embassy officials told us that although
cooperation on environmental issues continues to grow, the Japanese
often find China's approach to environmental discussions
frustrating, with China repeatedly stating that it is still a
developing country that lacks the technology needed to curb energy
emissions. "Meanwhile, China declines to offer specific proposals
to Japan indicating what kind of technology it needs. Japan is
willing to provide assistance, but China needs to tell us what they
need," our counterparts said.

No Agreement on Market Economy Status or Renminbi

BEIJING 00007382 002 OF 003


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

6. (SBU) Our Japanese counterparts told us that the Japanese side
brought up RMB appreciation in the context of Japan's late 1980s
"bubble economy." Sensing Chinese concerns that the Japanese yen's
appreciation following the Plaza Accord led to the country's
economic difficulties in the 1990s, Japan told China at the HLED
that a prolonged period of excess liquidity, not the yen's
appreciation, caused Japan's real estate and stock market bubble.
Japanese Embassy officials informed us that in a joint statement
issued following the talks, the Japanese included a sentence noting
the importance of rapid RMB appreciation. (Note: The sentence read,
"he Japanese side welcomed the Chinese policy for increased
flexibility in the exchange rate of the RMB and expressed hope that
China would make efforts toward accepting a faster pace of
appreciation of the RMB's effective exchange rate." End note.)
According to our Japanese Embassy contacts, the Chinese side deleted
this sentence from the Chinese translation of the joint statement.
(Comment: In a meeting with Econ MinCouns several weeks earlier,
METI Vice Minister Toyoda confided that a major sticking point in
negotiations over technology transfer for environmental and energy
projects was China's poor record of IPR protection. He added that
Japan hoped to leverage China's interest in these projects to make
progress on IPR more broadly, noting that China had at least resumed
discussing IPR with Japan after temporarily freezing bilateral
cooperation in the wake of Japan's decision to participate as a
third party in the U.S. WTO case. End Comment.)

7. (SBU) Regarding China's request for market economy status,
Japanese embassy officials informed us that the Chinese asked Japan
for a yes or no response on whether China is a market economy. The
Japanese did not offer a response to the Chinese side on this issue.


Japanese Enterprises Wary of China
----------------------------------

8. (SBU) Japanese Embassy officials told us they attribute part of
the recent decline in Japanese investment in China to China's poor
track record of IPR enforcement. During the HLED, the two sides
agreed to broaden cooperation on IPR, including via public-private
bilateral cooperation mechanisms. "Though China has the necessary
legislation in place," our contacts said, "enforcement, particularly
at the local level, continues to deter investors. This is
particularly true for small and medium-sized Japanese enterprises
that lack the legal resources of larger companies."

9. (SBU) In addition to facing IPR enforcement problems, Japanese
companies in China report that they are frustrated by Chinese
regulations on investment and mergers and acquisitions, which they
perceive as discriminatory. Political tensions resulting from
former PM Koizumi's Yasukuni Shrine visits and Japanese officials'
discussions with the Dalai Lama have also contributed to Japanese
businesses' wariness about doing business in China, our Japanese
Embassy contacts explained.

Joint Vision on Japan-China Economic Cooperation
--------------------------------------------- ---

10. (U) According to Japanese Embassy officials, during a February
2006 meeting, Chinese Commerce Minister Bo Xilai and former Japanese
Minister of Economy, Trade, and Industry Toshihiro Nikai agreed to
form a group of representatives from both governments to forge a
Joint Vision on Japan-China Economic and Trade Cooperation. The
group convened four times in both Japan and China over the past year
and a half for discussions on the bilateral economic relationship.
In conjunction with the HLED, the working group published a joint
report on December 1.

11. (U) The report states that China has benefited from Japanese
FDI, government loans, technology transfer and employment
opportunities, while Japanese companies have enhanced their profits,
improved their competitiveness, and increased exports to China as a
result of closer bilateral economic ties. It also asserts that both
countries could benefit if China shifts its development model from

BEIJING 00007382 003 OF 003


export-driven to domestic-consumption led growth. In addition, the
report contains information on the difficulties facing Japanese
companies in China and Chinese companies in Japan. Concerns voiced
by Japanese companies include IPR enforcement difficulties, lack of
transparency in the legal system, complex customs procedures and
regulations, and discrimination against foreign enterprises.
Chinese companies in Japan expressed concerns about their position
in the Japanese market, food and product safety standards and
regulations, and difficulties obtaining business visas. Both sides
agreed to address these concerns through high level bilateral
discussions in the future.

Nothing New This Time Around
----------------------------

12. (SBU) Our Japanese contacts told us the HLED did little to
resolve controversial bilateral economic issues such as RMB
appreciation, East China Sea energy exploration, or China's drive
for market economy status. The meeting did, however, result in a
joint statement that renewed commitments to cooperate on issues of
bilateral concern such as IPR enforcement, environmental protection,
and reduction of barriers to trade. Though these areas for
cooperation are not new, Japanese officials expect that over the
next year, terms of cooperation will become more concrete as they
work toward the 2008 HLED.

RANDT

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