Cablegate: Ambassador Holmerqs November 7 Meetings in Beijing

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PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #4198/01 3171139
ZNR UUUUU ZZH
P 121139Z NOV 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 0829
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 BEIJING 004198

SIPDIS
SENSITIVE

STATE FOR EAP/CM/PARK AND E/YON
TREASURY FOR AHOLMER, TSMITH
TREASURY FOR OASIA/DOHNER/WINSHIP
TREASURY FOR IMFP/SOBEL/MOGHTADER
NSC FOR SHRIER/LOI

E.O. 12958: N/A
TAGS: ECON EFIN CH
SUBJECT: AMBASSADOR HOLMERQS NOVEMBER 7 MEETINGS IN BEIJING

THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET
DISTRIBUTION.

1. (SBU) Summary. In November 7 meetings in Beijing,
Chairman Liu He of the Central Leading Group on Finance and
Economics asked Ambassador Alan Holmer to convey ChinaQs
support for the upcoming global financial summit and for
measures taken individually and collectively by G-20
members. He reviewed some of ChinaQs policy responses to
maintain growth, and detailed why the (RMB) exchange rate
was a Qcomplicated issue.Q China Construction Bank
Chairman Guo Shuqing said China could be a source of equity
to the under capitalized U.S. banking sector, although the
U.S. QmentalityQ and political climate vis--vis Chinese
investment needs to change for this to occur. State Food
and Drug Administration (SFDA) Commissioner Shao Mingli
reviewed current bilateral pharmaceutical regulation and
trade issues, while Standards Administration of China (SAC)
Administrator Ji Shengkun discussed food and product safety
concerns. End Summary.

Summit on Financial Markets and the World Economy
--------------------------------------------- ----

2. (SBU) Regarding the November 14-15 summit in Washington,
Chairman Liu He of the Central Leading Group on Finance and
Economics asked Ambassador Holmer to pass the following
message to senior USG officials: Chinese senior leaders
support the global financial summit and will support
measures taken individually and collectively by G-20
members. To contribute to global growth, China will take
measures to maintain its own growth. China does not want
to see radical change to the international financial
architecture; while important, such reform will take time
and China does not want to see radical changes. A more
pressing need is to stabilize financial markets, which
requires that leaders signal they will work together. As
global economic growth slows, the risk of protectionism
rises.

Chinese Economic Policies
-------------------------

3. (SBU) Chairman Liu reviewed some of ChinaQs current and
planned policy initiatives. He said the Economic Work
Conference will focus on how to maintain growth in the
short-term, while promoting medium-term structural reforms
such as less-energy intensive growth and the development of
higher value-added industries. Liu agreed that these two
objectives could at times conflict. Following the
investment boom of the last several years, Liu said
economic policy makers increasingly are concerned about
excess industrial capacity. The upcoming fiscal stimulus
will include both tax cuts and spending increases. Liu
opined that tax cuts, particularly for businesses, are
usually the most efficient way to promote growth. However,
during sharp cyclical downturns, given businesses
deteriorating outlook for future growth, he does not expect
tax cuts to spur investment in additional productive
capacity. Economic policy officials prefer to keep the
overall VAT tax rate steady and applicable to all goods,
and then adjust the rebate as needed to support targeted
sectors. Increasing investment in railways will be an
important element of fiscal stimulus, although there is
concern about how efficiently the railway monopoly can
spend additional resources. Also, recent public reports of
planned railway investments overstate likely spending, as
the Ministry of Rails is using the press to push for a
larger budgetary allocation. Finally, with global oil
prices falling, China will reform gasoline prices next year
and bring domestic prices in line with international
prices.

Exchange Rate
-------------

4. (SBU) Chairman Liu called the Chinese RenminbiQs (RMB)
exchange rate a Qcomplicated issue.Q Officials in eastern
provinces, SMEs and workers in the export sector are
QangryQ with the central government for letting the RMB
rise against the US dollar. Even without further RMB
appreciation, SMEs face higher labor costs and declining
profits. Liu stressed if the RMB strengthened further
against the US dollar, there would be unrest in these

BEIJING 00004198 002 OF 003

sectors. Liu foresaw continued conflict between political
pressures in China (for exchange rate stability) and abroad
(for continued RMB appreciation). (Note: LiuQs remarks
reinforce those from other interlocutors that the Chinese
public tends to view the relative strength of the RMB
almost entirely against the U.S. dollar, suggesting the
Chinese government is likely to continue to tolerate
further appreciation on a trade-weighted basis as long as
appreciation is limited against the U.S. dollar. End
comment).

U.S. Economy
------------

5. (SBU) Chairman Liu believes the worst of the U.S.
financial crisis is almost over. Now a greater concern is
the strength of the U.S. real economy and its impact on
China.

Climate Change
--------------

6. (SBU) Chairman Liu said Europeans (including the Swedish
Prime Minister and the UK Foreign Minister) told him they
will push aggressively for a sharp reduction in global
carbon emissions. He also said those leaders have
characterized ChinaQs stance on climate change as
productive and the U.S. stance as unhelpful. Liu said the
U.S. and China should discuss, perhaps in the SED, how to
respond to any EU proposal.

China Construction Bank
-----------------------

7. (SBU) Chairman Guo Shuqing of China Construction Bank
(CCB) told Ambassador Holmer he welcomed the FedQs easing
of monetary policy, although he worried about its long-term
inflationary impact. Guo also was concerned about rising
concentration and market dominance by a few firms in
certain U.S. dominated sectors (such as computer operating
systems and Microsoft). Regarding counter party risks, the
CCB believed that even after TARP equity injections, U.S.
banks remain under capitalized, particularly as U.S.
housing prices are expected to fall further and mortgage
defaults to rise. Given the expected weakening in U.S
economic growth, CCB was concerned whether $700 billion to
inject equity and purchase impaired assets sufficient.

8. (SBU) Guo said China, the Middle East, and other state-
owned investors can be a source of equity to the under
capitalized U.S. banking sector. Both the China Investment
Corporation (CIC) and ChinaQs State Administration of
Foreign Exchange (SAFE) would be willing to take 10-15%
stakes in U.S. financial institutions. For this to occur,
however, the U.S. QmentalityQ and political climate vis--
vis these kinds of investors needs to change. The U.S.
Government appears unwilling to let Chinese banks take
large equity stakes in U.S. banks. While noting that
Chinese banks do not seek operational control of U.S.
institutions, Guo doubted that the U.S. Congress or public
would accept even a 10% stake by a Chinese bank in a large
U.S. bank. Even setting up a single U.S. branch Qtakes
forever;Q CCB first sought a branch license in the mid-
1990s.

9. (SBU) Regarding Chinese banksQ reluctance to extend RMB
credit to foreign banks, CCB had held what it thought were
low risk bonds of several U.S. financial institutions that
went bankrupt, including Lehman. It therefore was not
surprising that when risks in lending to U.S. financial
institutions increased, banks reduced their exposure. Guo
thought lending constraints to foreign banks had now eased.

10. (SBU) Guo said investment growth was falling
significantly among CCBQs corporate clients, who suffer
from excess capacity. BanksQ lending to local governments
also has been cut back, as the expected decline in property
prices has reduced property developersQ demand to lease
land; those leases had been an important source of
collateral for bank lending. Rather than pressing banks to
support borrowers, as it had done in previous cyclical
downturns, and which led to the accumulation of large non-
performing loans, the Chinese government will provide tax
breaks or subsidies directly to borrowers.

BEIJING 00004198 003 OF 003

11. (SBU) Finally, Guo claimed that Chinese macroeconomic
imbalances are smaller than indicated by official data,
which undercounts substantially the provision and
consumption of services.

State Food and Drug Administration
----------------------------------
12. (SBU) State Food and Drug Administration (SFDA)
Commissioner Shao Mingli told Ambassador Holmer that the
SFDA already has posted on its website a list of drug
companies that meet GMP standards and have manufacturing
and export licenses, while a similar Chinese-language list
of licensed exporters has been provided to the FDA but not
posted online. (Note: Under the SFDA-HHS Memorandum of
Agreement on drugs and medical devices, SFDA is required to
post these lists online by June 2010. End note.) Shao
emphasized that importing countries are responsible for
regulating their own markets, so it might be more fruitful
for the U.S. to issue a list of importers (or perhaps
products) that must be registered with the FDA. In
response, Holmer observed that while a Chinese-language
list is helpful, what U.S. companies need more is an
English-language list of licensed exporters available
online.

13. (SBU) Asked whether the SFDA prohibits the export of
drugs not registered with SFDA or not in conformity with
GMP practices, Shao said export policy is not set by SFDA
and related rules are established at AQSIQ. He claimed it
is not practical for SFDA to issue a positive list of
"approved" companies to the AQSIQ, although that issue is
under discussion with the FDA. Holmer emphasized that
finding an appropriate solution would be beneficial to all
sides, and noted that the SED is a mechanism for inter-
agency cooperation if necessary. Regarding the existing
supervisory loophole on production of active pharmaceutical
ingredients (API) by unregistered companies, Shao said SFDA
has banned purchase by drug manufacturers of API from any
non-certified company, and also suggested that the FDA
should ban importation of drugs or API from companies not
certified, registered and licensed to produce API.
Finally, Holmer raised U.S. concern about Chinese dietary
supplements that have been found to contain active drugs,
including Viagra or similar pharmaceuticals. Shao said
SFDA had already provided information to the FDA concerning
this matter, and has banned the use of any medicine in
foods and dietary supplements. He said the SFDA has little
information on companies making such products.

Food and Product Safety
-----------------------

14. (SBU) In a meeting with Administrator Ji Shengkun of
the Standards Administration of China (SAC), Ambassador
Holmer asked whether previous responses to product and food
safety problems could guide or inform policy-makers on how
the U.S. and China can strengthen cooperation in the area
of product safety. Ji detailed China's unilateral
responses to recent problems with melamine contamination in
milk and milk formula. He also described provisions of an
improved food safety law as well as AQSIQ's new oversight
and inspection responsibilities. Ji's overall tone,
however, was somewhat defensive and echoed official media
statements suggesting that problems with China's product
safety are largely fabricated by an overzealous media. Ji
did not offer any suggestions for stronger food and product
safety cooperation between the US and China.

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