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Cablegate: Under Secretary Hormats Meets with Ndrc

DE RUEHBJ #3102/01 3170351
O 130351Z NOV 09




E.O. 12958: N/A
SUBJECT: Under Secretary Hormats Meets with NDRC
Vice Chairman Zhu Zhixin

(U) This cable is Sensitive but Unclassified (SBU)
and for official use only. Not for transmission
outside USG channels.

1. (SBU) SUMMARY. In a November 9 lunch meeting in
Beijing, Under Secretary Robert Hormats and NDRC
Executive Vice Chairman Zhu Zhixin agreed that the
State Department-National Development and Reform
Commission (NDRC) Dialogue should focus on long-term
global strategic issues. The two discussed the
scope of the dialogue, potential agenda topics, and
the possibility of incorporating it into the
existing Strategic and Economic Dialogue (SnED)
framework. Zhu highlighted China's progression
towards a more balanced economy but noted that
China's immediate focus was on infrastructure
development. U/S Hormats and Zhu agreed that some
trade friction between major trading partners was
inevitable but both countries must focus on long-
term trade relations and the broader goal of
reducing trade restrictions and trade barriers. U/S
Hormats stressed that the U.S. remains a very open
economy and emphasized the need to make progress on
climate change and energy cooperation during
President Obama's visit. He also stressed the
importance of holding the bilateral Investment Forum
well in advance of the next meeting of the SnED.

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Opening remarks

2. (SBU) Zhu Zhixin opened by highlighting the
positive results of the previous six rounds of the
State-NDRC Dialogue and his positive collaboration
with former Under Secretaries Sheeran and Larson.
U/S Hormats confirmed that the U.S. wants to build
on this success and looks forward to increased
cooperation. The Under Secretary congratulated
China on the great economic progress that has been
made since he first visited China in the 1970's with
Henry Kissinger.

State-NDRC Dialogue

3. (SBU) U/S Hormats suggested incorporating the
State-NDRC Dialogue into the existing SnED framework.
The State-NDRC dialogue meeting could advance and
coordinate topics discussed in the existing "global
issues" basket. As State is not the sole relevant
actor to such topics, the U.S. would like to bring
in other agencies such as Treasury, USTR, and
Commerce. U/S Hormats raised global development and
poverty alleviation, overseas investment, energy
security, international economic institutions
(excluding the multilateral development banks, on
which Treasury had lead), regional economic
architecture and commodities markets as potential
topics for discussion, and emphasized that the goal
should be to focus on a long-term strategic approach
rather than merely working to resolve the problem of
the moment.

4. (SBU) Zhu agreed that the State-NDRC Dialogue
should focus on long-term global strategic economic
issues, such as those proposed by U/S Hormats, and
proposed that each dialogue should have just one
focus at a time in order to make the discussion more
productive and ensure inclusion of the right
agencies. U/S Hormats agreed that the dialogue
should be limited to one or two topics at a time.
Zhu also supported holding the upcoming dialogues
outside of the capital cities, for example, in
western China, to better understand the reality of
China's rural development. Finally, Zhu agreed that
it was important to include other relevant agencies
on both sides in the discussion.

Economic overview and stimulus plans

5. (SBU) Regarding USG efforts to resolve the
financial crisis, U/S Hormats underscored that the
U.S. economic situation has improved but there are

BEIJING 00003102 002 OF 003

still problems, including high unemployment and
stress on credit markets. Consumption has decreased
and the savings rate is rising. U/S Hormats said
that the USG had designed the stimulus to work over
2-3 years to combat not only the recession but to
address the structural causes such as the weak
housing market, weak consumption and lack of
confidence in the credit markets. In formulating
the plan, Bernanke and Geithner paid close attention
to historical examples of the Great Depression and
Japan's lost decade, when stimulus packages were
withdrawn too quickly.

6. (SBU) According to Zhu, consumption is important
for China's growth and China's October financial
data shows retail sales continuing to rise. In
particular, the auto industry is thriving with
record sales (9.6 million units) and record
production (10 million units). According to data
from the previous three quarters, overall GDP growth
is up by 7.7 percent (4 percent consumption, 7.3
percent investment and negative 3.6 percent trade).
November marks the one year anniversary of the
release of China's 4 trillion Renminbi stimulus
package. In developing the stimulus, China
determined that the decline of external demand was a
long term problem so they had focused on fostering
internal demand.

Rebalancing China's economy

7. (SBU) In response to U/S Hormats inquiry about
plans for rebalancing China's economy and growing
its service sector, Zhu pointed out that China has
already committed in the tenth five-year plan to
reorganizing and upgrading the industrial structure.
Under this plan, the secondary (or industrial)
sector has developed fast and this will lead to the
development of the service sector. However, China
first needs to develop infrastructure to promote
urbanization, Zhu said, citing the example of high
passenger flow over the holidays. Increased
investment in infrastructure and improved living
standards will naturally lead to the development of
the service sector. Tourism within China is growing
quickly and is a good example of the developing
service sector and increased domestic consumption.

8. (SBU) Zhu emphasized that the 17th Party Congress
had agreed to transform China's economy to rely
equally on consumption, investment and exports.
Therefore the domestic market will play an
increasingly greater role. U/S Hormats agreed that
more emphasis on consumption, infrastructure and
investment will keep China growing despite lower
international demand for export goods and will help
rebalance the global economy. He stressed the
importance of sustained efforts to ensure steady and
substantial rebalancing.

Trade Protectionism

9. (SBU) Zhu insisted that maintaining an open
market is an important factor in maintaining a
balanced economy. Although some trade friction is
inevitable, it is important to have a global
attitude and focus on the long-term bilateral trade

10. (SBU) U/S Hormats agreed that protectionism has
a negative effect and acknowledged that trade
disputes do occasionally arise between major trading
partners, but highlighted that the United States
remains a very open economy and has a policy of
trying to relieve trade issues through consultation
and negotiation. Working together to correct
bilateral imbalances under the Pittsburgh G-20
framework will further alleviate U.S. internal
pressures to erect new barriers. Progress on global
trade issues led by Ambassador Kirk is critical to
redress such pressures as well and it would be wise
for PRC officials to work closely with him.

Environmental issues and the Investment Forum

BEIJING 00003102 003 OF 003

11. (SBU) U/S Hormats concluded the meeting by
bringing up two points in anticipation of the
Presidential visit. He emphasized the Obama
Administration's determination to make progress on
environmental and climate issues, to promote clean
energy and to make progress on an agreement for
Copenhagen. He also expressed his hope that both
parties could agree to hold the next Investment
Forum before the SnED in order to make the dialogue
more productive.

12. (U) Under Secretary Hormats cleared this message.


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