Cablegate: Sed Hailed in Secretary Paulson's Meetings

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E.O. 12958: N/A
TAGS: ECON EFIN CH
SUBJECT: SED HAILED IN SECRETARY PAULSON'S MEETINGS
WITH CHINESE VICE PREMIER WANG AND FINANCE MINISTER
XIE

1. (SBU) Summary. In separate meetings with PRC Vice
Premier Wang Qishan (August 13) and Finance Minister
Xie Xuren (August 12), Treasury Secretary Paulson
emphasized the importance of sustaining the Strategic
Economic Dialogue (SED). Paulson stressed that
significant accomplishments are needed at SED V to
demonstrate to the incoming U.S. Administration the
benefits of the SED. Wang said both countries fully
recognize the importance of the SED, which President
Hu and Premier Wen have decided to prioritize as a
platform to address difficult issues from a strategic
perspective and resolve problems in a concrete
manner. Minister of Finance Xie also hailed the SED
for producing concrete outcomes while, more
importantly, promoting mutual understanding and trust.
Paulson, Wang, and Xie agreed that the Ten-Year
Framework (TYF) on energy and the environment is
important to both countries and should be
significantly developed for SED V. Paulson confirmed
to Xie that he will keep working to ensure the SED's
durability during the transition, and cited progress
on the TYF as well as the Bilateral Investment Treaty
(BIT) and financial services as key priorities for SED
V.

2. (SBU) Summary, continued: Turning to Doha, VP Wang
noted that there were different readouts from Geneva,
and suggested these issues were not helpful in moving
to the next stage. Wang had told MOFCOM Minister Chen
Deming to prepare a new plan to implement President
Hu's desire for a successful Doha round. Wang said
the JCCT would be a good venue for further discussions
on Doha. Paulson reassured VP Wang that the U.S.
government would continue to take resolute action to
address stress in its financial sector, and Minister
Xie praised Secretary Paulson's quick action to
stabilize markets following the sub-prime mortgage
crisis and the Fannie Mae and Freddie Mac "crisis."
End Summary.

Future of the SED
-----------------

3. (SBU) In an August 13 meeting with Vice Premier
Wang Qishan and Commerce Minister Chen Deming,
Secretary Paulson stressed that the sustainability of
the SED is important to support the U.S.-China
relationship, which is the most important bilateral
relationship in the world. Paulson stressed that
significant accomplishments are needed at SED V to
demonstrate to the incoming Administration the
benefits of the SED.

4. (SBU) Citing the meeting between President Hu and
President Bush, Wang said that it is clear that both
countries fully recognize the importance of the SED,
and that the U.S. side is correct in its understanding
that President Hu and Premier Wen are making the
decision to prioritize this mechanism which provides a
platform to address difficult issues from a strategic
perspective and resolve problems in a concrete
manner. "Both speak highly about the SED," he
said. "In this they see eye to eye with President
Bush." It contributed to good relations by providing
a framework to discuss such issues as the
international response to the Sichuan earthquake
and stress in the U.S. financial sector. Wang also
emphasized that China has not adopted any measures
that would set back the issues discussed in the
SED. Paulson agreed and noted that the SED has also
been an important framework to address product safety
concerns. Wang added that the U.S. and China have a
long relationship and doubted that it would be easily
changed by a new Administration.

5. (SBU) Paulson called the Ten-Year Framework (TYF)
on energy and the environment the "centerpiece" of SED
V. Wang agreed that the TYF is important to both
countries and expressed his desire to see it
significantly developed for SED V. He said that he
hopes to have concrete outcomes related to the TYF at

BEIJING 00003205 002 OF 004

every SED.

6. (SBU) In a separate meeting with Secretary Paulson
on August 12, Minister of Finance Xie Xuren also
hailed the SED, resulting not only in concrete
outcomes, but also more importantly promoting mutual
understanding and trust. He noted that with the
upcoming change in U.S. administration, it was
important to "institutionalize" the dialogue. Paulson
confirmed to Xie that he will keep working on ensuring
the SED's durability during the transition, and cited
progress on the TYF, the BIT, and financial services
as key priorities for SED V.

Bilateral Investment Treaty
---------------------------

7. (SBU) Paulson noted to VP Wang that the BIT does
not have the same power to resonate broadly in the
U.S. as the TYF, but that it is very important to
continued and increased investment flows in both
countries. Further, he expressed concern that it is
controversial enough in both our countries that if
enough momentum is not created by December, the new
administration might not take it up. Given
disagreements on core issues, getting enough done to
create this momentum will require bold action by both
sides.

8. (SBU) Wang responded that President Hu had called
him after the meeting with President Bush and made a
special mention of the BIT, and that Hu and Premier
Wen responded positively to what Wang had
proposed. Wang noted that Paulson's discussion with
President Hu last April had helped break a long-
standing stalemate on the issue. The Chinese side was
pleased to hear that the U.S. is consulting with
industry on what it sees as most important for the
BIT. Wang stressed the U.S. and China should not
conclude a BIT just to produce good news, but should
reflect on what is in our mutual interest.

Next Steps
----------

9. (SBU) Paulson stressed that continued incremental
gains on financial services, such as what was agreed
to in SED IV, was also a priority. While liberalizing
equity caps on FDI in the financial sector remains a
priority, if this is not possible in the near term, it
would be helpful if CBRC and CSRC studies on foreign
investment could signal positive momentum in the
future.

10. (SBU) For SED V, Wang suggested focusing on easy
issues first, as focusing on more difficult issues
would not create a good atmosphere. Paulson agreed
this was the right approach for the Ten-Year
Framework, but for the BIT unless some of the toughest
issues are tackled now, there is increased risk that
the BIT will "die" in the next administration. Wang
said, in that case, he would focus quickly on the BIT
to understand better outstanding issues.

Doha
----

11. (SBU) Turning to Doha, Wang said he understood
Lamy has decided to launch another round in
September. He noted that there were different
readouts from Geneva, and suggested these issues were
not helpful in moving to the next stage. Wang noted
that Chen's performance in Doha had been widely
praised and that he gained respect and credibility
from many of his counterparts, including Lamy and
Mandelson. President Hu and premier Wen both heard
President Bush's emphasis on Doha and the Chinese
leaders want to see a successful Doha round. He had
told Minister Chen to draw up a new plan to implement
President Hu's desire to see a successful Doha round.

BEIJING 00003205 003 OF 004

12. (SBU) Wang said he will see Ambassador Schwab at
the JCCT in September and suggested this would be a
good venue to further discuss Doha. He also noted the
importance of the JCCT as the venue to discuss in
greater detail issues like IPR that have been raised
in the SED. Further, he has already convened several
meetings on the JCCT and is personally engaging in
JCCT preparations.

Fannie Mae and Freddie Mac
--------------------------

13. (SBU) On the U.S. financial sector, Fannie Mae and
Freddie Mac, Paulson reassured VP Wang that the U.S.
government would continue to take resolute
action. Paulson was grateful for China's
understanding and patience and noted that there would
be many opportunities to consult on developments in
the months ahead. Minister Xie praised Secretary
Paulson's quick action to stabilize markets following
the sub-prime mortgage crisis and the Fannie Mae and
Freddie Mac "crisis." Fannie Mae and Freddie Mac's
problems, he speculated, derived from the size of
their balance sheets, making them systemic risks. As
financial innovation brought new products such as
derivatives into the market, new regulation was
needed. (Comment: As a major holder of Fannie and
Freddie debt, Chinese officials have been following
the recent situation closely. They now appear more at
ease, following passage of U.S. legislation providing
a line of credit, that the greatest risks to the GSE's
creditors have passed. However, government and
industry sources have told Emboffs that senior
officials and bankers are still not distinguishing
between GSE's debt and equity prices, and the USG's
efforts to safeguard systemic financial stability
without bailing out shareholders. Thus many tend to
see declines in equity prices as indications of
increased credit risk. End Comment.)

Condition of China's Economy
---------------------------

14. (SBU) Minister Xie said China had successfully
lowered its real GDP growth rate to 10.4 percent,
within the target range, for the first half of 2008.
While acknowledging that Chinese companies,
particularly small- and medium-sized enterprises, are
facing difficulties from higher input costs and lower
demand, Xie posited that their troubles were due in
part to their inability to access credit. (Comment:
Many analysts say credit quotas have
disproportionately impacted lending to SMEs, most of
which have less established relations with the large
state banks. End Comment.) Xie said the Chinese
government wanted stable development and growth, but
gave "priority" to curbing inflation. (Comment: This
differs from recent Chinese official statements that
called for "fast" growth and listed controlling price
increases as only an important "task." End Comment.)

Earthquake Effect
-----------------

15. (SBU) Xie said that beyond the devastating human
toll and huge property losses, the May earthquake in
Sichuan Province would have little effect on China's
economy. He noted that reconstruction and increased
government investment that follow natural disasters
end up increasing GDP growth.

Comment
-------

16. (SBU) Paulson's interlocutors made clear that
Chinese senior leadership views sustaining the SED as
an important anchor for strong bilateral economic
relations. There was also clear support from senior
leaders for the TYF and the BIT, though for the
latter, no indications on whether this means the
Chinese will agree to all core BIT commitments.

BEIJING 00003205 004 OF 004

Chinese economic officials appear comfortable with the
stance they took in the Geneva Doha discussions, while
at the same time, signaling they support a
resurrection of negotiations. Among senior Chinese
economic officials, interest in U.S. financial sector
developments and policy responses remains high, first
due to concerns about the impact on the U.S. real
economy (and thus Chinese exports) and second due to
concerns about the impact on Chinese official and bank
holdings of US fixed income securities.

RANDT

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