VZCZCXRO6680
PP RUEHCN RUEHGH
DE RUEHBJ #5779/01 2130852
ZNR UUUUU ZZH
P 010852Z AUG 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 2776
RUCPDOC/USDOC WASHDC PRIORITY
RUEADWD/DA WASHINGTON DC PRIORITY
INFO RUEHCN/AMCONSUL CHENGDU 6886
RUEHGZ/AMCONSUL GUANGZHOU 1178
RUEHGH/AMCONSUL SHANGHAI 5418
RUEHSH/AMCONSUL SHENYANG 6650
RUEHHK/AMCONSUL HONG KONG 7919
RUEHIN/AIT TAIPEI 5866
RUEHGV/USMISSION GENEVA 1247

UNCLAS SECTION 01 OF 06 BEIJING 015779 
 
SIPDIS 
 
SIPDIS 
 
USDOC FOR DAS LEVINE, BIS/DUS/MFOULON, AND 
4420/ITA/MAC/CEA/MCQUEEN 
USTR FOR BHATIA/STRATFORD/WINTER/ALTBACH/MCCARTIN 
GENEVA FOR USTR 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ETRD EAGR ECON WTRO KIPR CH TW
SUBJECT: COMMERCE U/S LAVIN MEETS NDRC VICE CHAIRMAN ZHANG, 
SASAC VICE CHAIRMAN SHAO 
 
 
¶1. (SBU)Summary: Franklin L. Lavin, Department of Commerce 
Under Secretary (U/S) for International Trade on July 28, 
2006 held separate meetings with National Development and 
Reform Commission (NDRC) Vice Chairman Zhang Xiaoqiang and 
State-owned Asset Supervisory and Administration Commission 
(SASAC) Vice Chairman Shao Ning.  U/S Lavin during his 
meeting with NDRC Vice Chairman Zhang stated there is a 
growing perception that China is allowing political 
considerations to influence its economic policy.  He said a 
recent joint letter from Commerce Secretary Gutierrez and 
Energy Secretary Bodman demonstrates Washingon's support 
for Westinghouse's bid in China's nuclear power plant 
competition.  NDRC Vice Chairman Zhang said the Chinese 
Government is enacting policies that reflect the changing 
nature of China's market rather than being protectionist. 
He stated Beijing appreciated the Westinghouse letter's 
significance, but reiterated the long-term support of the 
competing companies host governments is a key criteria in 
the competition.  U/S Lavin closed by inviting NDRC 
participation in a venture capital forum, while Vice 
Chairman Zhang closed by encouraging Washington 
participation in energy talks to be held in Beijing. 
 
¶2. (SBU) During his meeting with SASAC Vice Chairman Shao, 
U/S Lavin stated that it is important for Washington to 
learn as much as possible about how China's SOE system 
operates.  He said there is a need for China's stated owed 
enterprises (SOEs) to make dividend payments to the Chinese 
Government, rather than simply plow profits back into the 
enterprise.  This would level the playing field between the 
SOEs and foreign companies doing business in the China. 
SASAC Vice Chairman Shao said he agreed with this point.  He 
stated that the Chinese Government is working to establish a 
system that would facilitate such payments.  The system also 
will allow SASAC to better manage the sell-off or spin-off 
of subsidiaries from SOEs. End Summary. 
 
--------------------------------------------- ------------ 
Under Secretary Lavin Meets With NDRC Vice Chairman Zhang 
--------------------------------------------- ------------ 
 
Zhang Defends Recent Foreign Investment Restrictions 
--------------------------------------------- ------- 
 
¶3. (SBU) U/S Lavin, accompanied by Clark T. Randt, U.S. 
Ambassador to China, on July 28, 2006 met NDRC Vice Chairman 
Zhang Xiaoqiang to discuss a broad range of bilateral trade 
and investment issues.   U/S Lavin started the meeting by 
stating that some in the United States perceive that the 
Chinese Government is increasingly allowing political issues 
to influence investment decisions in China.  Vice Chairman 
Zhang said that Beijing, since the beginning of its opening 
and reform period, has sought to promote the introduction of 
advanced management techniques, high-technology, and foreign 
capital into the Chinese market.   Beijing's evolving 
economic policies must reflect the changing nature of 
investment activity in China while also protecting the 
environment and promoting energy efficiency. 
 
¶4. (SBU) Vice Chairman Zhang said that in previous years 
mergers and acquisitions (M&A) accounted for about five 
percent of foreign direct investment (FDI) in China.  M&A 
activities in 2005 accounted for 20 percent of China's FDI. 
Vice Chairman Zhang stated many Chinese government and 
industry observers have commented that if left unchecked, 
this trend could damage China's economic security.  To avoid 
this type of damage, the NDRC is placing restrictions on 
foreign investment in the financial, energy, and heavy 
machinery equipment sectors.  Vice Chairman Zhang said that 
the Chinese Government has closely studied the U.S. 
Government's response to 9/11.  Beijing has noted that 
following 9/11 Washington placed restrictions on foreign 
investment in several sectors, including agriculture, 
energy, transportation, banking and finance, and high- 
technology.  The Chinese Government similarly believes it is 
important to protect its economy from foreign threats. 
 
BEIJING 00015779  002 OF 006 
 
 
 
¶5. (SBU) U/S Lavin stated Washington understands Beijing 
must ensure that it protects China's economic security when 
formulating investment policies.  In some recent cases, 
however, it appears Beijing is protecting domestic 
businesses rather than the country's economic security.  The 
steel and automobile sectors in particular, are growing 
areas of concern in that regard.  U/S Lavin noted that cross 
border investment can help countries avoid bilateral trade 
frictions, such as antidumping charges.  Vice Chairman Zhang 
said that China's automobile and steel sectors have always 
been open to foreign investment.  China's automobile 
industry has largely been built through joint ventures with 
the world's leading automobile manufacturers, including 
General Motors, Volkswagen, and Nissan among others.  China 
only has one brand of automobile that is not foreign.  Vice 
Chairman Zhang said that foreign interest in participating 
in China's steel sector is relatively recent since the 
sector has expanded only in the past several years to the 
degree necessary to attract foreign investment.  Arcelor and 
Mittal, two of the world's leading steel makers, now have 
significant investment in Chinese steel enterprises.  U/S 
Lavin said that Beijing's achievement ensuring foreign 
investment in these sectors is laudable, and certainly 
contributed to the past twenty years of China's economic 
growth.  The concern among many U.S. investors and 
businesses is that the appearance of a growing economic 
nationalism in China may prevent similar success stories 
during the next twenty years. 
 
Zhang, Lavin Discuss Westinghouse, JCCT Commitments 
--------------------------------------------- ------ 
 
¶6. (SBU) U/S Lavin said that he wanted to ensure that 
Beijing understands the significance of a recent joint 
letter from Commerce Secretary Gutierrez and Energy 
Secretary Bodman to the Chinese Government supporting 
 
SIPDIS 
Westinghouse's bid to build nuclear power plants in China. 
This type of joint letter is rare and should be taken as a 
signal of the U.S. Government's firm commitment to 
Westinghouse.  Vice Chairman Zhang stated that the Chinese 
Government took note of the positive attitude of the U.S. 
Government towards Westinghouse's bid.  Beijing believes 
that the company selected to participate in China's nuclear 
power program needs to have the firm backing of its 
government. 
 
¶7. (SBU) Vice Chairman Zhang said he is aware that in the 
past some contracts between U.S. companies and Chinese 
counterparts have been nullified because of political 
factors.  In many cases, Beijing has been willing to accept 
these decisions because the contracts were relatively small. 
Zhang said that in the case of the nuclear power program, 
however, anything short of a full, long-term commitment by 
the U.S. Government would be unacceptable.  U/S Lavin stated 
that Washington wants to ensure that Westinghouse is able to 
compete for the contract on normal business terms.  Beyond 
the joint letter, the U.S. Government's long-term commitment 
to peaceful nuclear power programs abroad has been futher 
demonstrated by the recent passing of Congressional 
legislation supporting U.S. participation in India's nuclear 
power program. 
 
¶8. (SBU) U/S Lavin stated that the U.S. Government 
appreciates the efforts the NDRC has taken to date in 
communicating with U.S. medical device companies.  Company 
representatives indicate that solid groundwork has been laid 
for future cooperation.  U/S Lavin said that the U.S. 
Government is pleased that the Chinese Government continues 
to take positive steps following the recent Joint Commission 
on Commerce and Trade (JCCT) talks in Washington to enable 
express delivery services to expand their business in China. 
The development of these businesses in China will inevitably 
expand the country's economic growth.  U/S Lavin stated that 
Washington also has been pleased with Beijing's neutral 
stance on the type of 3G cell phone technology to be used in 
 
BEIJING 00015779  003 OF 006 
 
 
China.  Vice Chairman Zhang said Beijing remains committed 
to enacting postal reform that promotes a healthy business 
climate for express delivery services and other related 
businesses.  Beijing will allow the market to determine the 
best 3G cell phone technology for Chinese customers.  Vice 
Chairman Zhang stated for a particular cell phone technology 
to be successful in China, it will need to be advanced and 
reliable, provide good return on investment for the 
companies employing it, and will have to adhere to China's 
information security laws. 
 
Zhang Presses For More U.S. Hi-Tech Exports 
------------------------------------------- 
 
¶9. (SBU) Vice Chairman Zhang stated one of the most 
important discussions held during the recent JCCT dialog was 
that regarding the need to increase U.S. exports to China. 
As stated during the JCCT, Beijing believes the lifting of 
U.S. export restrictions on high technology (hi-tech) civil 
use computer equipment and components is the most immediate 
way to increase U.S. exports.  The Chinese Government 
estimates it would lead to a 20 billion U.S. dollar annual 
increase in U.S. exports to China.  Vice Chairman Zhang 
stated Beijing has learned that Washington is considering 
amending its export regulations to make them more 
restrictive.  U/S Lavin stated that he questioned whether 
the lifting of export restrictions on hi-tech sales would 
have as significant an impact as Beijing suspects.  It also 
is important to note that the United States is a leading 
exporter to China of other items, such as cotton and 
soybeans.  Additionally, during the first five months of 
2006, overall U.S. exports to China have grown by some 36.5 
percent.  U/S Lavin stated these facts point to the 
improving competitiveness of U.S. products in the Chinese 
market. 
 
¶10. (SBU) Vice Chairman Zhang said despite rising U.S. 
exports to China during the first part of 2006, the Chinese 
Government still maintains U.S. companies are missing out on 
hi-tech opportunities in China.  Chinese Government 
statistics indicate that in 2005, foreign businesses 
exported some 200 billion U.S. dollars worth of hi-tech 
products to China.  The United States accounted for only 
around six percent of this trade.  Vice Chairman Zhang 
stated that U.S. companies could capture the bulk of this 
trade if Washington would ease export restrictions.  U.S. 
trade success in other areas, such as agricultural products, 
is laudable, but pale in comparison to the potential of the 
hi-tech field.  U/S Lavin stated that several U.S. hi-tech 
products could be exported to China if provided adequate 
market access.  These products include clean coal technology 
developed by General Electric and fiber optic cable made by 
Corning.  U/S Lavin stated that if the Chinese Government 
and Chinese businesses want to have a voice in the U.S. 
export regime, they should provide written comments on the 
pending revised export regulations.  These regulations are 
currently in a public comment period, but to date, Beijing 
has not participated in the process.  Vice Chairman Zhang 
said that he would encourage the Chinese Government and 
Chinese businesses to participate in the proposed export 
regulation comment process. 
 
Zhang Promotes Energy Talks, Lavin Venture Capital Forum 
--------------------------------------------- ----------- 
 
¶11. (SBU) Vice Chairman Zhang stated the Chinese Government 
hopes to build upon the rapport established by Chinese 
President Hu and U.S. President Bush during their meetings 
in Washington and on the margins of the G8 in Moscow.  The 
recent strengthening of bilateral political and economic 
ties is a positive development for the people of both 
countries.  To that end, Vice Chairman Zhang closed by 
encouraging U.S. participation in a Five Party Energy 
Ministerial dialog proposed by Beijing.  U/S Lavin said that 
he appreciated the opportunity to meet with Vice Chairman 
Zhang and other senior Chinese economic and trade 
 
BEIJING 00015779  004 OF 006 
 
 
policymakers.  He said the Department of Commerce would like 
to extend a formal invitation to the NDRC to attend a 
venture capital forum to be held in the United States.  The 
forum will be similar to one hosted by the NDRC several 
years ago.  U/S Lavin closed his remarks by stating that he 
hoped that the NDRC would accept the invitation and that 
Vice Chairman Zhang would lead the Chinese delegation to the 
forum. 
 
¶12. (U) Chinese Participants: 
 
-NDRC Vice Chairman Zhang 
-Chen Bin, Vice Director, Department of Industry, NDRC 
-Li Bin, Deputy Director General, Department of Foreign 
Affairs, NDRC 
-Wang Dong, Deputy Director General, Department of Foreign 
Capital Utilization, NDRC 
-Zhou Wangjun, Deputy Director General, Department of 
Prices, NDRC 
 
¶13. (U) United States Participants: 
 
-Franklin L. Lavin, Under Secretary of Commerce for 
International Trade 
-Clark T. Randt, United States Ambassador to China 
-Cheryl McQueen, Director, Office of the Chinese Economic 
Area, Market Access & Compliance 
-Matthew Dauphinais, Special Assistant, Office of the Under 
Secretary of Commerce for International Trade 
 
SIPDIS 
-Barry I. Friedman, Senior Commercial Officer, U.S. Embassy 
Beijing 
-Robert S. Luke, Economic Minister Counselor, U.S. Embassy 
Beijing 
 
--------------------------------------------- ------------ 
Under Secretary Lavin Meets With SASAC Vice Chairman Shao 
--------------------------------------------- ------------ 
 
Shao Provides SOE Reform History, Explains SASAC's Role 
--------------------------------------------- ---------- 
 
¶14. (SBU) On July 28, 2006 U/S Lavin met with SASAC Vice 
Chairman Shao Ning to discuss the Chinese Government's 
progress in reforming its SOE system.  Vice Chairman Shao 
began his comments by stating that SASAC has only been a 
government office since 2003 and is in the early stages of 
its work.  The most significant achievement to date in SOE 
reform occurred in 1998 when Beijing severed the financial 
tether binding the Central Government, Chinese state-owned 
banks, and SOEs.  This resulted in a large number of SOEs 
going bankrupt because they were no longer guaranteed bank 
loans to cover operating losses, but it ensured the 
financial viability of those SOEs that survived.  Vice 
Chairman Shao said that the next stage of reform would 
result in further closure or sale of numerous large SOEs. 
This should leave each Chinese Province retaining only 10 to 
20 of its large SOEs while the Central Government should be 
left with less than 100, down from its current portfolio of 
¶169. 
 
¶15. (SBU) U/S Lavin said that it is very important for the 
U.S. Government to learn as much as possible about how 
China's SOE system operates given the close economic ties 
between the two countries.  In particular, it would be 
helpful to know the scale of Central SOE's that SASAC 
oversees and SASAC's management role in these enterprises. 
Vice Chairman Shao stated that the State Grid Company with 
some 1.3 million employees is the largest SOE in SASAC's 
portfolio.  Meanwhile, two energy SOEs, Sinopec and 
PetroChina, are the leaders in terms of revenue and profit. 
Vice Chairman Shao said that SASAC's role in managing its 
SOEs is best illustrated by using PetroChina as an example. 
SASAC has no role in PetroChina's decisions where to drill 
for oil or natural gas.  That type of decision is left to 
PetroChina's professional managers.  By contrast, if 
PetroChina decided that it wanted to go into the real estate 
 
BEIJING 00015779  005 OF 006 
 
 
or other non-core business areas, the enterprise must have 
SASAC's approval. 
 
Shao Admits Approving Non-Core Business Ventures 
--------------------------------------------- --- 
 
¶16. (SBU) U/S Lavin said that Vice Chairman Shao's 
explanation of SASAC's role in managing its SOEs raises a 
question regarding Baosteel's role in the competition to 
purchase the Guangdong Development Bank.  Baosteel has 
teamed with French Bank, Societe Generale (SocGen), in that 
competition.  SocGen has little experience operating in 
China and small financial resources compared to its U.S. 
competitor, Citibank.  U/S Lavin stated that this fact, 
coupled with Baosteel's previous lack of financial sector 
experience, is leading some to suggest Baosteel's role is 
merely to lend its strong ties to the Chinese Government to 
a company too weak to win on its own merits.  Otherwise, it 
is unclear why Baosteel would launch a foray into a field 
that is clearly divorced from its core business interests. 
Vice Chairman Shao stated that SASAC approved Baosteel's 
request to participate in the Guangdong Development Bank 
competition.  Baosteel presented its case to SASAC as one of 
wanting to invest on-hand cash reserves rathe than that of 
evolving into a financial services or banking enterprise. 
Baosteel stated that margins in the steel sector are 
currently so tight that further investment in steelmaking 
would be unprofitable, but investing in the banking sector 
provided opportunity for significant returns. 
 
Shao Supports Siphoning SOE Dividend PaymentsTo Beijing 
--------------------------------------------- ---------- 
 
¶17. (SBU) U/S Lavin stated that this situation pointed to 
the need of SOEs to return some of their profits back to 
their shareholders, most notably the Chinese Government, 
rather than simply plow them back into the enterprise.   In 
the United States and other countries this is one of the 
ways shareholders earn a return on their investment in a 
company.  This type of system also would serve the purpose 
of leveling the playing field between China's SOEs and 
foreign companies trying to do business in the Chinese 
market.  Vice Chairman Shao said that he agreed with this 
assessment.  Dividend payment is one of the next steps in 
SOE reform, but SASAC first must develop a mechanism to 
facilitate these transactions.  To this end, SASAC is 
working to establish a state asset operation budget system. 
Vice Chairman Shao said that this system would create a 
means for SOEs to make dividend payments to the Chinese 
Government.  The new budget system also would enable SASAC 
to have more flexibility in managing the sell-off or spin- 
off of subsidiaries from SOEs.  U/S Lavin closed by 
encouraging SASAC to remain in close contact with U.S. 
Embassy Beijing as it develops this system.  For his part, 
Vice Chairman Shao closed by welcoming further interaction 
with U.S. Government and U.S. business officials because 
SASAC is solicitous of international comments on China's SOE 
reform process. 
 
¶18. (U) Chinese participants: 
 
-SASAC Vice Chairman Shao Ning 
-Zhang Zhonglin, Deputy Director General, Bureau of Planning 
and Development, SASAC 
- Yan Xiaofeng, Director General, Bureau of Foreign Affairs, 
SASAC 
 
¶19. (U) United States participants: 
 
-Franklin L. Lavin, Under Secretary of Commerce for 
International Trade 
-Cheryl McQueen, Director, Office of the Chinese Economic 
Area, Market Access & Compliance 
-Matthew Dauphinais, Special Assistant, Office of the Under 
Secretary of Commerce for International Trade 
 
SIPDIS 
-Barry I. Friedman, Senior Commercial Officer, U.S. Embassy 
 
BEIJING 00015779  006 OF 006 
 
 
Beijing 
 
¶20. (U) U/S Lavin cleared this cable prior to departing 
Beijing. 
 
Randt