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TO RUEHC/SECSTATE WASHDC IMMEDIATE 3717
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INFO RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS E F T O SECTION 01 OF 05 BEIJING 000259 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE ALSO FOR OES/WATSON AND DEROSA-JOYNT 
STATE PASS CEQ CONNAUGHTON 
STATE PASS CEA FOR BLOCK, SLAUGHTER 
STATE PASS USTR FOR STRATFORD, ALTBACH, WINTERS, CELICO 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN 
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRM FOR DAGES 
NSC FOR RHUNTER/JSCHRIER/KTONG 
TREASURY FOR OASIA/INA DOHNER/HAARSAGER/BAKER/CUSHMAN 
TREASURY FOR TAIYA SMITH 
DOE FOR INTERNATIONAL/PUMPHREY AND GEBERT 
EPA FOR INTERNATIONAL/AYRES, FIDLER, MCASKILL 
HHS FOR STEIGER, ELVANDER AND BHAT 
LABOR FOR ILAB 
 
E.O. 12958: N/A 
TAGS: ECON EFIN WTRO PREL SENV ENRG CH
SUBJECT: STRATEGIC ECONOMIC DIALOGUE (SED) OPENING SESSION 
ON CHINA'S DEVELOPMENT STRATEGY 
 
¶1. (SBU) Summary:  During the December 14 opening of the 
Strategic Economic Dialogue (SED), Vice Premier Wu Yi and 
National Development and Reform Chairman Ma Kai,s 
presentations on China,s development road and strategy broke 
little new ground and drew largely from 11th Five-Year Plan 
documents.  Vice Premier Wu discussed 1) cultural and 
historical factors underpinning China,s development 
strategy, 2) China,s status as a poor country facing 
development challenges and 3) China,s development goals. 
Chairman Ma followed up with a discussion of China,s 
development strategy.  The large amount of time allocated to 
Ma during the SED sessions, far greater than other ministers, 
appeared designed to signal his enhanced role in economic 
policy making.  In their interventions, Chinese officials 
stressed the priority placed on more balanced development, 
particularly between rural, urban, western and coastal 
regions. 
 
¶2. (SBU) USTR Schwab, emphasizing the importance of markets, 
argued for a limited role of government in the economy.  Her 
remarks noting China,s backtracking on reforms and 
incomplete transition to a market economy and rule of law 
sparked defensive responses from Vice Premier Wu, Chairman Ma 
and others.  End summary. 
 
Opening Statements 
------------------ 
 
¶3. (SBU) At the December 14-15, 2006 first meeting of the 
SED, Treasury Secretary Paulson and Vice Premier Wu Yi led 
discussions of long-range, cross-cutting strategic economic 
issues affecting the United States and China.  Secretary 
Paulson, six other Cabinet members, the Federal Reserve 
Chairman, and senior officials from State, Transportation, 
the Council of Economic Advisors and the U.S. ExIm Chairman 
exchanged views with the Vice Premier and twenty Ministers or 
Vice Ministerial-rank officials.  Vice Premier Wu Yi opened 
this unprecedented gathering of so many of the two sides' 
leading policymakers by emphasizing the following points: 
 
o  The SED will help increase bilateral trust and cooperation 
and facilitate constructive relations. 
 
o  The SED should focus on macro-level long-term and 
strategic issues. 
 
o  The SED will not replace existing bilateral dialogues but 
can be used to address issues of immediate importance. 
 
o  China hopes the SED will help the United States grasp a 
more holistic view of China's development plans and 
challenges. 
 
o  The SED should be based on mutual respect, cooperation and 
equality. 
 
¶4. (SBU) Secretary of the Treasury Henry Paulson agreed the 
SED should address long-term issues and pressing short-term 
problems.  He noted the United States intended to focus on: 
 
o  Achieving sustainable growth without large imbalances. 
 
o  The importance of open markets, rule-of-law, property 
rights and transparency. 
 
o  Energy and the environment. 
 
Vice Premier Wu Yi: China's Development Road 
------------------------- 
 
BEIJING 00000259  002 OF 005 
 
 
 
¶5. (SBU) Vice Premier Wu noted that the choice of "China's 
Development Road" as the SED theme was motivated by a 
perception that the United States neither fully understands 
China's development strategy nor appreciates the challenges 
it faces.  China's development, she said, should be viewed as 
an opportunity, not a threat.  Her presentation touched on 
themes consistent with priorities laid out in China's 11th 
Five-Year Plan.  A summary of the Vice Premier's presentation 
follows: 
 
o Peaceful development:  China's development strategy is 
driven by 1) a culture that values harmony and has a long 
history of diplomacy (e.g., the Silk Road, Zheng He's sea 
voyages) and 2) a painful, humiliating history of war and 
foreign domination that underpins China's quest for peace and 
stability (e.g., the Opium War, First Sino-Japan War, the War 
of Japanese Aggression (i.e., WWII)). 
 
o Economic development challenges:  China remains a 
developing country facing high income inequality, unbalanced 
development, rural poverty and weak public services 
(particularly for rural residents).  In the coming two 
decades 300 million rural migrants will move to urban areas. 
 
o Development goals:  Expand China's &well-off8 society to 
over one billion people by 2020 and become a medium developed 
country by 2050. 
 
o Development conditions:  China can sustain high economic 
growth for the next 15 years, has huge market demand, high 
household savings and abundant labor. 
 
o Development model:  1) Move away from a resource and 
capital intensive, high polluting model towards a high 
productivity, resource and environmentally friendly model, 2) 
encouragedomestic demand through rural reform and expand 
social services to reduce precautionary savings, 3) nurture 
independent innovation, 4) balance regional development, 5) 
strive for energy self-sufficiency by increasing conservation 
and 6) improve the environment by reducing energy 
consumption, increasing efficiency and lowering waste and 
emissions. 
 
o Economic reform:  China is a market economy (over 95 
percent of retail commodities are market-priced and the 
non-state owned sector now accounts for over 60 percent of 
value added) and public ownership is the &mainstay8 of the 
economic system.  China is working to:  1) increase the role 
of the market in determining resource allocation, factor 
pricing and enterprise competitiveness, 2) improve 
macro-economic controls, 3) perfect its legal framework, 4) 
intensify IPR protection and 5) support and expand the 
multilateral trading system. 
 
o Political reform:  China endeavors to 1) promote rule of 
law, 2) make government more responsive and 3) protect human 
rights based on international conventions. 
 
Secretary Paulson Responds 
 
SIPDIS 
----------------------- 
 
¶6. (SBU) Secretary Paulson noted the major question 
confronting China is the pace of reform.  China's size and 
global integration, he continued, makes it harder to manage 
reform with a mix of market and administrative approaches. 
The greatest risk, he opined, may be in not moving quickly 
enough.  While China is a developing country, he said, its 
economic size and integration magnifies the impact of China's 
 
BEIJING 00000259  003 OF 005 
 
 
policies on the global economy.  As China develops, he 
predicted, its global partners will become increasingly 
impatient. 
 
¶7. (SBU) Secretary Paulson stressed that China must rely more 
on markets to determine prices and allocate resources and 
rely more on competition to build strong companies.  In 
particular, China's service sector would benefit from greater 
liberalization.  This, he said, would help China build 
dynamic capital markets.  Failure to do so, he warned, will 
increase costs as Japan experienced in the 1990s.  He agreed 
with Vice Premier Wu that market-based pricing can help China 
achieve its environmental goals. 
 
NDRC Chairman Ma Kai: China's Economic Development Strategy 
----------------------- 
¶8. (SBU) NDRC Chairman Ma's presentation covered six core 
areas of China's development strategy and was essentially an 
outline of China's 11th Five-Year Plan: 
 
¶I.  Boost domestic demand through:  1) strengthening 
household consumption, 2) revitalizing the industrial sector 
by increasing corporate investment, and 3) accelerating 
urbanization. 
 
II.  Adjust China's economic structure by:  1) upgrading 
agriculture, 2) promoting innovation to move up the value 
chain, and 3) developing the services sector. 
 
III.  Conserve resources/protect the environment by:  1) 
reducing energy consumption and pollution, 2) increasing 
forest coverage, 3) promoting services and high tech, and 4) 
improving the legal framework and increasing budgetary 
resources to enforce environmental laws. 
 
IV.  Promote more balanced development by:  1) promoting 
urbanization, 2) improving rural infrastructure and services 
and increasing fiscal outlays to rural areas, and 3) 
promoting regional development campaigns like &Promote the 
West8, &Revitalize the Northeast8 and &Rise of the 
Central Region.8 
 
¶V.  Promote innovation and education by:  1) extending the 
coverage of compulsory education, 2) providing vocational 
training, and 3) increasing R&D funding. 
 
VI.  Continue reform by:  1) liberalizing trade and services, 
2) encouraging private sector development, 3) promoting 
administrative reform, 4) accelerating financial sector 
reform, 5) liberalizing administered prices, particularly of 
resource-based products, 6) improving the exchange rate 
mechanism and striving for basic import/export balance, 7) 
attracting higher quality foreign investment, and 8) 
encouraging Chinese enterprise investment and cooperation 
abroad. 
 
China's Economic Development Strategy ) United States 
Perspectives 
------------------------ 
 
¶9. (SBU) USTR Susan Schwab's presentation focused on three 
areas: 
 
I)  the role of government and markets:  Governments create 
the environment for innovation but shouldn't control 
outcomes.  Flaws emerge when governments intervene. 
 
II) Three development models:  1) a widely rejected central 
planning model, 2) a transparent free market model, and 3) 
 
BEIJING 00000259  004 OF 005 
 
 
the &East Asian8 model characterized by selective 
government intervention, which misallocates resources, 
insulates market participants from market forces and 
contributes to corruption and trade friction. 
 
III) China's incomplete transition:  Key sectors are not 
guided by market signals, the rule of law is underdeveloped, 
market access barriers persist and reform is backsliding.  An 
example is overcapacity in the steel industry. 
 
¶10. (SBU) USTR Schwab noted China's incomplete transition 
threatens its development and bilateral relations, as well as 
the stability of the global economy. 
 
¶11. (SBU) Secretary of Energy Samuel Bondman echoed User's 
comments on China's incomplete transition.  He further noted 
the importance of environmental and IPR protection.  The 
Department of Energy, he added, stands ready to explore ways 
to aid China's economic transition. 
 
¶12. (SBU) Secretary of Commerce Carlos Gutierrez noted that 
China's progress in the past 28 years is unprecedented.  The 
free market model discussed by USTR Schwab, he continued, is 
the one the United States eventually reached. 
 
¶13. (SBU) Matthew Slaughter, Member of the Council of 
Economic Advisors, noted that United States economic growth 
is built on entrepreneurship and the success and failure of 
private firms.  This facilitates innovation.  A flexible 
labor market and deep capital markets are additional key 
factors. 
 
Chinese Response 
---------------- 
 
¶14. (SBU) Vice Premier Wu asked USTR Schwab for evidence that 
China was backsliding on reform.  USTR Schwab cited China's 
promulgation of merger and acquisition rules, regulations 
limiting foreign distribution of economic news, postal reform 
that threatens foreign market access and potentially 
restrictive government procurement regulations.  China, 
Schwab said, appears to be picking winners and losers, a 
strategy proven to be ineffective in other countries. 
 
¶15. (SBU) NDRC Chairman Ma said it was difficult to agree 
with USTR Schwab's comments.  He reiterated China's intent to 
promote the private sector.  China, he stated, will allow the 
market to play a basic role guided by government 
macro-control.  This approach is distinct from either a fully 
planned or a laissez-faire model.  The challenge, he opined, 
is striking the balance between the role of the market and 
macro-control.  Ma challenged USTR Schwab's comments on 
China's steel industry, saying market forces determine what 
and how Chinese enterprises produce, where they invest and 
whether banks lend to them.  Except for a very few items, he 
said, pricing is free from government influence.  Ma admitted 
there is excess investment, but the government has taken 
steps to correct this by tightening monetary policy, 
adjusting land management policies and reducing the VAT 
rebate for steel exports. 
 
¶16. (SBU) NDRC Vice-Chairman Zhang Xiaoqing questioned USTR 
Schwab's comments on China's postal reform.  China, he said, 
is moving to separate the government from service provision 
and towards a market-based system.  In the next 1-2 months, 
he predicted, China will establish a postal system governed 
by modern corporate principles.  Perhaps, he suggested, the 
USG is unhappy with certain aspects of postal reform. 
Nonetheless, it should not deny that the overall direction is 
 
BEIJING 00000259  005 OF 005 
 
 
positive.  Minister of Information Industries Wang Xudong 
added that China's reform in this sector is proceeding at an 
appropriate pace. 
 
Participants List 
----------------- 
 
¶17. (U) United States Delegation: 
 
--Henry Paulson, Secretary of Treasury 
--Clark T. Randt, Jr., United States Ambassador to China 
--Michael Leavitt, Secretary of Health and Human Services 
--Samuel Bodman, Secretary of Energy 
--Carlos Gutierrez, Secretary of Commerce 
--Elaine Chao, Secretary of Labor 
--Susan Schwab, United States Trade Representative 
--Stephen Johnson, Administrator of the Environmental 
  Protection Agency 
--Benjamin Bernanke, Chairman of the Federal Reserve 
--James Lambright, Chairman and President of Ex-Im Bank 
--Daniel Sullivan, Assistant Secretary, Department of State 
--Andrew Steinberg, Assistant Secretary, Department of 
Transportation 
--Matthew Slaughter, Member of the Council of Economic 
Advisors 
 
¶18. (U) Chinese Delegation: 
 
--Wu Yi, Vice Premier 
--Jin Renqing, Minister of Finance 
--Ma Kai, Chairman of National Development and Reform 
  Commission 
--Xu Guanhua, Minister of Science and Technology 
--Tian Chengping, Minister of Labor and Social Security 
--Liu Zhijun, Minister of Railways 
--Li Shenglin, Minister of Communications 
--Wang Xudong, Minister of Information and Industry 
--Bo Xilai, Minister of Commerce 
--Gao Qiang, Minster of Health 
--Zhou Xiaochuan, Governor of People's Bank of China 
--Li Changjiang Administrator of General Administration of 
  Quality Supervision, Inspection, and Quarantine 
--Zhou Shengxian, Administrator of State Environmental 
  Protection Administration 
--Zhou Wenxhong, Chinese Ambassador to the United States 
--Xu Shaoshi, Deputy Secretary-General, State Council 
--Yang Jiechi, Senior Vice Minister, Ministry of Foreign 
Affairs 
--Zhang Xiaoqiang, Vice Chairman, National Development and 
Reform Commission 
--Li Yong, Vice Minister, Ministry of Finance 
--Yi Xiaozhun, Vice Minister, Ministry of Commerce 
--Hu Xiaolian, Vice Governor, People's Bank of China 
--Li Ruogu, Chairman of China Export-Import Bank 
SEDNEY