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O 111257Z JAN 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3727
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RUCPDOC/USDOC WASHDC IMMEDIATE
RUEHC/DEPT OF LABOR WASHDC IMMEDIATE
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INFO RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS E F T O SECTION 01 OF 04 BEIJING 000263 
 
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 ETRD PREL SENV ENRG CH
SUBJECT: SED SESSION THREE:  SUSTAINING ECONOMIC DEVELOPMENT 
 
REF: A. BEIJING 259 
 
     ¶B. BEIJING 262 
 
¶1. (SBU) Summary:  In the December 14 Strategic Economic 
Dialogue (SED) session on sustaining economic development, 
Federal Reserve Chairman Bernanke discussed how a flexible 
exchange rate will help balance China's economy.  National 
Development and Reform Commission (NDRC) Chairman Ma Kai 
raised the structural challenges that China faces and 
countered that relaxing United States export controls would 
help reduce China's trade surplus with the United States. 
Commerce Secretary Gutierrez added that China could both 
increase consumption and reduce its trade surplus by 
increasing market access for foreign services.  People's Bank 
of China (PBOC) Governor Zhou Xiaochuan said that China's 
financial reforms will proceed gradually to ensure steady 
growth and financial stability.  Health and Human Services 
Secretary Leavitt discussed the efficiencies of setting 
 
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common standards.  Minister of Labor and Social Security Tian 
Chengping and Labor Secretary Chao both expressed support for 
greater cooperation on pension reform.  End Summary. 
 
Chairman Bernanke on Balancing China's Economy 
---------------------- 
 
¶2. (SBU) Federal Reserve Chairan Benjamin Bernanke explained 
the risks of Chna's imbalanced growth to the participants in 
the third session of the Strategic Economic Dialogue (SED). 
He noted that investment and net exports are too high and 
consumption is too low.  Capital misallocation runs the risk 
of creating new non-performing loans (NPLs) and weakening 
financial institutions.  Chairman Bernanke encouraged China 
to increase public spending on pensions and healthcare and 
expand individuals' access to private insurance to reduce 
precautionary savings and raise consumption.  An appreciation 
of the renminbi (RMB) will change relative prices, reducing 
incentives to invest in the export sector. 
 
¶3. (SBU) Chairman Bernanke noted that limited RMB flexibility 
inhibits the central bank's ability to adjust interest rates 
to maintain price stability.  Due to China's high savings 
rate, the central bank has been able to mop up liquidity 
without a large increase in interest rates, but this will 
become increasingly difficult as the stock of sterilization 
bonds continue to grow.  Moreover, with a rigid exchange 
rate, as China liberalizes its capital account, the 
effectiveness of monetary policy will be hampered. 
 
China's Economy Like Japan's in the Seventies 
------------------------ 
 
¶4. (SBU) In response to observations by Treasury Secretary 
Henry Paulson on the lessons for China from Japan's 
experience, Chairman Bernanke noted that erratic monetary 
policy and an unwillingness to deal resolutely with NPLs in 
the financial sector, not the yen's appreciation following 
the Plaza Accord in the mid-1980s, had contributed to Japan's 
stagnation in the 1990s.  An even better lesson can be drawn 
from Japan's experience in the early 1970s.  During that 
time, Japan's excessive focus on exchange rate stability led 
to rapid money supply growth, followed by inflation, 
excessive investment and ultimately recession. 
 
NDRC: Rapid Investment Growth is Part of Industrialization, 
but Investment Slowing Down 
----------------------- 
 
¶5. (SBU) Chairman of the National Development and Reform 
Commission (NDRC) Ma Kai said rapid investment growth is 
inevitable and rational for China, which is currently 
 
BEIJING 00000263  002 OF 004 
 
 
undergoing urbanization and industrialization.  Wary of 
excess investment, the Chinese Government will work to 
moderate its growth and raise returns on investment by 
improving the allocation of investment.  For example, China 
will promote investment in sectors that conserve energy and 
raise energy efficiency. 
 
Chinese Government Measures to Raise Consumption 
--------------------------- 
 
¶6. (SBU) To promote consumption, Chairman Ma said the 
government is trying to raise incomes of farmers and 
low-income urban dwellers as well as promote services (which 
are less investment intensive). Ma acknowledged that 
insufficient access to health insurance also led to high 
precautionary savings.  Widening income inequality also 
contributes to high savings.  The government has introduced 
the following measures to raise rural and low-income urban 
dwellers' incomes:  1) abolishing rural taxes, 2) providing 
subsidies to farmers, 3) providing subsistence housing for 
low-income urban dwellers, 4) introducing a minimum wage in 
rural areas, 5) improving medical and social security 
benefits, and 6) raising government expenditures on cultural 
activities, such as tourism. 
 
¶7. (SBU) China does not pursue a trade surplus, Chairman Ma 
added, and only in the recent two years has China experienced 
surpluses that are large relative to its economy.  China's 
trade with the United States is mutually beneficial and 
complementary.  Ma hoped that the United States would relax 
controls on high-tech exports to reduce the trade imbalance. 
 
PBOC: Financial Reforms Will Proceed Gradually to Ensure 
Steady Growth 
-------------------------- 
 
¶8. (SBU) Zhou Xiaochuan, Governor of People's Bank of China 
(PBOC), said that the Chinese Government places priority on 
economic stability and steady growth.  The PBOC has made 
better use of indirect monetary policy instruments and more 
market based interest rates and the RMB has appreciated 
around six percent against the USD since July 2005.  He 
highlighted other structural adjustments, such as growth in 
consumer credit, mortgages and auto loans.  Governor Zhou 
said that China will deregulate financial markets gradually 
to maintain economic and financial stability. 
 
Gutierrez: Further Discussion on High-Tech Exports in JCCT 
--------------------------- 
 
¶9.  (SBU) Commerce Secretary Carlos Gutierrez said that the 
United States' goal to reduce its trade deficit is to export 
more, not import less.  Secretary Gutierrez noted that the 
United States and China had widely different assessments of 
the impact of high technology export controls on trade 
imbalances and suggested they discuss this in the High-Tech 
Working Group under the Joint Commission on Commerce and 
Trade.  He added that China could both raise consumption and 
reduce its trade surplus through greater market access for 
foreig services.  Assistant Secretary of State Daniel 
Sullivan added that another issue that prevents American 
companies from exporting high-tech equipment is China's 
inadequate IPR protection. 
 
MOH: China to Strengthen Health Services 
--------------------------- 
 
¶10.  (SBU) Minister of Health Gao Qiang said the Chinese 
Government's major goal is to strengthen health services by: 
1) closing the health services gap among regions (and 
 
BEIJING 00000263  003 OF 004 
 
 
particularly between rural and urban areas), 2) improving the 
quality of health services, 3) establishing different medical 
insurance schemes for different areas, 4) improving the 
financial health and supervision of hospitals, 5) providing 
safe and inexpensive medicines, and 6) diversifying health 
care services by encouraging investment in medical 
institutions. 
 
Secretary Leavitt: Technical Standards Can Be Trade Barriers 
 
SIPDIS 
---------------------- 
 
¶11. (SBU) Health and Human Services Secretary Michael Leavitt 
said he had just toured parts of rural China and recognized 
China's varying levels of health services.  Secretary Leavitt 
noted that varying technical standards for medical coding, 
software, and the environment could be significant barriers 
to trade and to the efficient provision of health care.  He 
commended examples of price transparency at Chinese hospitals 
he had recently visited. 
 
MOLSS: Expanding the Coverage of Pension and Health Insurance 
Schemes 
--------------------------------------------- ------ 
 
¶12. (SBU) Minister of Labor and Social Security Tian 
Chengping said the government is expanding the coverage of 
pensions to reduce household savings.  Although China started 
late in developing its pension scheme, pension coverage for 
workers has been growing.  In urban areas, the Chinese 
Government plans to cover an additional 10 million people per 
year starting in 2006 so that 50 million more will be covered 
by 2010.  Students, unemployed, and retired elderly people 
currently have no health insurance coverage, but China plans 
to launch pilot projects in 2007 so that all residents in 
selected urban areas will have access to health insurance. 
 
Secretary Chao: Greater Cooperation on Pension Reform 
 
SIPDIS 
--------------------------------------------- -------- 
 
¶13. (SBU) Labor Secretary Elaine Chao said that strengthening 
the social safety net will lead to more balanced growth. 
Secretary Chao stressed the important roles of both public 
 
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and private pensions.  She noted the importance for both 
countries to cooperate on this issue. 
 
 
Participants List 
----------------- 
 
¶14. (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 
 
¶15. (U) Chinese Delegation: 
 
 
BEIJING 00000263  004 OF 004 
 
 
--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