VZCZCXRO7518
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #5565/01 2342245
ZNR UUUUU ZZH
O 222245Z AUG 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1192
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/NSC WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BEIJING 005565 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR EXEC - TSMITH, OASIA/ISA 
STATE FOR EAP/CM 
USDOC FOR 4420 
NSC FOR MCCORMICK 
STATE PASS USTR FOR STRATFORD 
STATE PASS CEA 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON; SAN FRANCISCO 
FRB FOR CURRAN/LUNG; NEW YORK FRB FOR DAGES/CLARK 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ETRD CH
SUBJECT: TREASURY SECRETARY PUSHES CAPITAL MARKET REFORM 
WITH CSRC CHAIRMAN SHANG FULIN 
 
SUMMARY 
------- 
¶1. (SBU) Summary: In an August 1 meeting with Treasury 
Secretary Paulson, China Securities Regulatory Commission 
 
SIPDIS 
(CSRC) Chairman Shang Fulin described steps CSRC has taken to 
implement SED agreements, including licensing foreign stock 
market rep offices, resuming licensing new securities firms, 
increasing the quota for qualified foreign institutional 
investors (QFII) and expanding the scope of business for 
foreign joint venture securities companies.  In particular, 
lifting the moratorium on licensing of new securities firms 
may occur as soon as September, three months earlier than 
committed.  Shang also said joint venture securities 
companies could receive licenses to offer a full range of 
services by the end of the year.    Secretary Paulson 
suggested China allow 100% foreign-owned securities companies 
to compete in China and encouraged Shang to allow 
wholly-owned affiliates of international credit ratings 
agencies to rate RMB denominated bonds.  Shang responded that 
China needs to evaluate the progress of the current two pilot 
JVs, Goldman Sachs-Gao Hua and UBS-Beijing Securities, before 
adjusting equity caps.  He welcomed the suggestion to allow 
international ratings agencies to rate RMB debt, but noted 
that domestic ratings agencies would resist.  End Summary. 
 
ENVIRONMENTAL FACTORS AFFECT STOCK MARKET LISTING DECISIONS 
--------------------------------------- 
¶2. (SBU) Secretary Paulson described the Chinese conservation 
efforts he observed during his visit to Qinghai Lake.  Shang 
noted that environmental performance is one of the indicators 
CSRC considers in its review of applications for listing on 
China's stock markets. 
 
CSRC Report Card on SED II Deliverables 
--------------------------------------- 
¶3. (SBU) Shang reported on progress in implementing SED 
commitments to date: 
 
a) NYSE and NASDAQ Rep Offices: applications received, expect 
reiew and approval by October; 
 
b) Moratorium on Licenses for Securities Companies: aim to 
resume issuing in September, three months ahead of the SED 
commitment; 
 
c) Qualified Foreign Institutional Investor (QFII) Quota: 
CSRC now coordinating with other agencies (mainly the State 
Administration for Foreign Exchange, SAFE), but expects to 
increase quota from USD 10 to 30 billion by the end of 2007 
(Comment: SED commitment is to do so before SED III.  Even 
after the overall quota is increased, it will take time to 
issue firm specific quotas.  Embassy sources note that SAFE, 
which is concerned about excessive capital inflows, is 
delaying implementation. End comment); 
 
d) Scope of Business for Foreign JV Securities Companies: 
working to issue new regulations so JV,s could have a full 
securities license (i.e. be able to undertake brokerage and 
proprietary trading) by the end of 2007. (Comment:  This is 
more forward leaning than SED commitment to announce before 
SED III that JV securities will be able to expand gradually 
their scope of business). 
 
Equity Caps 
----------- 
¶4. (SBU) Secretary Paulson said it is hard to find cases of 
ownership caps on greenfield securities investments in major 
developing economies like Mexico, India and Russia. 
Secretary Paulson said that ownership caps should not be 
 
SIPDIS 
confused with market structure or development; the regulator 
decides on new product approvals and the "rules of the game." 
 The best policy, he said, is to allow the world's best firms 
to come in, compete and train local talent.  He noted that 
some domestic players may not welcome the competition, but 
reminded Shang that those interests may not be in line with 
national interests. 
 
¶5. (SBU) Citing the Goldman Sachs-Gao Hua and UBS-Beijing 
Securities joint venture (JV) deals, Shang said China needs 
 
BEIJING 00005565  002 OF 002 
 
 
to first review the results of these pilot JVs before 
adjusting equity caps. 
 
¶6. (SBU) Shang said China attaches great importance to 
opening the securities sector, but this must be gradual and 
conducive to stable economic development.  Despite the 
Chinese stock market's rise over the past two years, he 
explained that many problems still exist.  He believed 
movements in China's stock market had little influence on 
global financial markets. 
 
Let International Ratings Agencies Rate RMB Debt 
--------------------------------------------- --- 
¶7. (SBU) Secretary Paulson praised CSRC's efforts to develop 
its bond market.  He suggested that China allow international 
credit ratings agencies to rate China RMB denominated debt as 
a way to promote the domestic bond market.  (Comment: 
Currently, only JVs in which foreign firms are limited to a 
49 percent stake can rate RMB denominated bonds in China). 
Shang welcomed the suggestion.  He explained that bond 
scandals in the early 90's resulted in strict regulations 
that required that listed bonds have bank guarantees, which 
eliminated the need for ratings.  However, CSRC now has 
authority over bond issuance and will adopt a market-oriented 
approach.  He said CSRC welcomes foreign credit ratings 
agencies, but pointed out that domestic ratings agencies will 
resist. 
 
¶8. (U) Secretary Paulson's delegation cleared this cable. 
Piccuta