VZCZCXRO8511
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #5566/01 2342245
ZNR UUUUU ZZH
O 222245Z AUG 07 ZDK
FM AMEMBASSY BEIJING
TO RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEHC/SECSTATE WASHDC IMMEDIATE 1194
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BEIJING 005566 
 
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: SECRETARY PAULSON DISCUSSES BOND MARKET, EQUITY 
CAPS WITH CBRC CHAIRMAN 
 
BEIJING 00005566  001.2 OF 002 
 
 
  SUMMARY 
------- 
¶1. (SBU) Summary:  In an August 1 meeting with Secretary 
Paulson, China Banking Regulatory Commission (CBRC) Chairman 
Liu Mingkang reported that China is making significant 
efforts to step up its AML enforcement efforts, noting that 
banks are &getting a lot tougher.8  Second, he reported 
that the government, including the CBRC, is ramping up its 
efforts to meet environmental targets on pollution abatement. 
 Third, Chairman Liu reported how the government is promoting 
bond market development.  Fourth, on rebalancing growth, he 
noted President Hu,s view that GDP growth of 6 percent a 
year would be sufficient if it could be sustained and 
geographically balanced, saying that the emphasis now is on 
quality rather than speed.  He also noted the need to achieve 
better macroeconomic balance between investment and 
consumption.  Finally, he emphasized the significant steps 
China has recently taken to reduce net exports through tax 
reform. End Summary. 
 
Bond market development ) a role for foreign credit rating, 
auditing, and accounting agencies 
--------------------------------------------- -- 
 
¶2. (SBU) Chairman Liu emphasized that to support the 
development of China's corporate bond market, there is a need 
for high quality credit rating, auditing, and accounting 
agencies.  He acknowledged that there are a number of foreign 
credit rating, auditing, and accounting agencies that would 
like to operate in China but are currently unable to do so 
due to equity caps.  He suggested we put this issue on the 
agenda for SED III. 
 
¶3. (SBU) Chairman Liu further noted that bond market 
development would need to involve the development of a robust 
secondary market with participation from strategic 
institutional investors, and noted that more institutional 
investors from the United States would play a welcome role. 
He added that foreign trust companies could play a bigger 
role in helping to channel QDII funds to places like New York 
and London. 
 
CBRC to issue assessment on equity caps ahead of March 2008 
NPC 
--------------------------------------------- -- 
 
¶4. (SBU) Liu noted that CBRC has established a task force to 
assess the performance of 24 foreign bank joint ventures 
(JVs) involving 33 foreign strategic investors.  The 
assessment will be finished by next March, ahead of the 
National People's Congress, with the aim of providing 
proposals on reforms, including changes in equity caps, to 
the State Council.  Chairman Liu noted that the last 
assessment in 2004 recommended that equity caps be raised 
from 15 to 20 percent.  (Comment:  Liu's comments appear 
intended to signal that raising equity caps in banking is 
possible in the medium-term but not by SED III.  End comment). 
 
¶5. (SBU) Secretary Paulson also asked if China had considered 
opening the market to foreign non-bank institutions wishing 
to do RMB financing.  (Comment:  Current regulations require 
that the controlling shareholder of a foreign bank in China 
must be a commercial bank.  End comment). Chairman Liu 
responded by pointing to the successful turn around of 
Shenzhen Development Bank (SDB) by Texas Pacific Group, a 
non-bank financial firm that won control of SDB. End 
Comment.) 
 
Officials prefer tax reform over currency appreciation 
--------------------------------------------- ---- 
 
¶6. (SBU) Secretary Paulson commended the steps China has 
taken to reduce export tax rebates and introduce new taxes on 
resource intensive exports, but argued that changes in 
China,s currency policies are still needed, noting that it 
would be more efficient to address large current account 
surplus through the use of market-determined price mechanisms 
rather than administrative measures. 
 
 
BEIJING 00005566  002.2 OF 002 
 
 
¶7. (SBU) Chairman Liu responded that Chinese senior officials 
believe there are three reasons why adjusting tax policies is 
preferable to more rapid currency appreciation for promoting 
a reduction in external imbalances.  First, China's poor 
would bear the burden of more rapid appreciation.  He 
specifically mentioned the potential for job losses among 
migrant workers who work for multinational corporations 
engaged in low value-added processing trade.  Second, he 
argued that currency appreciation is a blunt policy 
instrument ) while changes in tax policy can target specific 
sectors of the economy that are problematic (i.e. heavily 
polluting or export intensive).  Third, he argued that, for 
targeted sectors, the impact of the tax changes dwarfs that 
of currency appreciation.  He noted that the currency has 
appreciated 9 percent over about two years, while the tax 
changes raised steel exporters, costs 19 percent overnight 
(reflecting the repeal of a 9 percent subsidy combined with 
the introduction of a 10 percent tax).  Chairman Liu reported 
that China would conduct a post-assessment of the tax changes 
to determine their impact on net exports. 
 
China seeks advice on environmental consequences of lending 
--------------------------------------------- ---- 
¶8. (SBU) Chairman Liu asked for U.S. assistance in 
identifying the environmental consequences of lending to 
different sectors, including any benchmarks or standards that 
China could use to help systematize environmentally-conscious 
bank lending.  David McCormick committed to follow up on this 
issue with the CBRC. 
 
¶9. (SBU) Secretary Paulson's delegation cleared this cable. 
Piccuta