VZCZCXRO2622
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #6889/01 3030635
ZNR UUUUU ZZH
P 300635Z OCT 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 3136
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHNSC/NSC WASHDC
RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 03 BEIJING 006889 
 
SIPDIS 
 
PASS TO US TRADE REPRESENTATIVE WASHDC 
SENSITIVE 
SIPDIS 
 
E.O. 12958: n/a 
TAGS: ECON ETRD EINV CH
SUBJECT:  TREASURYS SMITH AND MEDEIROS MEETING WITH MOF A/S ZHU 
GUANGYAO 
 
Summary 
------- 
 
¶1. (SBU) Summary: Treasury Deputy Chief of Staff Taiya Smith and 
Strategic Economic Dialogue (SED) Political Advisor Evan Medeiros 
discussed preparations for the third round of the SED with Ministry 
of Finance Assistant Minister Zhu Guangyao October 10.  Smith and 
Zhu agreed that the SED should focus on long-term strategic issues, 
identify areas of common interest, and provide guidance to other 
bilateral fora, while also achieving tangible results in the 
short-term.  For the December SED meeting, the two sides agreed to 
work on sustainable logging, financial services, food and product 
safety, air pollution (SO2), transparency, investment, water 
pollution, and clean fuels and autos.  Smith and Zhu discussed the 
possibility of the two countries cooperating on a long-term, 
ten-year joint project on a strategic topic.  Both agreed to talk 
again after consulting with their respective sides.  End Summary. 
 
SED Principles 
-------------- 
 
¶2. (SBU) In discussions October 10 with Ministry of Finance 
Assistant Minister Zhu Guangyao, Treasury Deputy Chief of Staff 
Taiya Smith and Strategic Economic Dialogue (SED) Political Advisor 
Evan Medeiros discussed preparations for the third round of the SED 
to be held December 12-13 in Beijing.  Smith and Zhu agreed that the 
SED should be guided by the following principals: a focus on 
long-term strategic issues, working cooperatively on areas of common 
interests, providing guidance to other bilateral dialogues, and 
working to achieve tangible, short-term results. 
 
¶3. (SBU) Smith emphasized that the SEDQs strategic focus would help 
both countries deal with long-term challenges, such as global 
climate change.  Towards that end, Smith suggested that the two 
sides consider launching a long-term, ten-year joint project on a 
strategic topic.  Both agreed to talk again after consulting with 
their respective sides. 
 
Sustainable Logging 
------------------- 
 
¶4. (SBU) Smith noted that Deputy USTR Karan Bhatia had recently 
discussed sustainable logging with MOFCOM Vice Minister Ma Xiuhong. 
Smith emphasized the importance of ministries such as MOFCOM and 
Customs strengthening cooperation with the State Forestry Agency 
(SFA) which has been assigned the lead role in negotiations on a 
bilateral agreement on sustainable logging.  She urged the Finance 
Ministry to help the different Chinese agencies to work together on 
this important issue, which affects not only Chinese wood 
manufacturers, but also affects global warming.  U.S. negotiators 
would soon present the SFA with a draft cooperation agreement and 
hoped to finalize an agreement by the December SED.  Zhu said he 
would work to strengthen coordination on the Chinese side and asked 
that Smith keep him abreast of developments. 
 
Financial Services 
------------------ 
 
¶5. (SBU) FinAtt David Loevinger said the United States hoped China 
would continue to liberalize its financial services market. 
Specifically, the United States wanted China to raise the equity 
caps for foreign owned and joint venture financial service firms and 
grant licenses allowing these firms to offer a full-range of 
financial services.  Zhu pressed Loevinger for a realistic target on 
equity caps and said any progress on this issue must take into 
account ChinaQs level of development.  Loevinger said the United 
States wanted to see ownership limits rise to 49 percent by the end 
of the year and to 100 percent by the end of 2008.  Zhu expressed 
deep skepticism that these goals could be reached in such a short 
time period, but said both sides should continue to exchange views 
on the matter. 
 
¶6. (SBU) On credit rating agencies, Loevinger observed that ChinaQs 
SED II commitment appeared to be wavering.  Chinese regulators had 
recently informed MoodyQs joint venture that it was no longer 
permitted to rate RMB-denominated bonds.  This was a step backward 
and contrary to ChinaQs SED II commitment on welcoming foreign 
credit rating agencies. 
 
¶7. (SBU) Zhu replied that the three major international credit 
rating agencies--MoodyQs, Standard & PoorQs, and Fitch--had been 
widely criticized by the international community over its ratings of 
collateralized debt obligations.  This led, Zhu asserted, to serious 
problems for the firms and a loss of reputation.  Zhu said China 
would only open its market to foreign credit rating agencies after 
they had addressed their serious weaknesses in corporate governance. 
 
BEIJING 00006889  002 OF 003 
 
 
 He said the United States was free to raise this issue in SED III 
but said he thought the issue was better addressed in the JEC. 
Loevinger said the U.S. position was firm and considered recent 
Chinese regulatory decisions as running contrary to ChinaQs SED 
commitments. 
 
Food and Product Safety 
----------------------- 
 
¶8. (SBU) Regarding ongoing negotiations to conclude two bilateral 
binding memoranda of agreement (MOA) on food and feed and drugs and 
medical devices, Zhu said he had recently spoken to the head of the 
State Food and Drug Agency (SFDA) who had complained that the United 
States had changed its position after returning to Washington 
following the first round of negotiations in Beijing. 
 
¶9. (SBU) Smith replied that the U.S. had not changed its position 
but was seeking greater clarity from the Chinese side regarding 
regulatory supervision of active pharmaceutical ingredients (APIs). 
It is unclear to the U.S. side whether SFDA has authority to 
regulate exports of such goods.  If SFDA is not the right agency to 
oversee APIs, then the Chinese side should identify the appropriate 
agency.  She also urged the Chinese negotiators to provide written 
comments on the revised draft text and to confirm when they will be 
able to travel to Washington to continue negotiations.  Zhu replied 
that he would report back to Vice Premier Wu Yi on this matter and 
would urge SFDA to strengthen communication with HHS/FDA. 
 
¶10. (SBU) Smith also noted that there were several other agreements 
related to food and product safety currently under discussions.  She 
said it would send a positive signal if all of these agreements 
could be finalized and announced by the December SED. 
 
SO2 Cap-and-Trade 
----------------- 
 
¶11. (SBU) Smith noted that in his meeting with EPA Administrator 
Johnson, NDRC Vice Chairman Xie Zhenhua was positive on the 
prospects of launching a national cap-and-trade emissions trading 
system for SO2.  EPA is currently working on a joint abatement study 
with ChinaQs SEPA and would have policy recommendations by the 
December SED.  Smith said it would be a strong demonstration of 
U.S-China cooperation if China was prepared to announce an SO2 
emissions trading system at SED III.  Zhu said the two sides should 
continue discussions on this issue. 
 
Transparency 
------------ 
 
¶12.  (SBU) On transparency, Smith said preparations were going well 
for two seminars on administrative rule-making and licensing, the 
first to be held in Beijing at the end of October and the other in 
late November in Washington.  The United States was also looking for 
China to implement its APEC transparency commitments and adopt a 
national policy on public notice-and-comment period.  Zhu recalled 
that both sides struggled during the May SED to come up with a 
common approach on this issue and urged both sides to prepare 
carefully for the upcoming SED. 
 
Investment 
---------- 
 
¶13. (SBU) Smith informed Zhu that Deputy USTR Bhatia had spoken to 
MOFCOMQs Madame Ma about prospects for concluding a bilateral 
investment treaty (BIT).  U.S. officials planned to have further 
discussions on this issue in Washington and would then discuss with 
the Chinese side how best to move forward.  Zhu said it would be 
important to make progress on this issue and that both sides should 
do more to improve trust and confidence in the investment 
environment.  He said that some examples of successful investments 
on both sides would demonstrate the value of open investment 
policies.  Smith suggested that U.S. and Chinese scholars could 
collaborate on case studies of both successful investments and those 
that ran into difficulties, such as the CNOOC case. 
 
Water Pollution 
--------------- 
 
¶14. (SBU) Noting ChinaQs interest in cooperating on water issues, 
Smith said the United States would look into strengthening the 
existing agreement between EPA and the Ministry of Water Resources. 
 
Autos/Low Sulfur Fuel 
--------------------- 
 
¶15. (SBU) Responding to ChinaQs interest in discussing clean fuels 
 
BEIJING 00006889  003 OF 003 
 
 
for automobiles, Smith said EPA had worked with Chinese officials on 
low sulfur fuel issues for many years.  Zhu said China welcomed 
cooperation on this issue and said he hoped both sides could do more 
work in this area for the December SED. 
 
Environmental Tariffs 
--------------------- 
 
¶16. (SBU) Regarding lowering tariffs on environmental goods and 
services, Zhu asked if the United States had any further ideas on 
how to discuss this issue in a bilateral context.  He suggested both 
sides consider building on President HuQs proposal at APEC to 
establish an Asia Pacific information network on environmental 
tariffs.  Smith said she would discuss with her colleagues in 
Washington on how best to move forward. 
 
Satellites 
---------- 
 
¶17. (SBU) Zhu raised the issue of renewing the expired bilateral 
satellite launch cooperation agreement, noting that JCCT discussions 
on this topic had not made progress.  Smith replied that this was a 
sensitive issue and must be approached carefully. 
 
Accounting Standards 
-------------------- 
 
¶18. (SBU) Zhu said Chinese companies found it burdensome to comply 
with U.S. accounting standards when trying to list shares on U.S. 
stock markets.  He asked if U.S. regulators could accept Chinese 
accounting statements which comply with international standards. 
Smith noted that U.S. accounting standards are more rigorous than 
international standards Q having been strengthened following the 
passage of Sarbanes-Oxley legislation and that U.S. regulators 
applied the same standard to all foreign firms.  Loevinger suggested 
that MOF Vice Minister Li Yong meet with SEC officials when he is in 
Washington to attend World Bank meetings. 
 
¶19. (U) Smith and Medeiros cleared this cable. 
 
Randt