VZCZCXRO5102
PP RUEHCN RUEHGH
DE RUEHBJ #7382/01 3400939
ZNR UUUUU ZZH
P 060939Z DEC 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 3867
INFO RUEHKO/AMEMBASSY TOKYO 1705
RUEHCN/AMCONSUL CHENGDU 8851
RUEHGZ/AMCONSUL GUANGZHOU 3687
RUEHHK/AMCONSUL HONG KONG 9871
RUEHGH/AMCONSUL SHANGHAI 8729
RUEHSH/AMCONSUL SHENYANG 8500
RUEHIN/AIT TAIPEI 6759
RUEHGV/USMISSION GENEVA 2049
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 BEIJING 007382 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE PASS USTR STRATFORD, WINTER, ALTBACH 
NSC FOR TONG 
GENEVA PASS USTR 
 
E.O. 12958: N/A 
TAGS: ETRD WTRO ECON CH
 
SUBJECT: CHINA/JAPAN HIGH-LEVEL ECONOMIC DIALOGUE, FORM WINS OVER 
SUBSTANCE 
 
¶1. (SBU) Summary: Form prevailed over substance at the first ever 
China-Japan High-Level Economic Dialogue (HLED) in Beijing December 
1, 2007.  The meeting was co-chaired by Chinese Vice Premier Zeng 
Peiyan and Japanese Foreign Minister Masahiko Koumura.  Topics 
included macroeconomic policies, economic cooperation, environmental 
protection, and plans for a second HLED in 2008.  After the two-hour 
meeting, ministers from both governments met with their 
counterparts, and the parties signed agreements on mutual 
cooperation in criminal investigations and on Japanese loans to 
China, including a USD 420 million loan for environmental projects. 
More contentious issues like China's push for recognition as a 
market economy and renminbi (RMB) appreciation were apparently not 
resolved. 
"Frank" Discussions and Agreement for 2nd Dialogue 
--------------------------------------------- ------- 
 
¶2. (SBU) According to Xinhua News, the talks were positive and both 
sides agreed to a second high-level dialogue in 2008 to be held in 
Tokyo.  The joint communique mentioned "frank" discussions of issues 
concerning macro-economic policies, trade and investment, climate 
change, environmental protection and multilateral and regional 
economic cooperation.  The two sides reaffirmed mutually beneficial 
bilateral economic ties and vowed to make a greater contribution to 
the sustained development of the world economy.  Our Japanese 
Embassy counterparts informed us that President Hu will likely visit 
Japan next year - the first visit by a Chinese president to Japan in 
a decade.  They also said that Prime Minister Fukuda has plans to 
visit China soon, possibly as early as the end of December or in 
early January 2008. 
 
Zeng's Four Problems with Sino-Japan Economic Ties 
--------------------------------------------- ---- 
 
¶3. (SBU) According to Chinese press reports Vice Premier Zeng 
identified four major problems in Sino-Japanese economic ties: a 
slowdown in the growth rate of bilateral trade, an unsatisfactory 
business environment, obstacles in technical cooperation, and 
fluctuating Japanese investment in China. 
Zeng also brought up concerns over market economy status, trade 
conditions, technology exports and a new emphasis on both 
commodities and services trade.  The Vice Premier urged both sides 
to improve technological exchanges on energy-saving and 
environmental protection and to work together to resolve global and 
regional economic issues. 
Some Progress on Environmental Cooperation 
------------------------------------------ 
¶4. (U) Japanese Embassy officials told us that the two sides made 
some progress on bilateral environmental protection cooperation, 
including a Japanese loan to China of USD 420 million loan for 
environmental protection projects.  Both sides shared a common view 
on participating in the development of an effective framework for 
2013 and beyond under the United Nations Convention on Climate 
Change, in which all major economies would agree to assume greater 
responsibility for environmental protection.  They also agreed to 
enhance cooperation in recycling initiatives, improvement of water 
quality in the Yangtze and other major waterways, prevention of 
cross-border movement of waste, and sustainable forestry management. 
 On energy cooperation, both sides confirmed they would exchange 
technology and information on biomass use, clean coal, and safe coal 
mining practices.  Japanese Embassy officials told us that 
environment ministers from both countries signed a statement 
agreeing to move forward on technology transfer and other 
assistance, but the statement did not include many details or 
concrete implementation plans. 
¶5. (SBU) Japanese Embassy officials told us that although 
cooperation on environmental issues continues to grow, the Japanese 
often find China's approach to environmental discussions 
frustrating, with China repeatedly stating that it is still a 
developing country that lacks the technology needed to curb energy 
emissions.  "Meanwhile, China declines to offer specific proposals 
to Japan indicating what kind of technology it needs.  Japan is 
willing to provide assistance, but China needs to tell us what they 
need," our counterparts said. 
 
No Agreement on Market Economy Status or Renminbi 
 
BEIJING 00007382  002 OF 003 
 
 
--------------------------------------------- ------- 
 
¶6. (SBU) Our Japanese counterparts told us that the Japanese side 
brought up RMB appreciation in the context of Japan's late 1980s 
"bubble economy."  Sensing Chinese concerns that the Japanese yen's 
appreciation following the Plaza Accord led to the country's 
economic difficulties in the 1990s, Japan told China at the HLED 
that a prolonged period of excess liquidity, not the yen's 
appreciation, caused Japan's real estate and stock market bubble. 
Japanese Embassy officials informed us that in a joint statement 
issued following the talks, the Japanese included a sentence noting 
the importance of rapid RMB appreciation. (Note:  The sentence read, 
"he Japanese side welcomed the Chinese policy for increased 
flexibility in the exchange rate of the RMB and expressed hope that 
China would make efforts toward accepting a faster pace of 
appreciation of the RMB's effective exchange rate." End note.) 
According to our Japanese Embassy contacts, the Chinese side deleted 
this sentence from the Chinese translation of the joint statement. 
(Comment:  In a meeting with Econ MinCouns several weeks earlier, 
METI Vice Minister Toyoda confided that a major sticking point in 
negotiations over technology transfer for environmental and energy 
projects was China's poor record of IPR protection.  He added that 
Japan hoped to leverage China's interest in these projects to make 
progress on IPR more broadly, noting that China had at least resumed 
discussing IPR with Japan after temporarily freezing bilateral 
cooperation in the wake of Japan's decision to participate as a 
third party in the U.S. WTO case.  End Comment.) 
 
¶7. (SBU) Regarding China's request for market economy status, 
Japanese embassy officials informed us that the Chinese asked Japan 
for a yes or no response on whether China is a market economy. The 
Japanese did not offer a response to the Chinese side on this issue. 
 
 
Japanese Enterprises Wary of China 
---------------------------------- 
 
¶8. (SBU) Japanese Embassy officials told us they attribute part of 
the recent decline in Japanese investment in China to China's poor 
track record of IPR enforcement.  During the HLED, the two sides 
agreed to broaden cooperation on IPR, including via public-private 
bilateral cooperation mechanisms. "Though China has the necessary 
legislation in place," our contacts said, "enforcement, particularly 
at the local level, continues to deter investors. This is 
particularly true for small and medium-sized Japanese enterprises 
that lack the legal resources of larger companies." 
 
¶9. (SBU) In addition to facing IPR enforcement problems, Japanese 
companies in China report that they are frustrated by Chinese 
regulations on investment and mergers and acquisitions, which they 
perceive as discriminatory.  Political tensions resulting from 
former PM Koizumi's Yasukuni Shrine visits and Japanese officials' 
discussions with the Dalai Lama have also contributed to Japanese 
businesses' wariness about doing business in China, our Japanese 
Embassy contacts explained. 
 
Joint Vision on Japan-China Economic Cooperation 
--------------------------------------------- --- 
 
¶10. (U) According to Japanese Embassy officials, during a February 
2006 meeting, Chinese Commerce Minister Bo Xilai and former Japanese 
Minister of Economy, Trade, and Industry Toshihiro Nikai agreed to 
form a group of representatives from both governments to forge a 
Joint Vision on Japan-China Economic and Trade Cooperation.  The 
group convened four times in both Japan and China over the past year 
and a half for discussions on the bilateral economic relationship. 
In conjunction with the HLED, the working group published a joint 
report on December 1. 
 
¶11. (U) The report states that China has benefited from Japanese 
FDI, government loans, technology transfer and employment 
opportunities, while Japanese companies have enhanced their profits, 
improved their competitiveness, and increased exports to China as a 
result of closer bilateral economic ties. It also asserts that both 
countries could benefit if China shifts its development model from 
 
BEIJING 00007382  003 OF 003 
 
 
export-driven to domestic-consumption led growth.  In addition, the 
report contains information on the difficulties facing Japanese 
companies in China and Chinese companies in Japan.  Concerns voiced 
by Japanese companies include IPR enforcement difficulties, lack of 
transparency in the legal system, complex customs procedures and 
regulations, and discrimination against foreign enterprises. 
Chinese companies in Japan expressed concerns about their position 
in the Japanese market, food and product safety standards and 
regulations, and difficulties obtaining business visas.  Both sides 
agreed to address these concerns through high level bilateral 
discussions in the future. 
 
Nothing New This Time Around 
---------------------------- 
 
¶12. (SBU) Our Japanese contacts told us the HLED did little to 
resolve controversial bilateral economic issues such as RMB 
appreciation, East China Sea energy exploration, or China's drive 
for market economy status.  The meeting did, however, result in a 
joint statement that renewed commitments to cooperate on issues of 
bilateral concern such as IPR enforcement, environmental protection, 
and reduction of barriers to trade.  Though these areas for 
cooperation are not new, Japanese officials expect that over the 
next year, terms of cooperation will become more concrete as they 
work toward the 2008 HLED. 
 
RANDT